<PAGE> 1
PROSPECTUS
----------
October 21, 1994
Merrill Lynch Municipal Bond Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is a
professionally managed, diversified, open-end investment company which
seeks to provide shareholders with as high a level of income exempt from
Federal income taxes as is consistent with the investment policies of each
of its Portfolios and prudent investment management. The Fund is a series
fund and is comprised of three separate Portfolios, each of which invests
primarily in a diversified portfolio of tax-exempt Municipal Bonds,
principally consisting of state, municipal and public authority
securities. Each of the Portfolios pursues its investment objective
through the separate investment policies described below:
Insured Portfolio invests primarily in long-term, investment grade
Municipal Bonds, each of which is covered by portfolio insurance
guaranteeing the timely payment of principal at maturity and interest.
National Portfolio invests primarily in long-term medium to lower
grade Municipal Bonds offering higher yields than the Insured Portfolio
but also subject to greater risks than investment grade Municipal Bonds.
Limited Maturity Portfolio invests in a portfolio primarily of
investment grade Municipal Bonds with a maximum maturity not to exceed
four years and, depending on market conditions, an average maturity of
less than two years is anticipated. The Limited Maturity Portfolio can be
expected to offer the lowest yield of the three Portfolios, but it will be
subject to less market risk than the longer-term Portfolios.
Each Portfolio is, in effect, a separate fund issuing its own shares.
Pursuant to the Merrill Lynch Select Pricing SM System, each Portfolio of
the Fund offers four classes of shares, each with a different combination
of sales charges, ongoing fees and other features. Class C shares of the
Limited Maturity Portfolio are available only through the Exchange
Privilege. The Merrill Lynch Select Pricing System permits an investor to
choose the method of purchasing shares that the investor believes is most
beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing SM System" on page 8.
Class A and Class D shares of the Fund's Portfolios may be purchased
directly from Merrill Lynch Funds Distributor, Inc. ("the Distributor"),
P.O. Box 9011, Princeton, New Jersey 08543-9011 (609 282-2800), or from
securities dealers which have entered into selected dealer agreements with
the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). Class B and Class C shares of the Fund's
Portfolios may only be purchased either directly from the Distributor or
Merrill Lynch. See "Purchase of Shares" below. The minimum initial
purchase for shares of each Portfolio is $1,000, and the minimum
subsequent purchase in each Portfolio is $50. Merrill Lynch may charge its
customers a processing fee (presently $4.85) for confirming purchases and
repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares." The net investment income of each
Portfolio is declared daily and paid monthly.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------
This Prospectus sets forth in concise form the information about the
Fund that a prospective investor should know before investing in the Fund.
Investors should read and retain this Prospectus for future reference.
Additional information about the Fund has been filed with the Securities
and Exchange Commission in a Statement of Additional Information, dated
October 21, 1994, and is available upon request and without charge, by
calling or writing the Fund at the address and telephone number set forth
above. The Statement of Additional Information is hereby incorporated by
reference into this Prospectus.
----------
Fund Asset Management - Investment Adviser
Merrill Lynch Funds Distributor, Inc. - Distributor
<PAGE> 2
Insured Portfolio
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring
and recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
Class A(a) Class B(b) Class C(c) Class D(c)
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering
price)................................ 4.00%(d) None None 4.00%(d)
Sales Charge Imposed on Dividend
Reinvestments......................... None None None None
Deferred Sales Charge (as a percentage
of original purchase price or redemption
proceeds, whichever is lower).......... None(e) 4.0% during 1% for one None(e)
the first year, year
decreasing 1.0%
annually thereafter
to 0.0% after
the fourth year
Exchange Fee............................ None None None None
Annual Fund Operating Expenses (as a
percentage of average net assets)(f)....
Management Fees(g)....................... 0.36% 0.36% 0.36% 0.36%
12b-1 Fees(h):
Account Maintenance Fees............... None 0.25% 0.25% 0.25%
Distribution Fees...................... None 0.50% 0.55% None
(Class B shares
convert to Class D
shares automatically
after approximately
ten years and
cease being subject
to distribution fees)
Other Expenses
Custodial Fees.......................... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(i).......... 0.03% 0.03% 0.03% 0.03%
Other................................... 0.02% 0.02% 0.02% 0.02%
----- ----- ----- -----
Total Other Expenses.................. 0.06% 0.06% 0.06% 0.06%
----- ----- ----- -----
Total Fund Operating Expenses............. 0.42% 1.17% 1.22% 0.67%
===== ===== ===== =====
</TABLE>
----------
(a) Class A shares are sold to a limited group of investors including
existing Class A shareholders, and investment programs. See "Purchase
of Shares-Initial Sales Charge Alternatives-Class A and Class D
Shares"-page 27.
(b) Class B shares convert to Class D shares automatically approximately
ten years after initial purchase. See "Purchase of Shares-Deferred
Sales Charge Alternatives-Class B and Class C Shares"- page 30.
(c) Prior to the date of this Prospectus, the Fund has not offered its
Class C and Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. Class A or Class D
purchases of $1,000,000 or more will not be subject to an initial sales
charge. See "Purchase of Shares-Initial Sales Charge Alternatives-
Class A and Class D shares-page 27.
(e) Class A and Class D shares are not subject to a contingent deferred
sales charge ("CDSC"), except that purchases of $1,000,000 or more
will be subject to a CDSC of 1.0% of amounts redeemed within the first
year of purchase.
(f) Information for Class A and Class B shares is stated for the fiscal
year ended June 30, 1994. Information under "Other Expenses" for
Class C and Class D shares is estimated for the fiscal year ending
June 30, 1995.
(g) See "Investment Adviser"-page 22.
(h) See "Purchase of Shares-Distribution Plans"-page 33.
(i) See "Shareholder Services-Transfer Agent"-page 50.
2
<PAGE> 3
EXAMPLE:
<TABLE>
<CAPTION>
Cumulative Expenses Paid for the Period of:
------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $40 initial sales charge
(Class A and Class D shares only) and assuming (1) the
Total Fund Operating Expenses for each class set forth
above; (2) a 5% annual return throughout the periods and
(3) redemption at the end of the period:
Class A................................................... $44 $53 $63 $ 91
Class B................................................... $52 $57 $64 $142
Class C................................................... $22 $39 $67 $148
Class D................................................... $47 $61 $76 $120
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of the
period:
Class A................................................... $44 $53 $63 $ 91
Class B................................................... $12 $37 $64 $142
Class C................................................... $12 $39 $67 $148
Class D................................................... $47 $61 $76 $120
</TABLE>
The foregoing Fee Table is intended to assist investors in
understanding the costs and expenses that a shareholder in the Fund will
bear directly or indirectly. The Example set forth above assumes
reinvestment of all dividends and distributions and utilizes a 5% annual
rate of return as mandated by Securities and Exchange Commission
regulations. The Example should not be considered a representation of past
or future expenses or annual rates of return, and actual expenses or
annual rates of return may be more or less than those assumed for purposes
of the Example. Class B and Class C shareholders who hold their shares for
an extended period of time may pay more in Rule 12b-1 distribution fees
than the economic equivalent of the maximum front-end sales charges
permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its
customers a processing fee (presently $4.85) for confirming purchases and
redemptions. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares."
3
<PAGE> 4
National Portfolio
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring
and recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
Class A(a) Class B(b) Class C(c) Class D(c)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering
price)................................ 4.00%(d) None None 4.00%(d)
Sales Charge Imposed on Dividend
Reinvestments......................... None None None None
Deferred Sales Charge (as a percentage
of original purchase price or
redemption proceeds, whichever is
lower)................................ None(e) 4.0% during 1% for one None(e)
the first year, year
decreasing 1.0%
annually thereafter
to 0.0% after
the fourth year
Exchange Fee............................ None None None None
Annual Fund Operating Expenses (as a
percentage of average net assets)(f)....
Investment Advisory Fees(g).............. 0.48% 0.48% 0.48% 0.48%
12b-1 Fees(h):
Account Maintenance Fees............... None 0.25% 0.25% 0.25%
Distribution Fees...................... None 0.50% 0.55% None
(Class B shares
convert to Class D
shares automatically
after approximately
ten years and
cease being subject
to distribution fees)
Other Expenses
Custodial Fees.......................... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(i).......... 0.04% 0.04% 0.04% 0.04%
Other................................... 0.02% 0.02% 0.02% 0.02%
----- ------ ----- -----
Total Other Expenses.................. 0.07% 0.07% 0.07% 0.07%
----- ------ ----- -----
Total Fund Operating Expenses............. 0.55% 1.30% 1.35% 0.80%
===== ===== ===== =====
</TABLE>
----------
(a) Class A shares are sold to a limited group of investors including
existing Class A shareholders, certain retirement plans and investment
programs. See "Purchase of Shares-Initial Sales Charge Alternatives-
Class A and Class D Shares"-page 27.
(b) Class B shares convert to Class D shares automatically approximately
ten years after initial purchase. See "Purchase of Shares-Deferred
Sales Charge Alternatives-Class B and Class C Shares"-page 30.
(c) Prior to the date of this Prospectus, the Fund has not offered its
Class C and Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. Class A or Class D
purchases of $1,000,000 or more will not be subject to an initial sales
charge. See "Purchases of Shares-Initial Sales Charge Alternatives-
Class A and Class D Shares" - page 27.
(e) Class A and Class D shares are not subject to a contingent deferred
sales charge ("CDSC"), except that purchases of $1,000,000 or more
will be subject to a CDSC of 1.0% of amounts redeemed within the first
year of purchase.
(f) Information for Class A and Class B shares is stated for the fiscal
year ended June 30, 1994. Information under "Other Expenses" for
Class C and Class D shares is estimated for the fiscal year ending
June 30, 1995.
(g) See "Investment Adviser"-page 22.
(h) See "Purchase of Shares-Distribution Plans"-page 33.
(i) See "Shareholder Services-Transfer Agent"-page 50.
4
<PAGE> 5
EXAMPLE:
<TABLE>
<CAPTION>
Cumulative Expenses Paid for the Period of:
---------------------------------------------
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $40 initial sales charge
(Class A and Class D shares only) and assuming (1) the
Total Fund Operating Expenses for each class set forth
above; (2) a 5% annual return throughout the periods and
(3) redemption at the end of the period:
Class A................................................... $45 $57 $70 $106
Class B................................................... $53 $61 $71 $157
Class C................................................... $24 $43 $74 $162
Class D................................................... $48 $65 $83 $135
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of the
period:
Class A................................................... $45 $57 $70 $106
Class B................................................... $13 $41 $71 $157
Class C................................................... $14 $43 $74 $162
Class D................................................... $48 $65 $83 $135
</TABLE>
The foregoing Fee Table is intended to assist investors in
understanding the costs and expenses that a shareholder in the Fund will
bear directly or indirectly. The Example set forth above assumes
reinvestment of all dividends and distributions and utilizes a 5% annual
rate of return as mandated by Securities and Exchange Commission
regulations. The Example should not be considered a representation of past
or future expenses or annual rates of return, and actual expenses or
annual rates of return may be more or less than those assumed for purposes
of the Example. Class B and Class C shareholders who hold their shares for
an extended period of time may pay more in Rule 12b-1 distribution fees
than the economic equivalent of the maximum front-end sales charges
permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its
customers a processing fee (presently $4.85) for confirming purchases and
redemptions. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares."
5
<PAGE> 6
Limited Maturity
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring
and recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
Class A(a) Class B(b) Class C(c)* Class D(c)
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering
price)................................ 1.00%(d) None None 1.00%(d)
Sales Charge Imposed on Dividend
Reinvestments......................... None None None None
Deferred Sales Charge (as a percentage
of original purchase price or
redemption
proceeds, whichever is lower).......... None(e) 1.0% during 1% for one None(e)
the first year, year
decreasing to 0.0% after
the first year
Exchange Fee............................ None None None None
Annual Fund Operating Expenses (as a
percentage of average net assets)(f)....
Investment Advisory Fee(g)............... 0.33% 0.33% 0.33% 0.33%
12b-1 Fees(h):
Account Maintenance Fees.............. None 0.15% 0.15% 0.10%
Distribution Fees..................... None 0.20% 0.20% None
(Class B shares
convert to Class D
shares automatically
after approximately
ten years and
cease being subject
to distribution fees)
Other Expenses
Custodial Fees.......................... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(i).......... 0.02% 0.03% 0.03% 0.02%
Other................................... 0.04% 0.04% 0.04% 0.04%
----- ----- ----- -----
Total Other Expenses.................. 0.07% 0.08% 0.08% 0.07%
----- ----- ----- -----
Total Fund Operating Expenses............. 0.40% 0.76% 0.76% 0.50%
===== ===== ===== =====
</TABLE>
----------
(a) Class A shares are sold to a limited group of investors including
existing Class A shareholders, certain retirement plans and investment
programs. See "Purchase of Shares-Initial Sales Charge Alternatives-
Class A and Class D Shares"-page 27.
(b) Class B shares convert to Class D shares automatically approximately
ten years after initial purchase. See "Purchase of Shares-Deferred
Sales Charge Alternatives-Class B and Class C Shares"- page 30.
(c) Prior to the date of this Prospectus, the Fund has not offered its
Class C and Class D shares to the public.
(d) Reduced for purchases of $100,000 and over. Class A or Class D
purchases of $100,000 or more will not be subject to an initial sales
charge. See "Purchases of Shares-Initial Sales Charge Alternatives-
Class A and Class D Shares" - page 27.
(e) Class A and Class D shares are not subject to a contingent deferred
sales charge ("CDSC"), except that purchases of $1,000,000 or more
will be subject to a CDSC of .20% of amounts redeemed within the first
year of purchase.
(f) Information for Class A and Class B shares is stated for the fiscal
year ended June 30, 1994. Information under "Other Expenses" for
Class C and Class D shares is estimated for the fiscal year ending
June 30, 1995.
(g) See "Investment Adviser" - page 22.
(h) See "Purchase of Shares-Distribution Plans"-page 33.
(i) See "Sharehoder Services - Transfer Agent"-page 50.
* Class C shares of the Limited Maturity Portfolio are available only
through the Exchange Privilege. See page 42.
6
<PAGE> 7
EXAMPLE:
<TABLE>
<CAPTION>
Cumulative Expenses Paid for the Period of:
--------------------------------------------
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $10 initial sales charge
(Class A and Class D shares only) and assuming (1) the
Total Fund Operating Expenses for each class set forth
above; (2) a 5% annual return throughout the periods and
(3) redemption at the end of the period:
Class A................................................... $14 $23 $32 $60
Class B................................................... $18 $24 $42 $94
Class C*.................................................. $18 $24 $42 $94
Class D................................................... $15 $26 $38 $72
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of the
period:
Class A................................................... $14 $23 $32 $60
Class B................................................... $ 8 $24 $42 $94
Class C*.................................................. $ 8 $24 $42 $94
Class D................................................... $15 $26 $38 $72
</TABLE>
----------
* Class C shares of the Limited Maturity Portfolio are available only
through the Exchange Privilege.
The foregoing Fee Table is intended to assist investors in
understanding the costs and expenses that a shareholder in the Fund will
bear directly or indirectly. The Example set forth above assumes
reinvestment of all dividends and distributions and utilizes a 5% annual
rate of return as mandated by Securities and Exchange Commission
regulations. The Example should not be considered a representation of past
or future expenses or annual rates of return, and actual expenses or
annual rates of return may be more or less than those assumed for purposes
of the Example. Class B and Class C shareholders who hold their shares for
an extended period of time may pay more in Rule 12b-1 distribution fees
than the economic equivalent of the maximum front-end sales charges
permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its
customers a processing fee (presently $4.85) for confirming purchases and
redemptions. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares."
7
<PAGE> 8
MERRILL LYNCH SELECT PRICING SM SYSTEM
Each Portfolio of the Fund offers four classes of shares under the
Merrill Lynch Select Pricing SM System. The shares of each class may be
purchased at a price equal to the next determined net asset value per
share subject to the sales charges and ongoing fee arrangements described
below. Shares of Class A and Class D are sold to investors choosing the
initial sales charge alternatives, and shares of Class B and for the
Insured and National Portfolios only Class C are sold to investors
choosing the deferred sales charge alternatives. Class C shares of the
Limited Maturity Portfolio are offered only through the exchange privlege
and may not be purchased except through exchange of Class C shares of
another Portfolio or another Fund. The Merrill Lynch Select Pricing SM
System is used by more than 50 mutual funds advised by Merrill Lynch Asset
Management, L.P. ("MLAM") or its affiliate, Fund Asset Management, L.P.
("FAM" or the "Investment Adviser"). Funds advised by MLAM or FAM are
referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of one of the Fund's
Portfolios represents an identical interest in the investment portfolio of
the applicable Portfolio and has the same rights, except that Class B,
Class C and Class D shares bear the expenses of the ongoing account
maintenance fees and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency
costs resulting from the deferred sales charge arrangements. The deferred
sales charges and account maintenance fees that are imposed on Class B and
Class C shares of a Portfolio, as well as the account maintenance fees
that are imposed on the Class D shares, will be imposed directly against
those classes and not against all assets of the relevant Portfolio and,
accordingly, such charges will not affect the net asset value of any other
class or have any impact on investors choosing another sales charge
option. Dividends paid by a Portfolio for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively
by that class. Each class has different exchange privileges. See
"Shareholder Services-Exchange Privilege."
Investors should understand that the purpose and function of the
initial sales charges with respect to the Class A and Class D shares are
the same as those of the deferred sales charges with respect to the Class
B and Class C shares in that the sales charges applicable to each class
provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes
of shares.
The following table sets forth a summary of the distribution
arrangements for each class of shares under the Merrill Lynch Select
Pricing SM System, followed by a more detailed description of each class
and a discussion of the factors that investors should consider in
determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System that the investor believes is most beneficial under his
particular circumstances. More detailed information as to each class of
shares is set forth under "Purchase Shares."
8
<PAGE> 9
Insured and National Portfolios
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Account
Maintenance Distribution Conversion
Class Sales Charge (1) Fee Fee Feature
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum 4.00% initial sales
A charge (2),(3) No No No
- -----------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.50% B shares convert to D
years, at a rate of 4.0% during shares automatically
the first year, decreasing after approximately
1.0% annually to 0.0% ten years (4)
- -----------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
decreasing to 0.0% after
the first year
- -----------------------------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales 0.25% No No
charge (3)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Limited Maturity Portfolio
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Account
Maintenance Distribution Conversion
Class Sales Charge (1) Fee Fee Feature
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum 1.00% initial sales
A charge (2),(3) No No No
- -----------------------------------------------------------------------------------------------------------------
B CDSC at a rate of 1.00% 0.15% 0.20% B shares convert to D
during the first year, shares automatically
decreasing to 0.0% after the first year after approximately
ten years (4)
- -----------------------------------------------------------------------------------------------------------------
C (5) 1.0% CDSC for one year 0.15% 0.20% No
decreasing to 0.00% after the first year
- -----------------------------------------------------------------------------------------------------------------
D Maximum 1.00% initial sales 0.10% No No
charge (3)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
----------
(1) Initial sales charges are imposed at the time of purchase as a
percentage of the offering price. Contingent deferred sales charges
("CDSCs") are imposed if the redemption occurs within the applicable
CDSC time period. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares
being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares-Initial
Sales Charge Alternatives-Class A and Class D Shares-Eligible Class A
Investors."
(footnotes continued on next page)
9
<PAGE> 10
(3) Reduced for purchases of $25,000 or more for the Insured and National
Portfolios and $100,000 or more for the Limited Maturity Portfolio.
Class A and Class D share purchases of $1,000,000 or more will not be
subject to an initial sales charge but instead will be subject to a 1.0%
CDSC for the Insured and National Portfolios and a .20% CDSC for the
Limited Maturity Portfiolio, for one year. See "Class A" and
"Class D" below.
(4) The conversion period for dividend reinvestment shares is modified.
Also, Class B shares of certain other MLAM-advised mutual funds into
which exchanges may be made have a eight year conversion period. If
Class B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period
for the shares acquired.
(5) Class C shares of the Limited Maturity Portfolio are available only
through the Exchange Privilege. See p. 42.
Class A: Class A shares incur an initial sales charge when they are
purchased and bear no ongoing distribution or account maintenance
fees. Class A shares are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares in a
shareholder account are entitled to purchase additional Class A
shares in that account. Other eligible investors include
participants in certain investment programs. In addition, Class A
shares will be offered to Merrill Lynch & Co., Inc. and its
subsidiaries (including MLAM) (the term "subsidiaries," when used
herein with respect to Merrill Lynch & Co., Inc., includes MLAM, FAM
and certain other entities indirectly by wholly-owned and controlled
by Merrill Lynch & Co., Inc.) and their directors and employees and
to members of the Boards of MLAM-advised mutual funds. The maximum
initial sales charge is 4.00% for the Insured and National
Portfolios and 1.00% for the Limited Maturity Portfolio and is
reduced for purchases of $25,000 and over for the Insured and
National Portfolios and for purchases of $100,000 or over for the
Limited Maturity Portfolio. Purchases of $1,000,000 or more will not
be subject to an initial sales charge but such purchases will be
subject to a CDSC of 1.0% (for the Insured and National Portfolios)
or .20% (for the Limited Maturity Portfolio) if the shares are
redeemed within one year after purchase. Sales charges also are
reduced under a right of accumulation which takes into account the
investors's holdings of all classes of all MLAM-advised mutual
funds. See "Purchase of Shares-Initial Sales Charge
Alternatives-Class A and Class D Shares."
Class B: Class B shares do not incur a sales charge when they are
purchased, but they are subject to an ongoing account maintenance
fee of 0.25% (in the case of the Insured Portfolio and the National
Portfolio) and 0.15% (in the case of the Limited Maturity Portfolio)
of the Portfolio's average net assets attributable to the Class B
shares, an ongoing distribution fee of 0.50% (in the case of the
Insured Portfolio and the National Portfolio) and 0.20% (in the case
of the Limited Maturity Portfolio) of the Portfolio's average net
assets attributable to Class B shares and a CDSC if they are
redeemed within four years of purchase (in the case of the Insured
Portfolio and National Portfolio) and within one year of purchase
(in the case of the Limited Maturity Portfolio). Approximately ten
years after issuance, Class B shares of the Portfolio will convert
automatically into Class D shares of the Portfolio, which are
subject to an account maintenance fee but no distribution fee; Class
B shares of certain other MLAM-advised mutual funds into which
exchanges may be made convert into Class D shares automatically
after approximately eight years. If Class B shares of a Portfolio
are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the
shares acquired. Automatic conversion of Class B shares into Class D
shares will occur at least once a month on the basis of the relative
net asset values of the shares of the two classes on the conversion
date, without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for
10
<PAGE> 11
Federal income tax purposes. Shares purchased through reinvestment
of dividends on Class B shares also will convert automatically to
Class D shares. The conversion period for dividend reinvestment
shares is modified as described under "Purchase of Shares-Deferred
Sales Charge Alternatives-Class B and Class C Shares-Conversion of
Class B Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are
purchased, but they are subject to an ongoing account maintenance
fee of 0.25% (in the case of the Insured Portfolio and the
National Portfolio) and 0.15% (in the case of the Limited
Maturity Portfolio) of average net assets and an ongoing
distribution fee of 0.55% (in the case of the Insured Portfolio
and the National Portfolio) and 0.20% (in the case of the Limited
Maturity Portfolio) of average net assets. Class C shares are
also subject to a CDSC if they are redeemed within one year of
purchase. Although Class C shares are subject to a 1.0% CDSC for
only one year (as compared to four years for Class B of the
Insured Portfolio and National Portfolio), Class C shares have no
conversion feature and, accordingly, an investor that purchases
Class C shares will be subject to distribution fees that will be
imposed on Class C shares for an indefinite period subject to
annual approval by the Fund's Board of Directors and regulatory
limitations. Class C shares of the Limited Maturity Portfolio are
available only through the Exchange Privilege. See p. 42.
Class D: Class D shares incur an initial sales charge when they are
purchased and are subject to an ongoing account maintenance fee
of 0.25% (in the case of the Insured Portfolio and the National
Portfolio) and 0.10% (in the case of the Limited Maturity
Portfolio) of average net assets. Class D shares are not subject
to an ongoing distribution fee or any CDSC when they are
redeemed. Purchases of $1,000,000 or more will not be subject to
an initial sales charge but such purchase will be subject to a CDSC
of 1% (for the Insured and National Portfolios) or .20% (for the
Limited Maturity Portfolio) if the shares are redeemed within one
year after purchase. The schedule of initial sales charges
and reductions for Class D shares is the same as the schedule for
Class A shares. Class D shares also will be issued upon conversion
of Class B shares as described above under "Class B." See "Purchase
of Shares-Initial Sales Charge Alternatives-Class A and Class D
Shares."
The following is a discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill
Lynch Select Pricing SM System that the investor believes is most
beneficial under his particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial
sales charge alternative may elect to purchase Class D shares or, if an
eligible investor, Class A shares. Investors choosing the initial sales
charge alternative who are eligible to purchase Class A shares should
purchase Class A shares rather than Class D shares because of the account
maintenance fee imposed on Class D shares. Investors qualifying for
significantly reduced initial sales charges may find the initial sales
charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges
imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated
ongoing account maintenance and distribution fees on Class B or Class C
shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase
Class A shares of other MLAM-advised mutual funds, those previously
purchased Class A shares, together with Class B, Class C and Class D share
holdings, will count toward a right of accumulation which may qualify the
investor for reduced initial sales charges on new initial sales charge
purchases. In addition, the ongoing Class B
11
<PAGE> 12
and Class C account maintenance and distribution fees will cause Class B
and Class C shares to have higher expense ratios, pay lower dividends and
have lower total returns than the initial sales charge shares. The ongoing
Class D account maintenance fees will cause Class D shares to have a
higher expense ratio, pay lower dividends and have a lower total return
than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges
are deducted at the time of purchase, Class B and Class C shares provide
the benefit of putting all of the investor's dollars to work from the time
the investment is made. The deferred sales charge alternatives may be
particularly appealing to investors who do not qualify for a reduction in
initial sales charges. Both Class B and Class C shares are subject to
ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be
offset to the extent any return is realized on the additional funds
initially invested in Class B or Class C shares. In addition, Class B
shares of a Portfolio will be converted into Class D shares of that
Portfolio after a conversion period of approximately ten years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they
determine it to be most advantageous to have all their funds invested
initially and intend to hold their shares for an extended period of time.
Investors in Class B shares should take into account whether they intend
to redeem their shares within the CDSC period and, if not, whether they
intend to remain invested until the end of the conversion period and
thereby take advantage of the reduction in ongoing fees resulting from the
conversion into Class D shares. Other investors, however, may elect to
purchase Class C shares if they determine that it is advantageous to have
all their assets invested initially and they are uncertain as to the
length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period
at a lower rate, they forgo the Class B conversion feature, making their
investment subject to account maintenance and distribution fees for an
indefinite period of time. In addition, while both Class B and Class C
distribution fees are subject to the limitations on asset-based sales
charges imposed by the NASD, the Class B distribution fees are further
limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares-Limitations on the Payment of Deferred Sales Charges."
12
<PAGE> 13
FINANCIAL HIGHLIGHTS
The financial information in the table below in connection with shares
of the Insured Portfolio, National Portfolio and the Limited Maturity
Portfolio has been audited in conjunction with the audits of the financial
statements of the Portfolios by Deloitte & Touche LLP, independent
auditors. Financial statements for the year ended June 30, 1994 and the
independent auditors' report thereon are included in the Statement of
Additional Information. Financial information is not presented for Class C
or Class D shares, since no shares of those classes are publicly issued as
of the date of this Prospectus. Further information about the performance
of the Fund is contained in the Fund's most recent annual report to
shareholders which may be obtained, without charge, by calling or by
writing the Fund at the telephone number or address on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
Insured Portfolio
---------------------------------------------------------------------------------------------------
Class A
---------------------------------------------------------------------------------------------------
THE FOLLOWING PER SHARE
DATA AND RATIOS HAVE
BEEN DERIVED FROM
INFORMATION PROVIDED
IN THE FINANCIAL
STATEMENTS:
INCREASE (DECREASE) IN NET For the Year Ended June 30,
----------------------------------------------------------------------------------------------
ASSET VALUE: 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 8.64 $ 8.26 $ 7.92 $ 7.86 $ 7.97 $ 7.69 $ 7.79 $ 7.84
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment income-net... .47 .50 .52 .54 .55 .58 .57 .60
Realized and unrealized
gain (loss) on
investments-net....... (.53) .49 .41 .12 (.11) .28 .00 (.04)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations............ (.06) .99 .93 .66 .44 .86 .57 .56
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income-net. (.47) (.50) (.52) (.54) (.55) (.58) (.57) (.60)
Realized gains on
investments-net...... (.23) (.11) (.07) (.06) - - (.10) (.01)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions........ (.70) (.61) (.59) (.60) (.55) (.58) (.67) (.61)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of period......... $ 7.88 $ 8.64 $ 8.26 $ 7.92 $ 7.86 $ 7.97 $ 7.69 $ 7.79
========== ========== ========== ========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN:**
Based on net asset
value per share...... (1.08%) 12.43% 12.11% 8.84% 5.76% 11.62% 7.75% 6.94%
========== ========== ========== ========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
distribution fees... .42% .42% .44% .45% .46% .49% .52% .57%
========== ========== ========== ========== ========== ========== ========== ==========
Expenses................ .42% .42% .44% .45% .46% .49% .52% .57%
========== ========== ========== ========== ========== ========== ========== ==========
Investment income-net... 5.53% 5.94% 6.44% 6.90% 7.03% 7.46% 7.55% 7.21%
========== ========== ========== ========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)......... $1,941,741 $2,225,188 $2,062,591 $1,984,307 $2,019,166 $2,013,219 $1,982,997 $2,238,480
========== ========== ========== ========== ========== ========== ========== ==========
Portfolio turnover...... 28.34% 43.86% 22.50% 33.12% 23.20% 45.49% 33.98% 63.55%
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
Insured Portfolio
------------------------------------------------------------------------------------------------
Class A Class B
------------------------- ------------------------------------------------------------------
THE FOLLOWING PER SHARE
DATA AND RATIOS HAVE
BEEN DERIVED FROM
INFORMATION PROVIDED For the
IN THE FINANCIAL Period
STATEMENTS: Oct. 21
INCREASE (DECREASE) IN NET For the Year 1988+ to
Ended June 30, For the Year Ended June 30, June 30,
------------------------ -------------------------------------------------------
ASSET VALUE: 1986 1985 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 7.36 $ 6.61 $ 8.63 $ 8.26 $ 7.92 $ 7.86 $ 7.97 $ 7.81
---------- -------- -------- -------- -------- -------- -------- --------
Investment income-net... .63 .65 .40 .44 .46 .48 .49 .36
Realized and unrealized
gain (loss) on
investments-net....... .48 .75 (.53) .48 .41 .12 (.11) .16
---------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations............ 1.11 1.40 (.13) .92 .87 .60 .38 .52
---------- -------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income-net. (.63) (.65) (.40) (.44) (.46) (.48) (.49) (.36)
Realized gains on
investments-net...... - - (.23) (.11) (.07) (.06) - -
---------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions........ (.63) (.65) (.63) (.55) (.53) (.54) (.49) (.36)
---------- -------- -------- -------- -------- -------- -------- --------
Net asset value,
end of period......... $ 7.84 $ 7.36 $ 7.87 $ 8.63 $ 8.26 $ 7.92 $ 7.86 $ 7.97
========== ========= ========== ========= ========= ========= ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset
value per share...... 15.62% 22.21% (1.81)% 11.45% 11.27% 8.02% 4.98% 6.88%#
========== ========= ========== ========= ========= ========= ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
distribution fees... .60% .71% .42% .43% .44% .45% .47% .48%*
========== ========= ========== ========= ========= ========= ======== ========
Expenses................ .60% .71% 1.17% 1.18% 1.19% 1.20% 1.22% 1.23%*
========== ========= ========== ========= ========= ========= ======== ========
Investment income-net... 8.13% 9.30% 4.78% 5.17% 5.69% 6.13% 6.27% 6.58%*
========== ========= ========== ========= ========= ========= ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)......... $1,741,727 $921,803 $866,193 $911,307 $706,016 $537,755 $408,641 $175,707
========== ========= ========== ========= ========= ========= ======== ========
Portfolio turnover...... 43.70% 47.28% 28.34% 43.86% 22.50% 33.12% 23.20% 45.49%
========== ========= ========== ========= ========= ========= ======== ========
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
# Aggregate total investment return.
<PAGE> 15
FINANCIAL HIGHLIGHTS - (Continued)
<TABLE>
<CAPTION>
National Portfolio
--------------------------------------------------------------------------------------------------
Class A
--------------------------------------------------------------------------------------------------
THE FOLLOWING PER SHARE
DATA AND RATIOS HAVE
BEEN DERIVED FROM
INFORMATION PROVIDED
IN THE FINANCIAL
STATEMENTS:
INCREASE (DECREASE) IN NET For the Year Ended June 30,
----------------------------------------------------------------------------------------------------
ASSET VALUE: 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period... $ 11.02 $ 10.64 $ 10.17 $ 10.12 $ 10.31 $ 9.94 $ 10.12 $ 10.28
---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Investment income-net. .62 .67 .71 .73 .74 .77 .76 .80
Realized and unrealized
gain(loss) on
investments-net...... (.64) .57 .58 .05 (.19) .37 (.11) .02
---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Total from investment
operations........ (.02) 1.24 1.29 .78 .55 1.14 .65 .82
---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Less dividends and
distributions:
Investment income-net. (.62) (.67) (.71) (.73) (.74) (.77) (.76) (.80)
Realized gains on
investments-net...... (.30) (.19) (.11) - - - (.07) (.18)
---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Total dividends and
distributions....... (.92) (.86) (.82) (.73) (.74) (.77) (.83) (.98)
---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Net asset value,
end of period....... $ 10.08 $ 11.02 $ 10.64 $ 10.17 $ 10.12 $ 10.31 $ 9.94 $ 10.12
========== ========== ========== ========== ========== ========== ========== ==========
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share...... (0.47%) 12.21% 13.09% 7.94% 5.53% 11.89% 6.89% 8.00%
========== ========== ========== ========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
distribution fees... .55% .55% .55% .55% .55% .55% .55% .55%
========== ========== ========== ========== ========== ========== ========== ==========
Expenses.............. .55% .55% .55% .55% .55% .55% .55% .55%
========== ========== ========== ========== ========== ========== ========== ==========
Investment income-net. 5.72% 6.23% 6.80% 7.20% 7.27% 7.63% 7.79% 7.56%
========== ========== ========== ========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands) $1,203,181 $1,353,805 $1,278,055 $1,255,820 $1,365,541 $1,445,116 $1,467,982 $1,506,369
========== ========== ========== ========== ========== ========== ========== ==========
Portfolio turnover.... 73.33% 65.43% 50.94% 75.25% 48.80% 76.73% 72.77% 72.44%
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE> 16
FINANCIAL HIGHLIGHTS - (Continued)
<TABLE>
<CAPTION>
National Portfolio
---------------------- --------------------------------------------------------------------------
Class A Class B
---------------------- --------------------------------------------------------------------------
THE FOLLOWING PER SHARE
DATA AND RATIOS HAVE
BEEN DERIVED FROM For the
INFORMATION PROVIDED Period
IN THE FINANCIAL Oct. 21,
STATEMENTS: For the Year 1988+ to
INCREASE (DECREASE) IN NET Ended June 30, For the Year Ended June 30, June 30,
------------------------ ------------------------------------------------------------- -----------
ASSET VALUE: 1986 1985 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 9.57 $ 8.63 $ 11.02 $ 10.63 $ 10.16 $ 10.11 $ 10.30 $ 10.14
----------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Investment income-net. .86 .90 .54 .59 .63 .65 .66 .48
Realized and unrealized
gain(loss) on
investments-net...... .71 .94 (.65) .58 .58 .05 (.19) .16
----------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Total from investment
operations........ 1.57 1.84 (.11) 1.17 1.21 .70 .47 .64
----------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Less dividends and
distributions:
Investment income-net. (.86) (.90) (.54) (.59) (.63) (.65) (.66) (.48)
Realized gains on
investments-net...... - - (.30) (.19) (.11) - - -
----------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Total dividends and
distributions....... (.86) (.90) (.84) (.78) (.74) (.65) (.66) (.48)
----------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Net asset value,
end of period....... $ 10.28 $ 9.57 $ 10.07 $ 11.02 $ 10.63 $ 10.16 $ 10.11 $ 10.30
========== ========== ========== ========== ========== ========== ========== ==========
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share...... 17.09% 22.36% (1.39)% 11.47% 12.25% 7.14% 4.74% 6.48%#
========== ========== ========== ========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
distribution fees... .56% .59% .55% .56% .56% .56% .56% .56%*
========== ========== ========== ========== ========== ========== ========== ==========
Expenses.............. .56% .59% 1.30% 1.31% 1.31% 1.31% 1.31% 1.31%*
========== ========== ========== ========== ========== ========== ========== ==========
Investment income-net. 8.41% 9.79% 4.97% 5.46% 6.03% 6.43% 6.52% 6.74%*
========== ========== ========== ========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands) $1,297,305 $617,764 $459,169 $424,071 $286,375 $213,581 $179,362 $97,196
========== ========== ========== ========== ========== ========== ========== ==========
Portfolio turnover.... 120.80% 85.18% 73.33% 65.43% 50.94% 75.25% 48.80% 76.73%
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
# Aggregate total investment return.
<PAGE> 17
FINANCIAL HIGHLIGHTS - (Concluded)
<TABLE>
<CAPTION>
Limited Maturity Portfolio
--------------------------------------------------------------------
Class A
---------------------------------------------------------------------
THE FOLLOWING PER SHARE
DATA AND RATIOS HAVE
BEEN DERIVED FROM
INFORMATION PROVIDED
IN THE FINANCIAL
STATEMENTS:
INCREASE (DECREASE) IN NET For the Year Ended June 30,
--------------------------------------------------------------------
ASSET VALUE: 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.01 $ 9.91 $ 9.75 $ 9.71 $ 9.73 $ 9.75
-------- -------- -------- -------- -------- --------
Investment income-net................... .37 .41 .50 .57 .60 .58
Realized and unrealized gain (loss) on
investments-net....................... (.14) .10 .16 .04 (.02) (.02)
-------- -------- -------- -------- -------- --------
Total from investment operations........ .23 .51 .66 .61 .58 .56
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income-net.................. (.37) (.41) (.50) (.57) (.60) (.58)
Realized gain on investments-net....... - - - - - -
-------- -------- -------- -------- -------- --------
Total dividends and distributions....... (.37) (.41) (.50) (.57) (.60) (.58)
-------- -------- -------- -------- -------- --------
Net asset value, end of period.......... $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71 $ 9.73
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 2.30% 5.28% 6.93% 6.45% 6.16% 5.96%
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees... .40% .41% .40% .40% .40% .41%
======== ======== ======== ======== ======== ========
Expenses................................ .40% .41% .40% .40% .40% .41%
======== ======== ======== ======== ======== ========
Investment income-net................... 3.68% 4.13% 5.02% 5.88% 6.21% 6.00%
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................ $790,142 $846,736 $613,407 $350,549 $352,005 $385,794
======== ======== ======== ======== ======== ========
Portfolio turnover...................... 45.67% 65.43% 96.32% 93.06% 106.44% 228.78%
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE> 18
FINANCIAL HIGHLIGHTS - (Concluded)
<TABLE>
<CAPTION>
Limited Maturity Portfolio
--------------------------------------------------------------------
Class A Class B
-------------------------------------------- ----------------------
THE FOLLOWING PER SHARE
DATA AND RATIOS HAVE
BEEN DERIVED FROM For the
INFORMATION PROVIDED For the Period
IN THE FINANCIAL Year Nov. 2,
STATEMENTS: Ended 1992+ to
INCREASE (DECREASE) IN NET For the Year Ended June 30, June 30, June 30,
--------------------------------------------
ASSET VALUE: 1988 1987 1986 1985 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.83 $ 9.87 $ 9.85 $ 9.70 $ 10.01 $ 9.93
-------- -------- -------- -------- -------- --------
Investment income-net................... .53 .52 .60 .67 .33 .24
Realized and unrealized gain (loss) on
investments-net....................... (.07) (.04) .02 .15 (.14) .08
-------- -------- -------- -------- -------- --------
Total from investment operations........ .46 .48 .62 .82 .19 .32
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income-net.................. (.53) (.52) (.60) (.67) (.33) (.24)
Realized gain on investments-net....... (.01) - - - - -
-------- -------- -------- -------- -------- --------
Total dividends and distributions....... (.54) (.52) (.60) (.67) (.33) (.24)
-------- -------- -------- -------- -------- --------
Net asset value, end of period.......... $ 9.75 $ 9.83 $ 9.87 $ 9.85 $ 9.87 $ 10.01
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 4.83% 4.99% 6.50% 8.72% 1.98% 3.26%#
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees... .40% .40% .42% .43% .41% .41%*
======== ======== ======== ======== ======== ========
Expenses................................ .40% .40% .42% .43% .76% .76%*
======== ======== ======== ======== ======== ========
Investment income-net................... 5.42% 5.27% 6.04% 6.83% 3.33% 3.60%*
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................ $567,158 $792,229 $623,902 $428,662 $145,534 $95,179
======== ======== ======== ======== ======== ========
Portfolio turnover...................... 146.01% 19.55% 7.94% 81.06% 45.67% 65.43%
======== ======== ======== ======== ======== ========
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
# Aggregate total investment return.
Further information about the Fund's performance is contained in the
Fund's Annual Report which may be obtained, without charge, upon request.
15
<PAGE> 19
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with
as high a level of income exempt from federal income taxes as is
consistent with the investment policies of each Portfolio and prudent
investment management. The Fund is comprised of three separate portfolios,
Insured Portfolio, National Portfolio and Limited Maturity Portfolio, each
of which is, in effect, a separate fund issuing its own shares. Each
Portfolio seeks to achieve its objective by investing in a diversified
portfolio of obligations issued by or on behalf of states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest from
which is exempt from federal income tax (such obligations are herein
referred to as "Municipal Bonds"). Municipal Bonds include general
obligations bonds; revenue or special obligation bonds, industrial
development bonds, variable rate demand notes, and short-term tax-exempt
municipal obligations such as tax anticipation notes. Each Portfolio at
all times, except during temporary defensive periods, maintains at least
80% of its net assets invested in Municipal Bonds. In addition, each
Portfolio may not purchase securities other than Municipal Bonds and
Temporary Investments described below. These are fundamental policies of
each Portfolio and may not be changed without a vote of the majority of
the outstanding shares of the Portfolio. Each Portfolio currently
contemplates that it will not invest more than 25% of its total assets
(taken at market value) in Municipal Bonds whose issuers are located in
the same state. There can be no assurance that the objective of any
Portfolio can be attained.
While the Fund does not intend to realize taxable investment income,
each Portfolio has the authority to invest as much as 20% of its net
assets on a temporary basis in taxable money market securities with a
remaining maturity not in excess of one year from the date of purchase
("Temporary Investments") for liquidity purposes or as a temporary
investment of cash pending investment of such cash in Municipal Bonds. In
addition, the Fund reserves the right to invest temporarily a greater
portion of its assets in Temporary Investments for defensive purposes,
when, in the judgment of the Investment Adviser, market conditions
warrant. Temporary Investments consist of U.S. Government securities, U.S.
Government agency securities, domestic bank certificates of deposit and
bankers' acceptances, short-term corporate debt securities such as
commercial paper, and repurchase agreements. From time to time, the Fund
may realize capital gains, which will constitute taxable income. In
addition, the Fund may invest in certain tax-exempt securities which are
classified as "private activity bonds," which may subject certain
investors to an alternative minimum tax. At June 30, 1994, the Fund's
Insured Portfolio, National Portfolio and Limited Maturity Portfolio did
not hold any "private activity bonds." These figures should not be
considered representative of the respective Portfolio's private activity
bond positions for any future period. See "Dividends, Distributions and
Taxes."
Certain instruments in which the Fund may invest may be characterized as
derivative instruments. The National Portfolio and the Limited Maturity
Portfolio are authorized to engage in transactions in financial futures
contracts for hedging purposes. For a more complete description of futures
transactions, see "Financial Futures Contracts and Derivatives" below and the
Statement of Additional Information.
Investment in the Fund offers several benefits. The Fund offers
investors the opportunity to receive income exempt from federal income
taxes from a diversified, professionally managed portfolio of Municipal
Bonds. The Fund also provides liquidity because of its redemption features
and relieves the investor of the burdensome administrative details
involved in managing a portfolio of tax-exempt securities. The benefits
are at least partially offset by the fact that there are expenses in
operating an investment company. Such expenses consist primarily of the
investment advisory fee and operational expenses, including, in the case
of the Insured Portfolio, premiums for insurance on portfolio securities.
16
<PAGE> 20
INVESTMENT POLICIES OF THE PORTFOLIOS
Each Portfolio pursues its investment objective through the separate
investment policies described below. These policies differ with respect to
the maturity and quality of portfolio securities in which a Portfolio may
invest, and these policies can be expected to affect the yield on each
Portfolio and the degree of market and financial risk to which the
Portfolio is subject. Generally, Municipal Bonds with longer maturities
tend to produce higher yield and are subject to greater market
fluctuations as a result of changes in interest rates ("market risk")
than are Municipal Bonds with shorter maturities. Generally, lower rated
Municipal Bonds will provide a higher yield than higher rated Municipal
Bonds of similar maturity but are subject to greater market risk and are
also subject to a greater degree of risk with respect to the ability of
the issuer to meet its principal and interest obligations ("financial
risk"). See "Additional Information - Rating Information" for
information with respect to ratings assigned to Municipal Bonds and
Temporary Investments by rating agencies.
INSURED PORTFOLIO
The Insured Portfolio may invest in investment grade Municipal Bonds
covered by portfolio insurance guaranteeing the timely payment of
principal at maturity and interest. Investment grade Municipal Bonds are
those rated at the date of purchase in the four highest rating categories
of Standard & Poor's Corporation (AAA, AA, A and BBB) or Moody's Investors
Service, Inc. (Aaa, Aa, A and Baa) in the case of long-term debt, rated
MIG 1 through MIG 4 by Moody's Investors Service or in the four highest
bond ratings of, or rated SP-1+ through SP-2 by, Standard & Poor's
Corporation in the case of short-term notes, and rated P-1 or P-2 in the
case of Moody's Investors Service or A-1+ through A-2 by Standard & Poor's
Corporation in the case of tax-exempt commercial paper. Depending on
market conditions, it is expected that long-term Municipal Bonds will
comprise a major portion of this Portfolio.
