<R>As filed with the Securities and Exchange Commission on September 10, 2001

Securities Act File No. 333-65446 Investment Company Act File No. 811-7642</R>

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM N-14

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

<R>	Pre-Effective Amendment No. 1	| X | </R>
	Post-Effective Amendment No.	|     |

(Check appropriate box or boxes)

MuniAssets Fund, Inc.

(Exact Name of Registrant as Specified in Charter)

(609) 282-2800 (Area Code and Telephone Number)

800 Scudders Mill Road Plainsboro, New Jersey 08536 (Address of Principal Executive Offices: Number, Street, City, State, Zip Code)

Terry K. Glenn MuniAssets Fund, Inc. 800 Scudders Mill Road, Plainsboro, New Jersey 08536 Mailing Address: PO Box 9011, Princeton, New Jersey 08543-9011

(Name and Address of Agent for Service)

Copies to :

Leonard B. Mackey, Jr. CLIFFORD CHANCE ROGERS & WELLS LLP 200 Park Avenue New York, New York 10166

Frank P. Bruno, Esq. SIDLEY AUSTIN BROWN & WOOD LLP One World Trade Center New York, New York 10048-0557

<R>Philip L. Kirstein, Esq.</R> FUND ASSET MANAGEMENT, L.P. 800 Scudders Mill Road Plainsboro, New Jersey 08543-9011

Approximate Date of Proposed Public Offering: As soon as practicable after the Registration Statement becomes effective under the Securities Act of 1933.

Calculation of Registration Fee Under the Securities Act of 1933

Title Of Securities Being Registered	Amount being Registered (1)	Proposed Maximum Offering Price Per Unit(1)	Proposed Maximum Aggregate Offering Price (1)	Amount of Registration Fee (2)
Common Stock ($.10 par value)	11,079,988	$13.07	$144,815,443	$36,204

(1)

Estimated solely for the purpose of calculating the filing fee.

(2)

Previously paid by wire transfer to the designated lockbox of the Securities and Exchange Commission in Pittsburgh, Pennsylvania.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

MUNIASSETS FUND, INC. MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS OF MUNIASSETS FUND, INC.

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS OF MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.

To Be Held on October 24, 2001

T O T HE S TOCKHOLDERS OF

M UNI A SSETS F UND , I NC . M ERRILL L YNCH H IGH I NCOME M UNICIPAL B OND F UND , I NC .:

NOTICE IS HEREBY GIVEN that an annual meeting of stockholders of MuniAssets Fund, Inc. (“MuniAssets”) and a special meeting of stockholders of Merrill Lynch High Income Municipal Bond Fund, Inc. (“High Income Municipal”) (together, the “Meetings”) will be held at the offices of Fund Asset Management, L.P. and Merrill Lynch Investment Managers, L.P., respectively, 800 Scudders Mill Road, Plainsboro, New Jersey on Wednesday, October 24, 2001 at 9:00 a.m. Eastern time (MuniAssets) and 10:00 a.m. Eastern time (High Income Municipal) for the following purposes:

For the stockholders of MuniAssets and High Income Municipal:

(1) To approve or disapprove an Agreement and Plan of Reorganization (the “Agreement and Plan”) contemplating (i) the acquisition of substantially all of the assets and the assumption of substantially all of the liabilities of High Income Municipal by MuniAssets, in return for newly issued shares of common stock of MuniAssets, and (ii) the distribution by High Income Municipal of such MuniAssets common stock to the holders of common stock of High Income Municipal (plus cash in lieu of fractional shares). A vote in favor of this proposal also will constitute a vote in favor of the liquidation and dissolution of High Income Municipal under Maryland corporate law and the termination of High Income Municipal’s registration under the Investment Company Act of 1940, as amended;

For the stockholders of MuniAssets only:

(2) To elect two Class I Directors of MuniAssets to serve for a term of three years; and

For the stockholders of both Funds:

(3) To transact such other business as properly may come before the Meetings or any adjournment thereof.

The Boards of Directors of MuniAssets and High Income Municipal have fixed the close of business on August 27, 2001 as the record date for the determination of stockholders entitled to notice of, and to vote at, the Meetings or any adjournment thereof.

A complete list of the stockholders of MuniAssets and High Income Municipal entitled to vote at the Meetings will be available and open to the examination of any stockholder of MuniAssets or High Income Municipal, respectively, for any purpose germane to the Meetings during ordinary business hours from and after October 10, 2001, at the offices of each Fund, 800 Scudders Mill Road, Plainsboro, New Jersey.

You are cordially invited to attend the applicable Meeting. Stockholders who do not expect to attend the Meetings in person are requested to complete, date and sign the enclosed form of proxy and return it promptly in the envelope provided for that purpose. If you have been provided with the opportunity on your proxy card or voting instruction form to provide voting instructions via telephone or the Internet, please take advantage of these prompt and efficient voting options. The enclosed proxy is being solicited on behalf of the Board of Directors of MuniAssets or High Income Municipal, as applicable.

<R>If you have any questions regarding the enclosed proxy material or need assistance in voting your shares of common stock, please contact our proxy solicitor, Georgeson Shareholder at 1-888-856-1572.</R>

By Order of the Boards of Directors, B RADLEY J. L UCIDO Secretary MuniAssets Fund, Inc. A LICE A. P ELLEGRINO Secretary Merrill Lynch High Income Municipal Bond Fund, Inc.

<R>Plainsboro, New Jersey Dated: September 10, 2001</R>

<R></R>

JOINT PROXY STATEMENT AND PROSPECTUS MUNIASSETS FUND, INC. MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 (609) 282-2800

ANNUAL MEETING OF STOCKHOLDERS OF MUNIASSETS FUND, INC.

SPECIAL MEETING OF STOCKHOLDERS OF MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.

To Be Held on October 24, 2001

This Joint Proxy Statement and Prospectus is furnished to you as a stockholder of one or both of the funds listed above. An annual meeting of stockholders of MuniAssets Fund, Inc. (“MuniAssets”) and a special meeting of stockholders of Merrill Lynch High Income Municipal Bond Fund, Inc. (“High Income Municipal”) will be held on October 24, 2001 (each, a “Meeting” and together, the “Meetings”) to consider the items listed below and discussed in greater detail elsewhere in this Joint Proxy Statement and Prospectus. The Board of Directors of each of the funds is requesting its stockholders to submit a proxy to be used at the applicable Meeting to vote the shares held by the stockholder submitting the proxy.

The proposals to be considered at the Meetings are:

For stockholders of MuniAssets and High Income Municipal:      1. To approve or disapprove an Agreement and Plan of Reorganization between the funds;

For stockholders of MuniAssets only:

2. To elect two Class I Directors of MuniAssets to serve for a term of three years; and

For the stockholders of both MuniAssets and High Income Municipal:

3. To transact such other business as may properly come before the Meetings or any adjournment thereof.

The Agreement and Plan of Reorganization that you are being asked to consider involves a transaction that will be referred to in this Joint Proxy Statement and Prospectus as the “Reorganization.” The Reorganization involves the combination of two funds into one. The two funds are:

MuniAssets, which will be the surviving fund, and

High Income Municipal

(continued on next page)

The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Joint Proxy Statement and Prospectus. Any representation to the contrary is a criminal offense.

<R>The date of this Joint Proxy Statement and Prospectus is September 10, 2001.</R>

MuniAssets and High Income Municipal are sometimes referred to herein collectively as the “Funds” and individually as a “Fund,” as the context requires. The fund resulting from the Reorganization is sometimes referred to herein as the “Combined Fund.”

In the Reorganization, MuniAssets will acquire substantially all of the assets and assume substantially all of the liabilities of High Income Municipal solely in return for shares of common stock of MuniAssets (“MuniAssets Common Stock”). High Income Municipal will distribute the MuniAssets Common Stock received in the Reorganization to its stockholders and will then liquidate and dissolve under Maryland law and terminate its registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”). MuniAssets will continue to operate as a registered, non-diversified, closed-end investment company with the investment objective and policies described in this Joint Proxy Statement and Prospectus.

<R>In the Reorganization, a holder of common stock of High Income Municipal (“High Income Municipal Common Stock”) will receive MuniAssets Common Stock (plus cash in lieu of fractional shares) with an aggregate net asset value equal to the aggregate net asset value of the shares of High Income Municipal Common Stock such stockholder held just prior to the Reorganization. All references to the High Income Municipal Common Stock will include shares of Common Stock representing Dividend Reinvestment Plan shares held in the book deposit accounts of holders of High Income Municipal Common Stock.</R>

This Joint Proxy Statement and Prospectus serves as a prospectus of MuniAssets in connection with the issuance of MuniAssets Common Stock in the Reorganization.

This Joint Proxy Statement and Prospectus sets forth information about MuniAssets and High Income Municipal that stockholders of the Funds should know before considering the Reorganization and should be retained for future reference. Each Fund has authorized the solicitation of proxies in connection with the Meetings solely on the basis of this Joint Proxy Statement and Prospectus and the accompanying documents.

The address of the principal executive offices of MuniAssets and High Income Municipal is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and the telephone number is (609) 282-2800.

MuniAssets Common Stock is listed on the New York Stock Exchange (the “NYSE”) under the symbol “MUA” and may be bought or sold at the market price on each day the NYSE is open for trading. High Income Municipal engages in a continuous offering of its Common Stock. High Income Municipal Common Stock is not listed on any exchange and no secondary market presently exists for High Income Municipal Common Stock nor is it expected that a secondary market will develop. After the Reorganization, shares of MuniAssets Common Stock will continue to be listed on the NYSE under the symbol “MUA.” See “Additional Information.”