The Insured Portfolio may invest only in Municipal Bonds that, at the
time of purchase, either (1) are insured under an insurance policy
purchased by the Fund or (2) are insured under an insurance policy
obtained by the issuer thereof or any other party from an insurance
carrier meeting the criteria of the Fund set forth below. The Fund has
purchased from AMBAC Indemnity Corporation ("AMBAC"), Municipal Bond
Investors Assurance Corporation ("MBIA") and Financial Security
Assurance Inc. ("FSA"), separate Mutual Fund Insurance Policies (the
"Policies"), each of which guarantees the payment of principal and
interest on specified eligible Municipal Bonds purchased by the Insured
Portfolio ("Insured Municipal Bonds"). Consequently, some of the Insured
Municipal Bonds in the Insured Portfolio may be insured by AMBAC, while
others may be insured by MBIA or FSA. The Policies generally have the same
characteristics and features. A Municipal Bond is eligible for coverage if
it meets certain requirements of the insurance company set forth in a
Policy. Additional information regarding these eligibility requirements is
set forth in the Statement of Additional Information. In the event
interest or principal on an Insured Municipal Bond is not paid when due,
AMBAC or MBIA or FSA (depending on which Policy covers the bond) is
obligated under its Policy to make payment not later than 30 days after it
has been notified by, and provided with documentation from, the Fund that
such nonpayment has occurred. The insurance feature reduces financial
risk, but the cost thereof and the restrictions on investments imposed by
the guidelines in the insurance policy reduce the yield to shareholders.
The Policies will be effective only as to Insured Municipal Bonds
beneficially owned by the Insured Portfolio. In the event of a sale of any
Municipal Bonds held by the Insured Portfolio, the issuer of the relevant
Policy is liable only for those payments of interest and principal which
are then due and owing. The Policies do not guarantee the market value of
the Insured Municipal Bonds or the value of the shares of the Insured
17
<PAGE> 21
Portfolio. It is the intention of the Insured Portfolio, however, to
retain any insured securities which are in default or in significant risk
of default and to place a value on the insurance, which ordinarily will be
the difference between the market value of the defaulted security and the
market value of similar securities which are not in default. In certain
circumstances, however, the Fund's management may determine that an
alternative value for the insurance, such as the difference between the
market value of the defaulted security and its par value, is more
appropriate. As the result of the value placed on the insurance with
respect to securities held in the Insured Portfolio which were in default
at the end of the Fund's last fiscal year, such securities were
effectively valued at par. The Insured Portfolio will be unable to manage
the portfolio to the extent it holds defaulted securities, which may limit
its ability in certain circumstances to purchase other Municipal Bonds.
See "Net Asset Value" in the Statement of Additional Information for a
more complete description of the Insured Portfolios method of valuing
defaulted securities and securities which have a significant risk of
default. Further information with respect to the portfolio insurance is
also set forth in the Statement of Additional Information.
AMBAC, MBIA and FSA may not withdraw coverage on securities insured by
their Policies and held by the Insured Portfolio so long as they remain in
the Portfolio. AMBAC, MBIA and FSA may not cancel their Policies for any
reason except failure to pay premiums when due. AMBAC and FSA have
reserved the right at any time upon written notice to the Fund to refuse
to insure any additional municipal securities purchased by the Insured
Portfolio after the effective date of such notice. The Board of Directors
of the Fund has reserved the right to terminate any of the Policies if it
determines that the benefits to the Insured Portfolio of having its
portfolio insured are not justified by the expense involved.
The premiums for the Policies are paid by the Insured Portfolio and
the yield on the Portfolio is reduced thereby. The Investment Adviser
estimates that the current cost of the annual premiums will range from
approximately .08% to .20% of the average net assets of the Insured
Portfolio. The estimate is based on the expected composition of the
Portfolio.
NATIONAL PORTFOLIO
The National Portfolio invests in a portfolio primarily of long-term
medium to lower grade Municipal Bonds. This Portfolio normally can be
expected to offer the highest yields of the three Portfolios, but it will
also be subject to the highest market and financial risks. Because an
investment in the National Portfolio entails relatively greater risks, it
may not be an appropriate investment for all investors.
The investment policies of the National Portfolio are not governed by
specific rating categories. Management of the Fund will seek primarily
medium and lower grade Municipal Bonds, including short-term tax-exempt
notes, tax-exempt commercial paper and variable rate tax-exempt demand
notes. Medium grade long-term debt obligations are those rated A and BBB
by Standard & Poor's or A and Baa by Moody's and unrated obligations of
comparable quality. Lower grade obligations (commonly known as "junk
bonds") are those rated below BBB or Baa and unrated obligations of
comparable quality. Lower grade obligations will generally be more
speculative with respect to the capacity of the issuer to make interest
and principal payments. Because issuers of Municipal Bonds having these
characteristics may choose not to have their obligations rated, it is
possible that a substantial portion of the National Portfolio's portfolio
may consist of obligations which are not rated. Unrated bonds are not
necessarily of lower quality than rated bonds, but the market for rated
bonds is often broader. It is not the present intention of the Portfolio
to invest over 35% of its assets in securities rated below Baa by Moody's
or in securities rated below BBB by Standard & Poor's.
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<PAGE> 22
Junk bonds are considered by Standard & Poor's and Moody's to have
varying degrees of speculative characteristics. Consequently, although
junk bonds can be expected to provide higher yields, such securities may
be subject to greater market price fluctuations and risk of loss of
principal than lower yielding, higher rated debt securities. Investments
in junk bonds will be made only when, in the judgment of the Fund's
management, such securities provide attractive total return potential
relative to the risk of such securities, as compared to higher quality
debt securities. The National Portfolio will not invest in debt securities
in the lowest rating categories (those rated CC or lower by Standard &
Poor's or Ca or lower by Moody's) unless the Fund's management believes
that the financial condition of the issuer or the protection afforded the
particular securities is stronger than would otherwise be indicated by
such low ratings. The National Portfolio does not intend to purchase debt
securities that are in default or which the Fund's management believes
will be in default. The Statement of Additional Information contains a
more detailed description of the risks involved in purchasing junk bonds.
The table below shows the average monthly dollar-weighted market
value, by Standard & Poor's rating category, of the securities held by the
National Portfolio during the year ended June 30, 1994:
% Market
Value
% Net Municipal
Rating Assets Bonds
------ ------ ----------
AAA.............................. 11.26% 12.43%
AA............................... 21.13 23.34
A................................ 28.96 31.99
BBB.............................. 17.41 19.22
BB............................... 3.31 3.66
NR................................ 8.47 9.36
----- -----
90.55% 100%
====== =====
It is expected that the National Portfolio will consist primarily of
revenue bonds emphasizing hospital, health care, public utility and
housing issues.
LIMITED MATURITY PORTFOLIO
The Limited Maturity Portfolio invests in a portfolio primarily of
short-term investment grade Municipal Bonds. Municipal Bonds in the
Limited Maturity Portfolio will be either Municipal Bonds with a remaining
maturity of less than four years or short-term municipal notes, which
typically are issued with a maturity of not more than one year. The
Limited Maturity Portfolio will treat Municipal Bonds which it has the
option to require the issuer to redeem within four years as having a
remaining maturity of less than four years, even if the period to the
stated maturity date of such Bonds is greater than four years. Municipal
notes include tax anticipation notes, bond anticipation notes and revenue
anticipation notes. The Limited Maturity Portfolio can be expected to
offer a lower yield than the longer-term Portfolios. Interest rates on
short-term Municipal Bonds may fluctuate more widely from time to time
than interest rates on long-term Municipal Bonds. However, because of the
shorter maturities, the market value of the Municipal Bonds held by the
Limited Maturity Portfolio can be expected to fluctuate less in value as a
result of changes in interest rates.
The Limited Maturity Portfolio will invest only in Municipal Bonds
rated at the date of purchase in the four highest ratings of Standard &
Poor's (AAA, AA, A and BBB) or Moody's (Aaa, Aa, A and Baa) in the case of
long-term debt, rated by Moody's as MIG 1 through MIG 4 or in the four
highest bond ratings of, or rated
19
<PAGE> 23
SP-1+ through SP-2 by, Standard & Poor's in the case of short-term
tax-exempt notes, and rated by Moody's P-1 through P-2 or rated A-1+
through A-2 by Standard & Poor's in the case of tax-exempt commercial
paper. The Limited Maturity Portfolio will also invest in other Municipal
Bonds deemed to qualify for such ratings and in variable rate tax-exempt
demand notes. Securities rated in the lowest of these categories are
considered to have some speculative characteristics. The Limited Maturity
Portfolio may continue to hold securities which, after being purchased by
the Portfolio, are downgraded to a rating lower than those set forth
above.
Forward Commitments
Each Portfolio may purchase Municipal Bonds on a forward commitment
basis at fixed purchase terms. The purchase will be recorded on the date
the Portfolio enters into the commitment and the value of the security
will thereafter be reflected in the calculation of the Portfolio's net
asset value. The value of the security on the delivery date may be more or
less than its purchase price. A separate account of the Portfolio will be
established with its custodian consisting of cash or liquid Municipal
Bonds having a market value at all times at least equal to the amount of
the forward commitment.
Financial Futures Contracts and Derivatives
The National Portfolio and the Limited Maturity Portfolio
(collectively, the "Portfolios") are authorized to purchase and sell
certain financial futures contracts ("futures contracts") and options on
such futures contracts solely for the purpose of hedging their investments
in Municipal Bonds against declines in value and to hedge against
increases in the cost of securities the Portfolios intend 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 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.
The Portfolios intend to trade in futures contracts based upon The
Bond Buyer Municipal Bond Index, a price-weighted measure of the market
value of 40 large, recently issued tax-exempt bonds, and to engage in
transactions in exchange-traded futures contracts on U.S. Treasury
securities and options on such futures. If making or accepting delivery of
the underlying commodity is not desired, a position in a futures contract
or an option on a futures contract may be terminated only by entering into
an offsetting transaction on the exchange on which the position was
established and only if there is a liquid market for such contract. If it
is not economically practicable, or otherwise possible to close a futures
position or certain option positions entered into by a Portfolio, the
Portfolio could be required to make continuing daily cash payments of
variation margin in the event of adverse price movements. In such
situations, if the Portfolio 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. In addition, the Portfolio may be
required to perform under the terms of its contracts. The inability to
close futures or options positions could also have an adverse impact on
the Portfolio's ability to hedge effectively. There is also risk of loss
by a Portfolio of margin deposits in the event of bankruptcy, of a broker
with whom the
20
<PAGE> 24
Portfolio has an open position in a futures contract, or the exchange or
clearing organization on which that contract is traded. The Portfolios may
also engage in transactions in other futures contracts, such as futures
contracts on other municipal bond indexes which may become available, if
the Investment Adviser believes such contracts would be appropriate for
hedging the Portfolios' investments in Municipal Bonds.
Utilization of futures or option contracts involves the risk of
imperfect correlation in movements in the price of such contracts and
movements in the price of the security or securities which are the subject
of the hedge. If the price of the futures or option contract moves more or
less than the price of the security or securities that are the subject of
the hedge, a Portfolio will experience a gain or loss which will not be
completely offset by movements in the price of such security, which could
occur as a result of many factors, including where the securities
underlying futures or option contracts have different maturities, ratings,
or geographic mixes than the security being hedged. In addition, the
correlation may be affected by additions to or deletions from the index
which serves as a basis for an index futures contract. The trading of
futures contracts or options on futures contracts based on indexes of
securities also involves a risk of imperfect correlation between the value
of the futures contracts and the value of the underlying index. The
anticipated spread between such values or in the correlation between the
futures contract and the underlying security may be affected by
differences in markets, such as margin requirements, market liquidity and
the participation of speculators in the futures markets. Moreover, when a
Portfolio enters into transactions in futures contracts on U.S. Treasury
securities, or options on such contracts, the underlying securities will
not correspond to securities held by the Portfolio. Finally, in the case
of futures contracts on U.S. Treasury securities and options on such
futures contracts, the anticipated correlation of price movements between
U.S. Treasury securities underlying the futures or options and Municipal
Bonds may be adversely affected by economic, political, legislative or
other developments which have a disparate impact on the respective markets
for such securities.
Under regulations of the Commodity Futures Trading Commission
("CFTC"), the futures trading activities described herein will not
result in the Portfolios' being deemed to be "commodity pools," as
defined under such regulations, provided that certain restrictions are
adhered to. In particular, among other requirements, the Portfolios may
either (a) purchase and sell futures contracts only for bona fide hedging
purposes, as defined under CFTC regulations, or (b) limit any transaction
not qualifying as bona fide hedging so that the sum of the amount of
initial margin deposits and premiums paid on such positions would not
exceed 5% of the market value of the Portfolio's net assets. Margin
deposits may consist of cash or securities acceptable to the broker and
the relevant contract market.
When either Portfolio purchases a futures contract, it will maintain
an amount of cash, cash equivalents or commercial paper or other
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 margin and option premiums held in the account of its broker
equals the value represented by the futures contract, as reflected by its
daily settlement price, thereby ensuring that the use of such futures
contract is unleveraged. It is not anticipated that transactions in
futures contracts will have the effect of increasing portfolio turnover.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts.
The Fund may invest in a variety of instruments which may be
characterized as "Derivative Securities." The Fund may invest in Municipal
Bonds the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
21
<PAGE> 25
maturity of certain Municipal Bonds also may be based on the value of an
index. Also, the Fund may invest in so-called "inverse floating obligations"
or "residual interest bonds" on which the interest rates typically decline
as market rates increase and increase as market rates decline. To the extent
the Fund invests in these types of Municipal Bonds, the Fund's return on such
Municipal Bonds will be subject to risk with respect to the value of the
particular index. Such securities have the effect of providing a degree of
investment leverage, since they may increase or decrease in value in response
to changes, as an illustration, in market interest rates at a rate which is a
multiple (typically two) of the rate at which fixed-rate long-term exempt
securities increase or decrease in response to such changes. As a result, the
market values of such securities will generally be more volatile than the
market values of fixed-rate tax exempt securities. To seek to limit the
volatility of these securities, the Fund may purchase inverse floating
obligations with shorter term maturities or which contain limitations on the
extent to which the interest rate may vary. The Manager believes that indexed
and inverse floating obligations represent a flexible portfolio management
instrument for the Fund which allows the Manager to vary the degree of
investment leverage relatively efficiently under different market conditions.
Certain investments in such obligations may be illiquid. The Fund may not
invest in such illiquid obligations if such investments, together with other
illiquid investments, would exceed 10% of the Fund's net assets.
Investment Restrictions
The Fund has adopted a number of restrictions and policies relating to
the investment of its assets and its activities, which are fundamental
policies of the Fund and may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities (including
a majority of the shares of each Portfolio). One such restriction prohibits
the Fund from entering into a repurchase agreement if, as a result thereof,
more than 10% of the total assets of any Portfolio (taken at market value at
the time of each investment) would be subject to repurchase agreements
maturing in more than seven days. Investors are referred to the Statement of
Additional Information for a complete description of such restrictions and
policies.
The Board of Directors of the Fund, at a meeting held on August 4, 1994,
approved certain changes to the fundamental and non-fundamental investment
restrictions of the Fund. These changes were proposed in connection with the
creation of a set of standard fundamental and non-fundamental investment
restrictions that would be adopted, subject to shareholder approval, by all
of the non-money market mutual funds advised by MLAM or FAM. The proposed
uniform investment restrictions are designed to provide each of these funds,
including the Fund, with as much investment flexibility as possible under the
Investment Company Act and applicable state securities regulations, help
promote operational efficiencies and facilitate monitoring of compliance. The
investment objectives and policies of the Fund will be unaffected by the
adoption of the proposed investment restrictions.
The full text of the proposed investment restrictions is set forth under
"Investment Objective and Policies-Proposed Uniform Investment Restrictions"
in the Statement of Additional Information. Shareholders of the Fund are
currently considering whether to approve the proposed revised investment
restrictions. If such shareholder approval is obtained, the Fund's current
investment restrictions will be replaced by the proposed restrictions, and
the Fund's Prospectus and Statement of Additional Information will be
supplemented to reflect such change.
INVESTMENT ADVISER
The investment adviser to the Fund is Fund Asset Management, L.P.
("FAM"), an affiliate of Merrill Lynch Asset Management L.P. ("MLAM"),
an indirect subsidiary of Merrill Lynch & Co., Inc., a financial services
holding company and the parent of Merrill Lynch. The address of FAM is
P.O. Box 9011, Princeton,
22
<PAGE> 26
New Jersey 08543-9011. FAM or MLAM acts as the Investment Adviser for over
100 other investment companies. As of August 31, 1994, the Investment Adviser
and MLAM had a total of approximately $165.7 billion in investment company
and other portfolio assets under management, including accounts of certain
affiliates of the investment adviser.
FAM, subject to the general supervision of the Fund's Board of
Directors, renders investment advice to the Fund and is responsible for
the overall management of the Fund's business affairs. The responsibility
for making decisions to buy, sell or hold a particular security rests with
FAM. For the year ended June 30, 1994, FAM received in fees from the Fund
$22,860,647, of which $11,040,540 was received with respect to the Insured
Portfolio (representing 0.36% of its average net assets), $8,514,268 was
received with respect to the National Portfolio (representing 0.48% of its
average net assets) and $3,305,839 was received with respect to the
Limited Maturity Portfolio (representing 0.33% of its average net assets).
The Investment Advisory Agreement obligates each Portfolio to pay certain
expenses incurred in its operation and a portion of the Fund's general
administrative expenses allocated on the basis of the asset size of the
respective Portfolios. The Fund's total expenses for the year ended June 30,
1994 were $37,728,533, of which $19,914,627 was attributable to the Insured
Portfolio (representing .42% of average net assets for Class A shares and
1.17% of average net assets for Class B shares), $13,322,352 was attributable
to the National Portfolio (representing .55% of average net assets for Class
A shares and 1.30% of average net assets for Class B shares) and $4,491,554
was attributable to the Limited Maturity Portfolio (representing 0.40% of
average net assets for Class A shares and 0.76% of average net assets for
Class B shares); no Class C shares or Class D shares had been issued that
year. FAM was not required to reduce its fee or reimburse any of the Fund's
expenses for the 1994 fiscal year.
Vincent Giordano has served as the Fund's Portfolio Manager since
1977, and is primarily responsible for the Fund's day-to-day management.
He has served as a Senior Vice President of the Investment Adviser and
MLAM since 1984, and as Vice President from 1980 to 1984.
DIRECTORS
The Directors of the Fund consist of six individuals, five of whom are
not "interested persons" of the Fund as defined in the Investment
Company Act of 1940. The Directors of the 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 of 1940.
The Directors of the Fund are:
ARTHUR ZEIKEL*-President and Chief Investment Officer of MLAM and FAM,
Executive Vice President of Merrill Lynch & Co, Inc. ("ML & Co.")
Director of the Distributor; President and Director of Princeton Services,
Inc. ("Princeton Services").
RONALD W. FORBES-Associate Professor of Finance, School of Business,
State University of New York at Albany.
CYNTHIA A. MONTGOMERY-Professor, Harvard Business School since 1989.
CHARLES C. REILLY-Adjunct Professor, Columbia University Graduate
School of Business.
KEVIN A. RYAN-Professor of Education at Boston University since 1982.
Founder and current Director of the Boston University Center for
Advancement of Ethics and Character.
23
<PAGE> 27
RICHARD R. WEST-Professor of Finance at New York University School of
Business Administration.
----------
*Interested person, as defined in the Investment Company Act of 1940, of
the Fund.
PURCHASE OF SHARES
Each Portfolio offers its shares in four classes at a public offering
price equal to the net asset value plus varying sales charges as set forth
below. Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an
affiliate of both the Investment Adviser and Merrill Lynch, acts as the
Distributor of the shares. Class C shares of the Limited Maturity
Portfolio are offered only through the Exchange Privilege. See p. 42.
Shares may be purchased directly from the Distributor or from other
securities dealers, including Merrill Lynch, with whom the Distributor has
entered into selected dealer agreements; however, only Class A and Class D
shares may be available for purchase through securities dealers, other than
Merrill Lynch, which are eligible to sell shares. The Fund is offering shares
in four classes of its Portfolios at a public offering price equal to the
next determined net asset value per share plus sales charges imposed either
at the time of purchase (the "initial sales charge alternative") or on a
deferred basis depending upon the class of shares selected by the investor
under the Merrill Lynch Select Pricing SM System, as described below. Net
asset value per share will be determined in the manner set forth under "Net
Asset Value." The minimum initial purchase in each Portfolio is $1,000 and
the minimum subsequent purchase in each Portfolio is $50. Merrill Lynch may
charge its customers an processing fee (currently $4.85) to confirm a
sale of shares. Purchases directly through the Fund's transfer agent are not
subject to the processing fee.
Because retirement plans qualified under Section 401 of the Internal
Revenue Code will be unable to benefit from the tax-exempt dividends of the
Fund, the shares of the Fund may not be suitable investments for such
retirement plans.
Each of the Portfolios issues four classes of shares under the Merrill
Lynch Select Pricing SM System, which permits each investor to choose the
method of purchasing shares that the investor believes is most beneficial
given the amount of the purchase, the length of time the investor expects to
hold the shares and other relevant circumstances. Shares of Class A and Class
D shares are sold to investors choosing the initial sales charge alternative
and shares of Class B and Class C shares are sold to investors choosing the
deferred sales charge alternatives. Class C shares of the Limited Maturity
Portfolio are available only through the Exchange Privilege and may not be
purchased except through exchange of Class C shares of another Portfolio or
another Fund.
Investors should determine whether under their particular
circumstances it is more advantageous to incur the initial sales charge or
to have the initial purchase price invested with the Portfolio with the
investment thereafter being subject to a contingent deferred sales charge
and ongoing distribution fees. A discussion of the factors that investors
should consider in determining the method of purchasing shares under the
Merrill Lynch Select Pricing SM System is set forth under the Merrill
Lynch Select Pricing SM System on page 8. Each Class A, Class B, Class C
and Class D share of a Portfolio represents identical interests in the
Portfolio and has the same rights, except that Class B, Class C and Class
D shares bear the expenses of the ongoing account maintenance fees, and
Class B and Class C shares bear the expenses of the ongoing distribution
fees and the additional incremental transfer agency costs resulting from
the deferred sales charge arrangements. The deferred sales charges and
account maintenance fees that are imposed on Class B and Class C shares,
as well as the account maintenance fees that are imposed on Class D
shares, will be imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class
24
<PAGE> 28
or have any impact on investors choosing another sales charge option.
Dividends paid by a Portfolio for each class of shares will be calculated in
the same manner at the same time and will differ only to the extent that
account maintenance and distribution fees and any incremental transfer agency
costs relating to a particular class are borne exclusively by that class.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such
class pursuant to which account maintenance and/or distribution fees are
paid. See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services-Exchange Privileges".
Investors should understand that the purpose and function of the
initial sales charges with respect to Class A and Class D shares are the
same as those of the deferred sales charges with respect to Class B and
Class C shares in that the sales charges applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes
of shares. Investors are advised that only Class A and Class D shares may
be available for purchase through securities dealers, other than Merrill
Lynch, which are eligible to sell shares.
The following tables set forth a summary of the distribution
arrangements for each class of shares under the Merrill Lynch Select
Pricing(SM) System.
Insured and National Portfolios
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Account
Maintenance Distribution Conversion
Class Sales Charge (1) Fee Fee Feature
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge (2)(3)
- ------------------------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, at a 0.25% 0.50% B shares convert to D shares
rate of 4.0% during the first year, automatically after approximately
decreasing 1.0% annually to 0.0% ten years(4)
- -------------------------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year decreasing to 0.25% 0.55% No
0.00% after the first year
- -------------------------------------------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales charge (3) 0.25% No No
- -------------------------------------------------------------------------------------------------------------------------------
[/TABLE]
25
<PAGE> 29
Limited Maturity Portfolio
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Account
Maintenance Distribution Conversion
Class Sales Charge (1) Fee Fee Feature
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 1.00% initial sales
charge (2)(3) No No No
- ------------------------------------------------------------------------------------------------------------------------------
B CDSC at a rate of 1.00% 0.15% 0.20% B shares convert to D
during the first year, shares automatically
decreasing to 0.0% after the first year after approximately
ten years (4)
- ------------------------------------------------------------------------------------------------------------------------------
C(5) 1.0% CDSC for one year 0.15% 0.20% No
decreasing to 0.00% after the first year
- ------------------------------------------------------------------------------------------------------------------------------
D Maximum 1.00% initial sales 0.10% No No
charge (3)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
----------
(1) Initial sales charges are imposed at the time of purchase as a
percentage of the offering price. CDSCs may be imposed if the
redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives-Class A and Class D Shares-Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more for the Insured and National
Portfolios. Reduced for purchases of $100,000 or more for Limited
Maturity Portfolio. Class A and Class D share purchases of $1,000,000
or more will not be subject to an initial sales charge but instead will
be subject to a 1.0% CDSC for the Insured and National Portfolios and
.20% CDSC for the Limited Maturity Portfolio, for one year.
(4) The conversion period for dividend reinvestment shares is modified.
Also, Class B shares of certain other MLAM-advised mutual funds into
which exchanges may be made have a eight-year conversion period. If
Class B shares of a Portfolio are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to
the Class B shares acquired in the exchange will apply, and the
holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(5) Class C shares of the Limited Maturity Portfolio are offered only
through the Exchange Privilege. See p. 42.
26
<PAGE> 30
Initial Sales Charge Alternatives - Class A and Class D Shares
Investors choosing the initial sales charge alternatives who are
eligible to purchase Class A shares should purchase Class A shares rather
than Class D shares because there is an account maintenance fee imposed on
Class D shares.
The initial sales charges, computed as indicated below, are reduced on
larger purchases. The Distributor may reallow discounts to securities
dealers with whom it has agreements and retain the balance over such
discount. At times the Distributor may reallow the entire sales charge to
selected dealers, in which case such dealers may be deemed to be
underwriters within the meaning of the Securities Act of 1933 and subject
to liability as such. The Distributor will retain the entire sales charge
on orders placed directly with it.
The public offering price of Class A and Class D shares of the
Portfolios, for purchasers choosing the initial sales charge alternative,
is the next determined net asset value plus varying sales charges (i.e.,
sales loads), as set forth below:
Class A and Class D shares of Insured and National Portfolios
<TABLE>
<CAPTION>
Sales Charge
-------------------------------------------------------------
Discount to
Sales Load as Sales Load as Select Dealers as a
a Percentage of a Percentage of Percentage of
Amount of Purchase Offering Price Net Amount Invested Offering Price
------------------ -------------- ------------------- --------------
<S> <C> <C> <C>
Less than $25,000 ...................... 4.00% 4.17% 3.75 %
$25,000 but less than $50,000 .......... 3.75 3.90 3.50
$50,000 but less than $100,000 ......... 3.25 3.36 3.00
$100,000 but less than $250,000 ........ 2.50 2.56 2.25
$250,000 but less than $1,000,000 ...... 1.50 1.52 1.25
$1,000,000 and over** .................. 0.00 .00 .00
</TABLE>
27
<PAGE> 31
Class A and Class D shares of Limited Maturity Portfolio
<TABLE>
<CAPTION>
Sales Charge
-------------------------------------------------------------
Discount to
Sales Load as Sales Load as Select Dealers as a
a Percentage of a Percentage of Percentage of
Amount of Purchase Offering Price Net Amount Invested Offering Price
------------------ -------------- ------------------- --------------
<S> <C> <C> <C>
Less than $100,000...................... 1.00% 1.01% .95 %
$100,000 but less than $250,000 ........ .75 .75 .70
$250,000 but less than $500,000 ........ .50 .50 .45
$500,000 but less than $1,000,000 ...... .30 .30 .27
$1,000,000 and over** .................. .00 .00 .00
</TABLE>
----------
* Rounded to the nearest one-hundredth percent.
** Class A and Class D purchases of $1,000,000 or more made on or after
October 21, 1994 will be subject to a CDSC of 1% for the Insured and
National Portfolios and 0.20% for the Limited Maturity Portfolio, if
the shares are redeemed within one year after purchase. Class A
purchases made prior to October 21, 1994 may be subject to a CDSC if the
shares are redeemed within one year of purchase at the following rates:
.75% on purchases of $1,000,000 to $2,500,000; .40% on purchases of
$2,500,001 to $3,500,000; .25% on purchases of $3,500,001 to
$5,000,000; and .20% on purchases of more than $5,000,000 for the Insured
Portfolio and National Portfolio in lieu of paying an initial sales
charge. Class A purchases of the Limited Maturity Portfolio made prior to
October 21, 1994 may be subject to a CDSC of 0.20% on purchases of more
than $1,000,000 if the shares are redeemed within one year of purchase
in lieu of paying the initial sales charge. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
The Distributor may reallow discounts to selected dealers and retain
the balance over such discounts. At times the Distributor may reallow the
entire sales charge to such dealers. Since securities dealers selling
Class A shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities
Act of 1933, as amended (the "Securities Act"). During the fiscal year
ended June 30, 1994, the Insured Portfolio, the National Portfolio and the
Limited Maturity Portfolio sold 33,131,876, 8,490,063 and 37,619,639,
Class A shares respectively, for aggregate net proceeds of $280,935,110,
$92,184,282 and $375,440,124, respectively. The gross sales charges for
the sale of Class A shares of the Insured Portfolio, the National
Portfolio and the Limited Maturity Portfolio for that year were
$3,435,864, of which $343,837 and $3,092,027 were received by the
Distributor and Merrill Lynch, respectively. For the fiscal year ended
June 30, 1994, the Distributor received CDSCs of $36,923 (in the case of
the National Portfolio), $45,329 (in the case of the Insured Portfolio)
and $93,556 (in the case of Limited Maturity Portfolio), all of which were
paid to Merrill Lynch, with respect to redemption within one year of
purchase of Class A shares purchased subject to front-end sales charge
waivers.
Eligible Class A Investors. Class A shares are offered to a limited
group of investors and also will be issued upon reinvestment of dividends
from outstanding Class A shares. Investors that currently own Class A
shares in a shareholder account, including participants in the Merrill
Lynch Blueprint SM program, are entitled to purchase additional Class A
shares in that account. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs provided that the
program has $3 million or more initially invested in MLAM-advised mutual
funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs, including TMA SM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services and certain purchases made in connection with the Merrill Lynch
Mutual Fund Adviser program. In addition, Class A shares will be offered
at net asset value to Merrill Lynch & Co., Inc. and its subsidiaries and
their directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired
shares of certain MLAM-advised
28
<PAGE> 32
closed-end funds who wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met. For example, Class A shares of
the Fund and certain other MLAM-advised mutual funds are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. who
wish to reinvest the net proceeds from a sale of certain of their shares of
common stock of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of
such funds.
As to purchase orders received by selected dealers prior to the close
of the New York Stock Exchange, which includes orders received after the
close on the previous day, the applicable offering price will be based on
the net asset value determined on the day the order is placed with the
Distributor, provided the order is received by the Distributor prior to
4:30 P.M., New York City time, on that day. Any order may be rejected by
the Distributor or the Fund. Neither the Distributor nor the dealers are
permitted to withhold placing orders to benefit themselves by a price
change. The Fund reserves the right to suspend the sale of its shares to
the public in response to conditions in the Municipal Bond markets, or
otherwise.
Payment by Wire. To purchase shares by wiring Federal Funds, payment
should be wired to The Bank of New York, New York City. Shareholders
should give their financial institutions the following wiring
instructions, ABA #021000018, DDA #902233, Financial Data Services, Inc.
For all communications regarding existing accounts, please indicate the
name of the Portfolio, the shareholder's account number, and the
shareholder's name. Instructions for new accounts should specify name,
address and social security number of each person in whose name the shares
are to be registered and the name of the Portfolio. Failure to submit the
required information may delay investment.
If Federal Funds are received by the Transfer Agent by 11:00 A.M.,
shares of the Portfolio will be issued that day based upon the net asset
value of the Portfolio determined as of the close of regular trading on
the New York Stock Exchange that day. Shares begin accruing dividends so
long as they are issued and outstanding. Shares are issued and outstanding
as of the settlement date of a purchase order to the settlement date of a
redemption order. Since purchases of shares of the Fund are normally
effected on the basis of a five-business-day settlement procedure, this
method of payment provides an expeditious method of investing in the
Portfolios of the Fund. Many of the Municipal Bonds in which a Portfolio
invests do not trade on the basis of one-day settlements, and, since the
only municipal securities that a Portfolio may acquire on a one-day
settlement offer lower yields, if a substantial amount is invested by wire
transfer this may have the effect of decreasing the yield in that
Portfolio. The Fund is not responsible for delays in the wiring system.
The minimum purchase for payment by wire is $1,000, except that the
minimum purchase for payment by wire for new accounts is $5,000.
Reduced Initial Sales Charges. No initial sales charges are imposed
upon Class A and Class D shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions. Class A and
Class D sales charges also may be reduced under a Right of Accumulation
and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible
Class A investors as set forth above under "Eligible Class A Investors."
Class D shares are also offered at net asset value without sales charge to
an investor who has a business relationship with a financial consultant
if certain conditions set forth in the Statement of Additional Information
are met. Class D shares may be offered at net asset value in connection with
the acquisition of assets of other investment companies.
29
<PAGE> 33
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint SM Program.
Additional information concerning these reduced initial sales charges
is set forth in the Statement of Additional Information.
Deferred Sales Charge Alternatives - Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should
consider Class B shares if they intend to hold their shares for an
extended period of time and Class C shares if they are uncertain as to the
length of time they intend to hold their assets in MLAM-advised mutual
funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time
of purchase. As discussed below, Class B shares of the Insured and
National Portfolios are subject to a four year CDSC and Class B shares of
the Limited Maturity Portfolio are subject to a one year CDSC, while Class
C shares are subject only to a one year 1.0% CDSC. On the other hand,
approximately ten years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with
respect to those shares, are automatically converted into Class D shares
of the relevant Portfolio and thereafter will be be subject to lower
continuing fees. Class C shares of the Limited Maturity Portfolio are
available only through the Exchange Privilege. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares of each
Portfolio are subject to an account maintenance fee of 0.25% (in the case
of the National and Insured Portfolios) and 0.15% (in the case of the
Limited Maturity Portfolio) of net assets. Class B and Class C shares of
the Insured and National Portfolios are subject to distribution fees 0.50%
and 0.55%, respectively of the net assets. Class B and Class C shares of
the Limited Maturity portfolio are subject to a distribution fee of 0.20%.
See "Distribution Plans." The proceeds from account maintenance fees are
used to compensate Merrill Lynch for providing continuing account
maintenance activities.
Class B and Class C shares are sold without an initial sales charge so
that the Fund will receive the full amount of the investor's purchase
payment. Merrill Lynch compensates its financial consultants for selling
Class B and Class C shares at the time of purchase from its own funds. See
"Distribution Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the
Distributor and are used in whole or in part by the Distributor to defray
the expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of
the Class B and Class C shares, such as the payment of compensation to
financial consultants for selling Class B and Class C shares, from its own
funds. The combination of the CDSC and the ongoing distribution fee
facilitates the ability of the Fund to sell the Class B and Class C shares
without a sales charge being deducted at the time of purchase.
Approximately ten years after issuance, Class B of a Portfolio shares will
convert automatically into Class D shares of that Portfolio, which are
subject to an account maintenance fee but no distribution fee; Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made convert into Class D shares automatically after approximately
eight years. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See
"Limitations on the Payment of Deferred Sales Charges" below. The
proceeds from the ongoing account maintenance fee are used to compensate
Merrill Lynch for providing continuing
30
<PAGE> 34
account maintenance activities. Class B shareholders on the Fund
exercising the exchange privilege described under "Shareholder
Services-Exchange Privileges" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the
Class B shares acquired as a result of the exchange.
Contingent Deferred Sales Charge-Class B Shares. Class B shares of the
Insured and National Portfolios redeemed within four years of purchase for
the National and Insured Portfolios and Class B shares of the Limited
Maturity Portfolio redeemed within one year of purchase, may be subject to
a CDSC at the rates set forth below charged as a percentage of the dollar
amount subject thereto. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed. Accordingly, no CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC will be
assessed on the redemption of shares received upon the reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the contingent deferred
sales charge on Class B shares applicable for the period starting October
21, 1994:
<TABLE>
<CAPTION>
Contingent Deferred
Insured or Sales Charge as a
National Portfolio: Percentage of
Year Since Purchase Dollar Amount
Payment Made Subject to Charge
------------ -----------------
<S> <C>
0-1 .................................................................... 4.0%
1-2 .................................................................... 3.0%
2-3 .................................................................... 2.0%
3-4 .................................................................... 1.0%
4 and thereafter ....................................................... 0.0%
</TABLE>
<TABLE>
<CAPTION>
Limited Maturity Contingent Deferred
Portfolio: Sales Charge as a
Year Since Purchase Percentage of
Payment Made Dollar Amount
------------ -------------
<S> <C>
0-1 .................................................................... 1.0%
1 and thereafter ....................................................... 0.0%
</TABLE>
In determining whether a contingent deferred sales charge is
applicable to a redemption, the calculation will be made in a manner that
results in the lowest possible applicable rate being charged. Therefore,
with respect to the Insured and National Portfolios, it will be assumed
that the redemption is first of shares held for over four years or shares
acquired pursuant to reinvestment of dividends or distributions and then
of shares held longest during the applicable four-year period. It will be
assumed, with respect to the Limited Maturity Portfolio, that the
redemption is of shares held for over one year or shares acquired pursuant
to reinvestment of dividends or distributions. The charge will not be
applied to dollar amounts representing an increase in the net asset value
since the time of purchase. A transfer of shares from a shareholder's
account to another account will be assumed to be made in the same order as
a redemption.
To provide an example, assume an investor purchased 100 Class B shares
of the Insured Portfolio at $10 per share (at a cost of $1,000) and in the
third year after purchase, the net asset value per share is $12 and,
during such time, the investor has acquired 10 additional shares upon
dividend reinvestment. If at such time the
31
<PAGE> 35
investor makes his or her first redemption of 50 shares (proceeds of
$600), 10 shares will not be subject to charge because of dividend
reinvestment. With respect to the remaining 40 shares, the CDSC is applied
only to the original cost of $10 per share and not the increase in net asset
value of $2 per share. Therefore, $400 of the $600 redemption proceeds will
be charged at a rate of 2.0% (the applicable rate in the third year after
purchase).
The Class B CDSC is waived on redemptions of shares following
the death or disability (as defined in the Internal Revenue Code) of a
shareholder.
The Class B CDSC also is waived on redemptions of shares placing
purchase orders through Merrill Lynch Blueprint SM Program. Additional
information concerning the waiver of the Class B CDSC is set forth in the
Statement of Additional Information.
For the fiscal year ended June 30, 1994, the Distributor received
$2,378,916 in contingent deferred sales charges, amounting to $1,469,123,
$718,890 and $190,903 in the Insured, National and Limited Maturity
Portfolios, respectively.
Contingent Deferred Sales Charges-Class C Shares. Class C shares which
are redeemed within one year of purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no Class
C CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no Class C CDSC will be assessed on shares
derived from reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the contingent deferred
sales charge on the Class C shares of the Insured, National and Limited
Maturity Portfolios:
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge as a
Percentage of
Year Since Purchase Dollar Amount
Payment Made Subject to Charge
<S> <C>
0-1 .................................................................... 1.0%
thereafter ............................................................. 0.0%
</TABLE>
In determining whether a Class C CDSC is applicable to a redemption,
the calculation will be determined in the manner that results in the
lowest possible rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over one year or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares
held longest during the one-year period. The charge will not be applied to
dollar amounts representing an increase in the net asset value since the
time of purchase. A transfer of shares from a shareholder's account to
another account will be assumed to be made in the same order as a
redemption.
Conversion of Class B Shares to Class D Shares. After approximately
ten years (the "Conversion Period"), Class B shares of a Portfolio will
be converted automatically into Class D shares of the relevant Portfolio.
Class D shares are subject to an ongoing account maintenance fee of 0.25%
(in the case of Insured Portfolio and National Portfolio) and 0.10% (in
the case of the Limited Maturity Portfolio) of net assets but are
not subject to the distribution fee that is borne by Class B shares.
Automatic conversion of Class B shares into Class D shares will occur at
least once each month (on the "Conversion Date") on the basis of the
relative net asset values of the shares of the two classes on the
Conversion Date, without the imposition of any sales load, fee or other
charge. Conversion of Class B shares to Class D shares will not be deemed
a purchase or sale of the shares for Federal income tax purposes.
32
<PAGE> 36
In addition, shares purchased through reinvestment of dividends on
Class B shares also will convert automatically to Class D shares. The
Conversion Date for dividend reinvestment shares will be calculated taking
into account the length of time the shares underlying such dividend
reinvestment shares were outstanding. If at a Conversion Date the
conversion of Class B shares to Class D shares of the Fund in a single
account will result in less than $50 worth of Class B shares being left in
the account, all of the Class B shares of the Fund held in the account on
the Conversion Date will be converted to Class D shares of the Fund.
Share certificates for Class B shares of the Fund to be converted must
be delivered to the Transfer Agent at least one week prior to the
Conversion Date applicable to those shares. In the event such certificates
are not received by the Transfer Agent at least one week prior to the
Conversion Date, the related Class B shares will convert to Class D shares
on the next scheduled Conversion Date after such certificates are
delivered.
In general, Class B shares of equity MLAM-advised mutual funds will
convert approximately eight years after initial purchase, and Class B
shares of taxable and tax-exempt fixed income MLAM-advised mutual funds
will convert approximately ten years after initial purchase. If, during
the Conversion Period, a shareholder exchanges Class B shares with an
eight-year Conversion Period for Class B shares with a ten-year Conversion
Period, or vice versa, the Conversion Period applicable to the Class B
shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired.
Distribution Plans
The Fund has adopted separate distribution plans for Class B, Class C
and Class D shares pursuant to Rule 12b-1 under the Investment Company Act
(each a "Distribution Plan") with respect to the account maintenance
and/or distribution fees paid by the Fund to the Distributor with respect
to such classes. The Class B and Class C Distribution Plans provide for
the payment of account maintenance fees and distribution fees, and the
Class D Distribution Plan provides for the payment of account maintenance
fees.
The Distribution Plans for Class B, Class C and Class D shares each
provide that the Fund pays the Distributor an account maintenance fee
relating to the shares of the relevant class of a Portfolio, accrued daily
and paid monthly, at the annual rate of 0.25% (in the case of the Class B,
Class C and Class D shares of the Insured Portfolio and the National
Portfolio) and 0.15% (in the case of Class B and Class C shares of the
Limited Maturity) and 0.10% (in the case of the Class D shares of the Limited
Maturity Portfolio) of the average daily net assets of the Portfolio
attributable to shares of the relevant class in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) in connection
with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that
the Fund also pays the Distributor a distribution fee relating to the shares
of the relevant class of a Portfolio, accrued daily and paid monthly, at the
annual rate of 0.50% and 0.55% for the Class B and Class C shares,
respectively, of the the Insured and National Portfolios and 0.20% for the
Class B and Class C shares of the Limited Maturity Portfolio of the average
daily net assets of the Portfolio attributable to the shares of the relevant
class in order to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing shareholder and distribution services, and
bearing certain distribution-related expenses of the Fund, including payments
to financial consultants for selling Class B and Class C shares of the
Portfolio. The Distribution Plans relating to Class B and Class C shares are
designed to permit an investor to purchase Class B and Class C shares through
dealers without the assessment of an initial sales charge and at the same
time permit the dealer to compensate its financial consultants in connection
with the sale of the Class B and Class C shares. In this regard, the purpose
and function of the
33
<PAGE> 37
ongoing distribution fees and the CDSC are the same as those of the initial
sales charge with respect to the Class A and Class D shares of the Fund in
that the deferred sales charges provide for the financing of the distribution
of the Fund's Class B and Class C shares.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing
distribution fee, accrued daily and paid monthly, at the annual rate of 0.75%
(in the case of the Insured Portfolio and National Portfolio) and 0.35% (in
the case of the Limited Maturity Portfolio) of the average daily net assets
of the Class B shares of the respective Portfolio's (the "Prior Plan") to
compensate the Distributor and Merrill Lynch for providing account
maintenance and distribution-related activities and services to Class B
shareholders. The fee rate payable and the services provided under the Prior
Plan are identical to the aggregate fee rate payable and the services
provided under the Distribution Plan, the difference being that the account
maintenance and distribution services have been unbundled. For the fiscal
year ended June 30, 1994, the Fund paid account maintenance and distribution
fees of $6,980,635 with respect to the Class B shares of the Insured
Portfolio, account maintenance and distribution fees of $3,496,610 with
respect to the Class B shares of the National Portfolio, and account
maintenance and distribution fees of $466,701 with respect to Class B shares
of the Limited Maturity Portfolio. Substantially all of the payments received
by the Distributor under the Distribution Plan was paid to Merrill Lynch for
providing distribution-related services in connection with the Class B
shares. The Distribution Plan is designed to permit an investor to purchase
Class B shares through dealers without assessment of a front-end sales load
and at the same time permit the dealer to compensate its financial
consultants in connection with the sale of the Class B shares. In this
regard, the purpose and function of the distribution fee and the CDSC are the
same as those of the initial sales charge with respect to the Class A share
of the Portfolio in that the deferred sales charges provide for the financing
of the distribution of such Portfolio's Class B shares.