Table of Contents

		Page
INTRODUCTION		1
ITEM 1. THE REORGANIZATION		1
SUMMARY		1
	The Reorganization	1
	What Will Be the Results of the Reorganization	2
	Reasons for the Reorganization	2
RISK FACTORS AND SPECIAL CONSIDERATIONS		9
	Trading at a Discount	9
	Interest Rate and Credit Risk	9
	Non-Diversification	9
	High Yield or “Junk Bonds”	10
	Private Activity Bonds	10
	Indexed and Inverse Floating Obligations	10
	Options and Futures Transactions	10
	Antitakeover Provisions	10
COMPARISON OF THE FUNDS		11
	Financial Highlights	11
	Investment Objective and Policies	13
	Description of Municipal Bonds	15
	Other Investment Policies	15
	Information Regarding Options and Futures Transactions	17
	Investment Restrictions	19
	Portfolio Composition	21
	Performance	21
	Portfolio Transactions	22
	Portfolio Turnover	22
	Net Asset Value	23
	Capital Stock	23
	Certain Provisions of the Charters	23
	Management of the Funds	24
	Code of Ethics	26
	Voting Rights	26
	Stockholder Inquiries	27
	Dividends and Distributions	27
	Automatic Dividend Reinvestment Plan	27
	Mutual Fund Investment Option	29
	Tax Rules Applicable to the Funds and Their Stockholders	29
	Tax Treatment of Options and Futures Transactions	31

AGREEMENT AND PLAN OF REORGANIZATION		32
	General	32
	Procedure	32
	Terms of the Agreement and Plan of Reorganization	33
	Potential Benefits to Common Stockholders of the Funds as a Result of the Reorganization	34
	Surrender and Exchange of Stock Certificates	35
	Tax Consequences of the Reorganization	36
	Capitalization	37

 

		Page
ITEM 2. ELECTION OF DIRECTORS OF MUNIASSETS		37
	Committee Report	39
	Committee and Board Meetings	39
	Independent Auditors’ Fees	40
	Compliance with Section 16(a) of the Securities Exchange Act of 1934	40
	Interested Persons	40
	Compensation of Directors	40
	Officers of MuniAssets	40
INFORMATION CONCERNING THE MEETINGS		40
	Date, Time and Place of Meetings	40
	Solicitation, Revocation and Use of Proxies	40
	Record Date and Outstanding Shares	41
	Security Ownership of Certain Beneficial Owners and Management	41
	Voting Rights and Required Vote	41
	Appraisal Rights	41
ADDITIONAL INFORMATION		42
CUSTODIAN		43
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR		43
ACCOUNTING SERVICES PROVIDER		43
LEGAL PROCEEDINGS		43
LEGAL OPINIONS		43
EXPERTS		43
STOCKHOLDER PROPOSALS		43
INDEX TO FINANCIAL STATEMENTS		F-1
APPENDIX I:  INFORMATION PERTAINING TO EACH FUND		I-1
APPENDIX II:  AGREEMENT AND PLAN OF REORGANIZATION		II-1
APPENDIX III:  RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER		III-1
APPENDIX IV:  CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF     DIRECTORS OF MUNIASSETS FUND, INC.		IV-1

INTRODUCTION

<R>This Joint Proxy Statement and Prospectus is furnished to you in connection with the solicitation of proxies on behalf of the Board of Directors of MuniAssets and High Income Municipal for use at the Meetings to be held at the offices of Fund Asset Management, L.P. (“FAM”) and Merrill Lynch Investment Managers, L.P. (“MLIM”), respectively, 800 Scudders Mill Road, Plainsboro, New Jersey on October 24, 2001, at the time specified for each Fund in Appendix I to this Joint Proxy Statement and Prospectus. The mailing address for each Fund is P.O. Box 9011, Princeton, New Jersey 08543-9011. The approximate mailing date of this Joint Proxy Statement and Prospectus is September 13, 2001.</R>

Any person giving a proxy may revoke it at any time prior to its exercise by executing a superseding proxy, by giving written notice of the revocation to the Secretary of MuniAssets or High Income Municipal, as applicable, at the address indicated above or by voting in person at the applicable Meeting. All properly executed proxies received prior to the Meetings will be voted at the Meetings in accordance with the instructions marked thereon or otherwise as provided therein. Unless instructions to the contrary are marked, (a) for the stockholders of both Funds, all proxies will be voted “FOR” Item 1 to approve the Agreement and Plan of Reorganization between MuniAssets and High Income Municipal (the “Agreement and Plan”); and (b) for the stockholders of MuniAssets only, all proxies submitted by MuniAssets stockholders will be voted “FOR” Item 2 to elect two Class I Directors of MuniAssets to serve for a term of three years.

<R>With respect to Item 1, assuming the required quorum is present at each Meeting, approval of the Agreement and Plan will require (i) the affirmative vote of a majority of the outstanding shares of High Income Municipal entitled to vote thereon and (ii) the affirmative vote of a majority of the votes cast by the holders of MuniAssets Common Stock with respect to such item, provided that the total number of votes cast on such item represents over 50% shares entitled to vote on such item. The Reorganization will not take place if either the MuniAssets stockholders or the High Income Municipal stockholders do not approve the Agreement and Plan.</R>

With respect to Item 2, assuming the required quorum is present at the Meeting of MuniAssets stockholders, the election of two Class I Directors of MuniAssets will require the affirmative vote of a plurality of the votes cast by MuniAssets stockholders. A “plurality of the votes cast” means the candidates must receive more votes than any other candidates for the same positions, but not necessarily a majority of votes cast.

<R>The Board of Directors of each Fund has fixed the close of business on August 27, 2001 as the record date (the “Record Date”) for the determination of stockholders entitled to notice of, and to vote at, the Meetings, or any adjournment thereof. Stockholders on the Record Date will be entitled to one vote for each share held, with no shares having cumulative voting rights. At the Record Date, each Fund had outstanding the number of shares of Common Stock indicated in Appendix I. To the knowledge of the management of each Fund, no person owned beneficially more than 5% of the outstanding shares of capital stock of the respective Fund as of the Record Date.</R>

The Boards of Directors of the Funds know of no business other than that discussed in Item 1 and Item 2 below that will be presented for consideration at the Meetings. If any other matter is properly presented, it is the intention of the persons named in the enclosed proxy to vote in accordance with their best judgment.

ITEM 1. THE REORGANIZATION

SUMMARY

The following is a summary of certain information contained elsewhere in this Joint Proxy Statement and Prospectus and is qualified in its entirety by reference to the more complete information contained in this Joint Proxy Statement and Prospectus and in the Agreement and Plan attached hereto as Appendix II.

The Reorganization

At separate meetings of the Board of Directors of High Income Municipal and MuniAssets held on June 7, 2001 and July 11, 2001, respectively, each Board unanimously approved the transaction whereby (i) MuniAssets would acquire substantially all of the assets and assume substantially all of the liabilities of High Income Municipal, (ii) MuniAssets would simultaneously issue to High Income Municipal shares of MuniAssets

Common Stock, (iii) the shares of MuniAssets Common Stock would be subsequently distributed to the holders of High Income Municipal Common Stock (plus cash in lieu of fractional shares) and (iv) High Income Municipal would be deregistered and dissolved, as described below.

What Will Be the Results of the Reorganization

If the Agreement and Plan is approved and the Reorganization is completed:

•

MuniAssets will acquire substantially all of the assets and assume substantially all of the liabilities of High Income Municipal;

•

Stockholders of High Income Municipal will become stockholders of MuniAssets; and

•

Stockholders of High Income Municipal Common Stock will receive full shares of MuniAssets Common Stock (plus cash in lieu of fractional shares) equal to the aggregate net asset value of the shares of High Income Municipal Common Stock currently owned by such stockholders.

Stockholders should consult their tax advisers regarding the effect of the Reorganization in light of their individual circumstances.

Reasons for the Reorganization

The Boards of Directors of MuniAssets and High Income Municipal have approved the Agreement and Plan. The Boards of Directors of MuniAssets and High Income Municipal recommend that you vote to approve the Agreement and Plan.

High Income Municipal

<R>The Board of Directors of High Income Municipal has determined that High Income Municipal common stockholders are likely to benefit from the Reorganization and that the interests of existing stockholders will not be diluted as a result of the Reorganization. The Board of Directors believes that the Reorganization is in the best interests of High Income Municipal and its common stockholders.

In reaching its decision, the Board of Directors considered a number of factors including the following:</R>

•

After the Reorganization, High Income Municipal common stockholders will be invested in a substantially larger non-diversified, closed-end fund with an investment objective and policies substantially similar to High Income Municipal’s investment objective and policies;

•

After the Reorganization, High Income Municipal common stockholders are expected to experience lower expenses per share, economies of scale and greater flexibility in portfolio management;

•

After the Reorganization, High Income Municipal common stockholders will benefit from the fact that the Combined Fund will not pay the administrative fee currently paid by High Income Municipal;

•

After the Reorganization, High Income Municipal common stockholders will no longer be subject to the expenses associated with High Income Municipal’s required yearly prospectus updates;

•

After the Reorganization, High Income Municipal common stockholders will no longer be subject to the expenses of conducting quarterly tender offers;

•

After the Reorganization, High Income Municipal common stockholders will no longer be subject to an early withdrawal charge (“EWC”) upon the sale of shares held for less than three years; and

•

<R>After the Reorganization, High Income Municipal common stockholders will be able to sell their shares on each day that the NYSE is open for trading at the market price; the market price may be lower or higher than the net asset value of the shares and transactions in shares may be subject to brokerage commissions and other charges.</R>

MuniAssets

<R>The Board of Directors of MuniAssets has determined that MuniAssets common stockholders are likely to benefit from the Reorganization and that the interests of existing stockholders will not be diluted as a result of the Reorganization. The Board believes that the Reorganization is in the best interest of MuniAssets and its common stockholders.</R>

2

In reaching its decision the Board considered a number of factors including the following:

•

After the Reorganization, MuniAssets common stockholders will remain invested in a non-diversified, closed-end fund that has no changes to its current investment objective but has a larger asset base and is expected to have a lower expense ratio; and

•

After the Reorganization, MuniAssets common stockholders should experience economies of scale and greater flexibility in portfolio management.

See “Fee Table” below and “The Reorganization—Potential Benefits to Stockholders as a Result of the Reorganization.”

The Reorganization requires the approval of the stockholders of both Funds. The Reorganization will not take place if either the MuniAssets stockholders or the High Income Municipal stockholders do not approve the Agreement and Plan. If all of the requisite approvals are obtained, it is anticipated that the Reorganization will occur as soon as practicable after such approval, provided that the Funds have obtained prior to that time a favorable opinion of counsel concerning the tax consequences of the Reorganization as set forth in the Agreement and Plan. Under the Agreement and Plan, however, the Board of Directors of either Fund may cause the Reorganization to be postponed or abandoned in certain circumstances should such Board determine that it is in the best interest of the stockholders of that Fund to do so. The Agreement and Plan may be terminated, and the Reorganization abandoned, whether before or after approval by the stockholders of the Funds at any time prior to the Closing Date (as defined below), (i) by mutual consent of the Boards of Directors of the Funds, or (ii) by the Board of Directors of either Fund, if any condition to that Fund’s obligations has not been fulfilled or waived by such Fund’s Board of Directors.