For the year ended June 30, 1994, the Fund paid the Distributor account
maintenance fees of $3,625,758 and distribution fees of $7,318,188 under the
Class B Distribution Plan. The Fund did not begin to offer shares of Class C
or Class D publicly until the date of this Prospectus. Accordingly, no
payments have been made pursuant to the Class C or Class D Distribution Plans
prior to the date of this Prospectus.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the relevant shares regardless of
the amount of expenses incurred and, accordingly, distribution-related
revenues from Distribution Plans may be more or less than
distribution-related expenses. Information with respect to the
distribution-related revenues and expenses incurred by the Distributor and
Merrill Lynch with respect to the Class B shares is presented to the
directors for their consideration in connection with their deliberations as
to the continuance of the Class B and Class C Distribution Plans. This
information is presented annually as of December 31, of each year on a "fully
allocated accrual" basis and quarterly on a "direct expense and revenue/cash"
basis. On the fully allocated accrual basis, revenues consist of account
maintenance fees, the distribution fees, the contingent deferred sales
charges and certain other related revenues, and expenses consist of financial
consultant compensation, branch office and regional operation center selling
and transaction procession expenses, advertising, sales promotion and
marketing expenses, corporate overhead and interest expense. On the direct
expense and revenue/cash basis, revenues consist of the account maintenance
fees, distribution fees, the contingent deferred sales charges and expenses
consist of financial consultant compensation. As of December 31, 1993, the
last date for which fully allocated accrual data is available, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch
since October 24, 1988 with respect to Class B shares of the Insured
Portfolio exceeded revenues for that period by $6,929,000 (0.71% of the
Insured Portfolio's net assets at that date), and the fully allocated accrual
expenses incurred by the Distributor and Merrill Lynch during
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<PAGE> 38
that period with respect to Class B shares of the National Portfolio
exceeded revenues for that period by $4,235,000 (0.85% of the National
Portfolio's net assets at that date). The fully allocated accrual expenses
incurred by the Distributor and Merrill Lynch during the period from November
2, 1992 to December 31, 1993 with respect to Class B shares of the Limited
Maturity Portfolio exceeded revenues by $527,000 (0.37% of the Limited
Maturity Portfolio's net assets at that date). As of December 31, 1993,
direct cash revenues received with respect to the Insured Portfolio for the
period since October 24, 1988 exceeded direct cash expenses incurred with
respect to the Insured Portfolio by $10,889,786 (1.17%) of the Insured
Portfolio's net assets at that date), and direct cash revenues incurred with
respect to the National Portfolio for that period exceeded direct cash
expenses received with respect to the National Portfolio by $4,229,610 (0.85%
of the National Portfolio's net assets at that date). The direct cash
expenses incurred with respect to the Limited Maturity Portfolio for the
period from November 2, 1992 to December 31, 1993 exceeded direct cash
revenues received with respect to the Limited Maturity Portfolio by $1,669
(.001% of the Limited Maturity Portfolio's net asset value at December 31,
1993). As of June 30, 1994, direct cash revenues received with respect to the
Insured Portfolio for the period since October 24, 1988 exceeded direct cash
expenses incurred with respect to the Insured Portfolio by $13,801,624 (1.50%
of the Insured Portfolio's net assets at that date), and direct cash revenues
received with respect to the National Portfolio for the period exceeded
direct cash expenses incurred with respect to the National Portfolio by
$5,502,600 (1.20% of the National Portfolio's net assets at that date). As of
June 30, 1994, direct cash revenues received with respect to the Limited
Maturity Portfolio for the period since November 2, 1992 exceeded direct cash
expenses incurred with respect to the Limited Maturity Portfolio by $259,536
(.17% of the Limited Maturity Portfolio's net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance related expenses incurred by the Distributor and Merrill Lynch
in connection with the Class B, Class C and Class D shares, and there is
no assurance that the Board of Directors of the Fund will approve the
continuation of the Distribution Plans from year to year. However, the
Distributor intends to seek annual continuation of the Distribution Plans.
In their review of the Distribution Plans, the Directors will be asked to
take into consideration expenses incurred in connection with the account
maintenance and/or distribution of each Class of a Portfolio separately.
The initial sales charges, the account maintenance fee, the distribution
fee and/or the CDSCs received with respect to the one class of a Portfolio
will not be used to subsidize the sale of shares of another class of the
same Portfolio or of any class of another Portfolio. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth under "Deferred Sales
Charge Alternatives-Class B and Class C Shares-Conversion of Class B to
Class D Shares."
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD") imposes a
limitation on certain asset-based sales charges such as the Fund's
distribution fee and the CDSC borne by the Class B and Class C but not the
account maintenance fees. The maximum sales charge rule is applied
separately to each class and Portfolio. As applicable to a Portfolio, the
maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross
sales of Class B shares and Class C shares of that Portfolio , computed
separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges), plus (2) interest on the unpaid balance for
the respective classes, computed separately at the prime rate plus 1% (the
unpaid balance being the maximum amount payable minus amounts received
from the payment of the distribution fee and the CDSC). In
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<PAGE> 39
connection with the Class B shares the Distributor has voluntarily agreed
to waive interest charges on the unpaid balance in excess of 0.50% of
eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") in connection with
the Class B shares is 6.75% of eligible gross sales. The Distributor
retains the right to stop waiving the interest charge at any time. To the
extent payments would exceed the voluntary maximum, the Fund will not make
further payments of the distribution fee with respect to Class B shares
and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account
maintenance fees. In certain circumstances the amount payable pursuant to
the voluntary maximum may exceed the amount payable under the NASD
formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of each Portfolio
upon receipt of a written request in proper form. The redemption price is
the net asset value per share of the Portfolio next determined after the
initial receipt of proper notice of redemption. Except for any contingent
deferred sales load which may be applicable, there will be no charge for
redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends declared through the date of redemption. The
value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held
by the relevant Portfolio at such time. If a shareholder redeems all of
the shares in his account, he will receive, in addition to the net asset
value of the shares redeemed, a separate check representing all dividends
declared but unpaid. If a shareholder redeems a portion of the shares in
his account, the dividends declared but unpaid on the shares redeemed will
be distributed on the next dividend payment date. As set forth below,
special procedures are available pursuant to which shareholders may redeem
by check.
Redemption
A shareholder wishing to redeem shares may do so by tendering the
shares directly to the Transfer Agent, Financial Data Services, Inc.,
Transfer Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville,
Florida 32232-5289. Redemption requests delivered other than by mail
should be delivered to Financial Data Services, Inc., Transfer Agency
Mutual Fund Operations, 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited
with the Transfer Agent may be accomplished by a letter requesting
redemption. Proper notice of redemption in the case of shares for which
certificates have been issued may be accomplished by a written letter as
noted above accompanied by the certificate(s) for the shares to be
redeemed. The notice in either event requires the signature(s) of all
persons in whose name(s) the shares are registered, signed exactly as
their name(s) appear on the Transfer Agent's register or on the
certificate(s), as the case may be. The signature(s) on the redemption
request must be guaranteed by an "eligible guarantor institution" as
such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934,
the existence and validity of which may be verified by the Transfer Agent
through the use of industry publications. Notarized signatures are not
sufficient. Examples of eligible guarantor institutions include most
commercial banks and other broker dealers (including for example, Merrill
Lynch branch offices). Information regarding other financial institutions
which qualify as "eligible guarantor institutions" may be obtained from
the Transfer Agent. In certain instances, the Transfer Agent may require
additional documents such as, but not limited to, trust instruments, death
certifica tes, appointments as executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with the Transfer
Agent, payment will be mailed within seven days of receipt of a proper notice
of redemption.
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<PAGE> 40
At various times the Fund may be requested to redeem shares of a
Portfolio for which it has not yet received good payment. The Fund may
delay or cause to be delayed the mailing of a redemption check until such
time, not exceeding ten days, as it has assured itself that good payment
(e.g., cash or certified check drawn on a United States bank) has been
collected for the purchase of such shares. Normally this delay will not
exceed 10 days.
Repurchase
The Fund will also repurchase shares of each Portfolio through a
shareholder's listed securities dealer. The Fund will normally accept
orders to repurchase shares by wire or telephone from dealers for their
customers at the net asset value next computed after receipt of the order
by the dealer, provided that the request for repurchase is received by the
dealer prior to the close of business on the New York Stock Exchange on
the day received and is received by the Fund from the dealer not later
than 4:30 P.M., New York City time, on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not
later than 4:30 P.M., New York City time, in order to obtain that day's
closing price. These repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any
applicable CDSC); however, securities dealers may impose a charge on the
shareholder for transmitting the notice of repurchase to the Fund. Merrill
Lynch may charge its customers a processing fee (currently $4.85) to
confirm a repurchase of shares. Redemptions directly through the Fund's
Transfer Agent are not subject to the processing fee. The Fund reserves
the right to reject any order for repurchase. The exercise of this right
of rejection might adversely affect shareholders seeking redemption
through the repurchase procedure.
For shareholders redeeming through their listed securities dealer,
payment for full and fractional shares will be made by the securities
dealer within seven days of the proper tender of the certificates, if any,
and stock power or letter requesting redemption, in each instance with
signatures guaranteed as noted above.
Reinstatement Privilege-Class A and Class D Shares
As described in further detail in the Statement of Additional
Information, holders of Class A or Class D shares of any of the three
Portfolios who have redeemed their shares have a one-time privilege to
reinstate their accounts by purchasing Class A or Class D shares of the
same Portfolio, and class, as the case may be, in which they had invested
at net asset value without a sales charge up to the dollar amount
redeemed.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
The net investment income of each Portfolio is declared as dividends
daily as of the regular close of trading on the New York Stock Exchange
(currently 4:00 P.M.) immediately prior to the determination of the net
asset value of each Portfolio on that day. The net investment income of
each Portfolio for dividend purposes consists of interest earned on
portfolio securities, less expenses, in each case computed since the most
recent determination of net asset value. Expenses of each Portfolio,
including the advisory fee and Class B account maintenance and
distribution fees (if applicable), are accrued daily. Dividends of net
investment income are declared daily and reinvested monthly in the form of
additional full and fractional shares of each Portfolio at net asset value
unless the shareholder elects to receive such dividends in cash. The per
share dividend distributions on each class of shares of each of the three
Portfolios will be reduced as a result of any account maintenance,
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<PAGE> 41
distribution and transfer agency fees applicable to that class. Shares
will accrue dividends as long as they are issued and outstanding. Shares
are issued and outstanding as of the settlement date of a purchase order
to the settlement date of a redemption order.
Net realized capital gains, if any, are declared and distributed to
the Fund's shareholders at least annually. Capital gains distributions
will be automatically reinvested in shares unless the shareholder elects
to receive such distributions in cash.
See "Shareholder Services-Automatic Reinvestment of Dividends and
Capital Gains Distributions" for information as to how to elect either
dividend reinvestment or cash payments. Any portions of dividends and
distributions which are taxable to shareholders as described below are
subject to income tax whether they are reinvested in shares of any
Portfolio or received in cash.
Federal Income Taxes
Each Portfolio of the Fund generally will be treated as a separate
corporation for federal income tax purposes. Each Portfolio has qualified
and expects to continue to qualify for the special tax treatment afforded
regulated investment companies under the Internal Revenue Code of 1986, as
amended (the "Code"). If each Portfolio qualifies for that tax
treatment, it will not be subject to federal income tax on that part of
its net ordinary income and net realized long-term capital gains which it
distributes to its shareholders.
Each Portfolio has qualified and expects to continue to qualify to pay
"exempt-interest" dividends as defined in the Code. If it so qualifies,
dividends or any part thereof (other than any capital gain distributions)
paid by the Portfolio which are attributable to interest on tax-exempt
obligations and designated by the Portfolio as exempt-interest dividends
in a written notice mailed to the Portfolio's shareholders within sixty
days after the close of its taxable year may be treated by shareholders
for all purposes as items of interest excludable from their gross income
under Section 103(a) of the Code. The recipient of tax-exempt income is
required to report such income on his federal income tax return. However,
a shareholder is advised to consult his tax adviser with respect to
whether exempt-interest dividends retain the exclusion under Section
103(a) if such shareholder would be treated as a "substantial user"
under Section 147(a)(1) with respect to some or all of the tax-exempt
obligations held by the Portfolio. The Code provides that interest on
indebtedness incurred or continued to purchase or carry shares of the
Portfolio is not deductible to the extent attributable to exempt-interest
dividends. Also, any losses realized by individuals who dispose of shares
of the Fund within six months of their purchase are disallowed to the
extent of any exempt-interest dividends received with respect to such
shares.
Each Portfolio may realize capital gains, which will constitute
taxable income. Any distributions designated as capital gain dividends,
i.e., as being made from the Portfolio's net long-term capital gains
(whether from tax-exempt or taxable obligations) in a written notice
furnished annually to shareholders are taxable to shareholders as
long-term capital gains, regardless of a shareholder's holding period for
shares of the Portfolio. In addition, if, after April 30, 1993, a
Portfolio acquires tax-exempt obligations having market discount
(generally, obligations acquired for a price less than their principal
amount), any gain on the disposition or retirement of such obligations
will be treated as ordinary income to the extent of accrued market
discount.
Dividends paid by each Portfolio from its taxable income (i.e.,
interest on money market securities) and distributions of net realized
short-term capital gains (whether from tax-exempt or taxable obligations)
are taxable to shareholders as ordinary income.
Some shareholders may be subject to a 31% withholding tax ("backup
withholding") on reportable dividends, capital gains distributions and
redemption payments. Backup withholding is not required with respect to
dividends representing "exempt-interest." Generally, shareholders
subject to backup withholding will be those
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for whom no certified taxpayer identification number is on file with the
Fund or who, to the Fund's knowledge, have furnished an incorrect number.
When establishing an account, an investor must certify under penalties of
perjury that such number is correct and that he is not otherwise subject
to backup withholding.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's
basis in the Class D shares acquired will be the same as such
shareholder's basis in the Class B shares converted, and the holding
period of the acquired Class D shares will include the holding period for
the converted Class B shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
Individual shareholders of the Fund may be subject to alternative
minimum tax to the extent the Fund holds "private activity" bonds. The
Fund expects that it will hold private activity bonds; however, in
general, an individual shareholder filing a joint return who does not have
any tax preference items subject to the alternative minimum tax other than
income received from the Fund derived from private activity bonds would
have to receive more than $45,000 of such income from the Fund before
becoming subject to the alternative minimum tax.
Exempt-interest dividends paid by the Fund, whether or not
attributable to private activity bonds, may increase a corporate
shareholder's alternative minimum taxable income. In addition, the payment
of exempt- interest dividends may increase a corporate shareholder's
liability for the environmental tax imposed on a corporation's alternative
minimum taxable income (computed without regard to either the alternative
tax net operating loss deduction or the environmental tax deduction) at a
rate of $12 per $10,000 (0.12%) of alternative minimum taxable income in
excess of $2,000,000. The tax will be imposed even if the corporation is
not required to pay an alternative minimum tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect. For
the complete provisions, reference should be made to the pertinent Code
sections and the Treasury Regulations promulgated thereunder. The Code and
these Regulations are subject to change by legislative or administrative
action either prospectively or retroactively. The Statement of Additional
Information sets forth additional information regarding other tax aspects
of investment in the Fund.
Ordinary income and capital gains dividends may also be subject to
State and local taxes.
State and Local Taxes
Depending upon the extent of the Fund's activities in those states and
localities in which its offices are maintained or in which its agents or
independent contractors are located, the Fund may be subject to the tax
laws of such states or localities. In addition, the exemption of interest
income for federal income tax purposes does not necessarily result in
exemption under the income or other tax laws of any state or local taxing
authority. The laws of the several states and local taxing authorities
vary with respect to the taxation of such interest income, and each holder
of shares of the Fund is advised to consult his own tax adviser in that
regard. The Fund will report annually the percentage of interest income
received by each Portfolio during the preceding year on tax-exempt
obligations, indicating, on a state-by-state basis, the source of such
income.
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PORTFOLIO TRANSACTIONS
No Portfolio has any obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities.
Municipal Bonds and money market securities in which each Portfolio
invests are traded primarily in the over-the-counter market. Where
possible, each Portfolio deals directly with the dealers who make a market
in the securities involved except in those circumstances where better
prices and execution are available elsewhere. It is the policy of the Fund
to obtain the best net results taking into account such factors as price
(including the applicable dealer spread), the size, type and difficulty of
the transaction involved, the firm's general execution and operational
facilities, and the firm's risk in positioning the securities involved and
the provision of supplemental investment research by the firm. While the
Fund generally seeks reasonably competitive spreads or commissions, the
Fund will not necessarily be paying the lowest spread or commission
available. Municipal Bonds and money market securities are generally
traded on a net basis and do not normally involve either brokerage
commissions or transfer taxes. The cost of portfolio securities
transactions of each Portfolio consists primarily of dealer or underwriter
spreads. Under the 1940 Act, persons affiliated with the Fund, including
Merrill Lynch, are prohibited from dealing with the Fund as a principal in
the purchase and sale of securities. The Fund has obtained an exemptive
order permitting it to engage in certain principal transactions involving
high-quality short-term Municipal Bonds. In addition, the Fund may not
purchase Municipal Bonds from any underwriting syndicate of which Merrill
Lynch is a member except pursuant to procedures approved by the Board of
Directors which comply with rules adopted by the Securities and Exchange
Commission. Affiliated persons of the Fund may serve as its broker in
over-the-counter transactions conducted on an agency basis.
SHAREHOLDER SERVICES
Each Portfolio offers a number of shareholder services designed to
facilitate investment in its shares at no extra cost to the investor.
Below is a description of these services. Full details as to each of these
services and copies of the various plans described below can be obtained
from the Fund.
Investment Account
Each shareholder whose account is maintained with the Transfer Agent
has an Investment Account and will receive a statement, at least
quarterly, from the Transfer Agent. These statements will serve as
transaction confirmations for automatic investment purchase and the
reinvestment of ordinary income and long-term capital gains distributions.
These statements will also show any other activity in the account since
the preceding statement. After the end of each year, shareholders will
receive federal income tax information regarding dividends and capital
gain distributions. A shareholder may make additions to his Investment
Account at any time by purchasing shares at the applicable public offering
price either through a securities dealer which has entered into a selected
dealers agreement with the Distributor or by mail directly to the Transfer
Agent, acting as agent for the Distributor.
Shareholders also may maintain their accounts through Merrill Lynch.
Upon the transfer of shares out of a Merrill Lynch brokerage account, an
Investment Account in the transferring shareholder's name will be opened
automatically, without charge, at the Transfer Agent. Shareholders
considering transferring their Class A or Class D shares from Merrill
Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable
CDSC) so that the cash proceeds can be transferred to the account at the
new firm or such shareholder must continue to maintain an
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<PAGE> 44
Investment Account at the Transfer Agent for those Class A or Class D
shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their
new brokerage firm to maintain such shares in an account registered in the
name of the brokerage firm for the benefit of the shareholder at the
Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
Automatic Investment Plan
An Automatic Investment Plan is available whereby the Transfer Agent
is authorized through pre-authorized checks of $50 or more to charge the
regular bank account of the shareholder on a monthly basis to provide
systematic additions of shares of the Fund to the shareholder's Investment
Account. Shareholders whose positions in any Portfolio of the Fund are
maintained in a CMA (R) account may participate in the CMA Automated
Investment Program, through which investments in any Portfolio of the Fund
may be made on a regularly scheduled basis ranging from weekly to
semiannually in amounts of $100 or more.
Automatic Reinvestment of Dividends and Capital Gains Distributions
Unless specified instructions are given as to the method of payment of
monthly dividends and annual capital gains distributions, they will
automatically be reinvested in additional shares of the respective
Portfolio. Such reinvestment will be at the net asset value of the shares
of the respective Portfolio, without sales charge, as of the close of
business on the payable date of the dividend or distribution. Shareholders
may elect in writing to receive either their income dividends or capital
gains distributions, or both, in cash, in which event payment will be
mailed by the Transfer Agent as soon as practicable after the payment
date, which is the last day of each month.
A shareholder may at any time, by written notification to Merrill
Lynch if the shareholder's account is maintained with Merrill Lynch or by
written notification or by telephone (1-800-MER-FUND) to the Transfer
Agent if the shareholder's account is maintained with the Transfer Agent,
elect to have subsequent dividends or capital gains distributions, or
both, paid in cash, rather than reinvested, in which event payment will be
mailed on or about the payment date. Cash payments can also be directed to
the shareholder's bank account. No CDSC will be imposed upon redemption of
shares issued as a result of the automatic reinvestment of dividends or
capital gains distributions.
Systematic Withdrawal Plans
As described in further detail in the Statement of Additional
Information, a holder of Class A or Class D shares of any of the three
Portfolios may elect to make systematic withdrawals from his or her
Investment Account on either a monthly or calendar quarterly basis.
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Exchange Privileges
Shareholders of each class of shares of a Portfolio who have held all
or part of their shares in the Portfolio for at least 15 days may exchange
their shares for shares of certain other Portfolios of the Fund, or with
certain other MLAM-advised mutual funds.
Under the Merrill Lynch Select Pricing SM System, Class A
shareholders may exchange Class A shares of a Portfolio for Class A shares
of another Portfolio or a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the other Portfolio or second fund
in his account in which the exchange is made at the time of the exchange
or is otherwise eligible to purchase Class A shares of the other Portfolio
or second fund. If the Class A shareholder wants to exchange Class A
shares for shares of other Portfolio or a second MLAM-advised mutual fund,
and the shareholder does not hold Class A shares of the other Portfolio or
second fund in his account at that time of the exchange and is not
otherwise eligible to acquire Class A shares of the other Portfolio or
second fund, the shareholder will receive Class D shares of the other
Portfolio or second fund as a result of the exchange. Class D shares also
may be exchanged for Class A shares of another Portfolio or a second
MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the other Portfolio or second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus
an amount equal to the difference, if any, between the sales charge
previously paid on the Class A or Class D shares being exchanged and the
sales charge payable at the time of the exchange on the shares being
acquired.
Class B, Class C and Class D shares of a Portfolio will be
exchangeable with shares of the same class of another Portfolio or other
MLAM-advised mutual funds. Class C shares of the Limited Maturity
Portfolio are available only through the Exchange Privilege.
Shares of a Portfolio which are subject to a CDSC will be exchangeable
on the basis of relative net asset value per share without the payment of
any CDSC that might otherwise be due upon redemption of the shares of the
Portfolio. For purposes of computing the CDSC that may be payable upon a
disposition of the shares acquired in the exchange, the holding period for
the previously owned shares of the Portfolio is "tacked" to the holding
period of the newly acquired shares of the other fund or Portfolio.
Class A, Class B, Class C and Class D shares also will be exchangeable
for shares of certain MLAM-advised money market funds specifically
designated as available for exchange by holders of Class A, Class B, Class
C or Class D shares. The period of time that Class A, Class B, Class C or
Class D shares are held in a money market fund, however, will not count
toward satisfaction of the holding period requirement for reduction of any
CDSC imposed on such shares, if any, and, with respect to Class B shares,
toward satisfaction of the Conversion Period.
Class B shareholders of a Portfolio exercising the exchange privilege
will continue to be subject to the CDSC schedule applicable to that
Portfolio if such schedule is higher than the CDSC schedule relating to
the new Class B shares. In addition, Class B shares of a Portfolio
acquired through use of the exchange privilege will be subject to the CDSC
schedule applicable to that Portfolio if such schedule is higher than the
CDSC schedule relating to the Class B shares of the MLAM-advised mutual
fund from which the exchange has been made.
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Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes. For further information, see "Shareholder Services-
Exchange Privileges" in the Statement of Additional Information.
Each Portfolio's exchange privilege is modified with respect to
purchases of Class A and Class D shares under the Merrill Lynch Mutual
Fund Adviser ("MFA") program. First, the initial allocation of assets is
made under the MFA program. Then, any subsequent exchange under the MFA
program of Class A or Class D shares of an MLAM-advised mutual fund for
Class A or Class D shares of a Portfolio of the Fund will be made solely
on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference
between the sales charge previously paid on the shares of the other
MLAM-advised mutual fund and the sales charge payable on the shares of the
Fund being acquired in the exchange under the MFA program.
ADDITIONAL INFORMATION
Determination of Net Asset Value
The net asset value of the shares of all classes of each Portfolio is
determined by FAM once daily as of 4:15 P.M., New York City time, on each
day that the New York Stock Exchange is open for trading immediately after
the declaration of dividends. The net asset value per share is computed by
dividing the sum of the value of the portfolio securities held by each
Portfolio plus any cash or other assets minus all liabilities by the total
number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the investment advisory fees payable to FAM, account
maintenance and/or distribution fees payable to the distributor are
accrued daily.
The per share net asset value of Class A shares of a Portfolio
generally will be higher than the per share net asset value of shares of
the other classes of that Portfolio, reflecting the daily expense accruals
of the account maintenance, distribution and higher transfer agency fees
applicable with respect to Class B and Class C shares and the daily
expense accruals of the account maintenance and higher transfer agency
fees applicable with respect to Class D shares. Moreover, the per share
net asset value of Class D shares generally will be higher than the per
share net asset value of Class B and Class C shares, reflecting the daily
expense accruals of distribution and higher transfer agency fees
applicable with respect to Class B and Class C shares. It is expected,
however, that the per share net asset value of the four classes of a
Portfolio will tend to converge immediately after the payment of dividends
or distributions, which will differ by approximately the amount of expense
accrual differentials among the classes.
Performance Data
From time to time the Fund may include its average annual total
return, yield and tax equivalent yield for various specified time periods
in advertisements or information furnished to present or prospective
shareholders. Average annual total return, yield and tax equivalent yield
are computed separately for the Class A, Class B, Class C and Class D
shares of the Portfolios in accordance with formulas specified by the
Securities and Exchange Commission.
Average annual total return quotations for the specified periods will
be computed by finding the average annual compounded rates of return
(based on net investment income and any realized and unrealized capital
gains or losses on portfolio investments over such periods) that would
equate the initial amount invested to the
43
<PAGE> 47
redeemable value of such investment at the end of each period. Average
annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable
recurring and nonrecurring expenses, including any CDSC that would be
applicable to a complete redemption of the investment at the end of the
specified period, such as in the case of Class B and Class C shares and
the maximum sales charge in the case of Class A and Class D shares.
Dividends paid with respect to all shares of a Portfolio, to the extent
any dividends are paid, will be calculated in the same manner at the same
time on the same day and will be in the same amount, except that
distribution fees, account maintenance fees and any incremental transfer
agency costs relating to a class of shares will be borne exclusively by
that class. The Fund will include performance data for all classes of
shares of the Portfolios in any advertisement or information including
performance data for such Portfolios.
The Fund also may quote total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return and (2) the maximum
applicable sales charge will not be included. Actual annual or annualized
total return data generally will be lower than average annual total return
data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual
total return data since the aggregate rates of return reflect compounding
over a longer period of time. See "Purchase of Shares." The Fund's total
return may be expressed either as a percentage or as a dollar amount in
order to illustrate such total return on a hypothetical investment in the
Fund at the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing
(a) the net income based on the yield of each security earned during the
period by (b) the average daily number of shares outstanding during the
period that were entitled to receive dividends multiplied by the maximum
offering price per share on the last day of the period. Tax equivalent
yield quotations will be computed by dividing (a) the part of the Fund's
yield that is tax-exempt by (b) one minus a stated tax rate and adding the
result to that part, if any, of the Fund's yield that is not tax-exempt.
The yield for the 30-day period ending June 30, 1994 for National
Portfolio Class A shares was 5.59% and 5.05% for Class B shares, for
Insured Portfolio Class A shares was 5.20% and 4.65% for Class B shares,
and for Limited Maturity Portfolio Class A shares was 3.89% and 3.56% for
Class B shares. The tax-equivalent yield for the same period (based on a
tax rate of 28%) for National Portfolio Class A shares was 7.76% and 7.01%
for the Class B shares, for Insured Portfolio Class A shares was 7.22% and
6.46% for the Class B shares and for Limited Maturity Portfolio Class A
shares was 5.40% and 4.94% for Class B shares.
Total return, yield and tax equivalent yield figures are based on the
Fund's historical performance and are not intended to indicate future
performance. The Fund's total return, yield and tax equivalent yield will
vary depending on market conditions, the securities comprising the Fund's
portfolio, the Fund's operating expenses and the amount of realized and
unrealized net capital gains or losses during the period. The value of an
investment in the Fund will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to that of the
Standard & Poor's 500 Composite Stock Price Index, the Value Line
Composite Index, the Dow Jones Industrial Average, or performance data
contained in publications such as Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., Money Magazine, U.S. News & World Report,
Business Week, CDA Investment Technology, Inc., Forbes Magazine or Fortune
Magazine. As with other performance data, performance comparisons should
not be considered representative of the Fund's relative performance for
any future period.
44
<PAGE> 48
Rating Information
DESCRIPTIONS OF MOODY'S INVESTORS SERVICE, INC.'S MUNICIPAL BOND RATINGS
Aaa-Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa-Bonds which are rated Baa are considered medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba-Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B-Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca-Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Conditional Rating: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience,
(c) rentals which begin when facilities are completed, or (d) payments to
which some other limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or elimination of
basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3
in each generic rating classification from Aa through B in its municipal
bond rating system. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and a modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
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<PAGE> 49
Short-term Notes: The four ratings of Moody's for short-term notes are
MIG 1, MIG 2, MIG 3 and MIG 4. MIG 1 denotes best quality. There is
present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing;
MIG 2 denotes high quality. Margins of protection are ample although not
so large as in the preceding group; MIG 3 denotes favorable quality. All
security elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may
be narrow and market access for refinancing is likely to be less well
established; MIG 4 denotes adequate quality. Protection commonly regarded
as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
DESCRIPTIONS OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations having an original maturity not in
excess of nine months. Moody's employs the following three designations,
all judged to be investment grade, to indicate the relative repayment
capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory
obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTIONS OF STANDARD & POOR'S CORPORATION'S MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by Standard & Poor's from other sources Standard & Poor's
considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited
financial information. The rating may be changed, suspended or withdrawn
as a result of changes in, or unavailability of, such information, or for
other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditor's rights.
46
<PAGE> 50
AAA Debt rated "AAA" have the highest rating assigned by Standard
& Poor's to a debt obligation. Capacity to pay interest and
repay principal is extremely strong.
AA Debt rated "AA" have a very strong capacity to pay interest
and repay principal and differs from the higher rated issues
only in small degree.
A Debt rated "A" have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible
to the adverse effects of changes in circumstances and
economic conditions than debts in higher rated categories.
BBB Debt rated "BBB" are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt
in this category than in higher rated categories.
BB Debt rated "BB," "B," "CCC" and "CC" are regarded, on
B balance, as predominantly speculative with respect to capacity
CCC to pay interest and repay principal in accordance with the terms
CC of the obligation. "BB" indicates the lowest degree of
speculation and "CC" the highest of speculation. While such
debts will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
C The rating "C" is reserved for income bonds on which no
interest is being paid.
D Debt rated "D" is in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment
of debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion of the project,
makes no comment on the likelihood of, or the risk of default upon failure
of, such completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that
Standard & Poor's does not rate a particular type of
obligation as a matter of policy.
47
<PAGE> 51
Descriptions of Standard & Poor's Corporation's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into four categories, ranging from
"A" for the highest quality obligations to "D" for the lowest. The
four categories are as follows:
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category
are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is very strong.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more vulnerable
to the adverse effects of changes in circumstances than
obligations carrying the higher designations.
B Issues rated "B" are regarded as having only an adequate
capacity for timely payment. However, such capacity may be
damaged by changing conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based on current information furnished to
Standard & Poor's by the issuer or obtained by Standard & Poor's from
other sources it considers reliable. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of,
such information.
Descriptions of Standard & Poor's Corporation's Note Ratings
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in 3 years or less will
likely receive a note rating. Notes maturing beyond 3 years will most
likely receive a long-term debt rating. The following criteria will be
used in making that assessment.
- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
- Source of Payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong, or strong, capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
48
<PAGE> 52
Organization of the Fund
The Fund, a Maryland corporation, is a diversified, open-end
management investment company that commenced operations on October 21,
1977. Prior to September 21, 1979, the Fund consisted solely of the
Insured Portfolio. Currently, the Fund is comprised of three separate
Portfolios: Insured Portfolio, National Portfolio and Limited Maturity
Portfolio.
The authorized capital stock of the Fund consists of 3,850,000,000
shares of Common Stock, divided into three series, each of which is
divided into four classes, having a par value of $0.10 per share. The
shares of Insured Portfolio Series Common Stock (500,000,000 Class A,
375,000,000 Class B shares, 375,000,000 Class C shares, 500,000,000 Class D
shares authorized), High Yield Portfolio Series Common Stock (375,000,000
Class A, 375,000,000 Class B shares, 375,000,000 Class C shares,
375,000,000 Class D shares authorized), which does business under the name
"National Portfolio," and Limited Maturity Portfolio Series Common Stock
(150,000,000 Class A, 150,000,000 Class B shares, 150,000,000 Class C
shares, 150,000,000 Class D shares authorized) are divided into four
classes, designated Class A, Class B, Class C and Class D Common Stock.
Each Class A, Class B, Class C and Class D share of common stock of each
of the Portfolios represents an interest in the same assets of such
Portfolio and are identical in all respects to the shares of the other
classes except that the Class B, Class C and Class D shares bear certain
expenses related to the account maintenance associated with such shares,
and Class B and Class C shares bear certain expenses related to the
distribution of such shares. Each Class of shares of a Portfolio has
exclusive voting rights with respect to matters relating to account
maintenance services and distribution expenditures relative to that
Portfolio, as applicable. Only shares of each respective Portfolio are
entitled to vote on matters concerning only that Portfolio. The Fund has
received an order from the Securities and Exchange Commission permitting
the issuance and sale of multiple classes of shares of the Portfolios. The
Directors of the Fund may classify and reclassify the shares of the Fund
into additional series or classes of Common Stock at a future date. The
creation of additional classes would require an additional order from the
Securities and Exchange Commission. There is no assurance that such an
additional order will be issued.
Each issued and outstanding share is entitled to one vote and to
participate equally in dividends and distributions declared by the
respective Portfolios and in net assets of the respective Portfolios upon
liquidation or dissolution remaining after satisfaction of outstanding
liabilities, except, as noted above, the Class B, Class C and Class D
shares of the Portfolios bear certain expenses related to the distribution
of such shares. The shares of each Portfolio, when issued, will be fully
paid and nonassessable, have no preference, pre-emptive, conversion,
exchange or similar rights. Shares have the conversion rights described in
this Prospectus. Holders of shares of any Portfolio are entitled to redeem
their shares as set forth under "Redemption of Shares." Shares do not
have cumulative voting rights, and the holders of more than 50% of the
shares of the Fund voting for the election of Directors can elect all of
the Directors of the Fund if they choose to do so and in such event the
holders of the remaining shares would not be able to elect any Directors.
Stock certificates will be issued by the Transfer Agent only on specific
request. Certificates for fractional shares are not issued in any case.
Shareholders are entitled to redeem their shares as set forth under
"Redemption of Shares."
Custodian
The Bank of New York, 90 Washington Street, 12th Floor, New York, New
York 10286, is the Fund's custodian.
49
<PAGE> 53
Transfer Agent
Financial Data Services, Inc. ("FDS"), which is a wholly owned
subsidiary of Merrill Lynch & Co., Inc., acts as the Fund's Transfer Agent
pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant
to the Transfer Agency Agreement, FDS is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, FDS
receives an annual fee of $11.00 per shareholder account for Class A or
Class D shares of the Portfolios and $14.00 per shareholder account for
Class B or Class C shares of the Portfolios, and is entitled to
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. For the year ended June 30, 1994, the Insured, National
and Limited Maturity Portfolios of the Fund incurred fees of $989,990,
$692,712 and $195,214, respectively, pursuant to the Transfer Agency
Agreement.
Counsel and Auditor
Rogers & Wells, Counsel to the Fund, passes upon legal matters for the
Fund in connection with the shares offered by this Prospectus. Deloitte &
Touche LLP, independent auditors, are auditors of the Fund.
Shareholder Reports
The Fund issues to its shareholders quarterly reports containing
unaudited financial statements and annual reports containing financial
statements examined by auditors approved annually by the Directors. Only
one copy of each shareholder report and certain shareholder communications
will be mailed to each identified shareholder regardless of the number of
accounts such shareholder has. If a shareholder wishes to receive separate
copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name,
address, tax identification number and Merrill Lynch, Pierce, Fenner &
Smith Incorporated and/or mutual fund account numbers. If you have any
questions regarding this please call your Merrill Lynch financial
consultant or Financial Data Services, Inc. at 800-637-3863.
Additional Information
This Prospectus does not contain all the information included in the
Registration Statement filed with the Securities and Exchange Commission
under the Securities Act of 1933 with respect to the securities offered
hereby, certain portions of which have been omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. The Statement
of Additional Information, dated October 21, 1994, which forms a part of
the Registration Statement, is incorporated by reference into this
Prospectus. The Statement of Additional Information may be obtained
without charge as provided on the cover page of this Prospectus. The
Registration Statement, including the exhibits filed therewith, may be
examined at the office of the Securities and Exchange Commission in
Washington, D.C.
50
<PAGE> 54
MERRILL LYNCH MUNICIPAL BOND FUND-AUTHORIZATION FORM (PART 1)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Note: This form may not be used for purchases through the Merrill Lynch
BlueprintSM Program. You may request a Merrill Lynch BlueprintSM
Program application by calling (800) 537-3766.
--------------------------------------------------------------------------
1. Share Purchase Application
I, being of legal age, wish to purchase: (choose one)
Insured Portfolio / / Class A shares / / Class B shares / / Class C shares
/ / Class D shares
National Portfolio / / Class A shares / / Class B shares / / Class C shares
/ / Class D shares
Limited Maturity Portfolio / / Class A shares / / Class B shares
/ / Class C shares / / Class D shares
of Merrill Lynch Municipal Bond Fund and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be
purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Financial Data
Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price
next to be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds
that would qualify for the right of accumulation as outlined in the
Statement of Additional Information: (Please list all funds. Use a
separate sheet of paper if necessary.)
1. ............................. 4. .......................................
2. ............................. 5. .......................................
3. ............................. 6. .......................................
Name......................................................................
First Name Initial Last Name
Name of Co-Owner (if any).................................................
First Name Initial Last Name
Address..................................................... Date...........
............................................................
(Zip Code)
Occupation.................... Name and Address of Employer..............
..........................................
..........................................
............................................................................
Signature of Owner Signature of Co-Owner (if any)
2. Dividend and Capital Gain Distribution Options
Ordinary Income Dividends Long-term Capital Gains
Select / / Reinvest Select / / Reinvest
One: / / Cash One / / Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
If cash, specify how you would like your distributions paid to you:
/ / Check or / / Direct Deposit to bank account
If direct deposit to bank account is selected, please complete below:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with
the terms I have selected on the Merrill Lynch Municipal Bond Fund
Authorization Form.
Specify type of account (check one) / / checking / / savings
Name on your account......................................................
Bank Name ............ Bank Number ............ Account Number ............
Bank address..............................................................
I agree that this authorization will remain in effect until I provide
written notification to Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor....................................................
Signature of Depositor....................... Date.......................
(if joint account, both must sign)
Note: If direct deposit to bank account is selected, your blank, unsigned
check marked "VOID" or a deposit slip from your savings account should
accompany this application.
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<PAGE> 55
3. Social Security Number or Taxpayer Identification Number
Social Security Number or Taxpayer
Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and
(2) that I am not subject to backup withholding (as discussed in the
Prospectus under "Dividends, Distributions and Taxes-Federal Income Taxes")
either because I have not been notified that I am subject thereto as a result
of a failure to report all interest or dividends, or the Internal Revenue
Service ("IRS") has notified me that I am no longer subject thereto.
Instruction: You must strike out the language in (2) above if you have
been notified that you are subject to backup withholding due to
under-reporting and if you have not received a notice from the IRS that
backup withholding has been terminated. The undersigned authorizes the
furnishing of this certification to other Merrill Lynch sponsored mutual
funds.
Signature of Owner ........... Signature of Co-Owner (if any)...........
(In the case of co-owners, a joint tenancy with right of survivorship will
be presumed unless otherwise specified)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
4. Letter of Intention - Class A and D shares only (See terms and
conditions in the Statement of Additional Information)
Dear Sir/Madam: ..............................., 19....
Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of
Merrill Lynch Municipal Bond Fund or any other investment company with an
initial sales charge or deferred sales charge for which the Merrill Lynch
Funds Distributor, Inc. acts as distributor over the next 13 month period
which will equal or exceed:
Insured Portfolio / / $25,000 / / $50,000 / / $100,000 / / $250,000
/ / $1,000,000
National Portfolio / / $25,000 / / $50,000 / / $100,000 / / $250,000
/ / $1,000,000
Limited Maturity Portfolio / / $100,000 / / $250,000 / /$500,000
/ / $1,000,000
Each purchase will be made at the then reduced offering price
applicable to the amount checked above, as described in the Merrill Lynch
Municipal Bond Fund Prospectus.
I agree to the terms and conditions of the Letter of Intention. I
hereby irrevocably constitute and appoint Merrill Lynch Funds Distributor,
Inc., my attorney, with full power of substitution, to surrender for
redemption any or all shares of Merrill Lynch Municipal Bond Fund held as
security.
By.................................. ....................................
Signature of Owner Signature of Co-Owner (If registered
in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name........................... (2) Name...........................
Account Number..................... Account Number.....................
5. For Dealer Only
Branch Office, Address, Stamp
----------------------------------------
----------
------------------------------
---------- ----------
This form, when completed, should be
mailed to:
Merrill Lynch Municipal Bond Fund
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund
Operations
P.O. Box 45289
Jacksonville, FL 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our
agent in connection with transactions under this authorization form and
agree to notify the Distributor of any purchases made under a Letter of
Intention or Systematic Withdrawal Plan. We guarantee the shareholder's
52
<PAGE> 56
signature.
..........................................................................
Dealer Name and Address
By........................................................................
Authorized Signature of Dealer
--------------------
---------------------------------------------------------------------------
--------------------
Branch-Code F/C No...............
--------------------
---------------------------------------------------------------------------
--------------------
Dealer's Customer A/C No.
..........................................................................
F/C Last Name
52
<PAGE> 57
MERRILL LYNCH MUNICIPAL BOND FUND-AUTHORIZATION FORM (PART 2)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1. Account Registration
Name of Owner ........................
Name of Co-Owner (if any) ............
Address ..............................
..............................
Social Security Number
or Taxpayer Identification Number
Account Number .....................
(if existing account)
2. Systematic Withdrawal Plan-Class A and D Shares Only (See terms and
conditions in the Statement of Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D of the Insured Portfolio, / / Class A
or / / Class D shares of the National Portfolio, or / / Class A or / /Class D
shares of the Limited Maturity Portfolio in Merrill Lynch Municipal Bond
Fund at cost or current offering price. Withdrawals to be made either (check
one) / / Monthly on the 24th day of each month, or / / Quarterly on the 24th day
of March, June, September and December. If the 24th falls on a weekend or
holiday, the next succeeding business day will be utilized. Begin systematic
withdrawals on ----------or as soon as possible thereafter.
(month)
Specify how you would like your withdrawal paid to you (check one): / /
$---------- or / /----------% of the current value of / / Class A or / /
Class D shares in the account.
Specify withdrawal method: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
Draw checks payable (check one)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of......................................................
Mail to (check one)
/ / the address indicated in item 1.
/ / Name (please print)..................................................
Address ..................................................................
..................................................................
Signature of Owner..................... Date.....................
Signature of Co-Owner (if any)....................................
(b) I hereby authorize payment by direct deposit to bank account and, if
necessary, debit entries and adjustments for any credit entries made to my
account. I agreee that this authorization will remain in effect until I
provide written notification to Financial Data Services, Inc. amending or
terminating this service.
Specify type of account (check one) / / checking / / savings
Name on your account .....................................................
Bank Name.................................................................
Bank Number........................ Account Number........................
Bank Address..............................................................
..........................................................................
Signature of Depositor....................... Date.......................
Signature of Depositor....................................................
(If joint account, both must sign)
Note: If direct deposit is elected, your blank, unsigned check marked
"VOID" or a deposit slip from your savings account should accompany this
application.
53
<PAGE> 58
3. Application for Automatic Investment Plan
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D
shares
of Merrill Lynch Municipal Bond Fund subject to the terms set forth below.
In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account
for investment in Merrill Lynch Municipal Bond Fund as indicated below:
Amount of each ACH debit $.................................................
Account number.............................................................
Please date and invest ACH debits on the 20th of each month beginning
............................................................................
............................................................... (Month)
or as soon thereafter as possible.
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in
preparing or failure to prepare any such debit. If I change banks or desire
to terminate or suspend this program, I agree to notify you promptly in
writing. I hereby authorize you to take any action to correct erroneous ACH
debits of my bank account or purchases of fund shares including liquidating
shares of the Fund and credit my bank account. I further agree that if a
check or debit is not honored upon presentation, Financial Data Services,
Inc. is authorized to discontinue immediately the Automatic Investment Plan
and to liquidate sufficient shares held in my account to offset the purchase
made with the dishonored debit.
............ ........................
Date Signature of Depositor
........................
Signature of Depositor
(If joint account, both
must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To......................................................................Bank
(Investor's Bank)
Bank Address ...............................................................
City................... State................... Zip Code...................
As a convenience to me, I hereby request and authorize you to pay and charge
to my account ACH debits drawn on my account by and payable to Financial
Data Services, Inc. I agree that your rights in respect to each such debit
shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked personally by me
in writing. Until you receive such notice, you shall be fully protected in
honoring any such debit. I further agree that if any such debit be
dishonored, whether with or without cause and whether intentionally or
inadvertently, you shall be under no liability.
. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . .
Date Signature of Depositor
. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . .
Bank Account Number Signature of Depositor
(If joint account, both must sign)
Note: If Automatic Investment Plan is elected, your blank, unsigned check
marked "VOID" should accompany this Application.
54
<PAGE> 59
Investment Adviser
Fund Asset Management
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
(609) 282-2800
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, New York 10286
Transfer Agent
Financial Data Services, Inc.
Administrative Offices
Transfer Agency
Mutual Funds Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Legal Counsel
Rogers & Wells
200 Park Avenue
New York, New York 10166
Independent Auditors
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
<PAGE> 60
<TABLE>
<CAPTION>
<S> <C>
====================================================== ======================================================
No person has been authorized to give
any information or to make any Prospectus
representations, other than those contained
in this Prospectus, in connection with the
offer contained in this Prospectus, and, if
given or made, such other information or
representations must not be relied upon as
having been authorized by the Fund, the
Investment Adviser, or the Distributor. This
Prospectus does not constitute an offering
in any state in which such offering may not
lawfully be made.
----------
TABLE OF CONTENTS
(ART APPEARS HERE)
Page
----
Fee Table 2
Merrill Lynch Select Pricing
System...................... 8
Financial Highlights.......... 13
Investment Objective and
Policies.................... 16
Investment Policies of the
Portfolios.................. 17
Insured Portfolio........... 17
National Portfolio.......... 18 MERRILL LYNCH
Limited Maturity Portfolio.. 19 MUNICIPAL BOND
Investment Adviser............ 22 FUND, INC.
Directors..................... 23
Purchase of Shares............ 24
Initial Sales Charge
Alternatives-Class A and
Class D Shares............ 27
Deferred Sales Charge
Alternatives-Class B and
Class C Shares............ 30
Distribution Plans.......... 33 October 21, 1994
Limitations on the Payment
of Deferred Sales Charges. 35
Redemption of Shares.......... 36
Redemption.................. 36
Repurchase.................. 37
Reinstatement Privilege-
Class A and Class D
Shares.................... 37
Dividends, Distributions and
Taxes....................... 37
Dividends and Distributions. 37
Federal Income Taxes........ 38
State and Local Taxes....... 39
Portfolio Transactions........ 40
Shareholder Services.......... 40
Investment Account.......... 40
Automatic Investment Plan... 41
Automatic Reinvestment of
Dividends and Capital
Gains Distributions....... 41
Systematic Withdrawal Plans. 41
Exchange Privileges......... 42 Distributor:
Additional Information........ 43 Merrill Lynch
Determination of Net Asset Funds Distributor, Inc.
Value..................... 43
Performance Data............ 43
Rating Information.......... 45
Organization of the Fund.... 49
Custodian................... 49
Transfer Agent.............. 50
Counsel and Auditor......... 50
Shareholder Reports......... 50
Additional Information...... 50
Authorization Form............ 51
This prospectus should be
retained for future reference.
Code #10051 - 1094
====================================================== ======================================================
</TABLE>
<PAGE> 61
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
OCTOBER 21, 1994
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 * PHONE NO. (609) 282-2800
----------
Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is a
professionally managed, diversified, open-end investment company which
seeks to provide shareholders with as high a level of income exempt from
Federal income taxes as is consistent with the investment policies of each
of its Portfolios and prudent investment management. The Fund is comprised
of three separate Portfolios: the Insured Portfolio, the National
Portfolio and the Limited Maturity Portfolio, each of which invests
primarily in a diversified portfolio of tax-exempt Municipal Bonds,
principally consisting of state, municipal and public authority
securities.
The Fund is a series fund and is comprised of three separate
Portfolios. Each Portfolio is, in effect, a separate fund issuing its own
shares. Pursuant to the Merrill Lynch Select PricingSM System, each
Portfolio of the Fund offers four classes of shares, each with a different
combination of sales charges, ongoing fees and other features except that
Class C shares of the Limited Maturity Portfolio are available only
through the Exchange Privilege. The Merrill Lynch Select Pricing System
permits an investor to choose the method of purchasing shares that the
investor believes is most beneficial, given the amount of the purchase,
the length of time the investor expects to hold the shares and other
relevant circumstances.
----------
This Statement of Additional Information of the Fund is not a
prospectus and should be read in conjunction with the Prospectus of the
Fund (the "Prospectus") dated October 21, 1994, which has been filed
with the Securities and Exchange Commission and is available upon oral or
written request without charge. Copies of the Prospectus can be obtained
by calling or writing the Fund at the above telephone number or address.
This Statement of Additional Information has been incorporated by
reference into the Prospectus.
----------
FUND ASSET MANAGEMENT-INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
----------
<PAGE> 62
INVESTMENT OBJECTIVE AND POLICIES
Reference is made to "Investment Objective and Policies" in the
Prospectus for a discussion of the investment objective and policies of
the Fund.
At June 30, 1994, the average maturity of the Insured Portfolio,
National Portfolio and the Limited Maturity Portfolio was approximately
21.7 years, 21.5 years and 1.3 years, respectively.
INSURANCE ON PORTFOLIO SECURITIES
Reference is made to the discussion of the Insured Portfolio under
"Investment Policies of the Portfolios" in the Prospectus. As stated in
the Prospectus, the Fund has purchased from AMBAC Indemnity Corporation
("AMBAC"), Municipal Bond Investors Assurance Corporation ("MBIA") and
Financial Security Assurance Inc. ("FSA") separate Mutual Fund Insurance
Policies (the "Policies").
The Policies guarantee the payment of the principal at maturity and
interest on all Municipal Bonds which are purchased by the Insured
Portfolio at a time when they are eligible for insurance. Municipal Bonds
are eligible for insurance if they are, at the time of purchase by the
Insured Portfolio, identified separately or by category in qualitative
guidelines furnished by AMBAC, MBIA or FSA and are in compliance with the
aggregate limitations on amounts set forth in such guidelines. AMBAC, MBIA
and/or FSA may withdraw particular securities from the classifications of
securities eligible for insurance while continuing to insure previously
acquired bonds of such ineligible issues so long as they remain in the
Insured Portfolio and may limit the aggregate amount of each issue or
category of municipal securities thereof. The restrictions on investment
imposed by the eligibility requirement of the Policies may reduce the
yield of the Insured Portfolio.
RISK FACTORS IN TRANSACTIONS IN JUNK BONDS
The National Portfolio may invest in Municipal Bonds which are rated
below Baa by Moody's or below BBB by Standard & Poor's or which, in the
Investment Adviser's judgment, possess similar credit characteristics
("junk bonds"). See "Additional Information-Rating Information" in the
Prospectus for additional information regarding ratings of debt
securities. The Investment Adviser considers the ratings assigned by
Standard & Poor's or Moody's as one of several factors in its independent
credit analysis of issuers.
Junk bonds are considered by Standard & Poor's and Moody's to have
varying degrees of speculative characteristics. Consequently, although
junk bonds can be expected to provide higher yields, such securities may
be subject to greater market price fluctuations and risk of loss of
principal than lower yielding, higher rated debt securities. Investments
in junk bonds will be made only when, in the judgment of the Investment
Adviser, such securities provide attractive total return potential
relative to the risk of such securities, as compared to higher quality
debt securities. The National Portfolio will not invest in debt securities
in the lowest rating categories (those rated CC or lower by Standard &
Poor's or Ca or lower by Moody's) unless the Investment Adviser believes
that the financial condition of the issuer or the protection afforded the
particular securities is stronger than would otherwise be indicated by
such low ratings. The National Portfolio does not intend to purchase debt
securities that are in default or which the Investment Adviser believes
will be in default.
Issuers of junk bonds may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the
risks associated with acquiring the securities of such issuers generally
are greater than is the case with higher rated securities. For example,
during an economic downturn or a sustained period of rising interest
rates, issuers of high yield securities may be more likely to experience
financial stress,
2
<PAGE> 63
especially if such issuers are highly leveraged. In addition, the market
for high yield municipal securities is relatively new and has not
weathered a major economic recession, and it is unknown what effects such
a recession might have on such securities. During such a period, such
issuers may not have sufficient revenues to meet their interest payment
obligations. The issuer's ability to service its debt obligations also may
be adversely affected by specific issuer developments, or the issuer's
inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by
the issuer is significantly greater for the holders of junk bonds because
such securities may be unsecured and may be subordinated to other
creditors of the issuer.
Junk bonds frequently have call or redemption features that would
permit an issuer to repurchase the security from the National Portfolio.
If a call were exercised by the issuer during a period of declining
interest rates, the National Portfolio likely would have to replace such
called security with a lower yielding security, thus decreasing the net
investment income to the National Portfolio and dividends to shareholders.
The National Portfolio may have difficulty disposing of certain junk
bonds because there may be a thin trading market for such securities.
Because not all dealers maintain markets in all junk bonds, there is no
established secondary market for many of these securities, and the
National Portfolio anticipates that such securities could be sold only to
a limited number of dealers or institutional investors. To the extent that
a secondary trading market for junk bonds does exist, it is generally not
as liquid as the secondary market for higher rated securities. Reduced
secondary market liquidity may have an adverse impact on market price and
the National Portfolio's ability to dispose of particular issues when
necessary to meet its liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the
issuer. Reduced secondary market liquidity for certain securities also may
make it more difficult for the National Portfolio to obtain accurate
market quotations for purposes of valuing its portfolio. Market quotations
are generally available on many junk bonds only from a limited number of
dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
It is expected that a significant portion of the junk bonds acquired
by the National Portfolio will be purchased upon issuance, which may
involve special risks because the securities so acquired are new issues.
In such instances the National Portfolio may be a substantial purchaser of
the issue and therefore have the opportunity to participate in structuring
the terms of the offering. Although this may enable the National Portfolio
to seek to protect itself against certain of such risks, the
considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk
bonds, particularly in a thinly traded market. Factors adversely affecting
the market value of such securities are likely to affect adversely the
National Portfolio's net asset value. In addition, the National Portfolio
may incur additional expenses to the extent that it is required to seek
recovery upon a default on a portfolio holding or participate in the
restructuring of the obligation.
TRANSACTIONS IN FUTURES CONTRACTS
The National Portfolio and the Limited Maturity Portfolio
(collectively, the "Portfolios") may engage in the purchase and sale of
futures contracts on an index of municipal bonds or on U.S. Treasury
securities, or options on such futures contracts, for hedging purposes
only. The Portfolios may sell such futures contracts in anticipation of a
decline in the value of municipal bonds held by them or may purchase such
futures contracts in
3
<PAGE> 64
anticipation of an increase in the cost of municipal bonds they intend to
acquire. The Portfolios also are authorized to purchase and sell other
financial futures contracts which in the opinion of management provide an
appropriate hedge for some or all of the Fund's portfolio securities.
Because of low initial margin deposits made upon the opening of a
futures position, futures transactions involve substantial leverage. As a
result, relatively small movements in the price of the futures contract
can result in substantial unrealized gains or losses. Because the
Portfolios will engage in the purchase and sale of financial futures
contracts solely for hedging purposes, however, any losses incurred in
connection therewith should, if the hedging strategy is successful, be
offset in whole or in part by increases in the value of securities held by
the Portfolios or decreases in the price of securities the Portfolios
intend to acquire. Further, the Portfolios will maintain cash, cash
equivalents and high-grade securities with the Fund's custodian, so that
the amount segregated plus the initial margin equals the value represented
by the futures contract purchased by the Portfolios, thereby ensuring that
such transactions are actually unleveraged.
Municipal bond index futures contracts commenced trading in June 1985,
and it is possible that trading in such futures contracts will be less
liquid than that in other futures contracts. The trading of futures
contracts and options thereon is subject to certain market risks, such as
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention or other disruptions of normal trading activity,
which could at times make it difficult or impossible to liquidate existing
positions.
The liquidity of the market in futures contracts may be further
adversely affected by "daily price fluctuation limits" established by
contract markets, which limit the amount of a fluctuation in the price of
a futures contract or option thereon 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
positions at prices beyond the limit. Prices of existing contracts have in
the past moved the daily limit on a number of consecutive trading days.
The Portfolios will enter into a futures position only if, in the judgment
of the Investment Adviser, there appears to be an actively traded market
for such futures contracts.
The successful use of transactions in futures contracts and options
thereon depends on the ability of the Investment Adviser correctly to
forecast the direction and extent of price movements of these instruments,
as well as price movements of the securities held by the Portfolios within
a given time frame. To the extent these price movements are not correctly
forecast or move in a direction opposite to that anticipated, the
Portfolios may realize a loss on the hedging transaction which is not
fully or partially offset by an increase in the value of portfolio
securities. As a result, either Portfolio's total return for such period
may be less than if it had not engaged in the hedging transaction. See
"Additional Information-Description of Financial Futures Contract" below
for a further discussion of the risks of futures trading.
CURRENT INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions, none of
which may be changed without the approval of a majority of the Fund's
outstanding shares, including a majority of the shares of each Portfolio,
which for this purpose means the vote of (i) 67% or more of the Fund's
shares present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or
(ii) more than 50% of the Fund's outstanding shares, whichever is less.
For purposes of the following restrictions, the Fund's "Permissible
Investments" consist of Municipal Bonds and money market securities
referred to in the Prospectus as "Temporary Investments." The Fund may
not:
4
<PAGE> 65
(1) Purchase any securities other than Municipal Bonds and Temporary
Investments;
(2) Invest more than 5% of the total assets of any Portfolio (taken at
market value at the time of each investment) in the securities of any one
issuer (including repurchase agreements with any one bank or dealer)
except that such restrictions shall not apply to United States Government
or Government agency securities (for the purposes of this restriction, the
Fund will regard each state and each political subdivision, agency or
instrumentality of such state and each multi-state agency of which such
state is a member and each public authority which issues industrial
development bonds on behalf of a private entity as a separate issuer);
(3) Purchase, in connection with Temporary Investments, securities
(other than securities of the United States Government, its agencies and
instrumentalities) if, as a result of such purchase, more than 20% of the
total assets of any Portfolio (taken at market value) would be invested in
any one industry;
(4) Enter into a repurchase agreement if, as a result thereof, more
than 10% of the total assets of any Portfolio (taken at market value at
the time of each investment) would be subject to repurchase agreements
maturing in more than seven days;
(5) Make investments for the purpose of exercising control or
management;
(6) Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization;
(7) Purchase or sell real estate (provided that such restriction shall
not apply to Permissible Investments secured by real estate or issued by
companies which invest in real estate or interests therein), commodities
or commodity contracts (provided that such restriction shall not apply to
financial futures contracts), interests in oil, gas or other mineral
exploration or development programs;
(8) Purchase any securities on margin, except (a) to use short-term
credit necessary for clearance or purchases and sales of portfolio
securities and (b) to make margin payments in connection with transactions
in financial futures contracts;
(9) Make short sales of securities or maintain a short position in
securities or write, purchase or sell puts, calls, straddles, spreads or
combinations thereof (this restriction does not apply to transactions in
options on financial futures contracts);
(10) Make loans to other persons, provided that the Fund may make
Permissible Investments (the acquisition of Municipal Bonds or bonds,
debentures or other corporate debt securities which are not publicly
distributed is considered to be the making of a loan under the Investment
Company Act of 1940);
(11) Borrow amounts in any Portfolio in excess of 10% of the total
assets of such Portfolio, taken at market value, and then only from banks
as a temporary measure for extraordinary or emergency purposes (usually
only "leveraged" investment companies may borrow in excess of 5% of
their assets; however, the Portfolios will not borrow to increase income
but only to meet redemption requests which might otherwise require
untimely dispositions of portfolio securities);
(12) Mortgage, pledge, hypothecate or in any manner transfer as
security for indebtedness any securities owned or held by any Portfolio
except as may be necessary in connection with borrowings mentioned in (11)
above, in which case such mortgaging, pledging or hypothecating may not
exceed 10% of such Portfolio's total assets, taken at market value, or as
may be necessary in connection with transactions in financial futures
contracts as set forth in (8) above;
5
<PAGE> 66
(13) Invest in securities with legal or contractual restrictions on
resale (except for repurchase agreements) or for which no readily
available market exists if, regarding all such securities, more than 5% of
the total assets of any Portfolio (taken at market value) would be
invested in such securities;
(14) Act as an underwriter of securities, except to the extent that
the Fund may technically be deemed an underwriter when engaged in the
activities described in (10) above or insofar as the Fund may be deemed an
underwriter under the Securities Act of 1933 in selling portfolio
securities; and
(15) Invest in securities of any one issuer with a record of less than
three years of continuous operation, including predecessors, except
obligations issued or guaranteed by the United States Government or its
agencies or Municipal Bonds (except that, in case of industrial revenue
bonds, this restriction shall apply to the entity supplying the revenues
from which the issue is to be paid), if such investments by any Portfolio
would exceed 5% of the value of its total assets (taken at market value).
Proposed Uniform Investment Restrictions. As discussed in the
Prospectus under "Investment Objective and Policies-Investment
Restrictions", the Board of Directors of the Fund has approved the
replacement of the Fund's existing investment restrictions with the
fundamental and non-fundamental investment restrictions set forth below.
These uniform investment restrictions have been proposed for adoption by
all of the non-money market mutual funds advised by the Investment Adviser
or its affiliate, Merrill Lynch Asset Management, L.P. ("MLAM"). The
investment objectives and policies of the Fund will be unaffected by the
adoption of the proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve
the proposed revised investment restrictions. If such shareholder approval
is obtained, the Fund's current investment restrictions will be replaced
by the proposed restrictions, and the Fund's Prospectus and Statement of
Additional Information will be supplemented to reflect such change.
Under the proposed fundamental investment restrictions, the Fund may
not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that to the extent permitted
by applicable law the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investments in
government obligations, commercial paper, pass-through instruments,
certificates of deposit, bankers' acceptances, repurchase agreements or
any similar instruments shall not be deemed to be the making of a loan,
and except further that the Fund may lend its portfolio securities,
provided that the lending of portfolio securities may be made only in
accordance with applicable law and the guidelines set forth in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
6
<PAGE> 67
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies
as set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the proposed non-fundamental investment restrictions, each Fund may
not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of
any state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment
restriction (c).
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange or American Stock Exchange or a major foreign
exchange. For purposes of this restriction, warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
7
<PAGE> 68
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Investment Adviser, the directors of such general partner
or the officers and directors of any subsidiary thereof each owning
beneficially more than one-half of one percent of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
Notwithstanding fundamental investment restriction (7) above, the Fund
currently does not intend to borrow amounts in any Portfolio in excess of
10% of the total assets of such Portfolio, taken at
market value, and then only from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares.
In addition, the Fund will not purchase securities while borrowings are
outstanding.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each director and officer is P.O. Box
9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL-President and Director(1)(2)-President, Director and
Chief Investment Officer of the Investment Adviser (which term as used
herein includes its corporate predecessors) since 1977; President of MLAM
(which term as used herein includes its corporate predecessors) since 1977
and Director and Chief Investment Officer since 1976; President and
Director of Princeton Services, Inc. ("Princeton Services") since 1993;
Executive Vice President of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") since 1990 and Executive Vice President
of Merrill Lynch & Co. ("ML & Co.") since 1990 and Senior Vice President
from 1985 to 1990; and Director of Merrill Lynch Funds Distributor, Inc.
(the "Distributor").
RONALD W. FORBES-Director(2)-1400 Washington Avenue, Albany, New York
12222. Associate Professor of Finance, School of Business, State
University of New York at Albany, Member, Task Force on Municipal
Securities Markets, Twentieth Century Fund; Consultant, Public Finance
Banking, Shearson Lehman Brothers, Inc.
CYNTHIA A. MONTGOMERY-Director(2)-Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business
School, since 1989; Associate Professor, J.L. Kellogg Graduate School of
Management, Northwestern University, 1985-1989; Assistant Professor,
Graduate School of Business Administration, the University of Michigan,
1979-1985; Director, UNUM Corporation.
CHARLES C. REILLY-Director(2)-9 Hampton Harbor Road, Hampton Bays, New
York 11946. Adjunct Professor, Columbia University Graduate School of
Business, since 1990; Adjunct Professor, Wharton School, University of
Pennsylvania, 1990; President and Chief Investment Officer of Versus
Capital, Inc. from 1979 to 1990; Senior Vice President of Arnhold and S.
Bleichroeder, Inc. from 1973 to 1990.
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<PAGE> 69
KEVIN A. RYAN-Director(2)-127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167, Professor of Education at Boston University since
1982. Founder and current Director, Boston University Center for
Advancement of Ethics and Character, since 1989; formerly taught on the
faculties of the University of Chicago, Stanford University and The Ohio
State University.
RICHARD R. WEST-Director(2)-482 Tepi Drive, Southbury, Connecticut
06488. Professor of Finance at New York University School of Business
Administration since 1993. Dean of New York University School of Business
Administration from 1984 to 1993; Professor of Finance at the Amos Tuck
School of Business Administration, Dartmouth College, from 1976 to 1984
and Dean from 1976 to 1983; Director, Vornado, Inc. (real estate holding
company), Director of Re Capital Corp. (reinsurance holding company),
Constar International, Inc. (manufacturer of plastic containers),
Alexander's Inc. (department stores), and Smith Corona Corporation
(manufacturer of typewriters and word processors).
TERRY K. GLENN-Executive Vice President(1)(2)-Executive Vice President
of the Investment Adviser and MLAM since 1983 and Director since 1992;
Executive Vice President and Director of Princeton Services since 1993;
President and Director of the Distributor since 1986.
VINCENT R. GIORDANO-Senior Vice President(1)(2)-Senior Vice President
of the Investment Adviser and MLAM since 1984; Portfolio manager of the
Investment Adviser since 1977 and Vice President from 1980 to 1984.
DONALD C. BURKE-Vice President(2)-Vice President and Director of
Taxation of MLAM since 1990; employee of Deloitte & Touche LLP from 1981
to 1990.
KENNETH A. JACOB-Vice President(1)(2)-Vice President of the Investment
Adviser since 1984 and portfolio manager since 1982; employed by the
Investment Adviser since 1978.
GERALD M. RICHARD-Treasurer(1)(2)-Senior Vice President and Treasurer
of the Investment Adviser and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Treasurer of the Distributor
since 1984; Vice President of the Distributor since 1981 and Treasurer of
the Distributor since 1984.
MARK B. GOLDFUS-Secretary(2)-Vice President of FAM and MLAM since
1985.
----------
(1) Interested person, as defined in the Investment Company Act of 1940,
of the Fund.
(2) Mr. Zeikel is a director or trustee and officer, Messrs. Forbes,
Reilly, Ryan and West and Ms. Montgomery are directors or trustees, and
the officers of the Fund are officers and/or directors or trustees, of
certain other investment companies for which the Investment Adviser or
MLAM acts as investment adviser (see "Investment Advisory and Other
Services").
Mr. Zeikel, a director of the Fund, and the officers of the Fund owned
on September 30, 1994 an aggregate of less than 1/4 of 1% of the
outstanding shares of Common Stock of ML & Co.
The Fund has an Audit Committee consisting of all of the directors of
the Fund who are not interested persons of the Fund.
Each director of the Fund who is not an officer or employee of ML &
Co. or its subsidiaries receives an annual fee of $4,000 plus $800 per
meeting of the Board of Directors attended and an annual fee of $2,000 for
serving on the Audit Committee. In addition, the Fund pays all Directors'
actual out-of-pocket expenses relating to attendance at meetings of the
Board of Directors of the Fund or of any committee thereof. Mr. West is
paid an additional annual fee of $1,000 for serving as Chairman of the
Audit Committee. For the year ended June 30,
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<PAGE> 70
1994, fees and expenses paid to the unaffiliated directors of the Fund
aggregated $48,135. No officer or employee of ML & Co., Inc. or its
subsidiaries receives any compensation from the Fund for acting as a
director or officer of the Fund. The Fund requires no employees other than
its officers, all of whom are compensated by FAM or the Distributor.
INVESTMENT ADVISORY ARRANGEMENTS
Fund Asset Management, L.P. ("FAM"), a subsidiary of MLAM, an
indirect subsidiary of Merrill Lynch & Co., Inc., acts as the investment
adviser for the Fund and provides the Fund with management services. While
FAM is at all times subject to the direction of the Board of Directors of
the Fund, under the Investment Advisory Agreement, FAM is responsible for
the actual management of each Portfolio and constantly reviews the
holdings of each Portfolio in light of its own research analysis and
analyses from other relevant sources. The responsibility for making
decisions to buy, sell or hold a particular security rests with FAM. FAM
provides the portfolio managers for each Portfolio, who consider analyses
from various sources, make the necessary investment decisions and place
transactions accordingly. FAM is also obligated to perform certain
administrative and management services for the Fund and is obligated to
provide all the office space, facilities, equipment and personnel
necessary to perform its duties under the Agreement.
Securities held by the Fund may also be held by other funds for which
FAM or MLAM acts as an adviser or by investment advisory clients of MLAM.
If purchases or sales of securities for the Fund or other funds for which
FAM or MLAM acts as investment adviser or for their advisory clients arise
for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment Adviser or
MLAM during the same period may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse
effect on price.
Advisory Fee. As compensation for its services to the Portfolios, FAM
receives at the end of each month a fee with respect to each Portfolio at
the annual rates set forth below, which are based upon the average daily
value of the Fund's net assets. The rates are subject to reduction to the
extent that the aggregate of the average daily net assets of the three
combined Portfolios exceeds $250 million, $400 million, $550 million and
$1.5 billion, respectively. The reductions will be applicable to each
Portfolio regardless of size on a "uniform percentage" basis.
Determination of the portion of the net assets of each Portfolio to which
the reduced rate is applicable is made by multiplying the net assets of
that Portfolio by the "uniform percentages," derived by dividing the
amount by which the combined assets of all Portfolios exceeds the various
applicable breakpoints by such combined assets. In addition, although
under the Investment Advisory Agreement FAM is entitled to a fee with
respect to the Insured Portfolio at an annual rate of 0.375% when the
Fund's aggregate net assets exceed $1.5 billion, as reflected in the table
below, FAM has agreed to waive such fee in excess of an annual rate of
0.35%.
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<PAGE> 71
<TABLE>
<CAPTION>
RATE OF ADVISORY FEE
-------------------------------------------
LIMITED
INSURED NATIONAL MATURITY
AGGREGATE OF AVERAGE DAILY NET ASSETS OF THE THREE COMBINED PORTFOLIOS PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Not exceeding $250 million.................................................... 0.40 % 0.50 % 0.40 %
In excess of $250 million but not exceeding $400 million...................... 0.375 0.475 0.375
In excess of $400 million but not exceeding $550 million...................... 0.375 0.475 0.35
In excess of $550 million but not exceeding $1.5 billion...................... 0.375 0.475 0.325
In excess of $1.5 billion..................................................... 0.35 0.475 0.325
</TABLE>
At the date of this Statement of Additional Information, the only
state which imposes limitations on the expenses of the Fund is the State
of California. California's annual expense limitations require that FAM
reimburse each Portfolio for advisory fees received by it from the Fund,
to the extent that such Portfolio's aggregate ordinary operating expenses
(excluding interest, taxes, brokerage fees and commissions, extraordinary
charges such as litigation costs and a percentage of distribution fees)
exceed in any fiscal year 2.5% of the Portfolio's first $30,000,000 of
average net assets, 2.0% of the next $70,000,000 of its average net assets
and 1.5% of the remaining net assets. No fee payment will be made to FAM
with respect to any Portfolio during any fiscal year which will cause the
expenses of such Portfolio to exceed the pro rata expense limitation
applicable to such Portfolio at the time of such payment.
For the year ended June 30, 1992, FAM received $9,530,756 from the
Insured Portfolio, $7,118,326 from the National Portfolio and $1,571,887
from the Limited Maturity Portfolio as advisory fees. For the year ended
June 30, 1993, FAM received $10,497,116 from the Insured Portfolio,
$7,817,631 from the National Portfolio and $2,526,397 from the Limited
Maturity Portfolio as advisory fees. For the year ended June 30, 1994, FAM
received $11,040,540 from the Insured Portfolio, $8,514,268 from the
National Portfolio and $3,305,839 from the Limited Maturity Portfolio as
advisory fees.
Payment of Expenses. The Investment Advisory Agreement obligates FAM
to provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
economic research, investment research, trading and investment management
of the Fund, as well as the fees of all directors of the Fund who are
affiliated persons of Merrill Lynch & Co., Inc. or any of its
subsidiaries. Each Portfolio pays all other expenses incurred in its
operation and a portion of the Fund's general administrative expenses
allocated on the basis of the asset size of the respective Portfolios.
Expenses that will be borne directly by the Portfolios include redemption
expenses, expenses of portfolio transactions, shareholder servicing costs,
portfolio insurance maintained and paid by the Insured Portfolio, expenses
of registering the shares under Federal and state securities laws, pricing
costs (including the daily calculation of net asset value), interest,
certain taxes, charges of the Custodian and Transfer Agent and other
expenses attributable to a particular Portfolio. Expenses which will be
allocated on the basis of the size of the respective Portfolios include
directors' fees, legal expenses, state franchise taxes, auditing services,
costs of printing proxies, stock certificates, shareholder reports and
prospectuses (except to the extent paid by the Distributor), Securities
and Exchange Commission fees, accounting costs and other expenses properly
payable by the Fund and allocable on the basis of the size of the
respective Portfolios. Accounting services are provided for the Fund by
FAM, and the Fund reimburses FAM for its costs in connection with such
services. During the year ended June 30, 1994, the Fund reimbursed FAM
$414,293 for such services. Depending upon the nature of a lawsuit,
litigation costs may be directly applicable to the Portfolios or allocated
on the basis of the size of the respective Portfolios. The Board of
Directors has determined that this is an appropriate method of allocation
of expenses. As required by
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<PAGE> 72
the Distribution Agreement, the Distributor will pay certain of the
expenses of each Portfolio incurred in connection with the offering of
shares of each Portfolio, including the expense of printing the
prospectuses used in connection with the continuous offering of shares by
each Portfolio. See "Purchase of Shares-Distribution Agreement" in the
Prospectus.
Duration and Termination. Unless earlier terminated as described
below, the Investment Advisory Agreement will continue in effect from year
to year if approved annually (a) by the Board of Directors of the Fund or
by a majority of the outstanding voting shares of each Portfolio and (b)
by a majority of the Directors who are not parties to such contract or
interested persons (as defined in the Investment Company Act of 1940) of
any such party. Such contract terminates upon assignment and may be
terminated without penalty on 60 days' written notice at the option of
either party thereto or by the vote of the shareholders of the Fund.
If the shareholders of any Portfolio fail to approve the continuance
of the Investment Advisory Agreement, the Investment Advisory Agreement
will continue in effect as to any other Portfolio if the shareholders of
such Portfolio have approved the contract.
NET ASSET VALUE
The net asset value of the shares of each Portfolio is determined by
FAM once daily as of 4:15 P.M., New York City time, on each day that the
New York Stock Exchange is open for trading immediately after the
declaration of dividends. The New York Stock Exchange is not open for
trading on the following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value per share is computed by dividing the
sum of the value of the portfolio securities held by each Portfolio plus
any cash or other assets (including interest and dividends accrued but not
yet received) minus all liabilities (including accrued expenses) by the
total number of shares outstanding at such time, rounded to the nearest
cent. Expenses, including the investment advisory and any account
maintenance and/or distribution fees, are accrued daily.
The per share net asset value of the Class B, Class C and Class D
shares of a Portfolio generally will be lower than the per share net asset
value of the Class A shares of that Portfolio reflecting the daily expense
accruals of the account maintenance distribution and higher transfer
agency fees applicable with respect to the Class B, Class C and Class D
shares and daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares. Moreover the per share net
asset value of the Class B and Class C shares generally will be lower than
the per share net asset value of its Class D shares reflecting the daily
expense accruals of the distribution fees and higher transfer agency fees
applicable with respect to the Class B and Class C shares. It is expected,
however, that the per share net asset value of the four classes of a
Portfolio will tend to converge immediately after the payment of
dividends, which will differ by approximately the amount of the expense
accrual differential among the classes.
The Municipal Bonds and money market securities in which each
Portfolio invests are traded primarily in the over-the-counter markets and
are valued at the most recent bid price or yield equivalent as obtained
from dealers that make markets in such securities. Positions in futures
contracts are valued at closing prices for such contracts established by
the exchange on which they are traded on each day during which trading is
conducted thereon. Assets for which 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, including valuations
furnished by a pricing service retained by the Fund, which may utilize a
matrix system for valuations.
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<PAGE> 73
It is the intention of FAM, subject to guidelines established by the
Board of Directors of the Fund, to hold Insured Municipal Bonds in the
Insured Portfolio which are in default, or in significant risk of default,
in the payment of principal or interest until the default has been cured
or the principal and interest are paid by the issuer or the insurer. In
accordance with such guidelines, FAM will consider the following factors
in determining the effective value of Insured Municipal Bonds in the
Insured Portfolio which are in default or in significant risk of default,
in the payment of principal or interest: (1) the market value of the
bonds; (2) the market value of securities of similar issuers whose
securities carry similar interest rates; and (3) the value of the
insurance guaranteeing interest and principal payments. Absent unusual or
unforeseen circumstances, the value ascribed to the insurance feature of
the bonds would be the difference between the market value of the bonds
and the market value of securities of a similar nature which are not in
default or significant risk of default. It is the position of the Board of
Directors that this is a fair method of valuing the insurance feature and
reflects a proper valuation method in accordance with the provisions of
the Investment Company Act of 1940. This method of valuing securities will
mean that shareholders of the Insured Portfolio, whether they decide to
redeem or decide to retain their investment in the Insured Portfolio, will
in normal circumstances receive the benefit of the insurance. Because of
the unusual circumstances surrounding the bonds held in the Insured
Portfolio which were in default at the end of the Fund's last fiscal year,
the insurance feature was valued in an amount which, when combined with
the market value of the bonds, resulted in the bonds' having an effective
value of par.
PORTFOLIO TRANSACTIONS
Under the Investment Company Act of 1940, persons affiliated with the
Fund are prohibited from dealing with the Fund as a principal in the
purchase and sale of securities unless an exemptive order allowing such
transactions is obtained from the Securities and Exchange Commission.
Since over-the-counter transactions are usually principal transactions,
affiliated persons of the Fund, including Merrill Lynch, may not serve as
a dealer in connection with transactions with the Fund. However, the Fund
has obtained an exemptive order permitting it to engage in certain
principal transactions involving high quality short-term Municipal Bonds.
Affiliated persons of the Fund may serve as its broker in over-the-counter
transactions conducted on an agency basis. Certain court decisions have
raised questions as to the extent to which investment companies should
seek exemptions under the Investment Company Act in order to seek to
recapture underwriting and dealer spreads from affiliated entities. The
Directors have considered the possibilities of seeking to recapture
spreads for the benefit of the Fund and, after considering factors deemed
relevant, have made a determination not to seek such recapture at this
time. The Board will reconsider this matter from time to time.
Under the Investment Company Act of 1940, the Fund may not purchase
Municipal Bonds from any underwriting syndicate of which Merrill Lynch is
a member except pursuant to an exemptive order or rules adopted by the
Securities and Exchange Commission. During the year ended June 30, 1993,
the Fund made no purchases of Municipal Bonds in transactions pursuant to
an exemptive order or such a rule. During the year ended June 30, 1994,
the Fund purchased $230,231,897 of Municipal Bonds in 77 transactions
pursuant to an exemptive order or such a rule.
The Fund does not expect to use any particular dealer in the execution
of transactions for its Portfolios, but, subject to obtaining the best net
results, dealers who provide supplemental investment research (such as
economic data and market forecasts) to FAM may receive orders for
transactions by any Portfolio. Information so received will be in addition
to and not in lieu of the services required to be performed by FAM under
its Investment Advisory Agreement and FAM's expenses will not necessarily
be reduced as a result of the receipt of such supplemental information.
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<PAGE> 74
FAM expects that the portfolio turnover rate for the Insured Portfolio
and the National Portfolio should not generally exceed 100%. Because of
the short-term nature of the Limited Maturity Portfolio, its turnover rate
may be substantially higher. In any particular year, however, market
conditions could result in portfolio activity of a Portfolio at a greater
or lesser rate than anticipated.
PURCHASE OF SHARES
The Fund has entered into separate distribution agreements (the
"Distribution Agreements") with the Distributor in connection with the
offering of each class of shares of the three Portfolios. The Distribution
Agreements obligate the Distributor to pay certain expenses in connection
with the offering of the Fund's shares. After the prospectuses, statements
of additional information and periodic reports have been prepared, set in
type and mailed to shareholders, the Distributor pays for the printing and
distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary
sales literature and advertising costs. The Distribution Agreements are
subject to the same renewal requirements and termination provisions as the
Investment Advisory Agreement described above.
ALTERNATIVE SALES ARRANGEMENTS
The Fund is a series fund comprised of three separate Portfolios. All
three Portfolios are divided into four classes of shares under the Merrill
Lynch Select Pricing SM System. Class A and Class D shares of the three
Portfolios are sold to investors choosing the initial sales charge
alternative and Class B and Class C shares are sold to investors choosing
the deferred sales charge alternative. Each Class A, Class B, Class C and
Class D share of a Portfolio represents an identical interest in the
investment portfolio of the Portfolio, has the same rights and is
identical in all respects to the other classes of shares, except that
Class B, Class C and Class D shares of the Portfolio bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear
the expenses of the ongoing distribution fees and the additional transfer
agency costs resulting from the deferred sales charge arrangements. Class
B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such
class pursuant to which the distribution fee is paid. Each class has
different exchange privileges. See "Exchange Privilege."
INITIAL SALES CHARGE ALTERNATIVES-CLASS A and Class D SHARES
For the year ending June 30, 1994, sales charges were $3,435,864, of
which the Distributor received $343,837 and Merrill Lynch received
$3,092,027. For the year ending June 30, 1993, sales charges were
$5,700,495, of which the Distributor received $496,721 and Merrill Lynch
received $5,203,774. For the year ended June 30, 1992, sales charges for
Class A shares of the Insured Portfolio, the National Portfolio and the
Limited Maturity Portfolio were $4,922,010, of which the Distributor
received $444,198 and Merrill Lynch received $4,477,812. All of such sales
charges were attributable to payments of initial sales charges in
connection with purchases of Class A shares of the Portfolios.
Reduced Initial Sales Charges-Class A and Class D Shares. As set forth
in the Prospectus, a reduced sales charge is available for any purchase in
excess of $25,000 (in the case of the Insured Portfolio and National
Portfolio) and $100,000 for the Limited Maturity Portfolio of Class A or
Class D shares of a Portfolio. The term "purchase" as used in the
Prospectus and Statement of Additional Information in connection with
investment in Class A and Class D shares of the Fund refers to a single
purchase by an individual, or to concurrent purchases, which in the
aggregate are at least equal to the prescribed amounts by an individual,
his spouse and their
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<PAGE> 75
children under the age of 21 years purchasing shares for his or their own
account and to single purchases by a trustee or fiduciary purchasing
shares for a single trust or estate or single fiduciary account although
more than one beneficiary is involved. The term "purchase" also includes
purchases by any "company," as that term is defined in the Investment
Company Act of 1940, but does not include purchases by any such company
which has not been in existence for at least six months or has no purpose
other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it
will not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit card
holders of a company, policyholders of an insurance company, customers of
either a bank or broker-dealer or clients of an investment adviser.
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which investors are permitted to purchase
shares of any of the three Portfolios subject to an initial sales charge
at the offering price applicable to the total of (a) the public offering
price of the shares then being purchased plus (b) an amount equal to the
then current net asset value or cost, whichever is higher, of the
purchaser's combined holdings of all classes of the shares of all of the
Portfolios and of other MLAM-advised mutual funds. For any such right of
accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer,
with sufficient information to permit confirmation of qualification, and
acceptance of the purchase order is subject to such confirmation. The
right of accumulation may be amended or terminated at any time. Shares
held in the name of a nominee or custodian under pension, profit-sharing
or other employee benefits plans may not be combined with other shares to
qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
of Class A and Class D shares of the Portfolios, or any other MLAM-advised
mutual funds, where purchases of such shares aggregating $25,000 or more
for the Insured Portfolio and National Portfolio or $100,000 or more for
the Limited Maturity Portfolio are made through any dealer within a
13-month period starting with the first purchase pursuant to a Letter of
Intention in the form provided by the Distributor. The Letter of Intention
is not a binding obligation to purchase any amount of Class A or Class D
shares, but its execution will result in the purchaser's paying a lower
sales charge at the appropriate quantity purchase level. The Letter of
Intention is available only to investors whose accounts are maintained at
the Fund's Transfer Agent. A purchase not originally made pursuant to a
Letter of Intention may be included under a subsequent letter executed
within 90 days of such purchase if the Distributor is informed in writing
of this intent within such 90-day period. The value of Class A and Class D
shares of the Portfolios and of other MLAM-advised mutual funds (or
eligible shares) presently held, at cost or maximum offering price
(whichever is higher) on the date of the first purchase under the Letter
of Intention, may be included as a credit toward the completion of such
Letter, but the reduced sales charge applicable to the amount covered by
the Letter of Intention will be applied only to new purchases. If the
total amount of shares purchased does not equal the amount stated in the
Letter of Intention (minimum of $25,000 for the National and Insured
Portfolio or $100,000 for the Limited Maturity Portfolio), the
investor will be notified and must pay, within 20 days of the expiration
of such Letter, the difference between the sales charge on Class A or
Class D shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A
and Class D shares equal to five percent of the intended amount will be
held in escrow during the 13-month period (while remaining registered in
the name of the purchaser) for this purpose and will be involuntarily
redeemed to pay the additional sales charge, if necessary. The first
purchase under the Letter of Intention must be at least five percent of
the dollar amount of such Letter. If during the term of such Letter a
purchase brings the total amount invested to an amount equal to or in
excess of the amount indicated in the Letter, the purchaser will be
entitled on that purchase and subsequent purchases to the reduced
percentage sales charge
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<PAGE> 76
which would be applicable to a single purchase equal to the total dollar
value of the shares then being purchased plus the total cost of all shares
previously purchased under such Letter, but there will be no retroactive
reduction of the sales charges on any previous purchase. The value of any
shares redeemed or otherwise disposed of by the purchaser prior to
termination or completion of the Letter of Intention will be deducted from
the total purchases made under such Letter. An exchange from a
MLAM-advised money market fund into any Portfolio that creates a sales
charge will count toward completing a new or existing Letter of Intention
in any Portfolio.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Employer Sponsored Non-Qualified After-Tax Savings and Investment
Programs. Class A and Class D shares are offered at net asset value to
employer sponsored non-qualified After-Tax Savings and Investment programs
maintained on the Merrill Lynch Group Employee Services system, provided
the program, or certain other plans or programs sponsored by the employer,
has $5 million or more in existing plan assets initially invested in
portfolios, mutual funds or trusts advised by the Investment Adviser or an
affiliate. Class A and Class D shares are also offered at net asset value
to After-Tax Savings and Investment programs, provided the program has
accumulated $5 million or more in existing assets invested in mutual funds
advised by the Investment Adviser or an affiliated adviser charging a
front-end sales charge or contingent deferred sales charge. In this case
as well, assets of certain other plans sponsored by the same sponsor or an
affiliated sponsor may be aggregated. The Class A and Class D shares share
reduced load breakpoints also apply to these aggregated assets. After-Tax
Savings and Investment programs are also offered Class A or Class D shares
at net asset value, provided such plan initially has 1,000 or more
employees eligible to participate in the plan. Employees eligible to
participate in such plans of the same sponsoring employer or its
affiliates may be aggregated. The minimum initial and subsequent purchase
requirements are waived in connection with all the above-referenced plans.
Merrill Lynch Blueprint SM Program. Class D shares of any of the three
Portfolios are offered to participants in the Merrill Lynch Blueprint SM
Program ("Blueprint"). In addition, participants in Blueprint who own Class A
shares of a Portfolio may purchase additional Class A shares of the Portfolio
through Blueprint. Blueprint is directed to small investors, group IRAs and
participants in certain affinity groups such as credit unions and trade
associations. Investors placing orders to purchase Class A or Class D shares
of a Portfolio through Blueprint will acquire the shares at net asset value
plus a sales charge calculated in accordance with Blueprint sales charge
schedule (i.e., up to $5,000 at 0.80% for Limited Maturity Portfolio, up to
$5,000 at 3.5% for the Insured Portfolio or National Portfolio, and $5,000.01
or more at the standard disclosed sales charge rate in the Prospectus).
However, services, including the exchange privilege, available to Class A or
Class D shareholders through Blueprint may differ from those available to
other investors. Class A and Class D shares are offered at net asset value,
to Blueprint participants through the Merrill Lynch Directed IRA Rollover
Program ("IRA Rollover Program") available from Merrill Lynch Business
Financial Services, a business unit of Merrill Lynch. Orders for purchases
and redemptions of Class A or Class D shares of the Portfolios may be grouped
for execution purposes which, in some circumstances, may involve the
execution of such orders two business days following the day such orders are
placed. The minimum initial purchase price is $100, with a $50 minimum for
subsequent purchases through Blueprint. There are no minimum initial or
subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases
through Blueprint, including any annual fees and transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint SM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
16
<PAGE> 77
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net
asset value to shareholders of certain closed-end funds advised by MLAM or
the Investment Adviser who purchased such closed-end fund shares prior to
October 21, 1994 and wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in Eligible Class A shares, if the
conditions set forth below are satisfied. Alternatively, closed-end fund
shareholders who purchased such shares on or after October 21, 1994 and wish
to reinvest the net proceeds from a sale of their closed-end fund shares are
offered Class A shares (if eligible to purchase Class A shares) or Class D
shares of the Fund and other MLAM-advised mutual funds ("Eligible Class D
Shares"), if the following conditions are met. First, the sale of the
closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or
Class D shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends
from shares of common stock acquired in such offering. Third, the closed-end
fund shares must have been continuously maintained in a Merrill Lynch
securities account. Fourth, there must be a minimum purchase of $250 to be
eligible for the investment option. Class A shares of the Fund are offered at
net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. ("Senior Floating Rate Fund") who wish to reinvest the net proceeds from
a sale of certain of their shares of common stock of Senior Floating Rate
Fund in shares of the Fund. In order to exercise this investment option,
Senior Floating Rate Fund shareholders must sell their Senior Floating Rate
Fund shares to the Senior Floating Rate Fund in connection with a tender
offer conducted by the Senior Floating Rate Fund and reinvest the proceeds
immediately in the Fund. This investment option is available only with
respect to the proceeds of Senior Floating Rate Fund shares as to which no
Early Withdrawal Charge (as defined in the Senior Floating Rate Fund
prospectus) is applicable. Purchase orders from Senior Floating Rate Fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related Senior Floating Rate Fund tender offer terminates
and will be effected at the net asset value of the Fund at such day.
Purchase Privileges of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, ML & Co., Inc. and
its subsidiaries, (the term "subsidiaries", when used herein with respect to
Merrill Lynch & Co., Inc., includes MLAM, FAM and certain other entities
directly or indirectly wholly-owned and controlled by Merrill Lynch & Co.,
Inc.), and their directors and employees and any trust, pension,
profit-sharing or other benefit plan for such persons, may purchase Class A
shares of the Fund at net asset value.
Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a
financial consultant who joined Merrill Lynch from another investment firm
within six months prior to the date of purchase by such investor, if the
following conditions are satisfied. First, the investor must advise
Merrill Lynch that it will purchase Class D shares of the Fund with
proceeds from a redemption of a mutual fund that was sponsored by the
financial consultant's previous firm and was subject to a sales charge
either at the time of purchase or on a deferred basis. Second, the
investor also must establish that such redemption had been made within 60
days prior to the investment in the Fund, and the proceeds from the
redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at net asset value,
without sales charge, to an investor who has a business relationship with
a Merrill Lynch financial consultant and who has invested in a mutual fund
spon-
17
<PAGE> 78
sored by a non-Merrill Lynch company for which Merrill Lynch has served as a
selected dealer and where Merrill Lynch has either received or given notice
that such arrangement will be terminated ("notice"), if the following
conditions are satisfied: First, the investor must purchase Class D shares of
the Fund with proceeds from a redemption of shares of such other mutual fund
and such fund was subject to a sales charge either at the time of purchase or
on a deferred basis. Second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a
Merrill Lynch financial consultant and who has invested in a mutual fund
for which Merrill Lynch has not served as a selected dealer if the
following conditions are satisfied: First, the investor must advise
Merrill Lynch that it will purchase Class D shares of the Fund with
proceeds from the redemption of such shares of other mutual fund and that
such shares have been outstanding for a period of no less than six months.
Second, such purchase of Class D shares must be made within 60 days after
the redemption and the proceeds from the redemption must be maintained in
the interim in cash or a money market fund.