Fee Table for Common Stockholders of MuniAssets, High Income Municipal and the Pro Forma Combined Fund as of May 31, 2001 (Unaudited)

The following fee table below illustrates the expenses incurred by each Fund individually and the estimated pro forma expenses to be incurred by the Combined Fund after the Reorganization. Future fees and expenses may be greater or less than those indicated.

<R>	Actual				Pro Forma
	MuniAssets		High Income Municipal		Combined Fund*
Stockholder Transaction Expenses
Maximum Sales Load (as a percentage of the    offering price) imposed on purchases    of Common Stock	None	(a)	None		None	(a)(b)
Dividend Reinvestment and Cash Purchase    Plan Fees	None		None		None
Early Withdrawal Charge   (as a percentage of original purchase   price or net asset value at the   time of repurchase)(c)	None		3.0% during the first year, decreasing 1.0% annually thereafter to 0.0% after the third year		None
Annual Expenses (as a percentage of average    net assets attributable to Common Stock    at May 31, 2001)
Investment Advisory Fees(d)	.55	%	.95	%	.55	%
Other Expenses	.21	%	.66	%(e)	.13	%
Total Annual Expenses	.76	%	1.61	%	.68	%

*

The expenses for the Combined Fund represent the estimated annualized expenses as of May 31, 2001 assuming MuniAssets had acquired substantially all of the assets and assumed substantially all of the liabilities of High Income Municipal as of that date.

(a)

Shares of Common Stock purchased in the secondary market may be subject to brokerage commissions or other charges.

(b)

No sales load will be charged on the issuance of shares in the Reorganization. Shares of Common Stock are not available for purchase directly from the Combined Fund but may be purchased through a broker-dealer subject to individually negotiated commission rates.

(c)

No Early Withdrawal Charge (“EWC”) will apply to shares of MuniAssets Common Stock issued to High Income Municipal in the Reorganization, nor will any EWC be due on shares of High Income Municipal Common Stock in connection with the Reorganization.</R>

(d)

Based on average net assets of each Fund and the Combined Fund as of May 31, 2001.

(e)

Includes the administrative fee at the rate of 0.25% of average daily net assets paid by High Income Municipal.

 

3

Example:

Cumulative Expenses Paid on Shares of Common Stock for the Periods Indicated:

		1 Year		3 Years		5 Years		10 Years
An investor would pay the following expenses on a $1,000 investment assuming (1) the operating expense ratio for each Fund set forth above and (2) a 5% annual return throughout the period:
MuniAssets		$  8		$24		$42		$  94
High Income Municipal*		$16		$51		$88		$191
Combined Fund**		$  7		$22		$38		$  85

*

Assumes that the investor is not tendering shares at the end of the period.

**

Assumes that the Reorganization had taken place on May 31, 2001.

The foregoing Fee Table is intended to assist investors in understanding the costs and expenses that a stockholder of each Fund will bear directly or indirectly as compared to the costs and expenses that would be borne by such investors taking into account the Reorganization. The example set forth above assumes that all dividends were reinvested and uses a 5% annual rate of return as mandated by SEC regulations and for shares of High Income Municipal Common Stock that such shares were purchased in the initial public offering of shares of High Income Municipal Common Stock. The example should not be considered a representation of past or future expenses or annual rates of return. Actual expenses or annual rates of return may be more or less than those assumed for purposes of the example. See “Comparison of the Funds” and “The Reorganization — Potential Benefits to Common Stockholders of the Funds as a Result of the Reorganization.”

MuniAssets			<R>MuniAssets was incorporated under the laws of the State of Maryland on April 15, 1993 and commenced operations on June 25, 1993. As of July 31, 2001, MuniAssets had net assets of approximately $137.6 million.
High Income Municipal			High Income Municipal was incorporated under the laws of the State of Maryland on August 16, 1990 and commenced operations on November 2, 1990. As of July 31, 2001, High Income Municipal had net assets of approximately $133.2 million .
Comparison of the Funds			MuniYield		Municipal Strategy
	Fund Structure		Closed-end fund with its Common Stock listed on the NYSE		Continuously offered closed-end fund
	Liquidity		Common Stock trades at market price (which may be higher or lower than net asset value) on the NYSE on each day the NYSE is open for trading		Fund makes quarterly tender offers to purchase its Common Stock from stockholders at net asset value per share (less any applicable EWC)
	Purchases and Sales of Common Stock		Investors purchase and sell Common Stock through a registered broker-dealer on the NYSE, and transactions in shares may be subject to brokerage commissions or other charges		Investors purchase Common Stock from FAM Distributors, Inc. or from other selected securities dealers or financial intermediaries, and may sell their shares by tendering Common Stock to the Fund on a quarterly basis
</R>
			Investment Objectives and Policies. Each Fund is a non-diversified, closed-end management investment company. The Funds have substantially similar

 

4

		Municipal stockholders approve the Reorganization, it is not expected that High Income Municipal will make any additional tender offers for its shares.
		Portfolio Management. The investment adviser for MuniAssets is FAM and the investment adviser for High Income Municipal is MLIM. FAM and MLIM are affiliates. The investment adviser for the Combined Fund will be FAM. Theodore R. Jaeckel, Jr. currently serves as the portfolio manager for each Fund and will continue to serve as the portfolio manager for the Combined Fund after the Reorganization.
		Advisory and Administrative Fees. FAM and MLIM are responsible for the management of the investment portfolio of MuniAssets and High Income Municipal, respectively, and for providing administrative services to each respective Fund.
		MuniAssets pays FAM a monthly advisory fee at the annual rate of 0.55% of MuniAssets’ average weekly net assets. High Income Municipal pays MLIM a monthly advisory fee at the annual rate of 0.95% of High Income Municipal’s average daily net assets. High Income Municipal also pays MLIM a monthly administrative fee at the annual rate of 0.25% of High Income Municipal’s average daily net assets. MuniAssets does not pay FAM a separate administrative fee. After the Reorganization, the Combined Fund will pay FAM a monthly advisory fee at the annual rate of 0.55% of its average weekly net assets. The Combined Fund will not pay a separate administrative fee to FAM. See “Comparison of the Funds — Management of the Funds.”
		Overall Expense Ratio . The table below sets forth the total annualized operating expense ratio for MuniAssets and High Income Municipal and the Combined Fund based on their respective average net assets as of May 31, 2001.

				Average Net Assets as of May 31, 2001		Total Annualized Operating Expense Ratio
		MuniAssets		$134,643,032		0.76%
		High Income Municipal		$130,237,579		1.61%
		Combined Fund		$264,880,611		0.68%

		After the Reorganization, on a pro forma basis, the total annualized operating expenses of the Combined Fund as a percentage of net assets is expected to be: (a) 0.93% lower than High Income Municipal’s total annualized operating expense ratio, and (b) 0.08% lower than MuniAssets’ total annualized operating expense ratio.
		<R> Purchases and Sales of Common Stock. Investors typically purchase and sell shares of MuniAssets Common Stock through a registered broker-dealer on each day that the NYSE is open for trading at the market price on that day, and may incur a brokerage commission set by the broker-dealer. Investors typically can purchase</R>

6

		shares of High Income Municipal Common Stock from FAM Distributors, Inc. (“FAMD”), or from other selected securities dealers or other financial intermediaries. High Income Municipal Common Stock is not listed on any exchange. No secondary market presently exists for High Income Municipal Common Stock and it is not expected that a secondary market will develop. In order to provide liquidity for stockholders of High Income Municipal, High Income Municipal makes tender offers on a quarterly basis to purchase its Common Stock from stockholders at net asset value per share (less any applicable EWC). If High Income Municipal stockholders approve the Reorganization, it is not expected that High Income Municipal will make any additional tender offers for its shares.
		Ratings of Municipal Bonds. MuniAssets and High Income Municipal each invests at least 65% and 75%, respectively, of its total assets in Municipal Bonds that are rated in any one of the medium and lower rating categories by Moody’s, S&P or Fitch or in unrated bonds that FAM or MLIM believes are of comparable quality. MuniAssets and High Income Municipal each has the authority to invest as much as 35% and 25%, respectively, of its assets in Municipal Bonds in the higher rating categories (ratings of A or higher by Moody’s, S&P or Fitch or comparable unrated securities). In addition, each Fund reserves the right to invest temporarily 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 FAM or MLIM, prevailing market or financial conditions warrant.
		Portfolio Transactions . The portfolio transactions in which the Funds may engage are substantially similar, as are the procedures for such transactions. See “Comparison of the Funds — Portfolio Transactions.”
		Dividends and Distributions . The methods of dividend payment and distributions are substantially similar with respect to the Common Stock of each Fund. See “Comparison of the Funds — Dividends and Distributions.”
		Net Asset Value. The net asset value per share of MuniAssets Common Stock is determined as of the close of business on the NYSE (generally, 4:00 p.m., Eastern time) on the last business day of each week. The net asset value per share of High Income Municipal Common Stock is determined as of the close of business on the NYSE on each day the NYSE is open for trading.
		For purposes of determining the net asset value of a share of Common Stock of each Fund, the value of the securities held by the Fund plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) is divided by the total number of shares of

 

7

		Common Stock of the Fund. Expenses, including fees payable to FAM and MLIM, are accrued daily. See “Comparison of the Funds — Net Asset Value.”
		Voting Rights. The corresponding voting rights of the holders of shares of each Fund’s Common Stock are substantially similar. See “Comparison of the Funds — Capital Stock.”
		Stockholder Services. An automatic dividend reinvestment plan is available to holders of shares of the Common Stock of each Fund. The plans are different for each Fund. Under the respective plans, High Income Municipal issues new shares at net asset value. MuniAssets, however, purchases shares on the open market if its shares are trading at a discount to net asset value but issues new shares at net asset value if its shares are trading at a premium to net asset value. See “Comparison of the Funds — Automatic Dividend Reinvestment Plan.” Other stockholder services, including the provision of annual and semi-annual reports, are the same for each Fund.