A purchase of $1 million or more in a single transaction by an investor,
or a purchase by a TMA SM Managed Trust, of Class A and Class D Shares of the
Fund's Portfolios will not be subject to an initial sales charge. Such
purchases will be subject to a contingent deferred sales charge if the shares
are redeemed within one year after purchase at the following rates: 1.00% on
purchases of $1,000,000 to $2,500,000; 0.60% on purchases of $2,500,000 to
$3,500,000; 0.40% on purchases of $3,500,000 to $5,000,000; and 0.25% on
purchases of more than $5,000,000 in lieu of paying an initial sales charge.
Acquisition of Certain Investment Companies. The public offering price
of Class D shares of the Portfolios may be reduced to the net asset value
per share in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private
investment company. The value of the assets or company acquired in a
tax-free transaction may in appropriate cases be adjusted to reduce
possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund.
The issuance of Class D shares for consideration other than cash is
limited to bona fide reorganizations, statutory mergers or other
acquisitions of portfolio securities which (i) meet the investment
objectives and policies of the Fund; (ii) are acquired for investment and
not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control);
and (iii) are liquid securities, the value of which is readily
ascertainable, which are not restricted as to transfer either by law or
illiquidity of market (except that the Fund may acquire through such
transactions restricted or illiquid securities to the extent the Fund does
not exceed the applicable limits on acquisition of such securities set
forth under "Investment Objective and Policies" herein).
Purchases by Banks. Class A shares of the Fund's Insured Portfolio may
be purchased at net asset value, without a sales charge, by banks which
have invested a minimum of $25 million in such shares.
DEFERRED SALES CHARGE ALTERNATIVE-CLASS B SHARES
Distribution Plans. Reference is made to "Purchase of Shares-
Distribution Plans" in the Prospectus for certain information with
respect to the distribution plans for Class B and Class C shares
pursuant to Rule 12b-1 under the Investment Company Act (each, a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes.
18
<PAGE> 79
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act
of 1940. Among other things, each Distribution Plan provides that the
Distributor shall provide and the directors shall review quarterly reports
of the disbursement of the account maintenance and/or distribution fees
paid to the Distributor. In their consideration of each Distribution Plan,
the directors must consider all factors they deem relevant, including
information as to the benefits of the Distribution Plan to the Fund and
the related class of shareholders of the relevant Portfolio. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of directors who are not
"interested persons" of the Fund, as defined in the Investment Company
Act of 1940 (the "Independent Directors"), shall be committed to the
discretion of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is reasonable likelihood that such Distribution Plan
will benefit the Fund and the related class of shareholders of the
Portfolio. Each Distribution Plan can be terminated at any time, without
penalty, by the vote of a majority of the Independent Directors or by the
vote of the holders of a majority of the outstanding related voting
securities of the relevant Portfolio. A Distribution Plan cannot be
amended to increase materially the amount to be spent by any Portfolio
without the approval of the related class of shareholders of such
Portfolio and all material amendments are required to be approved by the
vote of directors, including a majority of the Independent Directors who
have no direct or indirect financial interest in such Distribution Plan,
cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each class of Distribution Plan
and any report made pursuant to such plan for a period of not less than
six years from the date of such Distribution Plan or such report, the
first two years in an easily accessible place.
For the year ended June 30, 1994, the Fund paid distribution fees of
$6,980,635 with respect to the Class B shares of the Insured Portfolio,
distribution fees of $3,496,610 with respect to the Class B shares of the
National Portfolio and distribution fees of $466,701 with respect to the
Class B shares of the Limited Maturity Portfolio. For the year ended June
30, 1993, the Fund paid distribution fees of $6,039,420 with respect to
the Class B shares of the Insured Portfolio, distribution fees of
$2,578,458 with respect to the Class B shares of the National Portfolio
and distribution fees of $112,800 with respect to the Class B shares of
the Limited Maturity Portfolio. The distribution-related expenses incurred
by the Distributor and Merrill Lynch in connection with the Class B shares
consist primarily of financial consultant compensation, branch office and
regional operation center selling and transaction processing expenses,
advertising, sales promotion and marketing expenses and corporate overhead.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD") imposes a
limitation on certain asset-based sales charges such as the distribution
fee and the CDSC borne by the Class B and Class C shares but not the
account maintenance fee. The maximum sales charge rule is applied
separately to each class of each Portfolio. As applicable to the Fund, the
maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund with respect to Class B or Class C
shares of a Portfolio to (1) 6.25% of eligible gross sales of such shares,
computed separately for each class of a Portfolio (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed
separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with
19
<PAGE> 80
the Class B shares of a Portfolio is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any
time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee with respect to Class
B shares of the relevant Portfolio, and any CDSCs with respect to that class
will be paid to the Fund rather than to the Distributor; however, the Fund
will continue to make payments of the account maintenance fee. In certain
circumstances the amount payable pursuant to the voluntary maximum may exceed
the amount payable under the NASD formula. In such circumstances payment in
excess of the amount payable under the NASD formula will not be made.
The following tables set forth comparative information as of June 30,
1994 with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge
rule and the Distributor's voluntary maximum for the period October 21,
1988 (commencement of Class B operations) to June 30, 1994 for the
National and Insured Portfolios, and for the period November 2, 1992
(commencement of Class B operations) to June 30, 1994 for the Limited
Maturity Portfolio. Since Class C shares of the Fund had not been publicly
issued prior to the date of this Prospectus, information concerning Class
C shares is not provided below:
DATA CALCULATED AS OF JUNE 30, 1994
National Portfolio
(In thousands)
<TABLE>
<CAPTION>
Annual
Distribution
Allowable Allowable Amounts Fee at
Eligible Aggregate Interest Maximum Previously Aggregate Current
Gross Sales on Unpaid Amount Paid to Unpaid Net Asset
Sales(1) Charges Balance(2) Payable Distributor(3) Balance Level(4)
-------- ------- ---------- ------- -------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD
Rule as
Adopted $555,411 $34,713 $7,265 $41,978 $10,322 $31,656 $2,296
Under
Distributor's
Voluntary
Waiver ......... $555,411 $34,713 $2,777 $37,490 $10,322 $27,168 $2,296
</TABLE>
20
<PAGE> 81
Insured Portfolio
(In thousands)
<TABLE>
<CAPTION>
Annual
Distribution
Allowable Allowable Amounts Fee at
Eligible Aggregate Interest Maximum Previously Aggregate Current
Gross Sales on Unpaid Amount Paid to Unpaid Net Asset
Sales(1) Charges Balance(2) Payable Distributor(3) Balance Level(4)
-------- ------- ---------- ------- -------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD
Rule as
Adopted $1,126,993 $70,437 $16,503 $86,940 $23,420 $63,520 $4,330
Under
Distributor's
Voluntary
Waiver ......... $1,126,993 $70,437 $5,635 $76,072 $23,420 $52,652 $4,330
</TABLE>
Limited Maturity Portfolio
(In thousands)
<TABLE>
<CAPTION>
Annual
Distribution
Allowable Allowable Amounts Fee at
Eligible Aggregate Interest Maximum Previously Aggregate Current
Gross Sales on Unpaid Amount Paid to Unpaid Net Asset
Sales(5) Charges Balance(2) Payable Distributor(6) Balance Level(4)
-------- ------- ---------- ------- -------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD
Rule as
Adopted $141,633 $8,852 $642 $9,494 $642 $8,852 $3,639
Under
Distributor's
Voluntary
Waiver ......... $141,633 $8,852 $708 $9,560 $642 $8,918 $3,639
</TABLE>
----------
(1) Purchase price of all eligible Class B shares sold since October 21,
1988 (commencement of Class B operations) other than shares acquired
through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly average Prime Rate basis based upon
the prime rate, as reported in The Wall Street Journal, plus 1.0%, as
permitted under the NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of
these distribution fee payments made prior to July 6, 1993 under the
Prior Plan at the 0.75% rate, 0.50% of average daily net assets has
been treated as a distribution fee and 0.25% of average daily net
assets has been deemed to have been a service fee and not subject to
the NASD maximum sales charge rule.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is
amortizing the unpaid balance. No assurance can be given that payments
of the distribution fee will reach either the voluntary maximum or the
NASD maximum.
(5) Purchase price of all eligible Class B shares sold since November 2,
1992 (commencement of Class B operations) other than shares acquired
through dividend reinvestment and exchange privilege.
(6) Consists of CDSC payments, distribution fee payments and accruals. Of
these distribution fee payments made prior to July 6, 1993 under the
Prior Plan at the 0.35% rate, 0.25% of average daily net assets has
been treated as a distribution fee and 0.10% of average daily net
assets has been deemed to have been a service fee and not subject to
the NASD maximum sales charge rule.
21
<PAGE> 82
REDEMPTION OF SHARES
The right to redeem shares or to receive payment with respect to any
such redemption may be suspended for any period during which trading on
the New York Stock Exchange is restricted as determined by the Securities
and Exchange Commission or such Exchange is closed (other than customary
weekend and holiday closings), for any period during which an emergency
exists as defined by the Commission as a result of which disposal of
portfolio securities or determination of the net asset value of any
Portfolio is not reasonably practicable, and for such other periods as the
Securities and Exchange Commission may by order permit for the protection
of shareholders of each Portfolio. Reference is made to "Redemption of
Shares" in the Prospectus, for certain information as to the redemption
and repurchase of Fund shares.
The value of shares at the time of redemption may be more or less than
the shareholder's cost, depending on the market value of the securities
held by each Portfolio at such time.
REINSTATEMENT PRIVILEGE
Holders of Class A or Class D shares of any Portfolio who have
redeemed their shares have a one-time privilege to reinstate their
accounts by purchasing Class A or Class D shares, as the case may be, of
the Portfolio in which they had invested at net asset value without a
sales charge up to the dollar amount redeemed. The reinstatement privilege
may be exercised as follows. A notice to exercise this privilege along
with a check for the amount to be reinstated must be received by the
Transfer Agent within 30 days after the date the request for redemption
was executed by the Transfer Agent or the Distributor. The reinstatement
will be made at the net asset value per share next determined after the
notice of reinstatement is received and cannot exceed the amount of the
redemption proceeds.
DEFERRED SALES CHARGE-CLASS B
As discussed in the Prospectus under "Purchase of Shares-Deferred
Sales Charge Alternatives-Class B and Class C Shares", while Class B shares
of the Insured Portfolio and National Portfolio redeemed within four years of
purchase and Class B shares of the Limited Maturity Portfolio redeemed
within one year of purchase are subject to a contingent deferred sales
charge under most circumstances, the charge is waived on redemptions of
Class B shares following the death or disability of a Class B shareholder.
Redemptions for which the waiver applies are any partial or complete
redemptions following the death or disability (as defined in the Internal
Revenue Code) of a Class B shareholder (including one who owns the Class B
shares of any Portfolio as joint tenant with his or her spouse), provided
the redemption is requested within one year of the death or initial
determination of disability.
For the year ended June 30, 1994, contingent deferred sales charges
paid by shareholders of the Fund to the Distributor were $718,890 for the
National Portfolio, $1,469,123 for the Insured Portfolio, and $190,903 for
the Limited Maturity Portfolio. All of such contingent deferred sales
charges were attributable to payments made in connection with redemptions
of Class B shares of the Portfolios.
Merrill Lynch Blueprint SM Program. Class B shares of all three
Portfolios are offered to certain participants in the Merrill Lynch
Blueprint SM Program ("Blueprint"). Blueprint is directed to small
investors and participants in certain affinity groups such as trade
associations and credit unions. Class B shares are offered through
Blueprint only to members of certain affinity groups. The CDSC is waived
for shareholders who are members of such affinity groups at the time of
placing orders to purchase Class B shares through Blueprint. However,
services, including the exchange privilege, available to Class B
shareholders through Blueprint may
22
<PAGE> 83
differ from those available to other Class B investors. Orders for purchases
and redemptions of Class B shares of any of the three Portfolios may be
grouped for execution purposes which, in some circumstances, may involve the
execution of such orders two business days following the day such orders are
placed. The minimum initial purchase price is $100, with a $50 minimum for
subsequent purchases throughout Blueprint. There is no minimum initial or
subsequent purchase requirement for investors who are part of the Blueprint
automatic investment plan. Additional information concerning Blueprint,
including any annual fees or transaction charges, is available from Merrill
Lynch, Pierce, Fenner & Smith Incorporated. The Blueprint(SM) Program, P.O.
Box 30441, New Brunswick, New Jersey 08989-0441.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Reference is made to "Dividends, Distributions and Taxes-Federal
Income Taxes" in the Prospectus.
Each Portfolio intends to qualify to pay "exempt-interest" dividends
as defined in Section 852(b)(5) of the Internal Revenue Code of 1986, as
amended (the "Code"). Under that section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from federal income tax ("tax-exempt
obligations"), pursuant to Section 103(a) of the Code (relating to
obligations of a state, territory, or a possession of the United States,
or any political sub-division of any of the foregoing, or of the District
of Columbia), the Portfolio will be qualified to pay exempt-interest
dividends to its shareholders. Exempt-interest dividends are dividends or
any part thereof (other than any capital gain distributions) paid by the
Portfolio which are attributable to interest on tax-exempt obligations and
designated by the Portfolio as exempt-interest dividends in a written
notice mailed to the Portfolio's shareholders within sixty days after the
close of its taxable year. The percentage of the total dividends paid by
the Portfolio during any taxable year which qualifies as exempt-interest
dividends will be the same for all shareholders of each Portfolio
receiving dividends during such year. Exempt-interest dividends may be
treated by shareholders for all purposes as items of interest excludible
from their gross income under Section 103(a) of the Code. However, a
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain the exclusion under Section 103(a) if
such shareholder would be treated as a "substantial user" under Section
147(a)(1) with respect to some or all of the tax-exempt obligations held
by the Portfolio.
Dividends paid by each Portfolio from its taxable income (i.e.,
interest on money market securities) and distributions of net realized
short-term capital gains (whether from tax-exempt or taxable obligations)
are taxable to shareholders as ordinary income. If a Portfolio acquires
tax-exempt obligations having market discount (generally, obligations
acquired for a price less than their principal amount) after April 30,
1993, gain on the disposition or retirement of such obligations will be
treated as ordinary income to the extent of accrued market discount. To
the extent the Portfolio has both taxable and tax-exempt income, expenses
of the Fund will be allocated between the taxable and the tax-exempt
income on a proportional basis. Since the Portfolio will not invest in the
stock of domestic corporations, the dividends received deductions for
corporations will not be available. The per share dividends on Class B and
Class C shares of any Portfolio will be lower than the per share dividends
on Class A and Class D shares of those Portfolios as a result of the
account maintenance distribution and higher transfer agency fees
applicable to Class B and Class C shares; similarly the per share
dividends and distributions on Class D shares will be lower than the per
share dividends and distributions on Class A shares as a result of the
account maintenance fees applicable with respect to the Class D shares.
See "Net Asset Value." The Code provides that interest on indebtedness
incurred or continued to purchase or carry shares of the Portfolio is not
deductible to the extent attributable to exempt-interest dividends.
23
<PAGE> 84
As a result of trading in futures contracts, a Portfolio may realize
net capital gains which, when distributed to shareholders, would be
taxable in the hands of the shareholders. For example, if the Portfolios
sold municipal bond index futures contracts in anticipation of a decline
in the value of securities they own and that index in fact declines in
value, the Portfolios would realize a capital gain upon the closing out of
that futures contract. Furthermore, if a Portfolio holds such a futures
contract on the last day of its taxable year, it would be deemed under the
Code to have sold that futures contract at its fair market value on the
last day of its taxable year and thus would realize a gain or loss. Such
gain or loss is treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss (hereinafter "blended gain or loss"),
notwithstanding the holding period of the futures contract. Since the
futures transaction was entered into to hedge the anticipated decline in
the portfolio securities of the Portfolio in question, it is likely that
the gain on the futures transactions would be partly or completely offset
by a corresponding decline in the value of the portfolio securities of such
Portfolio. However, unless the Portfolios sell such securities so as to
"realize" such losses in a manner to offset the blended gain for Federal
income tax purposes, the Portfolio would have a blended gain. Such blended
gain would result in taxable income to the shareholders of the Fund.
A redemption resulting in a gain is a taxable event whether or not the
reinstatement privilege is exercised. A redemption resulting in a loss
will not be a taxable event to the extent the reinstatement privilege is
exercised and an adjustment will be made to the shareholder's tax basis in
shares acquired pursuant to the reinstatement. For shares of a Portfolio
acquired after October 3, 1989, if a shareholder disposes of those shares
and subsequently reacquires shares of the Portfolio pursuant to the
reinstatement privilege, then the shareholder's tax basis in those shares
will be reduced to the extent the sales charge paid to the Portfolio
reduces any sales charge such shareholder would have been required to pay
on the subsequent acquisition in the absence of the reinstatement
privilege. Instead, such sales charge will be treated as an additional
amount paid for the subsequently acquired shares and will be included in
the shareholder's tax basis for such shares.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares for Class D shares. A shareholder's
basis in the Class D shares acquired will be the same as such
shareholder's basis in the Class B shares converted, and the holding
period of the acquired Class D shares will include the holding period of
the converted Class B shares.
If a shareholder exercises his exchange privilege within 90 days after
the date such shares were acquired to acquire shares in such fund or
another fund ("New Fund"), then the loss, if any, recognized on the
exchange will be reduced (or the gain, if any, increased) to the extent
the load charge paid to the Fund reduces any load charge such shareholder
would have been required to pay on the acquisition of the New Fund shares
in the absence of the exchange privilege. Instead, such load charge will
be treated as an amount paid for the New Fund shares and will be included
in the shareholder's basis for such shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
An exchange between funds pursuant to the Exchange Privilege is
treated as a sale for federal income tax purposes and, depending upon the
circumstances, a short- or long-term capital gain or loss may be realized.
In addition, any shareholder of the Fund who exercises the Exchange
Privilege and becomes a shareholder of another fund must certify to such
other fund his Social Security Number or Taxpayer Identification Number
and
24
<PAGE> 85
that he is not subject to the backup withholding tax if he wishes to avoid a
31% backup withholding tax on the gross proceeds paid by such other fund on
redemption of shares and on dividend distributions made to him by such other
fund.
Any dividend declared by a Portfolio in October, November or December
of any year and made payable to shareholders of record in such a month
will be deemed to be received on December 31 of such year if actually paid
during the following January. Accordingly, those dividends, to the extent
taxable, will be taxable to shareholders in the year declared, and not in
the year in which shareholders actually receive the dividend.
Not later than sixty days after the end of each fiscal year of the
Fund, the Fund will send to its shareholders the written notice required
by the Code designating the amount of its dividends that constitute
exempt-interest dividends, the amount of the dividends and distributions
which are ordinary taxable income and the amount of distributions which
are taxable to shareholders as long-term capital gains.
Every person required to file a tax return must disclose on that
return the amount of exempt-interest dividends received from a Portfolio
during the taxable year. The disclosure of this amount is for information
purposes only. In addition, with respect to a shareholder who receives
exempt-interest dividends on shares held for less than six months, any
loss on the sale or exchange of such shares will, to the extent of the
amount of such exempt-interest dividends, be disallowed.
Interest income with respect to certain tax-exempt bonds, known as
"private activity" bonds, is a preference item for purposes of the
corporate and individual alternative minimum tax. To the extent that a
Portfolio invests in private activity bonds, shareholders of the Portfolio
will have preference items attributable to their proportionate shares of
the interest income received by the Portfolio from such bonds, thereby
increasing a Shareholders' alternative minimum taxable income. In
addition, a corporation must increase its alternative minimum taxable
income by 75 percent of the amount by which adjusted current earnings
exceed alternative minimum taxable income (without regard to this
provision or the alternative net operating loss deduction). Adjusted
current earnings are computed by making certain adjustments, which
generally follow the rules applicable to corporations in computing
earnings and profits. All tax-exempt dividends received by the corporate
shareholders of a Portfolio are included in their current earnings, thus,
increasing a corporate shareholders' alternative minimum taxable income.
The Code imposes a four percent nondeductible excise tax on a
regulated investment company, such as a Portfolio of the Fund, if the
company does not distribute to its shareholders during the calendar year
an amount equal to 98 percent of the investment company's taxable income,
with certain adjustments, for such calendar year, plus 98 percent of the
company's capital gain net income for the one-year period ending on
October 31 of such calendar year. In addition, an amount equal to any
undistributed investment company taxable income or capital gain net income
from the previous calendar year must also be distributed to avoid the
excise tax. The excise tax is imposed on the amount by which a company
does not meet the foregoing distribution requirements. The excise tax will
not, however, generally apply to the tax-exempt income of a regulated
investment company, such as a Portfolio of the Fund, that pays
exempt-interest dividends. In addition, if a Portfolio has taxable income
that would be subject to the excise tax, the Fund intends to distribute
the income of such Portfolio so as to avoid payment of the excise tax.
At June 30, 1994, the Fund had a net capital loss carryforward of
approximately $4,250,000 in the Limited Maturity Portfolio, of which
$1,416,000 expires in 1997, $2,787,000 expires in 1998, $22,000 expires in
1999 and $25,000 expires in 2002. These will be available to offset like
amounts of any future taxable gains.
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<PAGE> 86
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For
the complete provisions, reference should be made to the pertinent Code
sections and the Treasury Regulations promulgated thereunder. The Code and
these Regulations are subject to change by legislative or administrative
action.
SYSTEMATIC WITHDRAWAL PLANS
A holder of Class A or Class D shares of any of the three Portfolios
may elect to make systematic withdrawals of either a monthly or calendar
quarterly basis as provided below. Quarterly withdrawals of such shares
are available for shareholders who have acquired Class A or Class D shares
having a value, based upon cost or the current offering price, of $5,000
or more, and monthly withdrawals are available for shareholders with Class
A or Class D shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The
shareholder may specify either a dollar amount or a percentage of the
value of his Class A or Class D shares. Redemptions will be made at net
asset value as determined at the close of business on the New York Stock
Exchange (currently 4:00 pm New York time) on the 24th day of each month
or the 24th day of the last month of each quarter, whichever is
applicable. If the Exchange is not open for business on that day, Class A
or Class D shares will be redeemed at the close of business on the
following business day. The check for the withdrawal payment will be
mailed or the direct deposit for the withdrawal payment will be made on
the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all Class A or
Class D shares in the Investment Account are automatically reinvested in
Class A or Class D shares, respectively. A shareholder's Systematic
Withdrawal Plan Account is automatically reinvested in shares of the same
class. A shareholder's Systematic Withdrawal Plan may be terminated at any
time, without charge or penalty, by the shareholder, the Fund, the Fund's
Transfer Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or
income. Each withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder's original
investment may be correspondingly reduced. Purchases of additional Class A
or Class D shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax
liabilities. The Fund will not knowingly accept additions to an Investment
Account in which an election has been made to receive systematic
withdrawals unless such addition is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not
be made into an Investment Account in which the shareholder has elected to
make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA|Pr
or CBA|Pr Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $25. The proceeds
of systematic redemptions will be posted to the shareholder's account five
business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each
month, bimonthly systematic redemptions will be made at net asset value on
the first Monday of every other month, and quarterly, semiannual or annual
redemptions are made at net asset value on the first Monday of months
selected at the shareholder's option. If the first Monday of the month is
a holiday, the redemption will be processed at net asset value on the next
business day. The Systematic Redemption Program is not available if Fund
shares are being purchased within the account pursuant to the Automatic
Investment Program. For more information on the Systematic Redemption
Program, eligible shareholders should contact their Financial Consultant.
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<PAGE> 87
EXCHANGE PRIVILEGE
Shareholders of each class of shares of a Portfolio of the Fund have
an exchange privilege with other Portfolios of the Fund and with certain
other MLAM-advised mutual funds listed below. Under the Merrill Lynch
Select PricingSM System, Class A shareholders may exchange Class A shares of
a Portfolio for Class A shares of another Portfolio or a second
MLAM-advised mutual fund if the shareholder holds any Class A shares of
the other Portfolio or second fund in his account in which the exchange is
made at the time of the exchange or is otherwise eligible to purchase
Class A shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of another Portfolio or a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares
of the other Portfolio or second fund in his account at the time of the
exchange and is not otherwise eligible to acquire Class A shares of the
other Portfolio or second fund, the shareholder will receive Class D
shares of the other Portfolio or second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of another
Portfolio or a second MLAM-advised mutual fund at any time as long as, at
the time of the exchange, the shareholder holds Class A shares of the
other Portfolio or second fund in the account in which the exchange is
made or is otherwise eligible to purchase Class A shares of the other
Portfolio or second fund. Class B, Class C and Class D of a Portfolio
shares will be exchangeable with shares of the same class of another
Portfolio or other MLAM-advised mutual funds. For purposes of computing
the CDSC that may be payable upon a disposition of the shares acquired in
the exchange, the holding period for the previously owned shares of the
Portfolio is "tacked" to the holding period of the newly acquired shares
of the other Portfolio or other Fund as more fully described below. Class
A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated
below as available for exchange by holders of Class A, Class B, Class C or
Class D shares. Shares with a net asset value of at least $100 are
required to qualify for the exchange privilege, except that there is no
minimum value of shares which must be exchanged by shareholders of the
Insured Portfolio who exchange their shares for shares of either the
National Portfolio or the Limited Maturity Portfolio and any shares
utilized in an exchange must have been held by the shareholder for at
least 15 days. The exchange privilege available to participants in the
Merrill Lynch BlueprintSM Program may be different from that available to
other investors.
Exchanges of Class A and Class D shares of a Portfolio outstanding
("outstanding Class A and Class D shares") for Class A or Class D shares
of another Portfolio or another MLAM-advised mutual fund ("new Class A or
Class D shares) are transacted on the basis of relative net asset value
per Class A or Class D share respectively, plus an amount equal to the
difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have
taken place, the 'sales charge previously paid' will include the aggregate
of the sales charges paid with respect to such Class A or Class D shares
in the initial purchase and any subsequent exchange. Class A or Class D
shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For
purposes of the exchange privilege, dividend reinvestment Class A or Class
D shares will be exchanged into the Class A or Class D shares of the other
funds or into shares of the Class A or Class D money market funds without
a sales charge.
In addition, the Fund offers to exchange Class B and Class C shares of
a Portfolio outstanding ("outstanding Class B or Class C shares") for
Class B or Class C shares respectively of another Portfolio or any of the
other MLAM-advised mutual funds ("new Class B or Class C shares") on the
basis of relative net asset value per Class B or Class C share, without
the payment of any CDSC that might otherwise be due on redemp-
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<PAGE> 88
tion of the outstanding shares. Class B shareholders of a Portfolio
exercising the exchange privilege will continue to be subject to that
Portfolio's contingent deferred sales charge schedule if such schedule is
higher than the CDSC schedule relating to the new Class B shares acquired
through the use of the exchange privilege. In addition, Class B shares of the
Portfolio acquired through the use of the exchange privilege will be subject
to that Portfolio's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the fund or Portfolio from which
the exchange has been made. For purposes of computing the sales charge that
may be payable on a disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B shares is "tacked" to the holding
period of the new Class B or Class C shares. For example, an investor may
exchange Class B or Class C shares of the National Portfolio for those of the
Merrill Lynch Basic Value Fund, Inc. after having held the National Portfolio
Class B shares for two and a half years. The 2% contingent deferred sales
charge that generally would apply to a redemption would not apply to the
exchange. Two years later the investor may decide to redeem the Class B
shares of Merrill Lynch Basic Value Fund, Inc. and receive cash. There will
be no contingent deferred sales charge due on this redemption, since by
"tacking" the two and a half year holding period of National Portfolio Class
B shares to the two year holding period for the Merrill Lynch Basic Value
Fund, Inc. Class B shares, the investor will be deemed to have held the new
Class B shares for more than four years.
Shareholders also may exchange shares of the Fund into shares of a
money market fund advised by the Investment Adviser or its affiliates, but
the period of time that Class B or Class C shares are held in a Class B or
Class C money market fund will not count towards satisfaction of the
holding period requirement for purposes of reducing the CDSC or, with
respect to the Class B shares, towards satisfaction of the conversion
period. However, shares of a Class B money market fund which were acquired
as a result of an exchange for Class B or Class C shares of a fund may, in
turn, be exchanged back into Class B or Class C shares of any fund
offering such shares, in which event the holding period for Class B or
Class C shares of the fund will be aggregated with previous holding
periods for purposes of reducing the CDSC. Thus, for example, an investor
may exchange Class B shares of the National Portfolio for shares of
Merrill Lynch Institutional Fund ("Institutional Fund") after having
held the Class B shares for two and a half years, and two years later
decide to redeem the shares of Institutional Fund for cash. At the time of
this redemption, the 2% CDSC that would have been due had the Class B
shares of the National Portfolio been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If, instead of
such redemption the shareholder exchanged such shares for Class B shares
of a fund which the shareholder continued to hold for an additional one
and a half years, any subsequent redemption will not incur a CDSC.
A list of the funds into which exchanges may be made and their
respective investment objectives is as follows:
Funds Issuing Class A, Class B, Class C and Class D Shares
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC.......High current income consistent with a policy
of limiting the degree of fluctuation in net
asset value by investing primarily in a
portfolio of adjustable rate securities,
consisting principally of mortgage-backed and
asset-backed securities.
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<PAGE> 89
MERRILL LYNCH AMERICAS INCOME
FUND, INC..................A high level of current income, consistent
with prudent investment risk, by investing
primarily in debt securities denominated in a
currency of a country located in the Western
Hemisphere (i.e., North and South America and
the surrounding waters).
MERRILL LYNCH ARIZONA LIMITED
MATURITY MUNICIPAL BOND
FUND.......................A portfolio of Merrill Lynch Multi-State
Limited Maturity Muncipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal
and Arizona income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade Arizona
Municipal Bonds.
MERRILL LYNCH ARIZONA
MUNICIPAL BOND FUND........A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arizona income
taxes as is consistent with prudent
investment management.
MERRILL LYNCH ARKANSAS
MUNICIPAL BOND FUND........A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arkansas
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH ASSET GROWTH
FUND, INC..................High total investment return, consistent with
prudent risk, from investment in United
States and foreign equity, debt and money
market securities, the combination of which
will be varied both with respect to types of
securities and markets in response to
changing market and economic trends.
MERRILL LYNCH ASSET INCOME
FUND, INC..................A high level of current income through
investment primarily in United States fixed
income securities.
MERRILL LYNCH BALANCED FUND
FOR INVESTMENT AND
RETIREMENT................. As high a level of total investment return as
is consistent with a relatively low level of
risk through investment in common stocks and
other types of securities, including fixed
income securities and convertible securities.
MERRILL LYNCH BASIC VALUE
FUND, INC..................Capital appreciation and, secondarily, income
by investing in securities, primarily
equities, that are under-valued and therefore
represent basic investment value.
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<PAGE> 90
MERRILL LYNCH CALIFORNIA
MUNICIPAL BOND FUND........Currently the only portfolio of Merrill Lynch
California Municipal Series Trust, a series
fund, whose objective is to provide as high a
level of income exempt from Federal and
California income taxes as is consistent with
prudent investment management.
MERRILL LYNCH CALIFORNIA
INSURED MUNICIPAL BOND
FUND.......................A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and California income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of
insured California Municipal Bonds.
MERRILL LYNCH CALIFORNIA
LIMITED MATURITY MUNCIPAL
BOND FUND................. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
shareholders with as high a level of income
exempt from Federal and California income
taxes as is consistent with prudent
investment management through investment in a
portfolio primarly of intermediate-term
investment grade California Municipal Bonds.
MERRILL LYNCH CAPITAL FUND,
INC........................The highest total investment return
consistent with prudent risk through a fully
managed investment policy utilizing equity,
debt and convertible securities.
MERRILL LYNCH COLORADO
MUNICIPAL BOND FUND........A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Colorado
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH CONNECTICUT
MUNICIPAL BOND FUND........A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Connecticut
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH CORPORATE BOND
FUND, INC. ................Current income from three diversified
portfolios of fixed income securities.
MERRILL LYNCH DEVELOPING
CAPITAL MARKETS FUND, INC. Long-term appreciation through investment in
securities, principally equities, of issuers
in countries having smaller capital markets.
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<PAGE> 91
MERRILL LYNCH DRAGON FUND,
INC.........................Capital appreciation primarily through
investment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin.
MERRILL LYNCH EUROFUND ......Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Western Europe.
MERRILL LYNCH FEDERAL
SECURITIES TRUST ..........High current return through investments in
U.S. government and governmental agency
securities, including GNMA mortgage-
backed certificates and other mortgage-backed
government securities.
MERRILL LYNCH FLORIDA LIMITED
MATURITY MUNICIPAL BOND
FUND.......................A portfolio of Merrill Lynch Multi-State
Limited Maturity Series Trust, a series fund,
whose objective is to provide as high a level
of income exempt from Federal income taxes as
is consistent with prudent investment
management while seeking to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes through investment in
a portfolio primarily of intermediate-term
investment grade Florida Municipal Bonds.
MERRILL LYNCH FLORIDA
MUNICIPAL BOND FUND........A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as is
consistent with prudent investment management
while seeking to offer shareholders the
opportunity to own securities exempt from
Florida intangible personal property taxes.
MERRILL LYNCH FUND FOR
TOMORROW, INC..............Long-term growth through investment in a
portfolio of high quality securities,
primarily common stock, potentially
positioned to benefit from demographic and
cultural changes as they affect consumer
markets.
MERRILL LYNCH FUNDAMENTAL
GROWTH FUND, INC...........Long-term growth through investment in a
diversified portfolio of equity securities
placing particular emphasis on companies that
have exhibited above-average growth rates in
earnings.
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<PAGE> 92
MERRILL LYNCH GLOBAL
ALLOCATION FUND, INC.......High total investment return, consistent with
prudent risk, through a fully-managed
investment policy utilizing United States and
foreign equity, debt and money market
securities, the combination of which will be
varied from time to time both with respect to
the types of securities and markets in
response to changing market and economic
trends.
MERRILL LYNCH GLOBAL BOND
FUND FOR INVESTMENT AND
RETIREMENT.................High total investment return by investing in
a global portfolio of debt investments
denominated in various currencies and
multinational currency units.
MERRILL LYNCH GLOBAL
CONVERTIBLE FUND, INC. ....High total return from investment primarily
in an internationally diversified portfolio
of convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of
debt securities or preferred stock and
warrants or options.
MERRILL LYNCH GLOBAL
HOLDINGS, INC. (residents
of Arizona must meet
investor suitability
standards).................The highest total investment return
consistent with prudent risk through
worldwide investment in an internationally
diversified portfolio of securities.
MERRILL LYNCH GLOBAL
RESOURCES TRUST............Long-term growth and protection of capital
from investment in securities of foreign and
domestic companies that possess substantial
natural resource assets.
MERRILL LYNCH GLOBAL SMALLCAP
FUND, INC..................Long-term growth of capital by investing
primarily in equity securities of companies
with relatively small market capitalizations
located in various foreign countries and in
the United States.
MERRILL LYNCH GLOBAL UTILITY
FUND, INC..................Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt securities
issued by domestic and foreign companies
primarily engaged in the ownership or
operation of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
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<PAGE> 93
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT..Growth of capital and, secondarily, income
from investment in a diversified portfolio of
equity securities placing principal emphasis
on those securities which management of the
fund believes to be undervalued.
MERRILL LYNCH HEALTHCARE
FUND, INC. (residents of
Wisconsin must meet
investor suitability
standards).................Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare.
MERRILL LYNCH INTERNATIONAL
EQUITY FUND................Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
MERRILL LYNCH LATIN AMERICA
FUND....................... Capital appreciation by investing primarily
in Latin American equity and debt securities.
MERRILL LYNCH MARYLAND
MUNICIPAL BOND FUND........A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Maryland
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MASSACHUSETTS
LIMITED MATURITY MUNICIPAL
BOND FUND..................A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal
and Massachusetts income taxes as is
consistent with prudent investment management
through investment in a portfolio primarily
of intermediate-term investment grade
Massachusetts Municipal Bonds.
MERRILL LYNCH MASSACHUSETTS
MUNICIPAL BOND FUND........A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Massachusetts
income taxes as is consistent with prudent
investment management.
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<PAGE> 94
MERRILL LYNCH MICHIGAN
LIMITED MATURITY MUNICIPAL
BOND FUND..................A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal
and Michigan income taxes as is consistent
with prudent investment in a portfolio
primarily of intermediate-term investment
grade Michigan Municipal Bonds.
MERRILL LYNCH MICHIGAN
MUNICIPAL BOND FUND .......A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Michigan
personal income taxes as is consistent with
prudent investment management.
MERRILL LYNCH MINNESOTA
MUNICIPAL BOND FUND .......A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Minnesota
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MUNICIPAL
INTERMEDIATE TERM FUND ....Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level as
possible of income exempt from Federal income
taxes by investing in investment grade
obligations with a dollar weighted average
maturity of five to twelve years.
MERRILL LYNCH NEW JERSEY
LIMITED MATURITY MUNICIPAL
BOND FUND..................A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal
and New Jersey income taxes as is consistent
with prudent investment management through a
portfolio primarily of intermediate-term
investment grade New Jersey Municipal Bonds.
MERRILL LYNCH NEW JERSEY
MUNICIPAL BOND FUND .......A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Jersey
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH NEW MEXICO
MUNICIPAL BOND FUND........A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Mexico
income taxes as is consistent with prudent
investment management.
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<PAGE> 95
MERRILL LYNCH NEW YORK
LIMITED MATURITY MUNICIPAL
BOND FUND .................A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal,
New York State and New York City income taxes
as is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade New York Municipal Bonds.
MERRILL LYNCH NEW YORK
MUNICIPAL BOND FUND .......A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal, New York State
and New York City income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH NORTH CAROLINA
MUNICIPAL BOND FUND........A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and North Carolina
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH OHIO MUNICIPAL
BOND FUND..................A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Ohio income
taxes as is consistent with prudent
investment management.
MERRILL LYNCH OREGON
MUNICIPAL BOND FUND........A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Oregon income
taxes as is consistent with prudent
investment management.
MERRILL LYNCH PACIFIC FUND,
INC. ..................... Capital appreciation primarily through
investment in equities of corporations
domiciled in Far Eastern or Western Pacific
countries, including Japan, Australia, Hong
Kong and Singapore.
MERRILL LYNCH PENNSYLVANIA
LIMITED MATURITY MUNICIPAL
BOND FUND..................A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal
and Pennsylvania income taxes as is
consistent with prudent investment management
through investment in a portfolio primarily
of intermediate-term investment grade
Pennsylvania Municipal Bonds.
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<PAGE> 96
MERRILL LYNCH PENNSYLVANIA
MUNICIPAL BOND FUND........A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Pennsylvania
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH PHOENIX FUND,
INC. ......................Long-term growth of capital from investing in
equity and fixed income securities, including
tax-exempt securities, of issuers in weak
financial condition or experiencing poor
operating results that are undervalued
relative to the assessment of the current or
prospective condition of such issuer.
MERRILL LYNCH SHORT-TERM
GLOBAL INCOME FUND, INC. ..As high a level of current income as is
consistent with prudent investment management
from a global portfolio of high quality debt
securities denominated in various currencies
and multinational currency units and having
remaining maturities not exceeding three
years.
MERRILL LYNCH SPECIAL VALUE
FUND, INC. ................Long-term growth of capital from investments
in securities, primarily common stocks, or
relatively small companies believed to have
special investment value and emerging growth
companies regardless of size.
MERRILL LYNCH STRATEGIC
DIVIDEND FUND..............Long-term total return from investment in
dividend-paying common stocks which yield
more than Standard & Poor's 500 Composite
Stock Price Index.
MERRILL LYNCH TECHNOLOGY
FUND, INC. ................Long-term capital appreciation through
worldwide investment in equity securities of
companies that derive or are expected to
derive a substantial portion of their sales
from products and services in technology.
MERRILL LYNCH TEXAS MUNICIPAL
BOND FUND .................A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as is
consistent with prudent investment management
from a portfolio of long-term, investment
grade obligations issued by the State of
Texas, its political subdivisions, agencies
and instrumentalities.
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<PAGE> 97
MERRILL LYNCH UTILITY INCOME
FUND, INC..................High current income through investment in
equity and debt securities issued by
companies which are primarily engaged in the
ownership or operation of facilities used to
generate, transmit or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH WORLD INCOME
FUND, INC..................High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies, including
multinational currency units.
Class A Share Money Market
Funds:
MERRILL LYNCH READY ASSETS
TRUST..................... Preservation of capital, liquidity and the
highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in which
the Trust invests.
MERRILL LYNCH RETIREMENT
RESERVES MONEY FUND
(available only for
exchanges within certain
retirement plans)..........Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund, whose
objectives are current income, preservation
of capital and liquidity available from
investing in a diversified portfolio of
short-term money market securities.
MERRILL LYNCH U.S.A.
GOVERNMENT RESERVES........Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
MERRILL LYNCH U.S. TREASURY
MONEY FUND.................Preservation of capital, liquidity and
current income through investment exclusively
in a diversified portfolio of short-term
marketable securities which are direct
obligations of the U.S. Treasury.
Class B, Class C and Class D
Share Money Market Funds:
MERRILL LYNCH GOVERNMENT
FUND......................A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities
issued or guranteed by the U.S. Government,
its agencies and instrumentalities and in
repurchase agreements secured by such
obligations.
37
<PAGE> 98
MERRILL LYNCH INSTITUTIONAL
FUND...................... A portoflio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high-quality portfolio of
money market securities.
MERRILL LYNCH INSTITUTIONAL
TAX-EXEMPT FUND............A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income exempt
from Federal income taxes, preservation of
capital and liquidity available from
investing in a diversified portfolio of
short-term, high quality municipal bonds.
MERRILL LYNCH TREASURY FUND..A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct
obligations of the U.S. Treasury and up to
10% of its total assets in repurchase
agreements secured by such obligations.
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to
be made. Exercise of the exchange privilege is treated as a sale for
Federal income tax purposes and, depending on the circumstances, a short-
or long-term capital gain or loss may be realized. In addition, a
shareholder exchanging shares of any of the funds may be subject to a
backup withholding tax unless such shareholder certifies under penalty of
perjury that the taxpayer identification number on file with any such fund
is correct and that such shareholder is not otherwise subject to backup
withholding. See "Dividends, Distributions and Taxes" below.
To exercise the Exchange Privilege, shareholders should contact their
listed dealer, who will advise the Fund of the exchange, or the
shareholder may write to the Transfer Agent requesting that the exchange
be effected. Such letter must be signed exactly as the account is
registered with signature(s) guaranteed by "eligible guarantor
institution" (including, for example, Merrill Lynch branch offices and
certain other financial institutions) as such is defined in Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended, the existence and
validity of which may be verified by the transfer agent through the use of
industry publications. Shareholders of the Fund, and shareholders of the
other funds described above with shares for which certificates have not
been issued may exercise the Exchange Privilege by wire through their
securities dealers. The Fund reserves the right to require a properly
completed Exchange Application. These funds may suspend the continuous
offering of their shares to the public at any time and may thereafter
resume such offering from time to time.
The Exchange Privilege may be modified or terminated at any time on 60
days' notice. The Fund reserves the right to limit the number of times an
investor may exercise the Exchange Privilege. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally
may be made.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return
and other total return data, as well as yield and tax equivalent yield, in
advertisements or information furnished to present or prospective
shareholders. Total return yield, and tax equivalent yield figures are based
on the Fund's historical performance and are
38
<PAGE> 99
not intended to indicate future performance. Average annual total return,
yield and tax equivalent yield are determined separately for Class A, Class
B, Class C and Class D shares, in accordance with formulas specified by the
Securities and Exchange Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period in
the case of Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total
return and aggregate total return performance data, both as a percentage
and as a dollar amount based on a hypothetical $1,000 investment, for
various periods other than those noted below. Such data will be computed
as described above, except that, (1) as required by the periods of the
quotations, actual annual, annualized or aggregate data, rather than
average annual data, may be quoted (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data
calculation of including or excluding the maximum applicable sales
charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of
return reflect compounding of return. Aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of
time.
Set forth below is total return information for the Class A and Class
B shares of the Insured Portfolio and National Portfolio and shares of the
Limited Maturity Portfolio for the periods indicated. Since Class C and
Class D Shares have not been issued prior to the date of this Statement of
Additional Information, performance information concerning Class C and
Class D shares is not yet provided.
<TABLE>
<CAPTION>
Expressed as a Percentage Based on Redeemable Value of a Hypothetical $1,000
a Hypothetical $1,000 Investment Investment at the End of the Period
---------------------------------- -----------------------------------------
Limited Limited
National Insured Maturity National Insured Maturity
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Average Annual Total Return (including
maximum applicable sales charges)
One Year Ended June 30, 1994
Class A ............................... (4.45)% (5.03)% 1.27% $ 955.50 $ 949.70 $1,012.70
Class B ............................... (5.03) (5.44) 1.00 949.70 945.60 1,010.00
Five Years Ended June 30, 1994
Class A................................ 6.67 6.62 5.20 1,381.20 1,377.80 1,288.40
Class B................................ 6.72 6.67 - 1,384.50 1,381.00 -
Ten Years Ended June 30, 1994 .......... 9.84 9.61 5.69 2,555.90 2,503.80 1,739.60
Class B shares 10/21/88-6/30/94 ........ 7.06 7.08 - 1,474.30 1,476.00 -
Class B shares 11/02/92-6/30/94 ........ - - 3.17 - - 1,053.10
39
<PAGE> 100
Annual Total Return
(excluding maximum applicable sales charge)
Year Ended June 30,
1994
(Class A) ............................. (0.47)% (1.08)% 2.30% $ 995.30 $ 989.20 $1,023.00
(Class B) ............................. (1.39) (1.81) 1.98 986.10 981.90 1,019.80
1993
(Class A) ............................. 12.21 12.43 5.28 1,122.10 1,124.30 1,052.80
(Class B)* ............................ 11.47 11.45 3.26 1,114.70 1,114.50 1,032.60
1992
(Class A) ............................. 13.09 12.11 6.93 1,130.90 1,121.10 1,069.30
(Class B) ............................. 12.25 11.27 - 1,122.50 1,112.70 -
1991
(Class A) ............................. 7.94 8.84 6.45 1,079.40 1,088.40 1,064.50
(Class B) ............................. 7.14 8.02 - 1,071.40 1,080.20 -
1990
(Class A) ............................. 5.53 5.76 6.16 1,055.30 1,057.60 1,061.60
(Class B) ............................. 4.74 4.98 - 1,047.40 1,049.80 -
1989
(Class A) ............................. 11.89 11.62 5.96 1,118.90 1,116.20 1,059.60
(Class B) (10/21/88-6/30/89) .......... 6.48 6.88 - 1,064.80 1,068.80 -
1988 ................................... 6.89 7.75 4.83 1,068.90 1,077.50 1,048.30
1987 ................................... 8.00 6.94 4.99 1,080.00 1,069.40 1,049.90
1986 ................................... 17.09 15.62 6.50 1,170.90 1,156.20 1,065.00
1985 ................................... 22.36 22.21 8.72 1,223.60 1,222.10 1,087.20
1984 ................................... 4.44 3.00 5.58 1,044.40 1,030.00 1,055.80
1983 ................................... 32.66 31.60 8.59 1,326.60 1,316.00 1,085.90
1982 ................................... 2.73 (.33) 7.96 1,027.30 996.70 1,079.60
1981 ................................... (2.72) (10.27) 4.55 972.80 897.30 1,045.50
1980 ................................... 4.21 (5.88) 5.91 1,042.10 941.20 1,059.10
1979 ................................... - 5.48 - - 1,054.80 -
</TABLE>
----------
* November 2, 1992 to June 30, 1994 for Limited Maturity Portfolio.
<TABLE>
<CAPTION>
Aggregate Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C> <C> <C>
From Inception to June 30, 1994*
Class A.............................. 268.77% 192.19% 138.41% $3,687.70 $2,921.90 $2,384.10
Class B ............................. 47.43 47.60 5.31 1,474.30 1,476.00 1,053.10
</TABLE>
----------
* Commencement of operations is November 2, 1979 for Class A shares of
National Portfolio and shares of Limited Maturity Portfolio, October 21,
1977 for Class A shares of Insured Portfolio, and October 21, 1988 for
Class B shares of National Portfolio and Insured Portfolio, and November
2, 1992 for Class B shares of Limited Maturity Portfolio.
40
<PAGE> 101
In order to reflect the reduced sales charges applicable to certain
investors the performance data in advertisements distributed to investors
whose purchases are subject to reduced sales load, in the case of Class A
or Class D shares, or waiver of the contingent deferred sales charge in
the case of the Class B and Class C shares, may take into account the
reduced, and not the maximum, sales charge or may not take into account
the contingent deferred sales charge and therefore may reflect greater
total return since, due to the reduced sales charge, a lower amount of
expenses is deducted.
The Fund's total return may be expressed either as a percentage or as
a dollar amount in order to illustrate such total return on a hypothetical
investment in the Fund at the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing
(a) the net income based on the yield of each security earned during the
period by (b) the average daily number of shares outstanding during the
period that were entitled to receive dividends multiplied by the maximum
offering price per share on the last day of the period. Tax equivalent
yield quotations will be computed by dividing (a) the part of the Fund's
yield that is tax-exempt by (b) one minus a stated tax rate and adding the
result to that part, if any, of the Fund's yield that is not tax-exempt.
The yield for the 30-day period ending June 30, 1994 for National
Portfolio Class A shares was 5.59%, for National Portfolio Class B shares
was 5.05%, for Insured Portfolio Class A shares was 5.20%, for Insured
Portfolio Class B shares was 4.65%, for Limited Maturity Portfolio Class A
shares was 3.89%, and for Limited Maturity Portfolio Class B shares was
3.56%. The tax-equivalent yield for the same period (based on a tax rate
of 28%) for National Portfolio Class A shares was 7.76%, for National
Portfolio Class B shares was 7.01%, for Insured Portfolio Class A shares
was 7.22%, for Insured Portfolio Class B shares was 6.46%, for Limited
Maturity Portfolio Class A shares was 5.40%, and for Limited Maturity
Portfolio Class B shares was 4.94%.
Total return, yield and tax equivalent yield figures are based on the
Fund's historical performance and are not intended to indicate future
performance. The Fund's total return, yield and tax equivalent yield will
vary depending on market conditions, the securities comprising the Fund's
portfolio, the Fund's operating expenses and the amount of realized and
unrealized net capital gains or losses during the period. The value of an
investment in the Fund will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
ADDITIONAL INFORMATION
Description of Municipal Bonds
Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to finance various privately-
operated facilities, including pollution control facilities. Such
obligations are included within the term Municipal Bonds if the interest
paid thereon is exempt from federal income tax. Municipal Bonds also
include short-term tax-exempt municipal obligations such as tax
anticipation notes, bond anticipation notes, revenue anticipation notes,
variable rate demand notes and Public Housing Authority notes that are
fully secured by a pledge of the full faith and credit of the United
States.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special obligation" bonds. General
obligation bonds are secured by the issuer's pledge of faith, credit, and
taxing power for the payment of principal and interest. Revenue or special
obligation bonds are payable only from the
41
<PAGE> 102
revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific
revenue source such as from the user of the facility being financed.
Industrial development bonds are in most cases revenue bonds and do not
generally constitute the pledge of the credit or taxing power of the
issuer of such bonds. The payment of the principal and interest on such
industrial revenue bonds depends solely on the ability of the user of the
facilities 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. The Portfolio may also include "moral obligation" bonds
which are normally issued by special purpose public authorities. If an
issuer of moral obligation bonds is unable to meet its obligations, the
repayment of such bonds becomes a moral commitment but not a legal
obligation of the state or municipality in question.
Municipal Bonds may at times be purchased or sold on a delayed
delivery basis or a when-issued basis. These transactions arise when
securities are purchased or sold by a Portfolio with payment and delivery
taking place in the future, often a month or more after the purchase. The
payment obligation and the interest rate are each fixed at the time the
buyer enters into the commitment. The Fund will only make commitments to
purchase such securities with the intention of actually acquiring the
securities, but the Fund may sell these securities prior to the settlement
date if it is deemed advisable. Purchasing Municipal Bonds on a
when-issued basis involves the risk that the yields available in the
market when the delivery takes place may actually be higher than those
obtained in the transaction itself; if yields so increase, the value of
the when-issued obligation will generally decrease. When a Portfolio
engages in when-issued and delayed delivery transactions, the Portfolio
relies on the buyer or seller, as the case may be, to consummate the
trade. Failure of the buyer or seller to do so may result in the
Portfolio's missing the opportunity of obtaining a price considered to be
advantageous. The Fund will maintain a separate account as its custodian
bank consisting of cash or liquid Municipal Bonds (valued on a daily
basis) equal at all times to the amount of the when-issued commitment.
Variable rate demand notes ("VRDNs") are tax-exempt obligations
which contain a floating or variable interest rate adjustment formula and
an unconditional right of demand to receive payment of the unpaid
principal balance plus accrued interest upon a short notice period not to
exceed seven days. The interest rates are adjustable at intervals ranging
from daily up to six months to some prevailing market rate for similar
investments, such adjustment formula being calculated to maintain the
market value of the VRDN at approximately the par value of the VRDN upon
the adjustment date. The adjustments are typically based upon the prime
rate of a bank or some other appropriate interest rate adjustment index.
The Fund may also invest in VRDNs in the form of participation
interests ("Participating VRDNs") in variable rate tax-exempt
obligations held by a financial institution, typically a commercial bank
("institution"). Participating VRDNs provide the Fund with a specified
undivided interest (up to 100%) of the underlying obligation and the right
to demand payment of the unpaid principal balance plus accrued interest on
the Participating VRDNs from the institution upon a specified number of
days' notice, not to exceed seven days. In addition, the Participating
VRDN is backed by an irrevocable letter of credit or guaranty of the
institution. The Fund has an undivided interest in the underlying
obligation and thus participates on the same basis as the institution in
such obligation except that the institution typically retains fees out of
the interest paid on the obligation for servicing the obligation,
providing the letter of credit and issuing the repurchase commitment.
The Fund has been advised by its counsel to the effect that the
interest received on Participating VRDNs will be treated as interest from
tax-exempt obligations as long as the Fund does not invest more than a
limited amount (not more than 20%) of its total assets in such investments
and certain other conditions are met. It is contemplated that the Fund
will not invest more than a limited amount of its total assets in
Participating VRDNs.
42
<PAGE> 103
Yields on Municipal Bonds are dependent on a variety of factors,
including the general condition of the money market and of the municipal
bond market, the size of a particular offering, the maturity of the
obligation, and the rating of the issue. The ability of a Portfolio to
achieve its investment objective is also dependent on the continuing
ability of the issuers of the Municipal Bonds in which the Portfolio
invests to meet their obligations for the payment of interest and
principal when due. There are variations in the risks involved in holding
Municipal Bonds, within a particular classification and between
classifications, depending on numerous factors. Furthermore, the rights of
holders of Municipal Bonds and the obligations of the issuers of such
Municipal Bonds may be subject to applicable bankruptcy, insolvency and
similar laws and court decisions affecting the rights of creditors
generally and such laws, if any, that may be enacted by Congress or state
legislatures imposing a moratorium on the payment of principal and
interest or imposing other constraints or conditions on the payment of
principal of and interest on Municipal Bonds.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption
for interest on Municipal Bonds. It may be expected that similar proposals
may be introduced in the future. If such a proposal were enacted, the
ability of the Portfolios to pay "exempt-interest" dividends might be
adversely affected and the Fund would re-evaluate its investment objective
and policies and consider changes in its structure. See "Dividends,
Distributions and Taxes."
Description of Temporary Investments
The short-term money market securities in which the Portfolios may
invest as temporary investments consist of United States Government
securities, United States Government agency securities, domestic bank
certificates of deposit and bankers' acceptances, short-term corporate
debt securities such as commercial paper, and repurchase agreements. The
money market securities must have a stated maturity not in excess of one
year from the date of purchase. U.S. Government securities consist of
various types of marketable securities issued by or guaranteed as to
principal and interest by the U.S. Government and supported by the full
faith and credit of the U.S. Treasury. U.S. Government agency securities
consist of debt securities issued by government sponsored enterprises,
federal agencies and international institutions. Such securities are not
direct obligations of the Treasury but involve government sponsorship or
guarantees by government agencies or enterprises. The Fund has established
the following standards with respect to money market securities in which
the Portfolios invest. Commercial paper investments at the time of
purchase must be rated "A" by Standard & Poor's Corporation or "Prime"
by Moody's Investors Service, Inc. or, if not rated, issued by companies
having an outstanding debt issue rated at least "A" by Standard & Poor's
or Moody's. Investments in corporate bonds and debentures (which must have
maturities at the date of purchase of one year or less) must be rated at
the time of purchase at least "A" by Standard & Poor's or by Moody's.
The Portfolios may not invest in any securities issued by a commercial
bank or a savings and loan association unless the bank or association is
organized and operating in the United States, has total assets of at least
one billion dollars and is a member of the Federal Deposit Insurance
Corporation.
Insurance on Portfolio Securities
Set forth below is further information with respect to the Mutual Fund
Insurance Policies (the "Policies") which the Fund has obtained from
AMBAC Indemnity Corporation ("AMBAC"), Municipal Bond Investors
Assurance Corporation ("MBIA") and Financial Security Assurance Inc.
("FSA"), with respect to Insured Municipal Bonds held by the Insured
Portfolio (see "Investment Policies of the Portfolios-Insured Portfolio"
43
<PAGE> 104
in the Prospectus). During the fiscal year ended June 30, 1994, the
premium for the policies aggregated $74,901 or approximately 0.002% of the
average net assets of the Insured Portfolio. During the fiscal year ended
June 30, 1993, the premium for the Policies aggregated $162,176 or
approximately 0.01% of the average net assets of the Insured Portfolio.
In determining eligibility for insurance, AMBAC, MBIA and FSA have
applied their own standards, which correspond generally to the standards
they normally use in establishing the insurability of new issues of
Municipal Bonds and which are not necessarily the criteria which would be
used in regard to the purchase of Municipal Bonds by the Insured
Portfolio. The Policies do not insure (i) municipal securities ineligible
for insurance, or (ii) municipal securities which are no longer owned by
the Insured Portfolio. In addition, the AMBAC policy does not insure
municipal obligations which were insured as to the payment of principal
and interest at the time of their issuance by AMBAC.
The Policies do not guarantee the market value of the Insured
Municipal Bonds or the value of the shares of the Insured Portfolio. In
addition, if the provider of an original issuance insurance policy is
unable to meet its obligations under such policy or if the rating assigned
to the claims paying ability of any such insurer deteriorates, neither
AMBAC nor MBIA nor FSA has any obligation to insure any issue held by the
Insured Portfolio which is adversely affected by either of the above
described events. The AMBAC policy provides for an annual policy period,
which is renewable by the Fund for successive annual periods for so long
as the Fund is in compliance with the terms of the AMBAC policy. In
addition to the payment of premiums, the Policies require that the Insured
Portfolio notify AMBAC and MBIA as to all Municipal Bonds in the Insured
Portfolio and permit AMBAC and MBIA to audit records. The insurance
premiums are payable monthly by the Insured Portfolio in accordance with a
premium schedule which was furnished by AMBAC, MBIA and FSA at the time
the Policies were issued. Premiums are based upon the amounts covered and
the composition of the portfolio. AMBAC has reserved the right to change
the premium schedule for any renewal policy period as to any municipal
securities purchased by the Insured Portfolio during such renewal period.
The FSA policy and the MBIA policy both provide that the premium rate for
subsequent purchases by the Insured Portfolio of the same obligations will
be determined by FSA or MBIA as of the date of such purchases.
AMBAC has received a letter ruling from the Internal Revenue Service,
which holds in effect that insurance proceeds representing maturing
interest on defaulted municipal obligations paid by AMBAC to municipal
bond funds substantially similar to the Insured Portfolio, under policy
provisions substantially identical to the policy described herein, will be
excludable from federal gross income under Section 103(a) of the Internal
Revenue Code.
AMBAC insures the portfolio of the Insured Portfolio and the prompt
payment of the interest and principal of new issues of Municipal Bonds and
Municipal Bond portfolios of individuals, banks, trust companies,
corporations, insurance companies and units trusts. As of June 30, 1994,
the admitted assets of AMBAC were approximately $2.060 billion (unaudited)
with a qualified capital of approximately $766.7 million (unaudited).
Qualified capital consists of the statutory contingency reserve and
policyholders' surplus of the insurance company.
FSA insures the prompt payment of interest and principal of new issues
of Municipal Bonds and Municipal Bond portfolios of individuals, banks,
trust companies, corporations, insurance companies and unit trusts. As of
June 30, 1994, the total admitted assets (unaudited) of FSA were
approximately $604.8 million with a total capital and surplus (unaudited)
of approximately $367.7 million as reported to the Insurance Department of
the State of New York.
44
<PAGE> 105
MBIA insures the prompt payment of interest and principal of new
issues of Municipal Bonds and Municipal Bond portfolios of individuals,
banks, trust companies, corporations, insurance companies and unit trusts.
As of June 30, 1994, the total admitted assets of MBIA were approximately
$3.253 billion (unaudited) with total capital and surplus of approximately
$1,049 million (unaudited).
AMBAC has entered into reinsurance agreements with a number of
unaffiliated reinsurers, relating to the municipal bond insurance programs
of AMBAC including the insurance obtained by the Fund for the portfolio of
the Insured Portfolio.
The contracts of insurance relating to the Insured Portfolio and the
negotiations in respect thereof represent the only significant
relationship between AMBAC, MBIA and FSA and the Fund. Otherwise neither
AMBAC or any associate thereof, nor MBIA or any associate thereof, nor FSA
or any associate thereof has any material business relationship, direct or
indirect, with the Fund.
AMBAC, MBIA and FSA are subject to regulation by the department of
insurance in each state in which they are qualified to do business. Such
regulation, however, is not a guarantee that any of AMBAC, MBIA or FSA
will be able to perform on its contractual insurance in the event a claim
should be made thereunder at some time in the future.
The information relating to AMBAC, MBIA and FSA set forth above,
including the financial information, has been furnished by such
corporations. Financial information with respect to AMBAC, MBIA and FSA
appears in reports filed by AMBAC, MBIA and FSA with state insurance
regulatory authorities and is subject to audit and review by such
authorities. No representation is made herein as to the accuracy or
adequacy of such information with respect to AMBAC, MBIA or FSA or as to
the absence of material adverse changes in such information subsequent to
the date thereof.
Description of Financial Futures Contracts
Futures Contracts. 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 called for in the contract or, in some
instances, to make a cash settlement based upon the value of an instrument
or an index of values, at a specified future time for a specified price.
Although the terms of a contract call for actual delivery of the
underlying financial instrument, or for a cash settlement, in most cases
the contracts are closed out before the delivery date without the delivery
taking place. The Fund intends to close out its futures contracts prior to
the delivery date of such contracts.
The National and Limited Maturity Portfolios (the "Portfolios") may
sell futures contracts in anticipation of a decline in the value of their
investments in municipal bonds. The loss associated with any such decline
could be reduced without employing futures as a hedge by selling long-term
securities and either reinvesting the proceeds in securities with shorter
maturities or by holding assets in cash. This strategy, however, entails
increased transaction costs in the form of brokerage commissions and
dealer spreads and will typically reduce the Portfolio's average yields as
a result of the shortening of maturities.
The purchase or sale of a futures contract differs from the purchase
or sale of a security in that the total cash value reflected by the
futures contract is not paid. Instead, an amount of cash or securities
acceptable to the Fund's futures commission merchant ("FCM") and the
relevant contract market, which varies but is generally about 5% or less
of the contract amount, must be deposited with the FCM. This amount is
known as "initial margin," and represents a "good faith" deposit
assuring the performance of both the purchaser and the seller
45
<PAGE> 106
under the futures contract. Subsequent payments to and from the FCM, known
as "maintenance" or "variation margin," are required to be made on a
daily basis as the price of the futures contract fluctuates, making the
long or short position in the futures contract more or less valuable, a
process known as "marking to the market." Prior to the settlement date
of the futures contract, the position may be closed out by taking an
opposite position which will operate to terminate the position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid to or released by the FCM, and the
purchaser realizes a loss or gain. In addition, a commission is paid on
each completed purchase and sale transaction.
The sale of financial futures contracts provides an alternative means
of hedging a Portfolio against declines in the value of its investments in
Municipal Bonds. As such values decline, the value of the Portfolio's
positions in the futures contracts are expected to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Portfolios' fixed income investments which are being hedged. While the
Portfolios will incur commission expenses in establishing and closing out
futures positions, commissions on futures transactions may be
significantly lower than transaction costs incurred in the purchase and
sale of fixed income securities. In addition, the ability of the
Portfolios to trade in the standardized contracts available in the futures
market may offer a more effective hedging strategy than a program to
reduce the average maturity of portfolio securities, due to the unique and
varied credit and technical characteristics of the municipal debt
instruments available to the Portfolios. Employing futures as a hedge may
also permit the Portfolios to assume a hedging posture without reducing
the yield on their investments beyond any amounts required to engage in
futures trading.
The Portfolios engage in the purchase and sale of future contracts on
an index of municipal securities. These instruments provide for the
purchase or sale of a hypothetical portfolio of municipal bonds at a fixed
price in a stated delivery month. Unlike most other futures contracts,
however, a municipal bond index futures contract does not require actual
delivery of securities but results in a cash settlement based upon the
difference in value of the index between the time the contract was entered
into and the time it is liquidated.
The municipal bond index underlying the futures contracts traded by
the Portfolios is The Bond Buyer Municipal Bond Index, developed by The
Bond Buyer and the Chicago Board of Trade ("CBT"), the contract market
on which the futures contracts are traded. As currently structured, the
index is comprised of 40 tax-exempt term municipal revenue and general
obligation bonds. Each bond included in the index must be rated either A|m-
or higher by Standard & Poor's or A or higher by Moody's Investors Service
and must have a remaining maturity of 19 years or more. Twice a month new
issues satisfying the eligibility requirements are added to, and an equal
number of old issues will be deleted from, the index. The value of the
index is computed daily according to a formula based upon the price of
each bond in the Index, as evaluated by four dealer-to-dealers brokers.
The Portfolios may also purchase and sell futures contracts on U.S.
Treasury bills, notes and bonds for the same types of hedging purposes.
Such futures contracts provide for delivery of the underlying security at
a specified future time for a fixed price, and the value of the futures
contract generally fluctuates with movements in interest rates.
The municipal bond index futures contract, futures contracts on U.S.
Treasury securities and options on such futures contracts are traded on
the CBT and the Chicago Mercantile Exchange, which, like other contract
markets, assures the performance of the parties to each futures contract
through a clearing corporation, a nonprofit organization managed by the
exchange membership, which is also responsible for handling daily
accounting of deposits or withdrawals of margin.
46
<PAGE> 107
The Portfolios may also purchase financial futures contracts when they
are not fully invested in municipal bonds in anticipation of an increase
in the cost of securities they intend to purchase. As such securities are
purchased, an equivalent amount of futures contracts will be closed out.
In a substantial majority of these transactions, the Portfolios will
purchase municipal bonds upon termination of the futures contracts. Due to
changing market conditions and interest rate forecasts, however, a futures
position may be terminated without a corresponding purchase of securities.
Nevertheless, all purchases of futures contracts by the Portfolios will be
subject to certain restrictions, described below.
Options on Futures Contracts. An option on a futures contract provides
the purchaser with the right, but not the obligation, to enter into a long
position in the underlying futures contract (i.e., purchase the futures
contract), in the case of a "call" option, or to enter into a short
position (i.e., sell the futures contract), in the case of a "put"
option, for a fixed price (the "exercise" or "strike" price) up to a
stated expiration date. The option is purchased for a non-refundable fee,
known as the "premium." Upon exercise of the option, the contract market
clearing house assigns each party the appropriate position in the
underlying futures contract. In the event of exercise, therefore, the
parties are subject to all of the risks of futures trading, such as
payment of initial and variation margin. In addition, the seller, or
"writer", of the option is subject to margin requirements on the option
position. Options on futures contracts are traded on the same contract
markets as the underlying futures contracts.
The Portfolios may purchase options on futures contracts for the same
types of hedging purposes described above in connection with futures
contracts. For example, in order to protect against an anticipated decline
in the value of securities it holds, a Portfolio could purchase put
options on futures contracts, instead of selling the underlying futures
contracts. Conversely, in order to protect against the adverse effects of
anticipated increases in the cost of securities to be acquired, a
Portfolio could purchase call options on futures contracts, instead of
purchasing the underlying futures contracts. The Portfolios generally will
sell options on futures contracts only to close out an existing position.
The Portfolios will not engage in transactions in such instruments
unless and until the Investment Adviser determines that market conditions
and the circumstances of the Portfolios warrant such trading. To the
extent the Portfolios engage in the purchase and sale of futures contracts
or options thereon, they will do so only at a level which is reflective of
the Investment Adviser's view of the hedging needs of the Portfolios, the
liquidity of the market for futures contracts and the anticipated
correlation between movements in the value of the futures or option
contract and the value of securities held by the Portfolios.
Restrictions on the Use of Futures Contracts and Options on Futures
Contracts. Under regulations of the Commodity Futures Trading Commission
("CFTC"), the futures trading activities described herein will not
result in the Portfolios' being deemed to be "commodity pools," as
defined under such regulations, provided that certain trading restrictions
are adhered to. In particular, CFTC regulations require that a notice of
eligibility be filed and that all futures and option positions entered
into by the Portfolios qualify as bona fide hedge transactions, as defined
under CFTC regulations, or that any non-qualifying positions be limited so
that the sum of the amount of initial margin deposits and premiums paid on
such positions would not exceed 5% of the market value of the respective
Portfolio's net assets.
When either Portfolio purchases a futures contract, it will maintain
an amount of cash, cash equivalents or commercial paper or other
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 margin held in the account of its broker equals the market value
of the futures contract, thereby ensuring that the use of such futures is
unleveraged.
47
<PAGE> 108
Risk Factors in Transactions in Futures Contracts and Options Thereon.
The particular municipal bonds comprising the index underlying the
municipal bond index futures contract may vary from the bonds held by the
Portfolios. In addition, the securities underlying futures contracts on
U.S. Treasury securities will not be the same as securities held by the
Portfolios. As a result, the Portfolios' ability effectively to hedge all
or a portion of the value of their municipal bonds through the use of
futures contracts will depend in part on the degree to which price
movements in the index underlying the municipal bond index futures
contract, or the U.S. Treasury securities underlying other futures
contracts traded, correlate with price movements of the Municipal Bonds
held by the Portfolios.
For example, where prices of securities in the Portfolios do not move
in the same direction or to the same extent as the values of the
securities or index underlying a futures contract, the trading of such
futures contracts may not effectively hedge the Portfolios' investments
and may result in trading losses. The correlation may be affected by
disparities in the average maturity, ratings, geographical mix or
structure of the Portfolios' investments as compared to those comprising
the index, and general economic or political factors. In addition, the
correlation between movements in the value of the index underlying a
futures contract may be subject to change over time, as additions to and
deletions from the index alter its structure. In the case of futures
contracts on U.S. Treasury securities and options thereon, the anticipated
correlation of price movements between the U.S. Treasury securities
underlying the futures or options and Municipal Bonds may be adversely
affected by economic, political, legislative or other developments that
have a disparate impact on the respective markets for such securities. In
the event that the Investment Adviser determines to enter into
transactions in financial futures contracts other than the municipal bond
index futures contract or futures on U.S. Treasury securities, the risk of
imperfect correlation between movements in the prices of such futures
contracts and the prices of Municipal Bonds held by the Portfolios may be
greater.
The trading of futures contracts on an index also entails the risk of
imperfect correlation between movements in the price of the futures
contract and the value of the underlying index. The anticipated spread
between the prices may be affected due to differences in the nature of the
markets, such as margin requirements, liquidity and the participation of
speculators in the futures markets. The risk of imperfect correlation,
however, generally diminishes as the delivery month specified in the
futures contract approaches.
Prior to exercise or expiration, and absent delivery, a position in
futures contracts or options thereon may be terminated only by entering
into a closing purchase or sale transaction on the relevant contract
market. A Portfolio will enter into a futures or option position only if
there appears to be a liquid market therefor, although there can be no
assurance that such a liquid market will exist for any particular contract
at any specific time. Thus, it may not be economically practicable, or
otherwise possible, to close out a position once it has been established.
Under such circumstances, a portfolio could be required to make continuing
daily cash payments of variation margin in the event of adverse price
movements. In such situations, if the Portfolio has insufficient cash, it
may be required to sell portfolio securities to meet daily variation
margin requirements at a time when it may be disadvantageous to do so. In
addition, the Portfolio may be required to perform under the terms of the
futures or option contracts it holds. The inability to close out futures
or options positions also could have an adverse impact on the Portfolio's
ability effectively to hedge its portfolio.
When a Portfolio purchases an option on a futures contract, its risk
is limited to the amount of the premium, plus related transaction costs,
although this entire amount may be lost. In addition, in order to profit
from the purchase of an option on a futures contract, a Portfolio may be
required to exercise the option and liquidate the underlying futures
contract, subject to the availability of a liquid market. The trading of
options on futures
48
<PAGE> 109
contracts also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of
the option, although the risk of imperfect correlation generally tends to
diminish as the maturity date of the futures contract or expiration date
of the option approaches.
"Position Limits" are generally imposed on the maximum number of
contracts which any person may hold or control at a given time. A contract
market may order the liquidation of positions found to be in violation of
these limits and it may impose other sanctions or restrictions. The
Investment Adviser does not believe that position limits will have any
adverse impact on the portfolio strategies for hedging a Portfolio's
investments.
Further, the trading of futures contracts is subject to the risk of
the insolvency of a brokerage firm or the relevant exchange or clearing
corporation, which could make it difficult or impossible to liquidate
existing positions or to recover margin or other payments due.
In addition to the risks of imperfect correlation and lack of a liquid
secondary market for such instruments, transactions in futures contracts
involve risks related to leveraging such that a change in the price of a
futures contract could result in substantial gains or losses. The
potential for incorrect forecasts of the direction and extent of interest
rate movements within a given time frame also involves the risk of loss in
the event such forecasts are inaccurate.
Computation of Offering Price per Share
The offering price for Class A and Class B shares of the Insured,
National and Limited Maturity, based on the value of each Portfolio's net
asset and the number of shares outstanding asof June 30, 1994, is
calculated as set forth below. Information is not provided for Class C or
Class D shares since no Class C or Class D shares were publicly offered prior
to the date of this Statement of Additional Information.
Issued Portfolio
Class A Class B
--------- ---------
Net Assets............................... $1,941,741,107 $866,193,154
============== ============
Number of Shares Outstanding............. 246,434,764 110,011,150
============== ============
Net Asset Value Per Share (net assets
divided by number of shares outstanding $7.88 $7.87
Sales Charge* (for Class A shares: 4.00%
of offering price (4.17% of net asset
value))................................. .33 **
-------------- ------------
Offering Price........................... $8.21 $7.87
============== ============
----------
*Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
**Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares"
in the Prospectus.
49
<PAGE> 110
National Portfolio
Class A Class B
--------- ---------
Net Assets............................... $1,203,180,964 $459,168,936
============== ============
Number of Shares Outstanding............. 119,410,837 45,583,411
============== ============
Net Asset Value Per Share (net assets
divided by number of shares outstanding $10.08 $10.07
Sales Charge* (for Class A shares: 4.00%
of offering price (4.17% of net asset
value))................................. .42 **
-------------- ------------
Offering Price........................... $10.50 $10.07
============== ============
----------
*Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
**Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares"
in the Prospectus.
Limited Maturity Portfolio
Class A Class B
--------- ---------
Net Assets............................... $790,142,342 $145,534,427
============ ============
Number of Shares Outstanding............. 80,064,850 14,744,916
============ ============
Net Asset Value Per Share (net assets
divided by number of shares outstanding $9.87 $9.87
Sales Charge* (for Class A shares: 1.00%
of offering price (1.01% of the net
asset value))........................... .10 **
------------ ------------
Offering Price........................... $9.97 $9.87
============ ============
----------
*Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
**Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares within one year of
purchase. See "Purchase of Shares--Deferred Sales Charge Alternatives--
Class B and Class C Shares" in the Prospectus.
50
<PAGE> 111
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Municipal Bond Fund, Inc.:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the Insured, National and
Limited Maturity Portfolios of Merrill Lynch Municipal Bond Fund, Inc. as
of June 30, 1994, the related statements of operations for the year then
ended and changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in
the five-year period then ended. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at June 30, 1994 by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Insured,
National and Limited Maturity Portfolios of Merrill Lynch Municipal Bond
Fund, Inc. as of June 30, 1994, the results of their operations, the
changes in their net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
July 29, 1994
51
<PAGE> 112
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
Municipal Bonds Insured Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alabama--0.8% Auburn University, Alabama, Revenue Refunding Bonds(e):
AAA Aaa $ 5,925 (Athletic Project), 5.25% due 4/01/2010 $ 5,430
AAA Aaa 5,000 (General Fee), 5.25% due 6/01/2013 4,429
AAA Aaa 1,500 (Housing and Dining), 5.25% due 6/01/2012 1,344
AAA Aaa 1,250 Mobile, Alabama, GO, Refunding and Capital Improvement Bonds,
10.875% due 11/01/2007(e) 1,712
AAA Aaa 7,465 Montgomery, Alabama, Baptist Medical Center, Special Care
Facilities Financing Authority Revenue Bonds, Series A, 5.75% due
1/01/2022(h) 6,850
Alaska--0.7% Kenai Peninsula Borough, Alaska, GO(b):
AAA Aaa 6,450 8.40% due 1/01/2000 7,394
AAA Aaa 8,460 8.40% due 1/01/2001 9,841
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Municipal Bonds Insured Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Arizona--2.1% AAA Aaa $ 4,000 Arizona State Municipal Financing Program, COP, Series 34,
7.25% due 8/01/2009(g) $ 4,491
AAA Aaa 3,800 Maricopa County, Arizona, IDA, Health Facilities Revenue Bonds
(Saint Joseph's Care Center Project), Series A, 7.75% due
7/01/2020(e) 4,241
Maricopa County, Arizona, IDA, Hospital Facilities Revenue Bonds
(Samaritan Health Services Hospital):
AAA Aaa 4,000 Refunding, Series A, 7% due 12/01/2013(e) 4,318
A1+ VMIG1 500 VRDN, Series B2, 2.90% due 12/01/2008(f) 500
AAA Aaa 7,000 Maricopa County, Arizona, Unified School District No. 97 Revenue
Bonds (Deer Valley Project), 1986 Series E, 10% due 7/01/2000(h) 8,685
Mesa, Arizona, IDA, Health Care Facilities Revenue Bonds (Western
Health Network)(g):
AAA Aaa 10,000 Refunding, Series A-2, 7.625% due 1/01/2013 10,902
AAA Aaa 7,340 Series A-1, 7.625% due 1/01/2019 8,104
Phoenix, Arizona, Street and Highway User, Revenue Refunding Bonds,
Series A(h)(j):
AAA Aaa 5,000 5.63% due 7/01/2012 1,527
AAA Aaa 5,000 5.63% due 7/01/2013 1,421
AAA Aaa 7,000 Tucson, Arizona, Refunding Bonds, 4.90% due 7/01/2013(h) 5,937
AAA Aaa 5,250 University of Arizona Medical Center Corporation, Hospital Revenue
Refunding Bonds, 5% due 7/01/2021(e) 4,311
<PAGE> 113
California--6.5% AAA Aaa 5,000 Anaheim, California, Public Financing Authority Revenue Bonds, 2nd