 

Outstanding Securities of MuniAssets and High Income Municipal as of May 31, 2001

Title of Class	Amount Authorized	Amount Held By Fund for Its Own Account	Amount Outstanding Exclusive of Amount Shown in Previous Column
MuniAssets Common Stock	200,000,000	0	10,454,359
High Income Municipal Common Stock	200,000,000	0	13,883,973

Tax Considerations		<R>The consummation of the Reorganization is subject to the receipt of an opinion of counsel to the effect that, among other things, neither Fund will recognize gain or loss on the transaction and the stockholders of High Income Municipal will not recognize gain or loss on the exchange of their shares of High Income Municipal Common Stock for MuniAssets Common Stock (except to the extent that a holder of High Income Municipal Common Stock receives cash representing an interest in less than a full share of MuniAssets Common Stock in the Reorganization). The Reorganization will not affect the status of MuniAssets as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). See “Agreement and Plan of Reorganization — Tax Consequences of the Reorganization.” </R>

 

8

RISK FACTORS AND SPECIAL CONSIDERATIONS

<R>The investment objective, policies and restrictions of MuniAssets and High Income Municipal are substantially similar. Each Fund invests primarily in long term municipal obligations, the interest on which, in the opinion of bond counsel to the issuer, is exempt from Federal income tax (“Municipal Bonds”). Therefore, many of the investment risks associated with an investment in MuniAssets are substantially similar to the investment risks associated with an investment in High Income Municipal. These investment risks will also apply to an investment in the Combined Fund after the Reorganization. The principal difference in risk between MuniAssets and High Income Municipal results from the fact that MuniAssets Common Stock trades at market value and shares may often trade at a discount to net asset value on the NYSE. Conversely, High Income Municipal Common Stock is not listed on any exchange and no secondary market presently exists for its common stock, nor is a secondary market currently expected to develop. Investors may, however, tender their shares to High Income Municipal for repurchase at net asset value on a quarterly basis. It is expected that the Reorganization itself will not adversely affect the rights of holders of shares of Common Stock of either Fund or create additional risks.</R>

Except where noted, each Fund is subject to the following risks:

Trading at a Discount

Closed-end funds that are listed on an exchange, such as MuniAssets, are subject to the risk that the market price at which the common stock trades may be lower than the net asset value, commonly referred to as “trading at a discount.” Shares may also trade at a price that is higher than the Fund’s net asset value (a “premium”).

High Income Municipal Common Stock is not listed on any exchange and no secondary market presently exists for its common stock, nor is a secondary market expected to develop. As long as there is no secondary market for High Income Municipal Common Stock, the Fund is not subject to the risk that its shares will trade at a discount to net asset value. To provide liquidity to stockholders, the Fund’s Board of Directors considers making tender offers once each quarter to repurchase the Fund’s shares at net asset value. However, shares of High Income Municipal Common Stock are less liquid than shares of funds traded on a stock exchange, and stockholders who tender shares of High Income Municipal Common Stock held for less than three years at the date of tender may pay an EWC. The Board of Directors of High Income Municipal is not obligated to authorize any tender offer, and there may be quarters in which no tender offer is made. If the Board does not authorize a tender offer, stockholders may be unable to sell their shares. Since the inception of High Income Municipal, however, the Board has authorized a tender offer each quarter. The most recent tender offer for shares of High Income Municipal Common Stock concluded on August 20, 2001. If the Reorganization is consummated, that will have been the final tender offer.      Each Fund is designed primarily for long-term investors and should not be considered a vehicle for trading purposes.

Interest Rate and Credit Risk

Each Fund invests primarily in long term Municipal Bonds that are subject to interest rate and credit risk. Interest rate risk is the risk that prices of Municipal Bonds generally increase when interest rates decline and decrease when interest rates increase. Prices of longer-term securities generally change more in response to interest rate changes than prices of shorter-term securities. Credit risk is the risk that the issuer will be unable to pay the interest or principal when due. The degree of credit risk depends on both the financial condition of the issuer and the terms of the obligation. Because each Fund invests primarily in lower rated municipal bonds, each Fund is more subject to credit risk than a fund that invests primarily in investment grade municipal bonds.

Non-Diversification

Each Fund is registered as a “non-diversified” investment company. This means that each Fund may invest a greater percentage of its assets in the obligations of a single issuer than a diversified investment company. Since a Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Fund may be more exposed to any single economic, political or regulatory occurrence than a more widely-diversified fund. Even as a non-diversified fund, each Fund must still meet the diversification requirements of applicable Federal income tax law.

 

9

High Yield or “Junk Bonds”

The Funds invest primarily in Municipal Bonds that are rated in any one of the medium and lower rating categories by S&P, Moody’s or Fitch, or are considered by MLIM or FAM, as applicable, to be of comparable quality. These high yield or “junk bonds” entail a higher level of credit risk (loss of income and/or principal) than investments in higher rated securities. Securities rated in the lower rating categories are considered to be predominantly speculative with respect to capacity to pay interest and repay principal. Issuers of high yield securities may be highly leveraged and may not have available to them more traditional methods of financing. New issuers also may be inexperienced in managing their debt burden. The issuer’s ability to service its debt obligations may be adversely affected by business developments unique to the issuer, the issuer’s inability to meet specific projected business forecasts or the inability of the issuer to obtain additional financing. High yield securities may be unsecured and may be subordinated to other creditors of the issuer.

Private Activity Bonds

Each Fund may invest all or a portion of its assets in certain tax-exempt securities classified as “private activity bonds.” These bonds may subject certain investors in a Fund to a Federal alternative minimum tax.

Indexed and Inverse Floating Obligations

Each Fund may invest in municipal bonds yielding returns based on a particular index of value or interest rates. Each Fund also may invest in “inverse floating obligations” or “residual interest bonds.” These securities generally pay interest at floating interest rates that decline as short-term market rates increase and increase as short-term market rates decline. FAM and MLIM believe that investing in indexed and inverse floating obligations allows a Fund to vary the degree of investment leverage relatively efficiently under different market conditions.

Options and Futures Transactions

<R>Each Fund may engage in certain options and futures transactions to reduce its exposure to interest rate movements. If a Fund incorrectly forecasts market values, interest rates or other factors, that Fund’s performance could suffer. Each Fund also may suffer a loss if the other party to the transaction fails to meet its obligations. The Funds are not required to use hedging and each may choose not to do so. The Funds cannot guarantee that any hedging strategies that they use will work.</R>

Antitakeover Provisions

The Articles of Incorporation of each Fund (in each case, a “Charter”) and Maryland law contain certain provisions that could limit the ability of other entities or persons to acquire control of that Fund or to change the composition of its Board of Directors. Such provisions could limit the ability of stockholders to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of a Fund.

 

10

COMPARISON OF THE FUNDS

Financial Highlights

MuniAssets . The financial information in the table below has been audited in conjunction with the annual audit of the financial statements of MuniAssets by Deloitte & Touche LLP , independent auditors. The following per share data and ratios have been derived from information provided in the financial statements of MuniAssets.

		For the Year Ended May 31,														For the Period June 25, 1993† to May 31,
		2001		2000		1999		1998		1997		1996		1995		1994
Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period		$12.76		$14.46		$14.77		$14.16		$ 13.74		$13.73		$13.40		$14.18
Investment income — net		.83		.80		.83		.84		.84		.88		.87		.81
Realized and unrealized gain (loss) on investments — net		.19		(1.69	)	(.32	)	.62		.42		.03		.33		(.66	)
Total from investment operations		1.02		(.89	)	.51		1.46		1.26		.91		1.20		.15
Less dividends and distributions: Investment income — net		(.82	)	(.81	)	(.82	)	(.85	)	(.84	)	(.89	)	(.85	)	(.74	)
Realized gain on investments — net		—		—		—		—		—		—		—		(.15	)
Total dividends and distributions		(.82	)	(.81	)	(.82	)	(.85	)	(.84	)	(.89	)	(.85	)	(.89	)
Capital charge resulting from Issuance     of Common Stock		—		—		—		—		—		(.01	)	(.02	)	(.04	)
Net asset value, end of period		$12.96		$12.76		$14.46		$14.77		$14.16		$13.74		$13.73		$13.40
Market price per share, end of period		$13.00		$11.1875		$13.00		$13.75		$12.625		$12.375		$11.875		$12.25
Total Investment Return:* Based on net asset value per share		8.58	%	(5.45	%)	3.74	%	10.87	%	10.11	%	7.46	%	9.93	%	.83	%**
Based on market price per share		24.22	%	(7.79	%)	.19	%	15.76	%	9.01	%	11.91	%	4.00	%	(12.87	)%**
Ratios to Average Net Assets: Expenses, net of reimbursement		.76	%	.74	%	.72	%	.75	%	.76	%	.55	%	.50	%	.20	%††
Expenses		.76	%	.74	%	.72	%	.75	%	.76	%	.77	%	.85	%	.85	%††
Investment income — net		6.44	%	5.96	%	5.66	%	5.75	%	6.06	%	6.24	%	6.54	%	6.12	%††
Supplemental Data: Net assets, end of period (in thousands)		$135,448		$133,065		$150,883		$153,947		$147,630		$143,195		$143,169		$64,154
Portfolio turnover		17.11	%	32.38	%	40.57	%	36.39	%	45.15	%	42.72	%	55.51	%	101.59	%

*

Total investment returns based on market value, which can be significantly greater or lesser than the net asset value, may result in substantially different returns. Total investment returns exclude the effects of sales charges.

**

Aggregate total investment return.

†

Commencement of operations.

††

Annualized.

11

<R> High Income Municipal . The financial information in the table below, except for the six-month period ended February 28, 2001, which is unaudited and has been provided by MLIM, has been audited in conjunction with the annual audit of the financial statements of High Income Municipal by Deloitte & Touche LLP , independent auditors. The following per share data and ratios have been derived from information provided in the financial statements of High Income Municipal.