Series-Electric Utility, San Juan 4, 5.75% due 10/01/2022(h) 4,571
AAA Aaa 6,000 Anaheim, California, Public Financing Authority, Revenue Refunding
Bonds (Electric Utility Projects), 5.625% due 10/01/2022(e) 5,388
AAA Aaa 8,000 Central Coast Water Authority, California, Revenue Bonds (State
Water Project Regional Facilities), 6.60% due 10/01/2022(b) 8,160
AAA Aaa 12,000 Fresno, California, Sewer Revenue Bonds, Series A-1, 6.25% due
9/01/2014(b) 12,067
AAA Aaa 2,415 Los Angeles, California, Regional Airports Improvement Corporation,
Lease Revenue Bonds (Los Angeles International Airport), AMT, 6.50%
due 1/01/2012(h) 2,459
Los Angeles, California, Wastewater System Revenue Bonds(e):
AAA Aaa 5,000 Series A, 5.70% due 6/01/2013 4,671
AAA Aaa 5,000 Series C, 5.60% due 6/01/2015 4,569
AAA Aaa 20,000 Series C, 5.60% due 6/01/2020 18,033
NR NR 28,800 Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Refunding Bonds (Proposition C--Second
Series), VRDN, Series A, 2.60% due 7/01/2020(e)(f) 28,800
AAA Aaa 6,000 Los Angeles County, California, Transportation Commission, Sales
Tax Revenue Bonds, Series A, 6.75% due 7/01/2001(a)(h) 6,643
A1+ VMIG1 11,100 Mountain View, California, M/F Housing Revenue Bonds (Villa
Mariposa Project), VRDN, Series A, 2.40% due 3/01/2017(f) 11,100
AAA Aaa 17,600 Northern California Power Agency, Multiple Capital Facilities
Revenue Bonds, 6.53% due 8/01/2025(a)(e) 18,932
University of California, Revenue Bonds (Multiple Purpose Projects)(b):
AAA Aaa 4,650 Series C, 5% due 9/01/2012 3,983
AAA Aaa 12,075 Series C, 5.25% due 9/01/2016 10,415
AAA Aaa 33,500 Series C, 5% due 9/01/2023 27,074
AAA Aaa 5,000 Series D, 6.375% due 9/01/2024 4,996
AAA Aaa 9,000 West and Central Basin Financing Authority, California, Revenue
Bonds, 6.125% due 8/01/2022(b) 8,707
Colorado--0.0% AAA Aaa 1,000 Colorado Health Facilities Authority, Revenue Refunding Bonds (Rose
Medical Center Project), 5.125% due 8/15/2021(e) 844
Connecticut--0.4% AAA Aaa 1,325 Connecticut State Health and Educational Facilities Authority Revenue
Bonds (New Britain General Hospital), Series B, 6% due 7/01/2024(b) 1,261
AAA Aaa 3,500 Connecticut State Health and Educational Facilities Authority
Revenue Bonds (Saint Francis Hospital and Medical Center), Series C,
5% due 7/01/2023(h) 2,850
AAA Aaa 625 Connecticut State Health and Educational Facilities Authority,
Revenue Refunding Bonds (Fairfield University), Series G, 5% due
7/01/2018(e) 518
AAA Aaa 8,400 Connecticut State Municipal Electric Energy Cooperative Power Supply
System, Revenue Refunding Bonds, Series A, 5% due 1/01/2018(e) 7,003
AAA Aaa 885 New Britain Connecticut, UT, 5% due 2/01/2014(e) 769
<PAGE> 114
Delaware--0.3% AAA Aaa 6,000 Delaware EDA, PCR, Refunding (Delmarva Power and Light Company),
Series B, 7.30% due 3/01/2014(e) 6,552
AAA Aaa 3,750 Delaware State Health Facilities Authority, Crossover Revenue
Refunding Bonds (Delaware Medical Center), 7% due 10/01/2015(e) 4,019
District of District of Columbia, Hospital Revenue Refunding Bonds (National
Columbia--0.7% Rehabilitation Hospital-Medlantic), Series A(e):
AAA Aaa 7,000 7.10% due 11/01/2011 7,552
AAA Aaa 9,250 7.125% due 11/01/2019 9,985
<PAGE> 115
Florida--8.0% AAA Aaa 2,735 Altamonte Springs, Florida, Health Facilities Authority, Hospital
Revenue Bonds (Adventist Health/Sunbelt), Series A, 7% due
11/15/2014(b) 2,954
A1+ VMIG1 23,200 Dade County, Florida, Water and Sewer System Revenue Bonds, VRDN,
3% due 10/05/2022(f)(h) 23,200
Florida Municipal Power Agency Revenue Bonds:
AAA Aaa 22,710 (All Requirement Power Supply Project), 5.10% due 10/01/2025(b) 18,804
AAA Aaa 5,000 Refunding (Saint Lucie Project), 5.25% due 10/01/2021(h) 4,378
AAA Aaa 4,840 Florida Municipal Power Agency, Revenue Refunding Bonds (All
Requirement Power Supply Project), 6.25% due 10/01/2019(a)(b) 5,180
AAA Aaa 5,000 Florida State Division, Board of Finance, Department of General
Services Revenue Bonds (Department of Natural Resource
Preservation), Series 2000-A, 6.75% due 7/01/2013 5,237
Florida Turnpike Authority, Turnpike Revenue Bonds, Series A:
AAA Aaa 2,935 9.50% due 7/01/2001(b) 3,658
AAA Aaa 4,500 5% due 7/01/2015(h) 3,838
Jacksonville, Florida, Health Facilities Authority, Hospital Revenue
Refunding and Improvement Bonds (Baptist Medical Center Project):
AAA Aaa 500 11.50% due 10/01/2012 783
AAA Aaa 26,500 Series A, 7.30% due 6/01/2019(e) 28,721
AAA Aaa 8,750 Jacksonville, Florida, Port Authority Revenue Bonds, AMT,
7.875% due 11/01/2018(g) 9,536
AAA Aaa 20,000 Lee County, Florida, Hospital Board of Directors, Hospital Revenue
Bonds, 6.60% due 4/01/2020(e) 20,531
AAA Aaa 16,700 Martin County, Florida, PCR, Refunding (Florida Power and Light
Company Project), 7.30% due 7/01/2020(e) 18,125
AAA Aaa 11,640 Orange County, Florida, Health Facilities Authority, Revenue
Refunding Bonds (Pooled Hospital Loan), Series B, 7.875% due
12/01/2025(g) 12,513
AAA Aaa 3,950 Orange County, Florida, HFA, Mortgage Revenue Refunding Bonds,
Series A, 7.60% due 1/01/2024(h) 4,077
AAA Aaa 4,495 Orange County, Florida, Sales Tax Revenue Bonds, 6.125% due
1/01/2019(h) 4,392
Palm Beach County, Florida, Criminal Justice Facilities, Revenue
Refunding Bonds(h):
AAA Aaa 5,000 5.375% due 6/01/2008 4,757
AAA Aaa 11,985 5.375% due 6/01/2009 11,320
AAA Aaa 4,935 5.375% due 6/01/2010 4,597
AAA Aaa 34,690 Reedy Creek, Florida, Improvement District, Florida Utilities
Revenue Refunding Bonds, Series 1, 5% due 10/01/2019(e) 28,984
AAA Aaa 3,500 Saint Lucie County, Florida, Sales Tax, Revenue Refunding Bonds,
5% due 10/01/2023(h) 2,891
AAA Aaa 5,700 South Broward, Florida, Hospital District Revenue Bonds, 6.61% due
5/01/2021(b) 5,857
AAA Aaa 2,000 Tampa, Florida, Water and Sewer System Revenue Bonds, Series A,
7.25% due 10/01/2016(b) 2,159
AAA Aaa 2,240 West Coast Regional Water Supply Authority, Florida, Capital
Improvement Revenue Bonds (Hillsborough County Project), 10.40%
due 10/01/2010(a)(b) 3,215
</TABLE>
<PAGE> 116
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Municipal Bonds Insured Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Georgia--3.4% AAA Aaa $ 5,000 Douglasville-Douglas County, Georgia, Water and Sewer Authority,
Water and Sewer Revenue Bonds, 5.625% due 6/01/2015(b) $ 4,638
AAA Aaa 20,000 Georgia Municipal Electric Authority Revenue Bonds, Series EE,
7% due 1/01/2025(b) 21,945
Metropolitan Atlanta Rapid Transit Authority, Georgia, Sales Tax
Revenue Refunding Bonds(b):
AAA Aaa 1,000 Series A, 5.125% due 7/01/2016 862
AAA Aaa 4,990 Series A, 5.125% due 7/01/2019 4,235
AAA Aaa 10,500 Series A, 5.125% due 7/01/2020 8,885
AAA Aaa 18,605 Series P, 6% due 7/01/2013 18,092
AAA Aaa 28,165 Series P, 6.25% due 7/01/2020 27,879
AAA Aaa 9,000 Municipal Electric Authority, Georgia, Special Obligation Bonds
(Fifth Crossover Series, Project One), 6.40% due 1/01/2013(b) 9,157
Hawaii--2.3% Hawaii Airport System Revenue Bonds, AMT:
AAA Aaa 21,795 7.30% due 7/01/2020(b) 23,420
AAA Aaa 23,200 Second Series, 7.50% due 7/01/2020(h) 25,160
Hawaii County, Hawaii, Revenue Refunding and Improvement Bonds,
Series A, UT(h):
AAA Aaa 1,000 5.60% due 5/01/2012 941
AAA Aaa 1,000 5.60% due 5/01/2013 939
Hawaii Department of Budget and Finance, Special Purpose Mortgage
Revenue Bonds (Hawaiian Electric Company), AMT(e):
AAA Aaa 4,340 7.625% due 12/01/2018 4,873
AAA Aaa 5,000 Series C, 7.375% due 12/01/2020 5,421
AAA Aaa 4,500 Hawaii Harbor Capital Improvement Revenue Bonds, AMT, 7% due
7/01/2017(e) 4,716
<PAGE> 117
Illinois--5.5% AAA Aaa 25,000 Chicago, Illinois, Public Building Commission Revenue Bonds (Community
College District No. 508), Series B, 8.75% due 1/01/2007(c)(g) 27,636
AAA Aaa 25,000 Chicago, Illinois, Public Building Commission Revenue Bonds, Series
A, 7.125% due 1/01/2015(c)(e) 27,756
AAA Aaa 20,000 Cook County, Illinois, GO, UT, Series A, 6.60% due 11/15/2022(e) 20,207
AAA Aaa 11,000 Evergreen Park, Illinois, Hospital Facility Revenue Refunding Bonds
(Little Company of Mary Hospital), 7.75% due 2/15/2009(e) 12,021
Illinois Health Facilities Authority Revenue Bonds:
AAA Aaa 3,250 (Elmhurst Memorial Hospital), 6.625% due 1/01/2022(h) 3,292
AAA Aaa 4,000 (Methodist Health Project), 6.903% due 5/01/2021(b) 4,133
AAA Aaa 5,500 (Northern Illinois Medical Center), 7.875% due 9/01/2014(b) 6,035
AAA Aaa 16,000 (Rush-Presbyterian Saint Luke's Medical Center), 6.80% due
10/01/2024(e) 16,439
Metropolitan Pier and Exposition Authority, Illinois, Dedicated
State Tax Revenue Bonds, Series A(h)(j)(k):
AAA Aaa 7,000 5.67% due 6/15/2010 2,521
AAA Aaa 5,000 5.70% due 6/15/2011 1,675
AAA Aaa 27,215 5.75% due 6/15/2013 8,017
AAA Aaa 25,845 5.75% due 6/15/2014 7,001
AAA Aaa 1,940 6.10% due 6/15/2015 492
AAA Aaa 9,750 6.10% due 6/15/2016 2,317
AAA Aaa 8,400 6.50% due 6/15/2027 8,388
AAA Aaa 3,025 Northwest Suburban Municipal Joint Action Water Agency, Illinois,
Water Supply System Revenue Refunding Bonds, Series A, 5.90% due
5/01/2015(e) 2,845
Indiana--0.8% AAA Aaa 6,725 Goshen-Chandler, Indiana, School Building Corporation, First Mortgage
Revenue Refunding Bonds, UT, 5.75% due 1/15/2010(e) 6,439
AAA Aaa 2,470 Indiana Employment Development Commission, Environmental Revenue
Bonds (Public Service Company of Indiana), AMT, 7.50% due 3/15/2015(e) 2,693
AAA Aaa 4,040 Indianapolis, Indiana, Local Public Improvement Bond Bank, Series A,
7.90% due 2/01/2002(a)(g) 4,662
AAA Aaa 2,000 Jasper County, Indiana, PCR, Refunding (Northern Indiana Public
Service), 7.10% due 7/01/2017(e) 2,140
AAA Aaa 3,830 Purdue University, Indiana, University Revenue Bonds (Purdue
University Dormitory System), Series B, 6% due 7/01/2001(a)(b) 4,057
AAA Aaa 3,550 Rockport, Indiana, PCR, Refunding (Indiana-Michigan Power), Series B,
7.60% due 3/01/2016(h) 3,904
Iowa--0.4% AAA Aaa 5,000 Des Moines, Iowa, Parking Facilities Revenue Bonds, 7.25% due
7/01/2015(h) 5,413
Iowa Finance Authority, Hospital Facilities Revenue Refunding Bonds
(Allen Memorial Hospital), Series A(b):
AAA Aaa 3,500 5.50% due 2/15/2013 3,188
AAA Aaa 2,100 5.60% due 2/15/2020 1,865
<PAGE> 118
Kentucky--0.9% AAA Aaa 4,500 Boone County, Kentucky, PCR, Refunding (Cincinnati Gas and Electric),
5.50% due 1/01/2024 3,977
AAA Aaa 11,470 Kentucky Development Finance Authority, Hospital Revenue Refunding
and Improvement Bonds (Saint Elizabeth Medical Center), Series A, 9%
due 11/01/2000(h) 13,748
Owensboro, Kentucky, Electric Light and Power Revenue Bonds,
Series B(b)(j)(k):
AAA Aaa 1,000 5.70% due 1/01/2011 346
AAA Aaa 5,000 5.90% due 1/01/2014 1,407
AAA Aaa 9,125 5.80% due 1/01/2015 2,410
AAA Aaa 7,675 5.90% due 1/01/2016 1,900
AAA Aaa 3,500 5.72% due 1/01/2019 713
Louisiana--0.4% AAA Aaa 8,700 Louisiana Public Facilities Authority, Health and Education Capital
Facilities Revenue Bonds (Our Lady of the Lake Regional Medical
Center), Series C, 8.20% due 12/01/2015(g) 9,776
Maryland--1.4% Baltimore, Maryland, Revenue Refunding Bonds (Water Projects),
Series A(h):
AAA Aaa 10,000 6.25% due 7/01/2002(a) 10,677
AAA Aaa 9,125 5% due 7/01/2024 7,482
Maryland Health and Higher Educational Facilities Authority
Revenue Bonds (University of Maryland Medical Systems) (h):
AAA Aaa 2,250 Series A, 7% due 7/01/2001(a) 2,505
AAA Aaa 4,400 Series B, 7% due 7/01/2022 4,948
Maryland Health and Higher Educational Facilities Authority,
Revenue Refunding Bonds:
AAA Aaa 6,325 (Greater Baltimore Medical Center), 5% due 7/01/2013(h) 5,409
AAA Aaa 7,500 (Sinai Hospital Project), 5.25% due 7/01/2019(b) 6,415
Massachusetts--1.6% AAA Aaa 3,175 Massachusetts Bay Transportation Authority, Massachusetts General
Transportation System Revenue Bonds, Series A, 7.10% due
3/01/1999(a)(g) 3,491
AAA Aaa 13,000 Massachusetts Bay Transportation Authority Revenue Bonds, COP,
Series A, 7.65% due 8/01/2015(i) 14,451
AAA Aaa 5,505 Massachusetts Educational Loan Authority Revenue Bonds, AMT, Issue D,
Series A, 7.25% due 1/01/2009(e) 5,717
Massachusetts Health and Educational Facilities Authority Revenue
Bonds:
AAA Aaa 2,355 (Massachusetts General Hospital), Refunding, Series G, 5.25%
due 7/01/2023(b) 1,986
AAA Aaa 6,200 (Saint Elizabeth Hospital), 6.56% due 8/15/2021(i) 6,413
AAA Aaa 3,250 Massachusetts Port Authority Revenue Bonds, 13% due 7/01/2013(c) 5,382
AAA Aaa 5,500 Massachusetts State Industrial Finance Agency Revenue Bonds
(Brandeis University), Series C, 6.80% due 10/01/2019(e) 5,670
AAA Aaa 4,500 Massachusetts State Turnpike Authority Turnpike Revenue Refunding
Bonds, Series A, 5.125% due 1/01/2023(h) 3,765
<PAGE> 119
Michigan--3.6% AAA Aaa 10,500 Chippewa Valley, Michigan, Schools Revenue Refunding Bonds, 5% due
5/01/2021(h) 8,695
AAA Aaa 10,000 Grand Rapids, Michigan, Water Supply Systems, Revenue Refunding
Bonds, 5.75% due 1/01/2018(h) 9,318
A1+ VMIG1 700 Michigan Higher Education Student Loan Authority, Revenue Refunding
Bonds, VRDN, AMT, Series X11-B, 2.65% due 10/01/2013(b)(f) 700
AAA Aaa 26,120 Michigan State Trunk Line, Series A, 5.80% due 11/15/2024 (h) 24,326
Monroe County, Michigan, PCR (Detroit Edison Company Project), AMT:
AAA Aaa 16,500 Project 1, 7.65% due 9/01/2020(h) 18,159
AAA Aaa 13,255 Series CC, 7.50% due 12/01/2019(b) 14,696
AAA Aaa 9,745 Series I-B, 7.50% due 9/01/2019(b) 10,771
AAA Aaa 15,000 Western Michigan University Revenue Bonds, Series A, 6.50% due
7/15/2001(a)(b) 16,328
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Municipal Bonds Insured Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Minnesota--0.2% AAA Aaa $ 5,000 Northern Municipal Power Agency, Minnesota, Electric Systems,
Revenue Refunding Bonds, Series A, 6% due 1/01/2019(b) $ 4,832
Mississippi--0.6% AAA Aaa 1,320 Harrison County, Mississippi, Wastewater Management District,
Revenue Refunding Bonds, Wastewater Treatment Facilities, Series A,
8.50% due 2/01/2013(h) 1,656
AAA Aaa 1,750 Hinds County, Mississippi, Revenue Refunding Bonds (Methodist
Hospital and Rehabilitation), 5.60% due 5/01/2012(b) 1,632
AAA Aaa 13,000 Mississippi Hospital Equipment and Facilities Authority, Revenue
Refunding and Improvement Bonds (North Mississippi Health
Services), 5.75% due 3/08/2016(b) 12,083
Montana--0.2% AAA Aaa 5,600 Montana Health Facilities Authority, Hospital Facilities Revenue
Bonds (Deaconess Medical Center Project), SAVRS, Series A, 2.80%
due 2/15/2016(b)(d) 5,600
<PAGE> 120
Nevada--2.7% AAA Aaa 6,500 Clark County, Nevada, Airport Improvement Revenue Bonds, AMT, 8.125%
due 7/01/2018(g) 7,307
Clark County, Nevada, Airport Revenue Bonds(a)(h):
AAA Aaa 4,450 6.90% due 6/01/2009 4,871
AAA Aaa 5,590 6.25% due 6/01/2011 5,920
AAA VMIG1 200 Clark County, Nevada, Airport Revenue Refunding Bonds, Series A,
VRDN, 2.85% due 7/01/2012(e)(f) 200
AAA Aaa 10,000 Clark County, Nevada, Passenger Facility Revenue Bonds (Las Vegas
McCarran International Airport), Series A, 6% due 7/01/2022(b) 9,570
AAA Aaa 8,000 Henderson, Nevada, Health Care Facility Revenue Refunding Bonds
(Catholic Healthcare), Series A, 5% due 7/01/2020(b) 6,529
Las Vegas, Nevada, Revenue Refunding Bonds(h):
AAA Aaa 1,500 6.50% due 10/01/2007 1,554
AAA Aaa 2,665 6.50% due 10/01/2008 2,747
AAA Aaa 35,000 Washoe County, Nevada, Water Facility Revenue Bonds (Sierra Pacific
Power), AMT, 6.65% due 6/01/2017(e) 35,709
New Jersey--1.7% AAA Aaa 3,350 Cape May County, New Jersey, Industrial Pollution Control Financing
Authority, Revenue Refunding Bonds (Atlantic City Electric Company),
Series A, 6.80% due 3/01/2021(e) 3,666
AAA Aaa 4,750 Jersey City, New Jersey, Sewer Authority Revenue Refunding Bonds,
6.25% due 1/01/2014(b) 4,847
AAA Aaa 5,000 New Jersey EDA, Water Facilities, Revenue Refunding Bonds (Hackensack
Water Company), Series A, 7% due 1/01/2019(b) 5,297
A1 VMIG1 4,000 New Jersey Sports and Exposition Authority, State Contract Revenue
Bonds, Series C, VRDN, 2.70% due 9/01/2024(e)(f) 4,000
New Jersey State Housing and Mortgage Finance Agency Revenue Bonds
(Home Buyer), AMT(e):
AAA Aaa 7,530 Series B, 7.90% due 10/01/2022 7,784
AAA Aaa 17,470 Series D, 7.70% due 10/01/2029 18,028
NR VMIG1 5,800 New Jersey State Turnpike Authority, Turnpike Revenue Refunding Bonds,
Series D, VRDN, 2.60% due 1/01/2018(f)(h) 5,800
New York--5.2% AAA Aaa 9,650 Metropolitan Transportation Authority, New York, Service Contract
Revenue Refunding Bonds (Transportation Facilities), Series L, 7.50%
due 7/01/2017(b) 10,571
New York City, New York, GO, Series I(b):
AAA Aaa 2,645 7.25% due 8/15/2013 2,893
AAA Aaa 10,130 7.25% due 8/15/2016 11,012
AAA Aaa 4,505 UT, 7.25% due 8/15/2013 4,991
AAA Aaa 6,010 New York City, New York, Health and Hospital Authority, Local
Government Revenue Refunding Bonds, Series A, 5.625% due 2/15/2013(b) 5,556
New York City, New York, Municipal Water Finance Authority, Water
and Sewer System Revenue Bonds:
AAA Aaa 50,000 5.20% due 6/15/2008(d) 46,479
AAA Aaa 4,510 Series C, 6.20% due 6/15/2021(b) 4,423
AAA Aaa 4,000 Series F, 5.50% due 6/15/2023(e) 3,519
New York City, New York, Municipal Water Finance Authority, Water
and Sewer System Revenue Bonds(h):
AAA Aaa 12,075 Refunding, Series A, 5.75% due 6/15/2018 11,189
AAA Aaa 1,090 Series A, 6.75% due 6/15/2014 1,128
New York City, New York, Municipal Water Finance Authority, Water
and Sewer System Revenue Bonds, VRDN(f)(h):
A1+ VMIG1 10,500 Series C, 3.30% due 6/15/2022 10,500
AAA VMIG1 500 Series C, 3.30% due 6/15/2023(g) 500
AAA VMIG1 6,100 Series G, 3.10% due 6/15/2024 6,100
New York City, New York, Series B, VRDN(f)(h):
A1+ VMIG1 2,500 3.30% due 10/01/2020 2,500
A1+ VMIG1 3,200 3.30% due 10/01/2022 3,200
A1+ VMIG1 300 3.30% due 10/01/2021 300
New York State Medical Care Facilities Finance Agency Revenue Bonds
(Mental Health Services):
AAA Aaa 3,085 Series C, 7.375% due 8/15/2019(e) 3,375
AAA Aaa 11,500 Series D, 5.90% due 8/15/2022(b) 10,824
Suffolk County, New York, Water Authority, Waterworks Revenue
Refunding Bonds(b):
AAA Aaa 1,235 7.375% due 6/01/2012 1,358
AAA Aaa 7,345 5.75% due 6/01/2013 6,979
AAA Aaa 1,100 Series C, 5.75% due 6/01/2002(a) 1,143
<PAGE> 121
North Carolina--0.8% AAA VMIG1 100 Charlotte, North Carolina, Airport Revenue Refunding Bonds,
VRDN, Series A, 2.55% due 7/01/2016(e)(f) 100
AAA Aaa 27,855 North Carolina Municipal Power Agency, Electric Revenue Refunding
Bonds (Catawba Electric Project No. 1), 5% due 1/01/2018(e) 23,221
Ohio--1.3% AAA Aaa 12,000 Clermont County, Ohio, Hospital Facilities Revenue Refunding Bonds
(Mercy Health Systems), Series A, 7.50% due 9/01/2019(b) 13,299
AAA Aaa 2,250 Cleveland, Ohio, Revenue Refunding Bonds, 5.375% due 9/01/2009(b) 2,124
AAA Aaa 6,700 Ohio Municipal Electric Generation Agency, Joint Ventures, COP,
5.376% due 2/15/2013(b) 6,101
AAA Aaa 15,000 Ohio State Air Quality Development Authority, Revenue Refunding
Bonds, PCR, Series B, Ohio Edison, 5.625% due 11/15/2029(b) 13,571
Oklahoma--1.3% AAA Aaa 7,500 Oklahoma Industrial Authority, Hospital Revenue Bonds (Baptist
Medical Center), Series A, 7% due 8/15/2014(b) 7,946
AAA Aaa 5,000 Tulsa, Oklahoma, Airports Revenue Bonds, 7.50% due 6/01/2008(e) 5,455
AAA Aaa 21,560 Tulsa, Oklahoma, Industrial Authority, Hospital Revenue Bonds
(Saint John's Medical Center, Inc.), 7.25% due 12/01/2009(e) 23,788
Oregon--0.2% AAA Aaa 1,200 Jefferson County, Oregon (School District No 509j), 5.50% due
6/15/2013(i) 1,113
AAA Aaa 4,000 Port Portland, Oregon, Portland International Airport, Airport
Revenue Bonds, Series 7-B, AMT, 7.10% due 7/01/2021(e) 4,273
Pennsylvania--8.8% AAA Aaa 1,500 Allegheny County, Pennsylvania, Airport Revenue Bonds (Greater
Pittsburgh International Airport), AMT, Series C, 7% due
1/01/2018(e) 1,579
AAA Aaa 1,750 Allegheny County, Pennsylvania, Hospital Development Authority
Revenue Bonds (Mercy Hospital of Pittsburgh), 6.75% due 4/01/2021(b) 1,796
AAA Aaa 6,900 Beaver County, Pennsylvania, Hospital Authority Revenue Bonds (Medical
Center of Beaver, Pennsylvania Incorporated), Series A, 6.25% due
7/01/2022(b) 6,705
AAA Aaa 3,365 Beaver County, Pennsylvania, IDA, PCR, Refunding (Ohio Edison
Company), Series A, 7% due 6/01/2021(h) 3,576
AAA Aaa 3,610 Berks County, Pennsylvania, Municipal Revenue Bonds (Reading Hospital
Medical Center Project), 5.70% due 10/01/2014(e) 3,356
AAA Aaa 6,500 Bethlehem, Pennsylvania, Water Authority Revenue Refunding Bonds,
5.20% due 11/15/2021(e) 5,498
AAA Aaa 9,000 Bucks County Pennsylvania, IDA, Revenue Bonds (Grand View Hospital
Project), 7% due 7/01/2001(a)(b) 10,033
AAA Aaa 10,000 Lehigh County, Pennsylvania, Revenue Refunding Bonds, UT, 5.125%
due 11/15/2011(h) 8,788
AAA Aaa 3,400 Monroeville, Pennsylvania, Hospital Authority, Hospital Revenue Bonds
(Forbes Health System), Series B, 7.35% due 10/01/2015(g) 3,656
AAA Aaa 8,000 Montgomery County, Pennsylvania, Higher Education and Health
Authority, Hospital Revenue Bonds (Abington Memorial Hospital),
5.125% due 6/01/2014(b) 6,880
</TABLE>
<PAGE> 122
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Municipal Bonds Insured Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Pennsylvania AAA Aaa $ 9,725 Pennsylvania Convention Center Authority Revenue Bonds, Series A,
(concluded) 6.70% due 9/01/2016(c)(h) $10,391
Pennsylvania Higher Educational Assistance Agency, Student Loan
Revenue Bonds, AMT:
AAA Aaa 34,000 6.03% due 3/01/2022(b) 31,750
AAA Aaa 20,000 6.71% due 9/03/2026(b) 20,437
AAA Aaa 16,000 7.437% due 3/01/2020(e) 16,940
Pennsylvania State Higher Educational Facilities Authority, College
and University Revenue Bonds:
AAA Aaa 1,500 (Bryn Mawr College), 6.50% due 12/01/2009(h) 1,555
AAA Aaa 4,250 (Temple University), First Series, 6.50% due 4/01/2021(e) 4,278
AAA Aaa 20,390 Pennsylvania Turnpike Commission, Turnpike Revenue Bonds, Series L,
6.25% due 6/01/2011(1) 20,499
Philadelphia, Pennsylvania, Airport Revenue Bonds, AMT(e):
AAA Aaa 8,150 7.75% due 6/15/2015 8,996
AAA Aaa 24,000 7.375% due 6/15/2018 25,967
AAA Aaa 5,000 Philadelphia, Pennsylvania, Gas Works Revenue Bonds, 12th Series B,
7% due 5/15/2020(c)(e) 5,588
AAA Aaa 5,750 Philadelphia, Pennsylvania, Parking Authority, Airport Parking
Revenue Bonds, 7.375% due 9/01/2018(b) 6,254
AAA Aaa 26,800 Philadelphia, Pennsylvania, Water and Wastewater Revenue Bonds, 5.01%
due 6/15/2004(h) 26,068
Pittsburgh, Pennsylvania, Revenue Refunding Bonds, UT, Series A(b):
AAA Aaa 1,200 5.10% due 9/01/2005 1,145
AAA Aaa 1,000 5.20% due 9/01/2006 947
AAA Aaa 1,000 5.40% due 9/01/2008 944
Pittsburgh, Pennsylvania, Water and Sewer Authority, Water and Sewer
System Revenue Refunding Bonds, Series A(h):
AAA Aaa 5,000 6.50% due 9/01/2001(a) 5,447
AAA Aaa 9,000 4.75% due 9/01/2016 7,217
AAA Aaa 7,500 University Area Joint Authority, Pennsylvania, Sewer Revenue
Refunding Bonds, 4.75% due 11/01/2020(e) 5,902
<PAGE> 123
Rhode Island--2.4% Providence, Rhode Island, GO, UT(e):
AAA Aaa 1,540 6.75% due 1/15/2008 1,635
AAA Aaa 1,540 6.75% due 1/15/2009 1,631
AAA Aaa 1,540 6.75% due 1/15/2010 1,627
Rhode Island Depositors Economic Protection Corporation, Special
Obligation Bonds, Series A(i):
AAA Aaa 35,000 5.75% due 8/01/2019 32,174
AAA Aaa 6,100 6.625% due 8/01/2002(a) 6,680
AAA Aaa 21,600 Rhode Island Health and Educational Building Corporation Revenue
Bonds (Rhode Island Hospital), 6.71% due 8/15/2021(h) 22,336
South Carolina-- AAA Aaa 7,000 Charleston, South Carolina, Waterworks and Sewer Revenue Refunding
6.8% Improvement Bonds, 6% due 1/01/2016(b) 6,754
AAA Aaa 5,000 Florence County, South Carolina, Hospital Revenue Bonds (McLeod
Regional Medical Center Project), 6.75% due 11/01/2020(h) 5,137
AAA Aaa 4,000 Georgetown County, South Carolina, Hospital Facilities Revenue
Refunding Bonds (Georgetown Memorial Hospital), Series B, 7.25%
due 11/01/2017(b) 4,413
AAA Aaa 1,750 Greenville, South Carolina, Hospital System, Hospital Facilities
Revenue Bonds, Series A, 7.50% due 5/01/2016(h) 1,866
AAA Aaa 2,410 Myrtle Beach, South Carolina, Water and Sewer System Revenue Bonds,
5.25% due 3/01/2020(e) 2,063
AAA Aaa 3,500 Pickens and Richland Counties, South Carolina, Hospital Facilities
Revenue Bonds (Baptist Hospital), Series A, 7% due 8/01/2001(a)(b) 3,896
Piedmont Municipal Power Agency, South Carolina, Electric Revenue
Refunding Bonds:
AAA Aaa 9,150 6.25% due 1/01/2021(h) 9,103
AAA Aaa 12,235 5% due 1/01/2022(h) 9,964
AAA Aaa 10,000 6.30% due 1/01/2022(e) 9,859
AAA Aaa 15,750 Series A, 7.40% due 1/01/2018(b) 17,057
AAA Aaa 29,100 South Carolina Jobs, EDA, Hospital Facilities Revenue Bonds,
5.41% due 8/01/2021(b) 24,802
South Carolina State Public Service Authority, Revenue Refunding
Bonds (Santee Cooper):
AAA Aaa 6,000 Series A, 5.50% due 7/01/2011(b) 5,568
AAA Aaa 37,805 Series A, 5.50% due 7/01/2021(e) 33,195
AAA Aaa 17,090 Series A, 6.375% due 7/01/2021(b) 16,970
AAA Aaa 4,000 Series B, 6.10% due 7/01/2027(b) 3,804
AAA Aaa 2,750 Series C, 5% due 1/01/2014(b) 2,324
AAA Aaa 18,500 Series C, 5% due 1/01/2018(h) 15,257
AAA Aaa 25,400 Series C, 5% due 1/01/2025(h) 20,485
Tennessee--0.2% AAA Aaa 1,905 Jackson, Tennessee, Water and Sewer System Revenue Bonds, 10.375%
due 7/01/2012 2,205
AAA Aaa 2,200 Knox County, Tennessee, Health, Educational and Housing Facilities
Board, Hospital Facilities Crossover Revenue Refunding Bonds (Mercy
Health Care System), Series A, 7.60% due 9/01/2019 2,465
<PAGE> 124
Texas--13.8% Austin, Texas, Utility System Revenue Bonds(e):
AAA Aaa 11,190 9.25% due 11/15/2004(a)(g) 14,245
AAA Aaa 5,250 Refunding, Series B, 5.25% due 5/15/2018 4,510
AAA Aaa 2,000 Bexar, Texas, Metropolitan Water District, Water Works System
Revenue Bonds, 5% due 5/01/2019(b) 1,650
Brazos River Authority, Texas, PCR, Refunding (Texas Utilities
Electric Company Project), AMT:
AAA Aaa 6,000 6.50% due 12/01/2027(b) 6,013
AAA Aaa 12,000 Series B, 6.625% due 6/01/2022(h) 12,134
Brazos River Authority, Texas, Revenue Refunding Bonds (Houston
Light and Power):
AAA Aaa 12,700 5.60% due 12/01/2017(e) 11,446
AAA Aaa 13,900 Series B, 7.20% due 12/01/2018(h) 15,159
AAA Aaa 20,000 Brownsville, Texas, Utility System Revenue Refunding Bonds, 6.25%
due 9/01/2014(e) 20,066
A1+ VMIG1 600 Harris County, Texas, Health Facilities Development Corporation,
Special Facilities, Revenue Bonds (Texas Medical Center Project),
VRDN, 3.40% due 2/15/2022(e)(f) 600
AAA Aaa 5,000 Harris County, Texas, Hospital District Mortgage, Revenue Refunding
Bonds, 7.40% due 2/15/2010(b) 5,616
AAA Aaa 1,695 Harris County, Texas, Toll Road Revenue Bonds, Series A, 6.50%
due 8/15/2011 1,734
Harris County, Texas, Toll Road Senior Lien Revenue Bonds:
AAA Aaa 6,045 5.30% due 8/15/2013(b) 5,378
AAA Aaa 2,750 6.50% due 8/15/2017(b) 2,770
AAA Aaa 42,065 5.375% due 8/15/2020(h) 36,624
AAA Aaa 4,000 5.50% due 8/15/2021(h) 3,539
AAA Aaa 10,305 Series A, 6.50% due 8/15/2002(a)(h) 11,218
AAA Aaa 15,250 Series A, 6.50% due 8/15/2002(a)(b) 16,622
AAA Aaa 8,390 Houston, Texas, Independent School District Refunding and School
House Bonds, 5.65% due 8/15/2009(b)(j)(k) 3,198
Houston, Texas, Water and Sewer System, Revenue Refunding Bonds,
Series C(b)(j)(k):
AAA Aaa 11,250 5.70% due 12/01/2009 4,258
AAA Aaa 17,700 5.70% due 12/01/2010 6,192
AAA Aaa 45,960 5.70% due 12/01/2011 15,005
AAA Aaa 53,850 5.78% due 12/01/2012 16,429
AAA Aaa 3,500 Houston, Texas, Water Conveyance System COP, Series J, 6.25%
due 12/15/2013(b) 3,527
Lower Colorado River Authority, Texas, Revenue Refunding Bonds:
AAA Aaa 5,000 5.15% due 1/01/2021 4,196
AAA Aaa 27,500 Fifth Supplemental Series, 5.25% due 1/01/2015(e) 24,029
AAA Aaa 4,415 Series B, 5.60% due 1/01/2009(c)(e)(j) 1,771
AAA Aaa 650 Series B, 7% due 1/01/2001(a)(b) 718
Matagorda County, Texas, Navigation District No. 1, PCR, AMT:
AAA Aaa 5,000 (Central Power and Light Company Project), 7.50% due 3/01/2020(b) 5,485
AAA Aaa 8,250 (Houston Light and Power), Series D, 7.60% due 10/01/2019(h) 9,063
Matagorda County, Texas, Navigation District No. 1, Revenue
Refunding Bonds (Houston Light and Power):
AAA Aaa 11,800 Series A, 6.70% due 3/01/2027(b) 12,034
AAA Aaa 26,305 Series C, 7.125% due 7/01/2019(h) 28,361
AAA Aaa 6,470 Series E, 7.20% due 12/01/2018(h) 7,031
</TABLE>
<PAGE> 125
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
Municipal Bonds Insured Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Texas AAA Aaa $ 15,000 Southwest Higher Education Authority Incorporated, Texas, Revenue
(concluded) Refunding Bonds (Southern Methodist University), Series B,
6.25% due 10/01/2022(h) $ 14,591
Tarrant County, Texas, Water Control and Improvement District No.
001, Water Revenue Refunding Bonds(b):
AAA Aaa 5,000 4.50% due 3/01/2011 4,074
AAA Aaa 5,000 4.75% due 3/01/2013 4,113
Texas Municipal Power Agency, Revenue Refunding Bonds:
AAA Aaa 10,000 5.50% due 9/01/2010(e) 9,388
AAA Aaa 33,885 6.10% due 9/01/2014(e)(j) 9,127
AAA Aaa 2,900 Series A, 6.75% due 9/01/2012(b) 3,008
Texas State Public Finance Authority, Building Revenue Capital
Appreciation Refunding Bonds(e)(j):
AAA Aaa 7,000 5.80% due 2/01/2009 2,761
AAA Aaa 2,890 6.10% due 2/01/2011 995
AAA Aaa 8,500 5.81% due 2/01/2012 2,736
Texas Turnpike Authority, Turnpike Revenue Refunding Bonds (Dallas
North Thruway)(b):
AAA Aaa 3,230 4.75% due 1/01/2011 2,733
AAA Aaa 2,085 4.75% due 1/01/2013 1,720
AAA Aaa 3,725 4.75% due 1/01/2014 3,042
AAA Aaa 25,875 Trinity River Authority, Texas, Regional Wastewater System, Revenue
Refunding Bonds, Series A, 5% due 8/01/2016(b) 21,688
Utah--1.5% AAA Aaa 2,805 Salt Lake City, Utah, Hospital Revenue Bonds (Holy Cross Health
System Corporation--Holy Cross Hospital), 7.375% due 12/01/2018(h) 3,020
AAA Aaa 28,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds (IHC Hospital,
Incorporated), 6.75% due 5/15/2020(b) 28,766
AA- Aaa 1,000 Uintah County, Utah, PCR (Deseret Generation and Transmission
Cooperative-National Rural Utilities Company), Series 1984 F-2,
10.50% due 6/15/2001(a) 1,298
AAA Aaa 2,650 Utah Board of Regents, Student Loan Revenue Bonds, AMT, Series F,
7.45% due 11/01/2008(b) 2,775
A1+ VMIG1 3,100 Utah Board of Regents, Student Loan Revenue Bonds, AMT, VRDN,
Series C, 2.60% due 11/01/2013(b)(f) 3,100
Utah Municipal Power Agency, Electric System Revenue Refunding
Bonds, Series A(h):
AAA Aaa 3,120 5.50% due 7/01/2012 2,850
AAA Aaa 3,295 5.50% due 7/01/2013 2,988
<PAGE> 126
Vermont--0.7% AAA Aaa 18,950 Vermont HFA Revenue Bonds (Home Mortgage Purchase), AMT, Series B,
7.60% due 12/01/2024(e) 19,578
Virginia--1.6% AAA Aaa 16,800 Prince William County, Virginia, Service Authority, Water and Sewer
System, Revenue Refunding Bonds, 5% due 7/01/2021(h) 13,758
AAA Aaa 19,020 Roanoke, Virginia, IDA, Hospital Revenue Bonds (Roanoke Memorial
Hospital Projects), Series A, 5% due 7/01/2024(e) 15,359
AAA Aaa 11,000 Upper Occoquan Sewer Authority, Virginia, Regional Sewer Revenue
Bonds, 6% due 7/01/2001(a)(e) 11,498
AAA Aaa 5,000 Winchester, Virginia, IDA, Hospital Facilities Revenue Refunding
Bonds (Winchester Medical Center--First Mortgage), SAVRS, 3.08%
due 1/21/2014(b)(d) 5,000
Washington--4.2% Seattle, Washington, Municipality, Metropolitan Seattle, Sewer
Revenue Bonds, Series W(e):
AAA Aaa 2,465 6.25% due 1/01/2022 2,405
AAA Aaa 4,485 6.25% due 1/01/2023 4,374
Seattle, Washington, Municipality, Metropolitan Seattle, Sewer
Revenue Refunding Bonds(h):
AAA Aaa 8,155 Series X, 5.30% due 1/01/2008 7,632
AAA Aaa 9,605 Series X, 5.375% due 1/01/2009 8,915
AAA Aaa 9,755 Series X, 5.40% due 1/01/2010 8,966
AAA Aaa 10,960 Series X, 5.40% due 1/01/2011 10,020
AAA Aaa 6,560 Series Y, 5.70% due 1/01/2015 6,082
AAA Aaa 3,315 Series Y, 5.70% due 1/01/2016 3,050
AAA Aaa 10,000 Seattle, Washington, Solid Waste Utility, Revenue Refunding
Bonds, Series A, 6.875% due 5/01/2009(g) 10,518
Tacoma, Washington, Sewer Revenue Bonds(e):
AAA Aaa 3,425 7.625% due 12/01/2006 3,741
AAA Aaa 4,075 7.625% due 12/01/2007 4,450
AAA Aaa 4,400 7.625% due 12/01/2008 4,805
AAA Aaa 3,250 University of Washington Revenue Bonds (Housing and Dining), 7% due
12/01/2021(e) 3,486
AAA Aaa 7,000 Washington Health Care Facilities Authority Revenue Bonds (Southwest
Washington Hospital-Vancouver), 7.125% due 10/01/2019(g) 7,600
D NR 719 Washington Public Power Supply System, Generating Facilities Revenue
Bonds (Nuclear Project Numbers 4 & 5), Series D, 12.50% due 7/01/2010 719
Washington Public Power Supply System, Revenue Refunding Bonds(e):
AAA Aaa 5,750 Project No. 1, 6.25% due 7/01/2017 5,606
AAA Aaa 12,380 Project No. 2, Series A, 5.70% due 7/01/2008 12,054
AAA Aaa 2,530 Washington Public Power Supply Systems, Revenue Refunding Bonds,
Project No. 1, Series A, 5.70% due 7/01/2017(e) 2,301
AAA Aaa 10,000 Washington Public Power Supply System, Revenue Refunding Bonds,
Project No. 1, Series B, 5.60% due 7/01/2015(e) 9,072
<PAGE> 127
West Virginia--0.8% AAA Aaa 9,270 Kanawha County, West Virginia, Building Commission Revenue Refunding
Bonds (Charleston Area Medical Center Inc.), Series A, 7.10% due
6/01/2013(e) 9,976
AAA Aaa 7,650 Putnam County, West Virginia, PCR, Refunding (Appalachian Power
Company Project), Series D, 5.45% due 6/01/2019(b) 6,690
AAA Aaa 5,600 West Virginia School Building Authority Revenue Bonds (Capital
Improvement), Series B, 6.75% due 7/01/2010(e) 5,810
Wisconsin--1.5% AAA Aaa 7,000 Superior, Wisconsin, Limited Obligation Revenue Refunding Bonds
(Midwest Energy Resources), Series E, 6.90% due 8/01/2021(h) 7,590
Wisconsin Health and Educational Facilities Authority Revenue Bonds:
AAA Aaa 1,500 (Saint Lukes Medical Center Project), 7.10% due 8/15/2019(e) 1,594
AAA Aaa 5,750 (Waukesha Memorial Hospital), Series B, 7.25% due 8/15/2019(b) 6,134
Wisconsin Public Power System Incorporated, Power Supply System
Revenue Bonds, Series A(b):
AAA Aaa 18,485 5.25% due 7/01/2021 15,644
AAA Aaa 6,500 6.875% due 7/01/2001(a) 7,211
Total Investments (Cost--$2,690,286)--96.3% 2,702,602
Other Assets Less Liabilities--3.7% 105,332
----------
Net Assets--100.0% $2,807,934
==========
<FN>
(a)Prerefunded.
(b)AMBAC Insured.
(c)Escrowed to maturity.
(d)The interest rate is subject to change periodically and inversely based upon the
prevailing market rate. The interest rate shown is the rate in effect at June 30,
1994.
(e)MBIA Insured.
(f)The interest rate is subject to change periodically based upon the prevailing
market rate. The interest rate shown is the rate in effect at June 30, 1994.
(g)BIG Insured.
(h)FGIC Insured.
(i)FSA Insured.
(j)Principal only securities which are traded on a discount basis and are amortized
to maturity.
(k)The interest rate shown represents the yield to maturity.
Ratings of issues shown have not been
audited by Deloitte & Touche.
</FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 128
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
Municipal Bonds National Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alaska--1.0% Valdez, Alaska, Marine Terminal Revenue Refunding Bonds:
AA- A1 $ 5,000 (British Petroleum Pipeline), Series B, 7% due 12/01/2025 $ 5,229
AA- A1 11,250 (Sohio Pipeline), 7.125% due 12/01/2025 11,819
Arizona--6.2% AA Aa 5,000 Arizona State Transportation Board, Highway Revenue Refunding
Bonds, Series A, 5% due 7/01/2010 4,467
A A3 19,500 Greenlee County, Arizona, IDA, PCR, Revenue Refunding (Phelps Dodge
Corporation Project), 5.45% due 6/01/2009 18,070
NR P1+ 3,100 Maricopa County, Arizona, IDA, M/F Housing Revenue Bonds (Vista
Ventana Apartments Project), VRDN, AMT, Series D, 2.60% due 6/01/2034
(a) 3,100
Phoenix, Arizona, Civic Improvement Corporation, Wastewater System,
Lease Revenue Bonds:
A NR 4,000 6.125% due 7/01/2003(k) 4,236
A A1 20,865 Refunding, 5% due 7/01/2018 16,807
A A1 6,930 Refunding, 4.75% due 7/01/2023 5,240
A1+ VMIG1 7,500 Phoenix, Arizona, VRDN, Series 1, 3.30% due 6/01/2018(a) 7,500
AA Aa 49,400 Salt River Project, Arizona, Agricultural Improvement and Power
District, Electric System Revenue Bonds, 5.050% due
1/01/2011(m) 43,354
Arkansas--0.0% AAA NR 500 Arkansas State, Development Finance Authority, S/F Mortgage
Revenue Bonds, Mortgage Back Securities Program, Series D,
5.65% due 6/01/2016(g) 452
NR NR 520 Hot Springs, Arkansas, Water Revenue Refunding Bonds, 5.60%
due 9/01/2008 501
California--2.6% SP1 MIG1++ 5,100 California State, RAN, Series B, 3.50% due 7/26/1994 5,102
NR NR 4,000 Long Beach, California, GO, Special Tax Community Facilities,
District No. 3, 6.375% due 9/01/2023 3,613
Los Angeles, California, Department of Water and Power, Electric
Plant Revenue Bonds, Second Issue:
AA Aa 5,000 4.75% due 10/15/2020 3,904
AA Aa 10,000 Crossover Refunding, 4.75% due 11/15/2019 7,869
SP1+ MIG2 20,000 Los Angeles County, California, Revenue Bonds, TRAN, 4.50% due
6/30/1995 20,154
A1+ VMIG1 3,900 Mountain View, California, M/F Housing Revenue Bonds (Villa
Mariposa Project), VRDN, Series A, 2.40% due 3/01/2017(a) 3,900
<PAGE> 129
Colorado--2.0% Boulder County, Colorado, Hospital Revenue Refunding Bonds
(Longmont United Hospital Project):
BBB+ Baa1 2,000 5.80% due 12/01/2013 1,790
BBB+ Baa1 1,000 5.875% due 12/01/2020 872
NR VMIG1 4,700 Colorado Student Obligation Bond Authority, Student Loan Revenue
Bonds, VRDN, Series A, 2.30% due 3/01/2024(a) 4,700
Denver, Colorado, City and County Airport Revenue Bonds, AMT:
BB Baa 8,570 Series A, 8% due 11/15/2025 8,600
BB Baa 1,310 Series B, 7.25% due 11/15/2007 1,282
BB Baa 3,000 Series B, 7.25% due 11/15/2023 2,765
BB Baa 5,650 Series C, 6.75% due 11/15/2022 4,952
BB Baa 7,840 Series D, 7.75% due 11/15/2021 7,716
Connecticut--1.4% AA+ Aa 2,500 Connecticut State Clean Water Fund Revenue Bonds, 5.80% due
6/01/2016 2,358
AA- Aa 4,900 Connecticut State, GO, Revenue Refunding Bonds, UT, Series B,
5.50% due 3/15/2012 4,599
A NR 750 Connecticut State Health and Educational Facilities Authority
Revenue Bonds (Taft School Issue),Series B, 5.40% due 7/01/2020 641
AA Aa 5,000 Connecticut State, HFA, Housing Mortgage Finance Program, Series B,
6.30% due 5/15/2024 4,856
AA- A 6,550 Connecticut State Resource Recovery Authority Revenue Bonds (American
Refuse Fuel), AMT, Series A, 8% due 11/15/2015 7,164
AA- A1 1,000 Connecticut State Special Tax Obligation Revenue Bonds (Trans-
portation Infrastructure), Series C, 5% due 10/01/2013 857
AA Aa 1,280 Danbury, Connecticut, UT, 4.50% due 2/01/2014 1,018
AAA Aaa 1,000 South Central Connecticut, Regional Water Authority, Water System
Revenue Bonds, 11th Series, 5.75% due 8/01/2012(f) 964
Westport, Connecticut, UT:
NR Aaa 580 5.70% due 6/15/2011 565
NR Aaa 580 5.75% due 6/15/2012 566
NR Aaa 580 5.75% due 6/15/2013 564
NR Aaa 580 5.75% due 6/15/2014 561
Delaware--0.5% BBB A1 7,500 Delaware State Health Facilities Authority Revenue Bonds (Beebe
Medical Center Project), 8.50% due 6/01/2016 8,125
District of AA- A1 7,500 District of Columbia Revenue Bonds (Georgetown University), 6.56% due
Columbia--0.5% 4/01/2022 7,463
<PAGE> 130
Florida--5.0% NR Aaa 10,580 Florida HFA, Home Ownership Revenue Bonds, AMT, Series G1, 7.90%
due 3/01/2022(g) 10,872
Florida State, Board of Education, Capital Outlay Refunding, UT,
Series B:
NR Aa 23,400 5.125% due 6/01/2008 21,485
NR Aa 21,600 5.125% due 6/01/2009 19,535
AA- Aa2 5,000 Hillborough County, Florida, IDA, PCR, Refunding (Tampa Electric
Company Project), Series 1991, 7.875% due 8/01/2021 5,562
AA Aa1 7,240 Jacksonville, Florida, Electric Authority Revenue Refunding Bonds
(Saint John's River Power Park System), Issue 2, Series 9, 5.25%
due 10/01/2021 6,155
NR NR 2,700 Leesburg, Florida, Hospital Capital Improvement Revenue Bonds
(Leesburg Regional Medical Center Project), Series 1991-A,
7.50% due 7/01/2002(k) 3,107
AAA NR 4,800 Orange County, Florida, HFA, Mortgage Revenue Bonds, AMT, Series A,
8.375% due 3/01/2021(g) 4,919
A1 VMIG1 6,085 Pinellas County, Florida, Health Facilities Authority Revenue
Refunding Bonds (Pooled Hospital Loan Program), DATES, VRDN,
3.40% due 12/01/2015(a)(f) 6,085
AA- Aa 5,000 Saint Petersburg, Florida, Public Utility, Revenue Bonds, 5.60%
due 10/01/2018 4,539
Georgia--1.7% AA- Aa 30,705 Atlanta, Georgia, Water and Sewer Revenue Refunding Bonds, 4.75%
due 1/01/2023 23,806
AA Aa 5,500 Fulton County, Georgia, School District, UT, 5.625% due 1/01/2021 4,972
Idaho--0.2% AA NR 2,775 Idaho Housing Agency, S/F Mortgage Revenue Bonds, AMT, Series E, 7.875%
due 7/01/2024(b) 2,864
<PAGE> 131
Illinois--6.0% Chicago, Illinois, Gas Supply Revenue Bonds (Peoples Gas, Light &
Coke Company Project), AMT, Series A:
AA- Aa3 8,000 8.10% due 5/05/2020 8,950
AA- Aa3 12,450 5.75% due 12/01/2023 10,981
Chicago, Illinois, O'Hare International Airport, Special Facilities
Revenue Bonds (United Airlines, Inc.):
BB Baa2 4,895 AMT, Series B, 8.95% due 5/01/2018 5,329
BB Baa2 14,330 Series 1984-B, 8.85% due 5/01/2018 15,642