	For the Six Months Ended February  28,	For the Year Ended August 31,																		For the Period November 2, 1990† to August 31,
	2001	2000		1999		1998		1997		1996		1995		1994		1993		1992		1991

Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period	$9.45							$10.24			$11.46		$11.34		$10.94		$10.97		$10.92		$11.44		$10.74		$10.29		$10.00
Investment    income    — net	.26							.55			.55		.61		.65		.66		.65		.65		.68		.71		.63
Realized and    unrealized    gain (loss)    on investments     — net	(.19					)		(.79		)	(.89	)	.32		.44		(.03	)	.23		(.45	)	.75		.50		.29
Total from     investment     operations	.07							(.24		)	(.34	)	.93		1.09		.63		.88		.20		1.43		1.21		.92
Less dividends and distributions:    Investment       income        — net	(.26					)		(.55		)	(.55	)	(.61	)	(.65	)	(.66	)	(.65	)	(.65	)	(.68	)	(.71	)	(.63		)
Realized       gain on          investments      — net	—							—			(.18	)	(.20	)	(.04	)	—		(.15	)	(.07	)	(.05	)	(.05	)	—
In excess of       realized      gain on      investments      — net	—							—			(.15	)	—		—		—		(.03	)	—		—		—		—
Total    dividends    and    distributions	(.26					)		(.55		)	(.88	)	(.81	)	(.69	)	(.66	)	(.83	)	(.72	)	(.73	)	(.76	)	(.63		)
Net asset    value, end    of period	$9.26							$9.45			$10.24		$11.46		$11.34		$10.94		$10.97		$10.92		$11.44		$10.74		$10.29
Total Investment Return: * Based on net    asset value    per share	0.81					%**		(2.29		)%	(3.16	)%	8.43	%	10.20	%	5.81	%	8.68	%	1.75	%	13.83	%	12.29	%	9.43		%**
Ratios to Average Net Assets: Expenses,     net of     reimburse-     ment	1.57					%††		1.46		%	1.46	%	1.48	%	1.44	%	1.50	%	1.52	%	1.48	%	1.37	%	1.30	%	.84		%††
Expenses	1.57					%††		1.46		%	1.46	%	1.48	%	1.44	%	1.50	%	1.52	%	1.48	%	1.47	%	1.55	%	1.76		%††
Investment    income    — net	5.74					%††		5.68		%	5.07	%	5.37	%	5.83	%	5.90	%	6.11	%	5.81	%	6.17	%	6.85	%	7.43		%††
Supplemental Data: Net assets,     end of     period (in     thousands)	$131,124							$149,394			$201,574		$233,713		$211,620		$199,552		$198,575		$212,958		$216,922		$170,735		$114,628
Portfolio    turnover	5.10					%		13.42		%	39.53	%	36.45	%	43.07	%	28.54	%	21.28	%	28.51	%	28.74	%	31.74	%	75.92		%

</R>

*

Total investment returns exclude the effect of the early withdrawal charge, if any. High Income Municipal is a continuously offered closed-end fund, the shares of which are offered at net asset value. Therefore, no separate market exists.

**

Aggregate total investment return.

†

Commencement of operations.

††

Annualized.

12

Per Share Data for Common Stock* (Unaudited)

<R> MuniAssets (Traded on NYSE)

Quarter Ended*	Market Price**				Net Asset Value				Premium (Discount) to Net Asset Value
	High		Low		High		Low		High		Low
	$		$		$		$		%		%
August 31, 1999	13.25		12.188		14.43		13.78		(6.57	)	(11.81	)
November 30, 1999	12.375		11.312		13.85		13.31		(9.47	)	(16.14	)
February 29, 2000	11.813		10.75		13.37		12.88		(9.27	)	(17.27	)
May 31, 2000	11.437		10.75		13.13		12.70		(11.68	)	(16.86	)
August 31, 2000	12.125		11.188		13.11		12.78		(7.30	)	(13.41	)
November 30, 2000	12.438		11.688		13.16		12.73		(4.98	)	(9.26	)
February 28, 2001	13.35		12.125		12.96		12.72		4.05		(4.98	)
May 31, 2001	13.89		12.50		12.99		12.84		2.95		(3.55	)
August 31, 2001	13.35		13.00		13.26		12.96		2.15		(0.99	)

</R>

*

Calculations are based upon shares of Common Stock outstanding at the end of each quarter.

**

As reported in the consolidated transaction operating system.

High Income Municipal

<R>

Quarter Ended*	Net Asset Value
	High		Low
	$		$
November 30, 1999	10.24		9.88
February 29, 2000	9.90		9.57
May 31, 2000	9.61		9.27
August 31, 2000	9.46		9.31
November 30, 2000	9.46		9.22
February 28, 2001	9.29		9.21
May 31, 2001	9.35		9.26
August 31, 2001	9.53		9.34

</R>

*

Calculations are based upon shares of Common Stock outstanding at the end of each quarter.

<R>During the last two years, share prices for MuniAssets Common Stock have fluctuated between a maximum premium of approximately 4.05% and a maximum discount of approximately 17.27%. Although there is no reason to believe that this pattern should be affected by the Reorganization, it is not possible to predict whether shares of the Combined Fund will trade at a premium or discount to net asset value following the Reorganization, or what the magnitude of any such premium or discount might be.</R>

Investment Objective and Policies

<R>The structure, organization and investment policies of the Funds are substantially similar. Each Fund is a non-diversified, closed-end management investment company registered under the Investment Company Act. 1 The investment objectives of the Funds are substantially similar. Each Fund seeks to provide stockholders with high current income exempt from Federal income taxes. Each Fund seeks to achieve its investment objective by investing primarily in a portfolio of medium to lower grade or unrated Municipal Bonds. Under normal circumstances, at least 80% of each Fund’s total assets will be invested in Municipal Bonds. MuniAssets and High Income Municipal each invests at least 65% and 75%, respectively, of its total assets in Municipal Bonds that are rated in any one of the medium and lower rating categories of Moody’s, S&P or Fitch, or in unrated Municipal Bonds that FAM or MLIM, as applicable, believes are of comparable quality. These ratings are currently Baa (Moody’s) or BBB (S&P or Fitch) or lower. MuniAssets and High Income Municipal each has the authority to invest as much as 35% and 25%, respectively, of its assets in Municipal Bonds in the higher rating

1

High Income Municipal commenced operations on November 2, 1990 upon the closing of its initial public offering of shares of Common Stock. As of August 27, 2001, High Income Municipal had 13,554,767 shares of Common Stock outstanding. MuniAssets commenced operations on June 25, 1993 upon the closing of its initial public offering of shares of Common Stock. As of August 27, 2001, MuniAssets had 10,461,767 shares of Common Stock outstanding.</R>

 

13

categories of nationally recognized statistical rating organizations (ratings of A or higher by Moody’s, S&P or Fitch or 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 FAM or MLIM, prevailing market or financial conditions warrant. 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.      Ordinarily, neither Fund intends to realize significant interest income that is subject to Federal income taxes. However, each Fund may invest all or a portion of its assets in certain tax-exempt securities classified as “private activity bonds” (in general, bonds that benefit non-governmental entities) that may subject certain investors in the Fund to a Federal alternative minimum tax.

<R>Each Fund also may invest in securities not issued by or on behalf of a state or territory or by an agency or instrumentality thereof, if the Fund nevertheless believes such securities pay interest or distributions that are exempt from Federal income taxation (“Non-Municipal Tax-Exempt Securities”). Non-Municipal Tax-Exempt Securities may include securities issued by other investment companies that invest in Municipal Bonds, to the extent such investments are permitted by the Investment Company Act. Other Non-Municipal Tax-Exempt Securities could include trust certificates or other instruments evidencing interest in one or more long-term Municipal Bonds. Certain Non-Municipal Tax-Exempt Securities may be characterized as derivative instruments. Non-Municipal Tax-Exempt Securities that pay interest exempt from Federal income taxes will be considered “Municipal Bonds” for purposes of the Funds’ investment objective and policies.</R>

Investments in lower rated Municipal Bonds generally provide a higher yield and are less affected by interest rate fluctuations than higher rated tax-exempt securities of similar maturity but are subject to greater overall 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 III - Ratings of Municipal Bonds and Commercial Paper.”

Each Fund seeks to reduce risk through investing in multiple issuers, credit analysis and monitoring of current developments regarding the obligor and trends in both the economy and financial markets. FAM and MLIM each will use various means to research the stability and/or potential for improvement of various municipal issuers in connection with the proposed purchase of their securities by the Funds. 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 that 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, FAM and MLIM each will vary the average maturity of the applicable Fund’s portfolio securities based upon their assessment of economic and market conditions.

<R>Each Fund is classified as non-diversified within the meaning of the Investment Company Act, which means that it is not limited by such Act in the proportion of its assets that it may invest in securities of a single issuer. However, each Fund’s investments will be limited so as to qualify the Fund as a “regulated investment company” for purposes of Federal tax laws. See “Taxes.” Requirements for qualification include limiting its investments so that, at the close of each quarter of the taxable year, (i) not more than 25% of the market value of the Fund’s total assets will be invested in the securities (other than U.S. Government securities) of a single issuer and (ii) with respect to 50% of the market value of its total assets, not more than 5% of the market value of its total assets will be invested in the securities (other than U.S. Government securities) of a single issuer and the Fund will not own more than 10% of the outstanding voting securities of a single issuer. A fund that elects to be classified as “diversified” under the Investment Company Act must satisfy the foregoing 5% and 10% requirements with respect to 75% of its total assets. To the extent that a Fund assumes large positions in the securities of a small number of issuers, the Fund’s 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.</R>

 

14

Description of Municipal Bonds

<R>Municipal Bonds include 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. In addition, certain types of private activity bonds (“PABs”) are issued by or on behalf of public authorities to finance various privately-operated facilities, including airports, public parks, mass commuting facilities and multifamily housing projects, as well as facilities for water supply, gas, electricity, sewage or solid waste disposal and pollution control facilities. For purposes of this Proxy Statement and Prospectus, such obligations are Municipal Bonds if the interest paid thereon is exempt from Federal income tax, even though such bonds may be industrial development bonds or PABs as discussed below. </R>

The two principal classifications of Municipal Bonds are “general obligation” bonds and “revenue” or “special obligation” bonds, which latter category includes PABs and, for bonds issued on or before August 15, 1986, industrial development bonds or “IDBs.” General obligation bonds are typically secured by the issuer’s pledge of faith, credit, and taxing power for the repayment of principal and the payment of 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. PABs 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 repayment of the principal and the payment of interest on such bonds depend 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.

Each Fund may purchase Municipal Bonds classified as PABs. Interest received on certain PABs is treated as an item of “tax preference” for purposes of the Federal alternative minimum tax and may impact the overall tax liability of investors in the Fund. There is no limitation on the percentage of the Fund’s assets that may be invested in Municipal Bonds the interest on which is treated as an item of “tax preference” for purposes of the Federal alternative minimum tax. See “Tax Rules Applicable to the Funds and their Stockholders.”

<R>Also included within the general category of Municipal Bonds are certificates of participation (“COPs”) executed and delivered for the benefit of government authorities or entities to finance the acquisition or construction of equipment, land and/or facilities. The COPs 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.</R>

Federal tax legislation has limited the types and volume of bonds qualifying for the Federal income tax exemption of interest. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by the Funds.

Other Investment Policies

Each Fund has adopted certain other policies as set forth below:

Taxable Commercial Paper.  Taxable commercial paper must be rated A-1+ through A-3 by S&P, Prime-1 through Prime-3 by Moody’s, F-1+ through F-3 by Fitch or have credit characteristics equivalent to such ratings

 

15

Call Rights . Each Fund may purchase a Municipal Bond issuer’s right to call all or a portion of such Municipal Bond for mandatory tender for purchase (a “Call Right”). A holder of a Call Right may exercise such right to require a mandatory tender for the purchase of related Municipal Bonds, subject to certain conditions. A Call Right that is not exercised prior to the maturity of the related Municipal Bond will expire without value. The economic effect of holding both the Call Right and the related Municipal Bond is identical to holding a Municipal Bond as a non-callable security.

<R> Indexed and Inverse Floating Obligations . Each Fund may invest in Municipal Bonds (and Non-Municipal Tax-Exempt Securities) yielding a return based on a particular index of value or interest rates. For example, the Funds may invest in Municipal Bonds that pay interest based on an index of Municipal Bond interest rates. The principal amount payable upon maturity of certain Municipal Bonds also may be based on the value of an index. The Funds’ return on these types of Municipal Bonds (and Non-Municipal Tax-Exempt Securities) will be subject to risk with respect to the value of the particular index, including reduced or eliminated interest payments and losses of invested principal. The Funds also may invest in so-called “inverse floating obligations” or “residual interest bonds” on which the interest rates typically vary inversely with a short-term floating rate (which may be reset periodically by a dutch auction, a remarketing agent, or by reference to a short-term tax-exempt interest rate index). Each Fund may purchase synthetically created inverse floating rate bonds evidenced by custodial or trust receipts. Generally, interest rates on inverse floating rate bonds will decrease when short-term interest rates increase, and will increase when short-term interest rates decrease. Such securities have the effect of providing a degree of investment leverage, since they may increase or decrease in value in response to changes in market interest rates at a rate that is a multiple (typically two) of the rate at which fixed-rate, long-term tax-exempt securities increase or decrease in response to such changes. As a result, the market values of such securities will generally be more volatile than the market values of fixed-rate tax-exempt securities. To seek to limit the volatility of these securities, each Fund may purchase inverse floating obligations that have shorter term maturities or that contain limitations on the extent to which the interest rate may vary. FAM and MLIM believe that indexed and inverse floating obligations represent a flexible portfolio management instrument for the Funds that allows FAM and MLIM to vary the degree of investment leverage relatively efficiently under different market conditions.

Repurchase Agreements . Each Fund may invest in securities pursuant to repurchase agreements. Repurchase agreements may be entered into only with a member bank of the Federal Reserve System or a primary dealer in U.S. Government securities or an affiliate thereof. Under a repurchase agreement, the seller agrees, upon entering into the contract, to repurchase the security at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed rate of return insulated from market fluctuations during such period. Each Fund may not invest in repurchase agreements maturing in more than seven days if such investments, together with all other illiquid investments, would exceed 15% of the Fund’s net assets. In the event of default by the seller under a repurchase agreement, the Fund may suffer time delays and incur costs or possible losses in connection with the disposal of the underlying securities. In general, for Federal income tax purposes, repurchase agreements are treated as collateralized loans secured by the securities “sold.” Therefore, amounts earned under such agreements will not be considered tax-exempt interest.</R>

 

16

Borrowings . High Income Municipal is authorized to borrow money in amounts of up to 33 1 /3 % of the value of its total assets at the time of such borrowings to finance the purchase of its own shares pursuant to tender offers, if any, or for temporary, extraordinary or emergency purposes. Borrowings by the Fund (commonly known as “leveraging”) create an opportunity for greater total return since the Fund will not be required to sell portfolio securities to purchase tendered shares but, at the same time, increase exposure to capital risk. In addition, borrowed funds are subject to interest costs that may offset or exceed the return earned on the borrowed funds.

Information Regarding Options and Futures Transactions

Each Fund may hedge all or a portion of its portfolio investments against fluctuations in interest rates through the use of options and certain financial futures contracts and options thereon. While each Fund’s use of hedging strategies is intended to reduce the volatility of the net asset value of Fund shares, the net asset value of Fund shares will fluctuate. There can be no assurance that a Fund’s hedging transactions will be effective. Furthermore, the Funds engage in hedging activities from time to time and may not necessarily be engaging in hedging activities when movements in interest rates occur. The Funds have no obligation to enter into hedging transactions and each may choose not to do so.

Gains from transactions in options and futures contracts distributed to stockholders are taxable as ordinary income or, in certain circumstances, as long-term capital gains to stockholders. See “Taxes — Tax Treatment of Options and Futures Transactions.”

The following is a description of the options and futures transactions 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 that Fund’s Board of Directors without the approval of the Fund’s 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 the Fund at the stated exercise price until the option expires. Each Fund only writes covered options, which means that so long as the Fund is obligated as the writer of a call option, it will own the underlying securities subject to the option. Neither Fund may write covered call options on underlying securities in an amount exceeding 15% of the market value of its total assets.

Each Fund receives a premium from writing a call option that increases the Fund’s return on the underlying security in the event the option expires unexercised or is closed out at a profit. By writing a call, a Fund limits its opportunity to profit from an increase in the market value of the underlying security above the exercise price of the option for as long as the Fund’s obligation as a writer continues. Covered call options serve as a partial hedge against a decline in the price of the underlying security. Each Fund may engage in closing transactions in order to terminate outstanding options that it has written.

Purchase of Options . Each Fund may purchase put options in connection with its hedging activities. By buying a put a Fund has a right to sell the underlying security at the exercise price, thus limiting 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, a put option may be sold in a closing sale transaction; profit or loss from the sale will depend on whether the amount received is more or less than the premium paid for the put option plus the related transaction costs. A closing sale transaction cancels out a Fund’s position as the purchaser of an option by means of an offsetting sale of an identical option prior to the expiration of the option it has purchased. In certain circumstances, a Fund may purchase call options on securities held in its portfolio on which it has written call options or on securities that it intends to purchase. Neither Fund will purchase options on securities if, as a result of such purchase, the aggregate cost of all outstanding options on securities held by that Fund would exceed 5% of the market value of the Fund’s total assets.       Financial Futures Contracts and Options . Each Fund may purchase and sell certain financial futures contracts and options thereon solely for the purpose of hedging its investments in Municipal Bonds against

17

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 futures contracts.

<R>The purchase or sale of a futures contract differs from the purchase or sale of a security in that no price or premium is paid or received. Instead, an amount of cash or U.S. Treasury bills 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 that the Funds hold or anticipate purchasing against adverse changes in interest rates. Each Fund also may purchase and sell financial futures contracts on U.S. Government securities and purchase and sell put and call options on such 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, Treasury notes, GNMA Certificates and three-month U.S. Treasury bills.</R>

Subject to policies adopted by its Directors, each Fund also may engage in transactions in other financial futures contracts transactions and options thereon, such as financial futures contracts or options on other municipal bond indices that may become available if FAM or MLIM, as the case may be, and the Directors of the Fund should determine that there is normally a sufficient correlation between the prices of such futures contracts and the Municipal Bonds in which the Funds invest to make such hedging appropriate.

Over-the-Counter Options . Each Fund may engage in options and futures transactions on exchanges and in the over-the-counter markets. 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 . Each Fund will 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 that 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 a Fund may be considered to be illiquid. The illiquidity of such options or assets may prevent a successful sale of such options or assets, result in a delay of sale, or reduce the amount of proceeds that might otherwise be realized.

<R>Risk Factors in Options and Futures Transactions . Utilization of futures transactions involves the risk of imperfect correlation in movements in the price of futures contracts and movements in the price of the security that is the subject of the hedge. If the price of the futures contract moves more or less than the price of the security that is the subject of the hedge, a Fund will experience a gain or loss that will not be completely offset by movements in the price of such security. There is a risk of imperfect correlation where the securities underlying 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 that serves as a basis for a financial futures contract. Finally, in the case of futures contracts on U.S. Government securities and options on such futures contracts, the anticipated correlation of price movements between the U.S. Government securities underlying the futures or options and Municipal Bonds may be adversely affected by economic, political, legislative or other developments which have a disparate impact on the respective markets for such securities.</R>      Under regulations of the Commodity Futures Trading Commission (the “CFTC”), the futures trading activities described herein will not result in a Fund being deemed a “commodity pool,” as defined under such regulations, provided that each Fund adheres to certain restrictions. In particular, each Fund may purchase and

 

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sell futures contracts and options thereon (i) for bona fide hedging purposes, without regard to the percentage of the Fund’s assets committed to margin and option premiums and (ii) for non-hedging purposes if, immediately thereafter, the sum of the amount of initial margin deposits on the Fund’s existing futures position and premiums paid for outstanding options would exceed 5% of the market value of the liquidation value of the Fund’s portfolio, after taking into account unrealized profits and unrealized losses on any such transactions. Margin deposits may consist of cash or securities acceptable to the broker and the relevant contract market.

When a Fund purchases a 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 the Fund’s custodian, so that the amount so segregated plus the amount of initial and variation margin held in the account of its broker equals the market value of the futures contract, thereby ensuring that the use of such futures contract is unleveraged.

Although certain risks are involved in options and futures transactions, FAM and MLIM believe that, because the Funds will 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 options and futures transactions.

The volume of trading in the exchange markets with respect to Municipal Bond options may be limited, and it is impossible to predict the amount of trading interest that may exist in such options. In addition, there can be no assurance that viable exchange markets will continue.

Each Fund intends to enter into options and futures transactions, on an exchange or in the over-the-counter market, only if there appears to be a liquid secondary market for such options or futures or, in the case of OTC options, FAM and MLIM believe the Funds can receive on each business day at least two independent bids or offers. There can be no assurance, however, that a liquid secondary market will exist at any specific time. Thus, it may not be possible to close an options or futures transaction. The inability to close options and futures positions also could have an adverse impact on a Fund’s ability to effectively hedge its portfolio. There is also the risk of loss by a Fund of margin deposits or collateral in the event of bankruptcy of a broker with whom a Fund has an open position in an options or futures contract.

The liquidity of a secondary market in a futures contract may be adversely affected by “daily price fluctuation limits” established by commodity exchanges which limit the amount of fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open futures positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days.

If it is not possible to close a financial futures position entered into by a Fund, that Fund would continue to be required to make daily cash payments of variation margin in the event of adverse price movements. In such a situation, if a Fund has insufficient cash, it may have to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so.

The successful use of these transactions also depends on the ability of FAM and MLIM 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 futures contract is held by a Fund or move in a direction opposite to that anticipated, that Fund may realize a loss on the hedging transaction that is not fully or partially offset by an increase in the value of portfolio securities. As a result, a Fund’s total return for such period may be less than if it had not engaged in the hedging transaction. Furthermore, a Fund only engages in hedging transactions from time to time and may not necessarily be engaging in hedging transactions when movements in interest rates occur.

Investment Restrictions

The Funds’ investment restrictions differ in some respects, as discussed below. The fundamental investment restrictions of each Fund may not be changed without the approval of the holders of a majority of the outstanding shares of Common Stock of that Fund. (For this purpose and under the Investment Company Act, “majority” 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.) The following investment restrictions of MuniAssets will apply to the Combined Fund. Under its fundamental investment restrictions, MuniAssets may not:

1)

Make investments for the purpose of exercising control or management.

2)

Purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment

 

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For purposes of restriction (7), the exception for states, municipalities and their political subdivisions applies only to tax-exempt securities issued by such entities.

Additional investment restrictions adopted by MuniAssets, which may be changed by its Board of Directors without stockholder approval, provide that MuniAssets 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)

<R>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.</R>

If a percentage restriction on the investment or use of assets set forth above is adhered to at the time a transaction is effected, later changes in percentages resulting from changing values will not be considered a violation.

High Income Municipal’s fundamental investment restrictions are substantially the same as MuniAsset’s fundamental investment restrictions (1) through (7) above. However, High Income Municipal has two other fundamental investment restrictions, which are substantially similar to MuniAsset’s additional non-fundamental investment restrictions (3) and (4) above.

FAM, MLIM and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) are owned and controlled by Merrill Lynch & Co., Inc. (“ML & Co.”). Because of the affiliation of Merrill Lynch with FAM and MLIM, the Funds are prohibited from engaging in certain transactions involving Merrill Lynch except pursuant to an exemptive order or otherwise in compliance with the provisions of the Investment Company Act and the rules and regulations thereunder. Included among such restricted transactions will be purchases from or sales to Merrill Lynch of securities in transactions in which it acts as principal. An exemptive order has been obtained 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.”

 

Portfolio Composition

<R>There are differences in concentration among the types of securities held in the portfolio of each Fund. For MuniAssets, as of July 31, 2001, approximately 88.6%, 10.4%, 0.3% and 0.7% of its portfolio was invested in revenue bonds, general obligation bonds, common stock and cash equivalents, respectively; for High Income Municipal, approximately 89.4%, 9.8%, 0.5% and 0.3% of its portfolio was invested in revenue bonds, general obligation bonds, common stock, and cash equivalents, respectively.

Although the investment portfolios of the Funds must satisfy the same standards with respect to credit quality, the actual securities owned by each Fund are different. As a result there are certain differences in the composition of the two investment portfolios. The tables below set forth the percentages as of July 31, 2001 of the municipal bonds held by each Fund.</R>

MuniAssets

<R>As of July 31, 2001, approximately 97% and 3% of the market value of MuniAssets’ portfolio was invested in long-term Municipal Bonds and short-term Municipal Bonds, respectively. The following table sets forth certain information with respect to the composition of MuniAssets’ long-term municipal obligation investment portfolio as of July 31, 2001.

S&P		Moody’s	Number of Issues	Value (in thousands)	Percent
	BBB	Baa	13	$  23,964	18.1%
	BB	Ba	15	$  25,148	19.0%
	B	B	3	$    4,423	3.3%
	NR	NR	44	$  78,849	59.6%
	Total:		75	$132,384	100.0%</R>

*

Ratings: Using the higher of S&P’s or Moody’s rating on the Fund’s Municipal Bonds S&P’s rating categories may be modified further by a plus (+) or minus (-) in AA, A and BBB ratings. Moody’s rating categories may be modified further by a 1, 2 or 3 in Aa, A and Baa ratings. See Appendix III —“Ratings of Municipal Bonds and Commercial Paper.”

High Income Municipal

<R>As of July 31, 2001, approximately 98% and 2% of the market value of High Income Municipal’s portfolio was invested in long-term Municipal Bonds and short-term Municipal Bonds, respectively. The following table sets forth certain information with respect to the composition of High Income Municipal’s long-term municipal obligation investment portfolio as of July 31, 2001.

S&P		Moody’s	Number of Issues	Value (in thousands)	Percent
	AAA	Aaa	4	$    8,178	6.3%
	A	A	2	$    3,729	2.9%
	BBB	Baa	6	$  17,811	13.8%
	BB	Ba	14	$  14,879	11.5%
	B	B	6	$  17,364	13.5%
	NR	NR	37	$  66,997	52.0%
	Total:		69	$128,958	100.0%</R>

*

Ratings: Using the higher of S&P’s or Moody’s rating on High Income Municipal’s Municipal Bonds. S&P’s rating categories may be modified further by a plus (+) or minus (-) in AA, A and BBB ratings. Moody’s rating categories may be modified further by a 1, 2 or 3 in AA, A and Baa ratings. See Appendix III —“Ratings of Municipal Bonds and Commercial Paper.”

Performance

<R>      The table below sets forth for each Fund the yield and tax equivalent yield for the 31 days ended May 31, 2001 and the average annual total return for the one, five and ten years ended May 31, 2001.

			Average Annual Total Return
	Yield — 31 days ended May 31, 2001	Tax equivalent yield — 31 days ended May 31, 2001†	One Year ended May 31, 2001	Five Years ended May 31, 2001	Since Inception/ Ten Years ended May 31, 2001
High Income Municipal	6.42%	8.10%	6.51%	3.50%	6.03%
MuniAssets	6.62%	9.32%	8.58%	5.39%	5.67%*

†		Assumes a 27.5% federal income tax rate.
*		Since inception on June 25, 1993.</R>

 

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Portfolio Transactions

The procedures for engaging in portfolio transactions are the same for each Fund. Subject to policies established by the Board of Directors of each Fund, FAM or MLIM is primarily responsible for the execution of the applicable Fund’s portfolio transactions. In executing such transactions, FAM and MLIM seek to obtain the best results for the applicable Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm involved and the firm’s risk in positioning a block of securities. While FAM and MLIM generally seek reasonably competitive commission rates, the Funds do not necessarily pay the lowest commission or spread available.

Neither Fund has any obligation to deal with any broker or dealer in the execution of transactions in portfolio securities. Subject to obtaining the best price and execution, securities firms that provide supplemental investment research to FAM and MLIM, including Merrill Lynch, may receive orders for transactions by a Fund. Information so received will be in addition to, and not in lieu of, the services required to be performed by FAM and MLIM under their respective investment advisory agreements with the Funds, and the expenses of FAM and MLIM will not necessarily be reduced as a result of the receipt of such supplemental information.

 

Each Fund invests in securities that are primarily traded in the over-the-counter markets, and each Fund normally deals directly with the dealers who make markets in the securities involved, except in those circumstances where better prices and execution are available elsewhere. Under the Investment Company Act, except as permitted by exemptive order, persons affiliated with a Fund are prohibited from dealing with the Fund as principals in the purchase and sale of securities. Since transactions in the over-the-counter markets usually involve transactions with dealers acting as principals for their own account, the Funds do not deal with affiliated persons, including Merrill Lynch and its affiliates, in connection with such transactions, except that, pursuant to an exemptive order obtained by FAM and MLIM, a Fund may engage in principal transactions with Merrill Lynch in high quality, short-term, tax-exempt securities. An affiliated person of a Fund may serve as its broker in over-the-counter transactions conducted on an agency basis.

Each Fund also may purchase tax-exempt debt instruments in individually negotiated transactions with the issuers of such securities. Because an active trading market may not exist for such securities, the prices that a Fund may pay for these securities or receive on their resale may be lower than that for similar securities with a more liquid market.

The Board of Directors of each Fund has considered the possibility of recapturing for the benefit of the Funds brokerage commissions, dealer spreads and other expenses of possible portfolio transactions, such as underwriting commissions, by conducting portfolio transactions through affiliated entities, including Merrill Lynch. For example, brokerage commissions received by Merrill Lynch could be offset against the investment advisory fees paid by each Fund to FAM or MLIM. After considering all factors deemed relevant, the Directors of each Fund made a determination not to seek such recapture. The Directors will reconsider this matter from time to time.

Portfolio Turnover

Generally, neither Fund purchases securities for short-term trading profits. However, either Fund may dispose of securities without regard to the time that they have been held when such action, for defensive or other reasons, appears advisable to FAM or MLIM. The portfolio turnover rate is calculated by dividing the lesser of purchases or sales of portfolio securities for the particular fiscal year by the monthly average of the value of the portfolio securities owned by a Fund during the particular fiscal year. For purposes of determining this rate, all securities whose maturities at the time of acquisition are one year or less are excluded. A high portfolio turnover rate results in greater transaction costs, which are borne directly by a Fund, and also has certain tax consequences for stockholders. The portfolio turnover rate for each Fund for the periods indicated is set forth below:

		Year Ended May 31, 2000	Year Ended May 31, 2001
	MuniAssets	32.38%	17.11%

		Year Ended August 31, 2000	Six Months Ended February 28, 2001
	High Income Municipal	13.42%	5.10%

 

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The net asset value per share of MuniAssets Common Stock is determined as of the close of business on the NYSE on the last business day of each week. The net asset value per share of High Income Municipal Common Stock is determined as of the close of business on the NYSE once daily on each day the NYSE is open for trading. The NYSE generally closes at 4:00 p.m. Eastern time. For purposes of determining the net asset value of a share of Common Stock of each Fund, the value of the securities held by each Fund plus any cash or other assets (including interest and dividends accrued 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 fees payable to FAM and MLIM, are accrued daily.

The Municipal Bonds in which each Fund invests are traded primarily in the over-the-counter markets. In determining net asset value, each Fund uses the valuations of portfolio securities furnished by a pricing service approved by its Board of Directors. The pricing service typically values portfolio securities at the bid price or the yield equivalent when quotations are readily available. Municipal Bonds for which quotations are not readily available are valued at fair market value on a consistent basis as determined by the pricing service using a matrix system to determine valuations. The procedures of the pricing service and its valuations are reviewed by the officers of each Fund under the general supervision of the Board of Directors of that Fund. The Board of Directors of each Fund has determined in good faith that the use of a pricing service is a fair method of determining the valuation of portfolio securities. Positions in futures contracts are valued at closing prices for such contracts established by the exchange on which they are traded, or if market quotations are not readily available, are valued at fair value on a consistent basis using methods determined in good faith by the Board of Directors of each Fund.

MuniAssets determines and makes available for publication weekly the net asset value of its Common Stock. Currently, the net asset values of shares of publicly traded closed-end investment companies investing in debt securities are published in Barron’s , the Monday edition of The Wall Street Journal , and the Monday and Saturday editions of The New York Times . The net asset value of High Income Municipal may be obtained by calling the Fund’s transfer agent at 1-800-637-3863.

Capital Stock

<R>Each Fund has outstanding Common Stock. The Common Stock of MuniAssets is traded on the NYSE. The shares of MuniAssets Common Stock commenced trading on the NYSE on July 20, 1993. As of August 31, 2001, the net asset value per share of MuniAssets Common Stock was $13.26 and the market price per share was $13.32. High Income Municipal engages in a continuous offering of High Income Municipal Common Stock. High Income Municipal Common Stock is not listed on any exchange. No secondary market presently exists for High Income Municipal Common Stock and a secondary market is not expected to develop. As of May 31, 2001, the net asset value per share of High Income Municipal Common Stock was $9.52.</R>

Each Fund is authorized to issue 200,000,000 shares of capital stock, all of which initially were classified as Common Stock. The Board of Directors of each Fund is authorized to classify or reclassify any unissued shares of capital stock by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption.

Holders of each Fund’s Common Stock are entitled to share equally in dividends declared by the Fund’s Board of Directors payable to holders of the Common Stock and in the net assets of the Fund available for distribution to holders of the Common Stock. Holders of a Fund’s Common Stock do not have preemptive or conversion rights and shares of a Fund’s Common Stock are not redeemable. The outstanding shares of Common Stock of each Fund are fully paid and nonassessable.

Certain Provisions of the Charters

Each Fund’s Charter includes provisions that could have the effect of limiting the ability of other entities or persons to acquire control of a Fund or to change the composition of its Board of Directors and in the case of MuniAssets, 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. With respect to High Income Municipal, a director may be removed from office with cause by action taken by the

 

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holders of at least 75% of the shares of capital stock entitled to be voted on the matter. With respect to MuniAssets, a director may be removed from office with or without cause by vote of the holders of 66% of the votes entitled to be voted on the matter.     In addition, the Charters of MuniAssets and High Income Municipal require the favorable vote of the holders of at least 66 2 /3 % and 75%, respectively, of all of the Fund’s shares of capital stock, then entitled to be voted on the matter, to approve, adopt or authorize the following:

•

a merger or consolidation or statutory share exchange of the Fund with any other corporation or entity,

•

a sale of all or substantially all of the Fund’s assets (other than in the regular course of the Fund’s investment activities), or

•

a liquidation or dissolution of the Fund,

unless such action has been approved, adopted or authorized by the affirmative vote of at least two-thirds of the total number of Directors fixed in accordance with the by-laws, in which case the affirmative vote of a majority of all of the votes entitled to be cast by stockholders of such Fund is required.

In addition, conversion of MuniAssets to an open-end investment company would require an amendment to MuniAssets’ Charter. The amendment would have to be declared advisable by the Board of Directors prior to its submission to stockholders. Such an amendment would require the affirmative vote of the holders of at least 66 2 /3 % of MuniAssets’ outstanding shares of capital stock entitled to be voted on the matter (or a majority of such shares if the amendment was previously 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). Such a vote also would satisfy a separate requirement in the Investment Company Act that the change be approved by the stockholders. Stockholders of an open-end investment company may require the company to redeem their shares of common stock at any time (except in certain circumstances as authorized by or under the Investment Company Act) at their net asset value, less such redemption charge, if any, as might be in effect at the time of a redemption. All redemptions will be made in cash. If MuniAssets is converted to an open-end investment company, it could be required to liquidate portfolio securities to meet requests for redemptions, and the MuniAssets Common Stock would no longer be listed on a stock exchange. Conversion to an open-end investment company would require changes in certain of the Fund’s investment policies and restrictions, such as those relating to the purchase of illiquid securities.

The Board of Directors of each Fund has determined that the voting requirements described above, which are greater than the minimum requirements under the Investment Company Act or, in certain circumstances, Maryland law, are in the best interests of stockholders generally. Reference should be made to the Charter of each Fund on file with the SEC for the full text of these provisions.

Management of the Funds

<R> Directors and Officers . The Board of Directors of MuniAssets currently consists of six persons, five of whom are not “interested persons,” as defined in the Investment Company Act, of MuniAssets. The Board of Directors of High Income Municipal currently consists of eight persons, seven of whom are not “interested persons,” as defined in the Investment Company Act, of High Income Municipal. Terry K. Glenn serves as President and a Director of each Fund. The Directors of each Fund are responsible for the overall supervision of the operations of the Fund and perform the various duties imposed on the directors of investment companies by the Investment Company Act and under applicable Maryland law. The Funds have the same slate of officers with a few exceptions. For further information regarding the Directors and officers of each Fund, see Appendix I —“Information Pertaining to Each Fund.”</R>

Theodore R. Jaeckel, Jr. serves as the portfolio manager of each Fund and will continue to serve as the portfolio manager of the Combined Fund after the Reorganization. The portfolio manager is primarily responsible for the management of the applicable Fund’s portfolio.       Advisory and Administrative Arrangements . FAM and MLIM, both of which are owned and controlled by ML & Co., serve as the investment adviser for MuniAssets and High Income Municipal, respectively, pursuant to separate investment advisory agreements that, except for (i) termination dates, (ii) advisory fee rates and (iii) the fact that the investment advisory agreement for MuniAssets contains certain provisions relating to FAM’s providing administrative services to MuniAssets, are substantially similar. See “Administrative Services and

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<R>Fees” below. FAM and MLIM provide the respective Fund with the same investment advisory and management services. FAM, MLIM, and their affiliates act as investment advisers to more than 100 registered investment companies and offer services to individuals and institutional accounts. As of July 2001, FAM and MLIM had a total of approximately $535 billion in investment company and other portfolio assets under management (approximately $24.6 billion of which were invested in municipal securities). This amount includes assets managed for certain affiliates of FAM and MLIM. FAM and MLIM were organized as investment advisers in 1977 and 1976, respectively, and each offers investment advisory services to more than 50 registered investment companies. The principal business address of both FAM and MLIM is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.</R>

Each Fund’s investment advisory agreement with FAM or MLIM (each, an “Investment Advisory Agreement”), as applicable, provides that, subject to the supervision of the Board of Directors of the Fund, FAM or MLIM is responsible for the actual management of the relevant Fund’s portfolio. The responsibility for making decisions to buy, sell or hold a particular security for a Fund rests with FAM or MLIM, as applicable, subject to review by the Board of Directors of that Fund.

For the services provided by FAM under MuniAssets’ Investment Advisory Agreement, MuniAssets pays a monthly fee at an annual rate of 0.55% of its average weekly net assets (i.e., the average weekly value of the total assets of the Fund, minus the sum of accrued liabilities of the Fund). For purposes of this calculation, average weekly net assets are determined at the end of each month on the basis of the average net assets of the 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. For the services provided by MLIM under High Income Municipal’s Investment Advisory Agreement, High Income Municipal pays a monthly fee at an annual rate of 0.95% of average daily net assets ( i.e ., the average daily value of the total assets of the Fund, minus the sum of accrued liabilities of the Fund). For purposes of this calculation, average daily net assets are determined at the end of each month on the basis of the average net assets of the Fund for each day during the month. After the Reorganization, the investment adviser for the Combined Fund will be FAM, and the Combined Fund will pay FAM a monthly fee at the annual rate of 0.55% of its average weekly net assets as described above.

<R>For the fiscal years ended May 31, 1999, 2000 and 2001, the fees paid by MuniAssets to FAM pursuant to the Investment Advisory Agreement were $839,645, $770,217, and $740,906, respectively (such fees based on average weekly net assets of approximately $152.7 million, $140.0 million and $134.6 million, respectively). For the fiscal years ended August 31, 1998, 1999 and 2000 and the six month period ended February 28, 2001, the fees paid by High Income Municipal to MLIM pursuant to the Investment Advisory Agreement were $2,144,677, $2,138,848, $1,661,213 and $669,103, respectively (such fees based on average daily net assets of approximately $226.4 million, $225.1 million, $174.9 million and $142.0 million, respectively).</R>

Administrative Services and Fees . Under the terms of the administration agreement between High Income Municipal and MLIM (the “Administration Agreement”), MLIM also performs or arranges for the performance of the administrative services ( i.e ., services other than investment advice and related portfolio activities) necessary for the operation of High Income Municipal, including administering shareholder accounts and handling shareholder relations. Pursuant to the MuniAssets Investment Advisory Agreement, FAM provides similar services for MuniAssets.

Under the Administration Agreement, High Income Municipal pays MLIM a monthly fee at an annual rate of 0.25% of the Fund’s average daily net assets determined in the same manner as the fee payable by High Income Municipal under the Investment Advisory Agreement. MuniAssets does not pay a separate administrative fee to FAM. FAM provides administrative services to MuniAssets under the MuniAssets’ Investment Advisory Agreement. After the Reorganization, the Combined Fund also will not pay a separate administrative fee to FAM.

<R> For the fiscal years ended August 31, 1998, 1999 and 2000 and the six month period ended February 28, 2001, the fees paid by High Income Municipal to MLIM pursuant to the Administration Agreement were $564,389, $562,855, $437,161 and $176,080, respectively (such fees based on average daily net assets of approximately $226.4 million, $225.1 million, $174.9 million and $142.0 million, respectively).</R>       Payment of Fund Expenses . Each Fund’s Investment Advisory Agreement obligates FAM or MLIM, as applicable, to provide investment advisory services and, in the case of MuniAssets, administrative services to the Fund. Under each Fund’s Investment Advisory Agreement, FAM or MLIM, as applicable, pays all compensation of and furnishes office space for officers and employees of the Fund connected with investment and economic

 

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