AAA Aaa 5,015 Chicago, Illinois, Public Building Commission Revenue Bonds (Community
College District No. 508), Series B, 8.75% due 1/01/2007(d)(i) 5,544
A1+ MIG1++ 8,200 Chicago, Illinois, Tender Notes, VRDN, Series B, 2.30% due 10/31/1995
(a) 8,200
BBB NR 3,000 Illinois Educational Facilities Authority, Revenue Refunding Bonds
(Columbia College), 6.875% due 12/01/2017 3,003
Illinois Health Facilities Authority Revenue Bonds:
AAA Aaa 3,000 (Methodist Health Project), 6.90% due 5/01/2021(c) 3,100
AAA Aaa 10,000 (Rush-Presbyterian Saint Luke's Medical Center), 6.80% due
10/01/2024(f) 10,274
A+ A1 5,905 Illinois Health Facilities Authority, Revenue Refunding Bonds (OSF
Healthcare Systems), 6% due 11/15/2023 5,412
A+ Aa 11,500 Illinois Housing Development Authority, Residential Mortgage Revenue
Bonds, AMT, 6.874% due 2/01/2018 11,493
Metropolitan Pier and Exposition Authority, Illinois, Dedicated
State Tax Revenue Bonds (McCormick Place Expansion Project),
Series A(e)(j)(l):
AAA Aaa 18,595 5.75% due 6/15/2015 4,718
AAA Aaa 26,250 5.75% due 6/15/2016 6,239
NR A1 4,000 Southwestern Illinois, Development Authority, Sewer Facilities
Revenue Bonds (Monsanto Company Project), AMT, 7.30% due 7/15/2015 4,248
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Municipal Bonds National Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Indiana--0.7% NR Baa1 $ 3,500 Indiana Health Facilities Financing Authority, Hospital Revenue
Bonds (Riverview Hospital Project), 6.875% due 8/01/2017 $ 3,395
A+ A1 2,000 Indiana Transportation Finance Authority, Highway Revenue Bonds,
Series A, 7.25% due 6/01/2015 2,239
A+ NR 5,000 Indianapolis, Indiana, Local Public Improvement Refunding Bond Bank,
Series D, 6.75% due 2/01/2020 5,030
NR Aa 1,500 Marion County, Indiana, Hospital Authority, Hospital Facility
Revenue Bonds (Daughters of Charity--Saint Vincent's Hospital Project),
10.125% due 11/01/2015 1,626
<PAGE> 132
Iowa--0.6% NR NR 9,000 Iowa Financing Authority, Health Care Facilities Revenue Bonds (Mercy
Health Initiatives Project), 9.95% due 7/01/2019 9,512
Kentucky--1.0% Owensboro, Kentucky, Electric Light and Power Revenue Bonds, Series
B(c)(j)(l):
AAA Aaa 6,100 5.72% due 1/01/2011 2,112
AAA Aaa 6,475 5.75% due 1/01/2012 2,096
AAA Aaa 2,750 5.75% due 1/01/2013 830
NR NR 4,500 Perry County, Kentucky, Solid Waste Disposal Revenue Bonds (TJ
International Project), AMT, 7% due 6/01/2024 4,444
AA Aa2 6,345 Trimble County, Kentucky, PCR (Louisville Gas and Electric Company),
AMT, Series A, 7.625% due 11/01/2020 6,846
Louisiana--1.7% NR Ba1 24,000 Lake Charles, Louisiana, Harbor and Terminal District Port Facilities,
Revenue Refunding Bonds (Trunkline LNG Company Project), 7.75% due
8/15/2022 25,525
BB- NR 3,000 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain
Company Project), 7.50% due 7/01/2013 2,963
Maryland--1.5% AA- Aa 7,000 Maryland State Stadium Authority, Sports Facilities Lease Revenue
Bonds, AMT, Series D, 7.60% due 12/15/2019 7,733
A+ A1 14,750 Montgomery County, Maryland, PCR, Refunding (Potomac Electric Power
Company), 5.375% due 2/15/2024 12,700
NR Baa 2,850 Prince Georges County, Maryland, Hospital Revenue Bonds (Greater
Southeast Healthcare Systems), 6.375% due 1/01/2023 2,635
Massachusetts-- AAA Aaa 6,000 Massachusetts Bay Transportation Authority Revenue Bonds, Series B,
5.6% 7.875% due 3/01/2001(a) 6,965
A+ A 4,000 Massachusetts Bay Transportation Authority Refunding Bonds, Series B,
6.20% due 3/01/2016 3,943
A+ A 20,000 Massachusetts State, Consolidated Loans, UT, Series B, 9.25% due
7/01/2000 24,051
Massachusetts State, Health and Educational Facilities Authority
Revenue Bonds:
A- NR 4,250 (Jordon Hospital), Series C, 6.875% due 10/01/2022 4,241
NR NR 9,600 (North Adams Regional Hospital), Series A, 9.625% due 7/01/2018 10,240
NR Baa 12,350 Massachusetts State, Health and Educational Facilities Authority,
Revenue Refunding Bonds (New England Memorial Hospital), Series B,
6.25% due 7/01/2023 10,984
A1 VMIG1 4,000 Massachusetts State, Industrial Finance Agency Revenue Bonds, VRDN,
3.40% due 3/15/2004(a) 4,000
A+ A1 13,750 Massachusetts State, Turnpike Authority, Turnpike Revenue Refunding
Bonds, Series A, 5% due 1/01/2020 11,315
A A 12,105 Massachusetts State, Water Resources Authority, Refunding, Series B,
5% due 3/01/2022 9,721
A A 6,985 Massachusetts State, Water Resources Authority, Series A, 5.75% due
12/01/2021 6,318
<PAGE> 133
Michigan--5.3% A+ A 1,000 Marquette, Michigan, City Hospital Finance Authority, Hospital
Revenue Refunding Bonds (Marquette General Hospital), Series C,
7.50% due 4/01/2019 1,063
AAA VMIG1 6,600 Michigan Higher Education Student Loan Authority Revenue Bonds, AMT,
Series XII-F, 2.30% due 10/01/2020(a)(c) 6,600
Michigan State Building Authority Revenue Bonds:
AA- A 3,000 Refunding, Series I, 6.25% due 10/01/2020 2,917
AA- A 14,000 Series II, 6.25% due 10/01/2020 13,611
Michigan State Hospital Finance Authority, Hospital Revenue Bonds
(Detroit Medical Center):
A- A 3,500 Refunding, Obligation Group, Series A, 7.50% due 8/15/2011 3,766
A- A 6,500 Refunding, Series A, 6.50% due 8/15/2018 6,285
A- A 19,585 Refunding, Series B, 5.75% due 8/15/2013 17,594
A- A 10,000 Refunding, Series B, 5.50% due 8/15/2023 8,437
AAA Aaa 7,365 Michigan State Trunk Line, GO, Series A, 5.67% due 10/01/2012 2,271
BBB Baa1 9,350 Monroe County, Michigan, PCR (Detroit Edison Project), AMT, Series
A, 7.75% due 12/01/2019 10,056
Royal Oaks, Michigan, Hospital Financing Authority, Hospital
Revenue Refunding Bonds (William Beaumont Hospital), Series G:
AA Aa 3,250 5.50% due 11/15/2013 2,894
AA Aa 12,000 5.25% due 11/15/2019 10,017
West Ottowa, Michigan, Public School District, Revenue Refunding
Bonds UT(e)(j)(1):
AAA Aaa 5,275 5.85% due 5/01/2016 1,278
AAA Aaa 5,755 5.85% due 5/01/2017 1,306
Minnesota--1.2% AA+ NR 6,215 Minnesota State, HFA, S/F Mortgage Bonds, AMT, Series A, 7.45%
due 7/01/2022(b) 6,436
AAA NR 9,255 Saint Paul, Minnesota, Housing and Redevelopment Authority, S/F
Mortgage Revenue Refunding Bonds, Series C, 6.95% due 12/01/2031(g) 9,367
A+ A1 4,250 Southern Minnesota, Municipal Power Agency, Power Supply Systems,
Revenue Refunding Bonds, Series A, 4.75% due 1/01/2016 3,416
Mississippi--0.9% BBB Baa 5,950 Lowndes County, Mississippi, Hospital Revenue Refunding Bonds
(Golden Triangle Medical Center), 8.50% due 2/01/2010 6,446
Medical Center Educational Building Corporation, Mississippi,
Revenue Bonds (University of Mississippi Medical Center Project):
A- NR 1,000 5.65% due 12/01/2009 941
A- NR 1,500 5.80% due 12/01/2014 1,362
A- NR 5,000 5.90% due 12/01/2023 4,448
<PAGE> 134
Missouri--0.9% BBB- NR 3,625 Joplin, Missouri, IDA, Hospital Facilities Revenue Refunding and
Improvement Bonds (Tri-State Osteopathic), 8.25% due 12/15/2014 3,899
NR Baa1 6,150 Missouri State Health and Educational Facilities Authority, Health
Facilities Revenue Refunding Bonds (Jefferson Memorial Hospital
Association Project), 6% due 8/15/2023 5,275
A+ A1 4,000 Missouri State Regional Convention and Sports Complex Authority
Refunding Bonds, Series A, 5.60% due 8/15/2017 3,533
St. Louis County, Missouri, Regional Convention and Sports Complex
Authority Refunding Bonds, Series B:
BBB+ A 2,575 5.50% due 8/15/2013 2,267
BBB+ A 4,760 5.75% due 8/15/2021 4,155
Missouri & BBB+ NR 11,400 Bi-State Development Agency, Missouri and Illinois, Metropolitan
Illinois--0.9% No. 5, Revenue Refunding Bonds (American Commonwealth), No. 5,
7.75% due 6/01/2010 12,225
Montana--1.0% Forsyth, Montana, PCR, Refunding (The Montana Power Company):
BBB+ Baa1 12,000 Project A, 6.125% due 5/01/2023 11,180
BBB+ Baa1 5,000 Series B, 5.90% due 12/01/2023 4,512
Nebraska--0.6% AAA Aaa 10,600 Nebraska Investment Finance Authority, S/F Mortgage Revenue Bonds,
AMT, 7.631% due 9/10/2030(g) 11,037
New Hampshire--1.3% NR Baa1 7,065 New Hampshire Higher Educational and Health Facilities Authority
Revenue Bonds (Saint Anselm College), 6.375% due 7/01/2023 6,721
A+ Aa 3,315 New Hampshire State, HFA, S/F Residential Mortgage Bonds, AMT, 7.90%
due 7/01/2022 3,428
New Hampshire State, IDA, PCR (Public Service Co. of New Hampshire
Project), AMT:
BB+ Baa3 4,850 Series A, 7.65% due 5/01/2021 5,063
BB+ Baa3 6,500 Series C, 7.65% due 5/01/2021 6,792
</TABLE>
<PAGE> 135
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Municipal Bonds National Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New Jersey--2.3% New Jersey Building Authority, State Building Revenue Refunding
Bonds:
AA- Aa $ 15,000 5% due 6/15/2015 $12,888
AA- Aa 10,000 5% due 6/15/2018 8,381
NR NR 6,700 New Jersey Health Care Facilities Financing Authority Revenue
Bonds (Riverwood Center Issue), Series A, 9.90% due 7/01/2021 7,363
AA A 9,500 University Medicine and Dentistry of New Jersey, Revenue Bonds,
Series C, 7.20% due 12/01/2019 10,331
New Mexico--0.7% BB Ba2 12,000 Farmington, New Mexico, PCR, Refunding (Public Service Company,
San Juan Project), Series A, 6.40% due 8/15/2023 10,889
New York and Port Authority of New York and New Jersey, Consolidated Refunding
New Jersey--1.1% Bonds:
AA- A1 4,265 87th Series, 5.20% due 7/15/2012 3,797
AA- A1 3,705 87th Series, 5.25% due 7/15/2014 3,258
AA- A1 6,000 89th Series, 5.125% due 10/01/2021 4,985
AA- A1 8,000 91st Series, 5.20% due 11/15/2016 6,977
<PAGE> 136
New York--15.4% A A 5,700 Battery Park City Authority, New York, Revenue Refunding Bonds
(Junior Lien), Series A, 5.70% due 11/01/2023 5,005
Metropolitan Transportation Authority, New York, Service Contract
Revenue Refunding Bonds (Commuter Facilities), Series 5:
BBB Baa1 2,145 6.90% due 7/01/2006 2,247
BBB Baa1 5,000 7% due 7/01/2012 5,231
New York City, New York, GO, UT:
A- Baa1 3,600 Series A, 7.75% due 8/15/2016 3,968
A- Baa1 4,065 Series A, 7.75% due 8/15/2017 4,481
A- Baa1 1,450 Series A, 8% due 8/15/2018 1,647
A-1 VMIG1 6,000 Series B, 3.25% due 9/01/1995(a) 6,000
A- Baa1 5,375 Series B, 8.25% due 6/01/2006 6,348
A- Baa1 2,700 Series B, 8.25% due 6/01/2007 3,200
A- Baa1 10,000 Series B, 7.75% due 2/01/2011 11,046
A- Baa1 4,500 Series B, 7.75% due 2/01/2012 4,953
A- Baa1 2,875 Series B, 7.75% due 2/01/2013 3,165
A- Baa1 1,650 Series B, 7.75% due 2/01/2014 1,816
A- Baa1 2,000 Series D, 7.70% due 2/01/2011 2,203
A- Baa1 3,575 Series D, Group C, 8% due 8/01/2015 4,058
A- Aaa 1,085 Series F, 8.25% due 11/15/2001(k) 1,297
A- Aaa 5,495 Series F, 8.25% due 11/15/2001(k) 6,567
AAA VMIG1 6,500 New York City, New York, Municipal Water Finance Authority, Water
and Sewer System Revenue Bonds, VRDN, Series C, 3.30% due 6/15/2023
(a) 6,500
New York State Dormitory Authority Revenue Bonds (City University
Systems), Series A:
BBB Baa1 10,000 Consolidated, 2nd General, Series A, 5.75% due 7/01/2013 9,178
BBB Baa1 4,900 Crossover, Refunding, Series E, 5.75% due 7/01/2011 4,563
New York State Dormitory Authority Revenue Bonds (State University
Educational Facilities):
BBB Baa1 7,500 Refunding, Series A, 5.50% due 5/15/2010 6,868
BBB Baa1 5,000 Refunding, Series A, 5.875% due 5/15/2011 4,702
BBB+ Baa1 5,725 Refunding, Series A, 5.50% due 5/15/2013 5,101
BBB+ Baa1 6,000 Refunding, Series A, 6.25% due 5/15/2017 5,774
BBB+ Baa1 4,000 Refunding, Series A, 5.50% due 5/15/2019 3,501
BBB+ Baa1 15,000 Refunding, Series B, 5.25% due 5/15/2011 13,150
BBB+ Baa1 5,085 Refunding, Series B 7.375% due 5/15/2014 5,466
BBB+ Baa1 5,000 Series A, 7.50% due 5/15/2013 5,633
New York State Energy Research and Development Authority, Electric
Facilities Revenue Bonds (Long Island Lighting), AMT, Series A:
BB+ Ba1 10,500 7.15% due 6/01/2020 10,474
BB+ Ba1 13,000 7.15% due 12/01/2020 12,983
A-1+ NR 1,000 New York State Environmental Facilities Corporation, Resource Recovery
Revenue Bonds (OFS Equity Huntington Project), AMT, VRDN, 2.95% due
11/01/2014(a) 1,000
New York State Local Government Assistance Corporation:
A A 10,000 Refunding, Series A, 6.50% due 4/01/2020 10,052
A A 5,000 Refunding, Series B, 5.375% due 4/01/2016 4,376
A A 6,000 Series A, 7% due 4/01/2012(k) 6,369
A Aaa 4,000 Series B, 7.375% due 4/01/2012(k) 4,546
<PAGE> 137
A A 10,000 Series B, 6% due 4/01/2018 9,432
AAA Aaa 6,000 Series B, 7.50% due 4/01/2020 6,862
A A 5,000 Series D, 5.375% due 4/01/2014 4,419
A A 15,325 Series D, 5% due 4/01/2023 12,349
A A1 5,380 New York State Thruway Authority, General Revenue Bonds, Series A,
5.75% due 1/01/2019 4,938
Triborough Bridge and Tunnel Authority, New York, General Purpose
Revenue Refunding Bonds:
A+ Aa 9,000 Series A, 4.75% due 1/01/2019 7,110
A+ Aa 9,075 Series Q, 6.75% due 1/01/2009 9,710
A+ Aa 10,000 Series Y, 5.50% due 1/01/2017 8,962
Ohio--3.1% A A1 3,610 Cuyahoga County, Ohio, Hospital Revenue Bonds (Meridia Health
Systems), 7.25% due 8/15/2019 3,783
NR VMIG1 2,300 Cuyahoga County, Ohio, Hospital Revenue Bonds (University Hospital
of Cleveland), VRDN, 3% due 1/01/2016(a) 2,300
NR VMIG1 2,100 Franklin County, Ohio, Health Systems Revenue Bonds (Franciscan
Sisters--Saint Anthony Medical Center), Series B, VRDN, 3% due
7/01/2015(a) 2,100
NR VMIG1 3,000 Hamilton County, Ohio, Health System Revenue Bonds (Franciscan
Sisters Poor Health), Series A, 2.55% due 3/01/2017(a) 3,000
Ohio HFA, S/F Mortgage Revenue Bonds, AMT(g):
AAA Aaa 22,000 RIB, Series B-4, 6.903% due 3/31/2031 22,031
AAA NR 2,980 Series B, 8.25% due 12/15/2019 3,060
AAA NR 4,955 Series C, 7.85% due 9/01/2021 5,135
BBB- Baa2 14,000 Ohio State Air Quality Development Authority, PCR, Refunding
(Ohio-Edison), Series A, 5.95% due 5/15/2029 12,252
NR VMIG1 1,000 Student Loan Funding Corporation Cincinnati Ohio Student Loan
Revenue, Series A-2, AMT, VRDN, 2.25% due 1/01/2007(a) 1,000
Oregon--0.2% AA- Aa 1,135 Oregon State, PCR, UT, Series C, 5.625% due 6/01/2013 1,076
AAA Aaa 1,200 Polk County, Oregon, School District No. 002, GO, UT, 5.40% due
6/01/2012(h) 1,108
<PAGE> 138
Pennsylvania--5.8% NR A1 7,600 Allegheny County, Pennsylvania, Industrial Development Authority,
PCR, Refunding (Parkway Center Project), 3.35% due 5/01/2009 7,600
BB+ Baa3 15,650 Beaver County, Pennsylvania, IDA, PCR, Refunding (Ohio Edison
Project), Series A, 7.75% due 9/01/2024 16,399
A1+ NR 2,500 Geisinger Authority, Pennsylvania, Health System Revenue Bonds,
VRDN, Series B, 3.30% due 7/01/2022(a) 2,500
AA Aa 17,600 Pennsylvania, HFA, Revenue Refunding Bonds, 7% due 10/01/2023 17,800
NR P1 2,100 Pennsylvania Higher Educational Facilities Authority, College
and University Revenue Bonds (Temple University), VRDN, 3.10%
due 10/01/2009(a) 2,100
AAA Aaa 20,000 Pennsylvania State Higher Educational Assistance Agency, Student
Loan Revenue Bonds, AMT, 6.80% due 9/03/2026(c) 20,437
A1+ VMIG1 4,300 Pennsylvania State Higher Educational Assistance Agency Student Loan
Revenue Bonds, AMT, VRDN, Series B, 2.30% due 7/01/2018(a) 4,300
BBB Baa1 2,000 Philadelphia, Pennsylvania, Hospital and Higher Educational Facilities
Authority, Hospital Revenue Bonds (Frankford Hospital), Series A, 6%
due 6/01/2023 1,712
BBB Baa1 5,400 Philadelphia, Pennsylvania, Hospital and Higher Educational
Facilities Authority Revenue Bonds (Graduate Health Systems),
Series A, 6.25% due 7/01/2013 5,010
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
Municipal Bonds National Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Pennsylvania BBB Baa $ 7,335 Philadelphia, Pennsylvania, Water and Wastewater Revenue Refunding
(concluded) Bonds, 5.75% due 6/15/2013 $ 6,636
AAA Aaa 4,800 Pittsburgh, Pennsylvania, Water and Sewer Authority, Water and
Sewer System Revenue Refunding Bonds, Series A, 6.75% due 9/01/2001
(e) 5,294
BBB Baa 5,650 Ridley Park, Pennsylvania, Hospital Authority Revenue Refunding
Bonds (Taylor Hospital), Series A, 6.125% due 12/01/2020 4,924
AAA Aaa 2,500 York County, Pennsylvania, Hospital Authority Revenue Bonds (York
Hospital), 7% due 7/01/2001(c)(k) 2,767
A1+ P1 800 York County, Pennsylvania, IDA, PCR, Refunding (Philadelphia
Electric Company), Series A, 3.10% due 8/01/2016(a) 800
<PAGE> 139
Puerto Rico--0.7% BB Baa 1,025 Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue,
Series A, 7% due 7/01/2019 1,062
A Baa1 5,000 Puerto Rico Commonwealth Highway and Transportation Authority,
Highway Revenue Bonds, Series W, 5.25% due 7/01/2020 4,210
A Baa1 1,000 Puerto Rico Commonwealth Highway and Transportation Authority,
Highway Revenue Refunding Bonds, Series K, 5.50% due 7/01/2015 905
A Baa1 1,000 Puerto Rico Commonwealth Refunding Bonds, UT, 5.25% due 7/01/2018 849
NR Aaa 1,500 Puerto Rico, Industrial, Medical and Environmental Pollution Control
Facilities, Financing Authority Revenue Bonds, Series A, 5.10% due
12/01/2018 1,294
Rhode Island--2.4% Rhode Island Depositors Economic Protection Corporation, Special
Obligation Bonds, Series A:
AAA NR 5,250 6.95% due 8/01/2002(k) 5,856
A- Baa1 5,500 Refunding, 5.75% due 8/01/2012 5,032
A- Baa1 30,000 Refunding, 6.25% due 8/01/2016 28,519
South Carolina--0.9% BBB- Baa 8,355 South Carolina Jobs, EDA, Economic Development Revenue Bonds (Saint
Francis Hospital--Franciscan Sisters), 7% due 7/01/2015 8,229
A+ A1 8,750 South Carolina State, Public Service Authority, Revenue Refunding
Bonds, Series C, 5.125% due 1/01/2021 7,210
Tennessee--0.6% NR NR 10,000 Knox County, Tennessee, Health, Educational and Housing Facilities
Board, Hospital Facilities Revenue Bonds (Baptist Health System of
East Tennessee), 8.60% due 4/15/2016 10,537
Texas--9.0% A- NR 13,500 Brazos County, Texas, Health Facility Development Corporation,
Franciscan Services Corporation, Revenue Refunding Bonds (Saint
Joseph Hospital and Health Center), Series B, 6% due 1/01/2013 12,320
Brazos River Authority, Texas, PCR (Texas Utilities Electric
Company Project), AMT, Series A:
BBB Baa2 2,095 8.25% due 1/01/2019 2,271
BBB Baa2 18,150 7.875% due 3/01/2021 19,585
A A2 12,350 Brazos River Authority, Texas, Revenue Refunding Bonds (Houston
Light and Power), Series 1989-A, 7.625% due 5/01/2019 13,183
Dallas, Texas, Waterworks and Sewer Systems, Revenue Refunding
and Improvement Bonds, Series A:
AA Aa 2,195 4% due 10/01/2012 1,565
AA Aa 2,320 4% due 10/01/2013 1,634
BBB Baa1 5,000 Gulf Coast Waste Disposal Authority, Texas, Revenue Bonds (Champion
International Corporation), AMT, 7.45% due 5/01/2026 5,182
Harris County, Texas, Certificates of Obligation, Tax and Revenue
Bonds:
AA+ Aa 2,400 10% due 10/01/2000 3,009
<PAGE> 140
AA+ Aa 2,400 10% due 10/01/2001 3,077
A1+ NR 1,200 Harris County, Texas, Health Facilities Development Corporation,
Hospital Revenue Bonds (Saint Lukes Episcopal), Series D, 3% due
2/15/2016(a) 1,200
Houston, Texas, Water and Sewer System, Revenue Refunding Bonds
(Junior Lien), Series C(c)(j)(l):
AAA Aaa 3,500 5.80% due 12/01/2009 1,325
AAA Aaa 5,000 5.80% due 12/01/2010 1,749
BBB- Baa 8,255 Jefferson County, Texas, Health Facilities Development Corporation,
Hospital Revenue Bonds (Baptist Healthcare System Project), 8.875%
due 6/01/2021 9,196
A NR 19,410 Lower Colorado River Authority, Texas, Revenue Refunding Bonds
(Junior Lien 4th), 5.25% due 1/01/2015(i) 17,494
AA Aa 24,000 North Central Texas, Health Facilities Development Corporation
Revenue Bonds (Baylor University Medical Center), Series A,
6.70% due 5/15/2016 24,801
AAA Aaa 13,685 Round Rock, Texas, Independent School District and School Building
Refunding Bonds, UT, 5.80% due 8/15/2011(f)(j)(l) 4,553
San Antonio, Texas, Refunding and General Improvement Bonds:
AA Aa 2,535 4% due 8/01/2011 1,917
AA Aa 4,610 4% due 8/01/2012 3,475
AA Aa 4,885 4% due 8/01/2013 3,614
AA Aa 5,775 4% due 8/01/2014 4,158
A+ Aa 10,105 Texas Housing Agency, Residential Development Mortgage Revenue
Bonds, Series A, 7.50% due 7/01/2015(g) 10,182
BBB Baa2 2,000 West Side Calhoun County, Texas, Navigation District, Solid Waste
Disposal Revenue Bonds (Union Carbide Chemicals Project), AMT, 6.40%
due 5/01/2023 1,859
Utah--0.9% AA Aa 7,835 Intermountain Power Agency, Utah, Power Supply Revenue Bonds, Series
B, 5.35% due 7/01/2004(j)(l) 4,337
AA Aa 5,000 Intermountain Power Agency, Utah, Power Supply Revenue Refunding
Bonds, Series A, 5.81% due 7/01/2017(j)(l) 1,098
A1+ VMIG1 8,100 Utah State Board Regents, Student Loan Revenue Bonds, Series B,
2.25% due 11/01/2000(a) 8,100
Virginia--0.5% A+ A1 9,000 Alexandria, Virginia, IDA, PCR, Refunding (Potomac Electric Project),
5.375% due 2/15/2024 7,738
Washington--2.2% AA Aa 20,000 Washington State, GO, Series A, 4.50% due 10/01/2018 14,903
Washington State Public Power Supply System, Revenue Refunding
Bonds (Nuclear Project #2), Series A:
AA Aa 16,470 5.80% due 7/01/2007 15,995
AA Aa 6,195 5.75% due 7/01/2012 5,682
Total Investments (Cost--$1,634,001)--96.1% 1,597,539
Other Assets Less Liabilities--3.9% 64,811
----------
Net Assets--100.0% $1,662,350
==========
<PAGE> 141
<FN>
(a)The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at June 30, 1994.
(b)FHA Insured.
(c)AMBAC Insured.
(d)BIG Insured.
(e)FGIC Insured.
(f)MBIA Insured.
(g)GNMA/FNMA Collateralized.
(h)FSA Insured.
(i)Escrowed to Maturity.
(j)The interest rate shown represents the yield to maturity.
(k)Prerefunded.
(l)Principal only securities which are traded on a discount basis and are
amortized to maturity.
(m)The interest rate is subject to change periodically and inversely based upon
prevailing market rates. The interest rate shown is the rate in effect at
June 30, 1994.
++Represents the highest short-term rating issued by Moody's Investors Service, Inc.
Ratings off issues shown have not been audited by Deloitte & Touche.
</FN>
See Notes to Financial Statements.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
Municipal Bonds Limited Maturity Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alabama--0.5% NR Aa $ 5,050 Alabama State Public School and College Authority, Refunding
Bonds, 3.70% due 12/01/1996 $ 4,962
<PAGE> 142
Alaska--1.0% Alaska State Housing Finance Corporation, GO, Series A:
A+ Aa 2,300 3.80% due 12/01/1994 2,304
A+ Aa 1,700 4.20% due 12/01/1995 1,692
AAA Aaa 5,000 Anchorage, Alaska, GO, Refunding Bonds, 4.85% due 7/01/1995(d) 5,045
Arizona--0.9% A+ A1 3,000 Maricopa County, Arizona, Transportation Board, Excise Tax Revenue
Bonds, 7.10% due 7/01/1996 3,140
AAA NR 5,000 Phoenix, Arizona, Street and Highway Revenue Refunding Bonds, 7.50%
due 7/01/1994(a) 5,101
AA P1 300 Pinal County, Arizona, IDA, PCR (Magma Copper/Newmont Mining Corp),
DDN, 3.40% due 12/01/2009(b) 300
California--3.0% NR VMIG1 5,850 California Higher Education Loan Authority, Student Loan Revenue
Refunding Bonds, Senior Lien, Series A-1, 3.90% due 7/01/1995 5,850
SP-1 MIG1++ 2,200 California State, RAN, Series B, 3.50% due 7/26/1994 2,201
A+ Aa 10,000 California State Various Purpose Bonds, GO, 4% due 10/01/1995 10,030
AA Aa 5,005 California Statewide Communities Development Authority, Revenue
Bonds, COP (Saint Joseph Health Systems), 4.10% due 7/01/1997 4,907
AA- Aa 1,100 San Diego County, California, Water Authority, Water Revenue Bonds,
COP, Series A, 4.10% due 5/01/1995 1,102
AAA Aaa 4,750 San Francisco, California, City and County Airports, International
Airport Revenue Refunding Bonds, Second Series, Issue 1, 6.10% due
5/01/1998(c) 4,940
Colorado--2.4% NR A 5,000 Colorado Student Obligation Bond Authority, Student Loan Revenue
Bonds, Series B, 5.10% due 12/01/1994 5,033
NR NR 10,000 Denver, Colorado, City and County Airport Revenue Bonds, Sub-series
B, 4.25% due 9/01/1995(b) 10,040
AAA Aaa 3,500 Denver, Colorado, Metropolitan Major League Baseball Stadium
District, Revenue Refunding Bonds (Sales Tax--Baseball Stadium
Project), 3.65% due 10/01/1997(f) 3,393
AA Baa1 3,810 Jefferson County, Colorado District No. R-001, Revenue Refunding
Bonds, Series A, 3.65% due 12/15/1996 3,737
Connecticut--3.4% Connecticut State Economic Recovery Notes, GO, Series A:
AA- Aa 4,200 5.25% due 12/15/1994 4,245
AA- Aa 3,900 5.40% due 12/15/1995 3,985
AA- Aa 3,250 5.50% due 6/15/1996 3,329
Connecticut State, GO:
AA- Aa 3,650 Series A, 5.20% due 3/15/1996 3,698
AA- Aa 6,705 Series B, 4.90% due 11/15/1995 6,800
NR Aa3 3,955 Connecticut State Housing Mortgage Revenue Bonds (Chestnut
Hill Apartments), 4.60% due 4/01/1997 3,940
AA- A1 3,515 Connecticut State Special Tax Obligation Revenue Bonds, Trans-
portation Infrastructure, Series C, 4.40% due 10/01/1997 3,485
AAA Aaa 2,000 Stratford, Connecticut, GO, 3.50% due 11/01/1996(f) 1,959
<PAGE> 143
Delaware--0.2% AAA Aaa 1,500 Delaware Realty Transfer Tax Revenue Bonds (Land and Water Con-
servation Trust Fund Program), 5.30% due 4/01/1995(f) 1,518
District of District of Columbia, General Fund Recovery Bonds DDN:
Columbia--1.8% A1+ VMIG1 3,400 Series B-3, 3.45% due 7/01/1994 3,400
AAA Aaa 11,000 Series C, 5.50% due 6/01/1995(f) 11,120
AAA Aaa 1,465 District of Columbia, GO, Series B, UT, 5.30% due 6/01/1995(d) 1,478
Florida--4.8% Dade County, Florida, Aviation Revenue Refunding Bonds, Series X:
A Aa 3,595 3.75% due 10/01/1994 3,599
A Aa 2,000 4.10% due 10/01/1995 2,010
AAA Aaa 1,900 Dade County, Florida, Water System Revenue Refunding Bonds, 4%
due 6/01/1995(f)(g) 1,907
Florida State Division, Board of Finance Revenue Bonds (Department
of Natural Resources Preservation 2000), Series A(c):
AAA Aaa 5,000 6.10% due 7/01/1994 5,000
AAA Aaa 5,000 6.10% due 7/01/1995 5,111
Florida State, GO, COP (Construction Equipment Financing Program):
A+ A 15,000 5.55% due 11/15/1994 15,109
A+ A 3,860 5.75% due 11/15/1995 3,945
Florida State Turnpike Authority, Turnpike Revenue Bonds, Series
A(f):
AAA Aaa 2,000 5% due 7/01/1994 2,000
AAA Aaa 2,375 5% due 7/01/1995 2,401
AAA Aaa 4,000 Homestead, Florida, Special Insurance Assessment Revenue Bonds
(Hurricane Andrew Covered Claim), 4.20% due 3/01/1996(d) 3,984
Georgia--1.1% A- A3 5,000 Crisp County, Georgia, Development Authority, Solid Waste Disposal
Revenue Bonds (International Paper Company), AMT, Series B, 3.35%
due 9/10/1994 4,999
AA Aa1 2,000 Gwinnett County, Georgia, COP (Water and Sewer), 7.60% due 8/01/1995 2,076
AAA Aaa 3,965 Metropolitan Atlanta, Georgia, Rapid Transit Authority, Sales Tax
Revenue Refunding Bonds, Series P, 4.75% due 7/01/1995(c) 3,998
<PAGE> 144
Illinois--7.3% Chicago, Illinois, Metropolitan Water Reclamation District, Greater
Chicago Revenue Refunding Bonds:
AA Aa 5,000 4% due 12/01/1996 4,944
AA Aa 3,100 4.10% due 12/01/1995 3,109
AA Aa 3,000 4.50% due 12/01/1996 2,998
A+ A1 2,580 Chicago, Illinois, O'Hare International Airport Revenue Bonds,
Series A, AMT, 4.40% due 1/01/1995 2,589
SP1+ NR 10,000 Chicago, Illinois, Park District Notes, GO, 3.25% due 10/01/1994 9,986
AAA Aaa 2,755 Chicago, Illinois, School Financing Authority, Revenue Refunding
Bonds, Series A, 5% due 6/01/1995(f) 2,773
Chicago, Illinois, Tender Notes:
A1+ VMIG1 7,500 Series A-1, 3.10% due 10/31/1995 7,500
A1+ VMIG1 15,000 Series B, 3.85% due 10/31/1994 15,046
AAA Aaa 3,750 Cook County, Illinois, High School District No. 205 Revenue Bonds,
UT (Thornton Township), 5% due 6/01/1995(f) 3,797
AAA Aaa 3,975 Illinois Educational Facilities Authority Revenue Bonds (University
of Chicago), 7% due 12/01/1996(a) 4,267
Illinois State, GO:
AA- Aa 3,000 5.50% due 6/01/1995 3,039
AA- Aa 4,120 5.25% due 10/01/1994 4,139
A A1 3,625 Illinois State Toll and Highway Authority, Revenue Refunding Bonds,
Series A, 3.70% due 1/01/1996 3,577
Indiana--0.5% AA- Aa 4,800 Purdue University, Indiana, University Revenue Bonds, Student
Fees, Series J, 4.15% due 7/01/1996 4,762
Kentucky--1.8% A A 13,000 Kentucky State Property and Building Community, Revenue Refunding
Bonds, Project No. 55, 3.60% due 9/01/1996 12,737
AAA Aaa 3,250 Kentucky State Turnpike Authority, Economic Development,
Refunding Revenue Bonds (Revitalization Projects), 4% due
7/01/1996(c) 3,224
Louisiana--1.1% Louisiana State Offshore Terminal Authority Revenue Bonds
(Deepwater Port), Series B:
A A3 4,000 4.20% due 9/01/1994 3,997
A A3 5,410 4.60% due 9/01/1995 5,441
NR NR 905 New Orleans, Louisiana, COP, 6.75% due 10/01/1994 912
</TABLE>
<PAGE> 145
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Municipal Bonds Limited Maturity Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Maine--0.6% AA+ Aa $ 5,255 Maine State General Purpose Bonds, 4.10% due 9/01/1995 $ 5,279
Maryland--0.6% AA+ Aaa 1,000 Baltimore County, Maryland, Metropolitan District, 63rd Issue,
Special Assessment Revenue Bonds, UT, 5.70% due 7/01/1994 1,000
A+ A1 4,535 Maryland State Transportation Authority Revenue Bonds UT, 6% due
7/01/1995 4,626
Massachusetts-- BBB+ NR 4,157 Massachusetts State, COP, 5.10% due 6/30/1996 4,186
4.9% A+ A 7,000 Massachusetts State, GO, Revenue Refunding Bonds, Series C, 3.55%
due 9/01/1994 6,991
AAA Aaa 2,900 Massachusetts State, GO, Series A, Dedicated Income Tax, 7% due
6/01/1995 (f) 2,978
AAA Aaa 7,535 Massachusetts State, GO, Series A, 7.87% due 6/01/1997 8,195
Massachusetts State Health and Educational Facilities Authority
Revenue Bonds:
AAA NR 4,590 (Melrose-Wakefield Hospital), Series A, 8.625% due 7/01/1996(a) 5,042
AAA Aaa 2,005 (New England Medical Center Hospitals), Series G, 3.80% due
7/01/1997(d) 1,950
Massachusetts State, HFA, Housing Projects, Revenue Refunding Bonds,
Series A:
A+ A1 6,720 3.90% due 4/01/1995(g) 6,688
A+ A1 3,600 4.40% due 10/01/1996 3,572
Massachusetts State Water Resource Authority, GO, Series A:
A A 1,690 6.70% due 4/01/1995 1,722
AAA Aaa 2,555 6.70% due 4/01/1995(g) 2,617
NR NR 1,015 South Hadley, Massachusetts, Industrial Revenue Bonds (South Hadley
Health Care), AMT, Series A, 5% due 12/01/1996 1,015
Michigan--1.4% NR VMG1 1,000 Detroit, Michigan, Downtown Development Authority Revenue Bonds
(Millender Center Project), VRDN, 2.40% due 7/01/1994(b) 1,000
SP1 MIG1++ 5,075 Detroit, Michigan, GO, Notes, 3.80% due 7/01/1995 5,136
A1 NR 600 Detroit, Michigan, Tax Increment Finance Authority Revenue Bonds, VRDN,
2.75% due 7/01/1994(b) 600
AAA NR 5,475 Michigan State Hospital Finance Authority Revenue Bonds (Harper--Grace
& Huron Valley Hospitals), Series A, 10% due 10/01/1995(a) 5,958
NR VMG1 800 Michigan State Strategic Fund, Solid Waste Disposal Revenue Bonds
(Grayling Generating Project), AMT, DDN, 2.75% due 1/01/2014(b) 800
<PAGE> 146
Minnesota--1.3% A1+ VMIG1 300 Duluth, Minnesota, Tax Increment Revenue Bonds (Lake Superior Paper),
DDN, 2.65% due 7/01/1994(b) 300
Hennepin County, Minnesota, Capital Improvement Bonds, Series B:
AAA Aaa 4,300 2.80% due 12/01/1994 4,292
AAA Aaa 3,225 3.25% due 12/01/1995 3,206
AAA Aaa 1,600 Minneapolis and St. Paul, Minnesota, Metropolitan Airports Revenue
Bonds, AMT, Series 8, 4.60% due 1/01/1995 1,607
AA+ NR 1,650 Minnesota Public Facilities Authority, Water Pollution Control
Revenue Bonds, Series A, 4.70% due 3/01/1995 1,662
Mississippi--1.1% A NR 10,000 Mississippi Higher Education Assistance Corporation, Student Loan
Revenue Refunding Bonds, Series C, AMT, 5.40% due 1/01/1996 10,126
Missouri--1.7% NR VMIG1 2,300 Missouri Higher Education Loan Authority, Student Loan Revenue
Bonds, DDN, AMT, Series A, 2.85% due 6/01/2017(b) 2,300
SP1+ NR 14,500 Missouri State Environmental Improvement and Energy Resource
Authority, Water, PCR (State Revolving Fund Program), Series
A, 3.90% due 9/01/1996 14,265
Nebraska--2.5% Nebraska Public Power District Revenue Bonds:
A+ A1 8,000 (Nuclear Facility), 3.60% due 7/01/1994 8,000
A+ A1 7,000 (Nuclear Facility), 4% due 7/01/1995 6,999
A+ A1 3,570 (Power Supply System), Series C, 3.50% due 1/01/1996 3,516
A+ A1 3,500 Refunding (Electric System), Series A, 4.50% due 1/01/1995 3,516
Nevada--0.8% AAA Aaa 7,000 Washoe County, Nevada, Airport Authority, Airport Systems
Improvement Revenue Bonds, AMT, Series A, 3.90% due 7/01/1995(d) 6,982
<PAGE> 147
New Jersey--7.9% Camden County, New Jersey, Improvement Authority (Solid Waste
Disposal), Revenue Refunding Bonds (Landfill Project):
A- A1 1,125 3.55% due 7/01/1995 1,121
A- A1 2,000 4% due 7/01/1997 1,954
AA+ Aaa 4,500 Middlesex County, New Jersey, Refunding Bonds, 3.60% due 7/15/1996 4,442
AAA Aaa 3,820 Middlesex County, New Jersey, Utility Authority, Solid Waste System
Revenue Bonds, 5.20% due 12/01/1995(f) 3,890
AA- Aa 4,365 New Jersey State Building Authority, Revenue Refunding Bonds, 4.20%
due 6/15/1997 4,314
AA+ NR 6,000 New Jersey State Governmental, GO, 5.80% due 8/01/1994(g) 6,015
New Jersey State Housing and Mortgage Finance Agency, Revenue
Refunding Bonds, Series 1:
A+ NR 3,670 4% due 11/01/1994 3,679
A+ VMIG1 5,000 3.40% due 3/29/1995 5,000
A+ NR 3,765 4.50% due 11/01/1995 3,760
New Jersey State Transportation Trust Fund Authority Revenue
Bonds (Transportation Systems):
A+ AA 5,505 Refunding, Series B, 3.20% due 6/15/1995 5,463
A+ AA 25,000 Series A, 5% due 12/15/1997 25,157
A A 2,160 New Jersey State Turnpike Authority, Revenue Refunding Bonds,
Series A, 5.50% due 1/01/1996 2,189
Passaic Valley, New Jersey, Sewage Commissioners Revenue Refunding
Bonds, Series D(c):
AAA Aaa 3,100 5.70% due 12/01/1994 3,132
AAA Aaa 3,265 5.70% due 12/01/1995 3,348
New Mexico--0.8% A1+ P1 5,000 Farmington, New Mexico, PCR, Refunding (Arizona Public Service Co.),
Series A, DDN, 3.30% due 5/01/2024(b) 5,000
AAA Aaa 2,500 New Mexico Education Loan Assistance Foundation, Student Loan
Revenue Bonds, Series A, AMT, 5.75% due 4/01/1996(c) 2,531
New York--4.4% AAA Aaa 4,000 Albany County, New York, Revenue Refunding Bonds, 3.30% due
10/01/1995(f) 3,985
AAA Aaa 2,000 Nassau County, New York, GO, 3.62% due 10/01/1997(c) 1,919
New York City, New York, GO:
A- Baa1 5,000 Refunding, Series A, 4.60% due 8/01/1995 5,028
A- Baa1 3,000 Series A, 7.20% due 3/15/1995(a)(g) 3,079
A- Aaa 945 Series D, 6.40% due 2/01/1995(a)(g) 962
A- Baa1 10,405 Series D, 6.40% due 2/01/1995 10,550
New York State Dormitory Authority Revenue Bonds, Series B:
A1+ VMIG1 7,000 (Cornell University), DDN, 3% due 7/01/2025(b) 7,000
A1+ VMIG1 7,000 (New York Public Library), 3.875% due 7/01/1995 7,029
A A 2,000 New York State Local Government Assistance Corporation Revenue
Bonds, Series A, 5% due 4/01/1995 2,014
<PAGE> 148
North Carolina--1.3% AAA Aaa 9,490 North Carolina Municipal Power Agency, Revenue Refunding Bonds
(Catawba Electric Project No. 1), 4.60% due 1/01/1997(f) 9,470
NR VMIG1 3,700 Person County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority Revenue Bonds (Solid Waste Disposal-
Carolina Power and Light Company Project), AMT, DDN, 3.30% due
11/01/2016(b) 3,700
North Dakota--0.5% NR Aa 5,000 North Dakota Student Loan Revenue Refunding Bonds, Series A, 5.40%
due 7/01/1996 5,072
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Municipal Bonds Limited Maturity Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Ohio--11.6% Cincinnati, Ohio, City School District:
A+ NR $ 2,500 RAN, 5.35% due 6/15/1996 $ 2,535
A+ NR 7,500 TAN, 5% due 6/01/1995 7,593
Cleveland, Ohio, City School District, RAN(c):
AAA Aaa 3,000 4.20% due 6/01/1996 2,984
AAA Aaa 10,000 4.35% due 6/01/1997 9,858
NR Aa1 2,700 Columbus, Ohio, Sewer Improvement Revenue Bonds (Waterworks
Parks), 6.75% due 7/01/1995(g) 2,777
NR MIG1++ 5,100 North Olmsted, Ohio, BAN, 3.97% due 12/15/1994 5,125
Ohio State Air Quality Development Authority, PCR (Ohio Edison
Company):
AAA Aaa 6,700 5.65% due 9/01/1994 6,714
A1+ VMIG1 10,500 Refunding, Series A, 4.25% due 8/01/1996 10,427
A1+ VMIG1 6,700 Series A, 3.45% due 2/01/1996 6,582
A1+ P1 3,000 Series C, AMT, 3.125% due 9/01/1994 3,000
A+ A1 2,500 Ohio State Building Authority, Revenue Refunding Bonds (State
Correctional Facility), Series A, 3.70% due 10/01/1994 2,501
A+ A1 5,620 Ohio State Higher Education Facilities Revenue Bonds, Series II-B,
5.875% due 12/01/1994 5,677
Ohio State Public Facilities Commission, Higher Education Facilities:
A+ A1 3,300 Capital Facilities, Series II-A, 5.30% due 12/01/1996 3,347
AAA AAA 5,000 Capital Facilities, Series II-A, Refunding, 4.60% due 6/01/1997(c) 4,973
A+ A1 3,090 Capital Facilities, Series II-C, Refunding, 4% due 12/01/1994 3,100
AAA Aaa 1,995 Series II-A, 6.25% due 5/01/1995(c) 2,039
A+ A1 8,500 Series II-B, 4.625% due 12/01/1996 8,514
A1+ P1 4,000 Ohio State Water Development Authority, Pollution Control Facility
Revenue Bonds (Ohio Edison Company Project), AMT, Series B, 3.125%
due 9/01/1994 4,000
NR MIG1++ 6,140 Toledo, Ohio, City Services Special Assessment Notes, 3.20% due
12/01/1994 6,145
AAA Aaa 10,250 Trumbull County, Ohio, Hospital Revenue Bonds (Trumbull Memorial
Hospital Project), 9.625% due 11/01/2012(a)(f) 11,172
<PAGE> 149
Oklahoma--0.7% A+ Aa 6,370 Oklahoma County, Oklahoma, Independent School District No. 89, 6.50%
due 2/01/1998 6,705
Pennsylvania--0.3% AAA Aaa 3,000 Pittsburgh, Pennsylvania, Water and Sewer Authority, Revenue
Refunding Bonds, Series A, 3.50% due 9/01/1996(f) 2,937
Puerto Rico--1.2% BBB Baa 7,065 Puerto Rico, Finance Housing Agency, Revenue Refunding Bonds, 3.75%
due 12/01/1995 6,978
A Baa1 3,415 Puerto Rico Public Buildings Authority, Revenue Refunding Bonds,
Series J, 5.20% due 7/01/1995 3,452
Rhode Island--2.3% Providence, Rhode Island, Redevelopment Agency, BAN:
NR NR 3,120 (Parcel 12 Project), Series 2, 4.25% due 7/28/1994 3,122
NR NR 3,435 (Promenade Project), Series I, 4.25% due 7/28/1994 3,437
Rhode Island Depositors Economic Protection Corporation, Special
Obligation Bonds, Series A(e):
AAA Aaa 4,395 4.70% due 8/01/1994 4,400
AAA Aaa 4,180 5% due 8/01/1995 4,228
NR A 6,000 Rhode Island State, Student Loan Authority, Student Loan Revenue
Refunding Bonds, Series A, 5.70% due 12/01/1996 6,188
South Carolina--1.4% NR NR 7,800 Berkeley County, South Carolina, Water and Sewer, BAN, 3.25% due
9/01/1994 7,802
AA- A1 1,000 Charleston, South Carolina, Waterworks and Sewer Improvement Revenue
Refunding Bonds, 4.45% due 1/01/1995 1,004
A+ A1 5,170 South Carolina State Public Service Authority Revenue Refunding
Bonds, Series C, 3.80% due 1/01/1997 5,043
<PAGE> 150
Texas--9.1% AAA Aaa 4,880 Austin, Texas, Utility System Revenue Refunding Bonds, Series A,
Prior Lien, 4.80% due 11/15/1995(d) 4,937
Brazos, Texas, Higher Education Authority, Student Loan Revenue
Refunding Bonds, AMT:
NR Aaa 2,250 Series A-1, 5% due 12/01/1996 2,254
NR Aaa 2,000 Series C-1, 5% due 11/01/1995 2,021
NR Aa 5,455 Series C-1, 5.60% due 11/01/1997 5,596
AAA Aaa 3,250 Dallas, Texas, Regional Airport Revenue Refunding Bonds
(Dallas-Fort Worth International Airport), 3.75% due 11/01/1996(d) 3,192
NR A1 950 Fort Bend County, Texas, IDR, Corporate, Refunding (Frito Lay
Incorporated Project), 4% due 10/01/1996 936
NR A1 3,650 Fort Bend County, Texas, PCR, Corporate, IDR, Refunding (Frito Lay
Incorporated Project), 4% due 10/01/1996 3,595
Harris County, Texas, Health Facilities Development Corporation,
Hospital Revenue Bonds (Saint Luke's Episcopal Hospital), DDN(b):
AA NR 500 Series B, 3.50% due 2/15/2016 500
AA NR 2,000 Series C, 3.30% due 2/15/2016 2,000
AA- Aa 3,915 Houston, Texas, Certificates of Obligation, Tax and Revenue Bonds,
Series F, 3.60% due 3/01/1997 3,791
A1+ NR 5,400 Houston, Texas, Health Facilities Development Corporation, Hospital
Revenue Bonds (Methodist Hospital Project), DDN, 3.50% due
12/01/2014(b) 5,400
AAA Aaa 9,500 Houston, Texas, Water and Sewer System, Revenue Refunding Bonds,
Series D, Junior Lien, 5.55% due 12/01/1995(f) 9,697
Panhandle-Plains, Texas, Higher Education Authority Incorporated,
Student Loan Revenue Refunding Bonds (Student Loan Marketing
Association):
NR VMIG1 6,000 Series A, 3.65% due 3/01/1995 6,001
NR Aaa 2,000 Series C, 3.95% due 9/01/1996 1,961
NR Aaa 2,675 Series C, 4.15% due 9/01/1997 2,607
San Antonio, Texas, Electric and Gas Revenue Refunding Bonds,
Series A, Junior Lien:
AA Aa1 9,000 5.80% due 2/01/1995 9,109
AA Aa1 3,000 6% due 2/01/1996 3,067
AA Aa 4,525 Texas State, GO, Refunding, 6.40% due 12/01/1994 4,583
AA Aa 3,000 Texas State Public Finance Authority Revenue Bonds, Series A, 6%
due 10/01/1995 3,077
AAA Aaa 4,770 Texas State Public Property Finance Corporation, Revenue Refunding
Bonds (Mental Health and Retardation), 4.25% due 9/01/1995 4,788
SP1+ MIG1++ 5,500 Texas State, TRAN, 3.25% due 8/31/1994 5,504
AAA Aaa 1,500 Texas Water Development Board Revenue Bonds (State Revolving Fund-
Senior Lien), 4.35% due 7/15/1995 1,505
AAA Aaa 3,000 University of Texas, Revenue Refunding Bonds (Financing System),
Series A, 5.60% due 8/15/1994 3,008
<PAGE> 151
Utah--4.3% NR NR 24,243 Carbon County, Utah, Solid Waste Disposal Revenue Refunding Bonds
(East Carbon Landfill Project), AMT, 6.04% due 5/01/1997 24,196
Intermountain Power Agency, Utah, Power Supply Revenue Refunding
Bonds:
AA Aa 1,250 Series A, 3.90% due 7/01/1996 1,230
AA Aa 4,250 Series B, 4.60% due 7/01/1995 4,268
AA- NR 1,715 University of Utah, Revenue Refunding Bonds (University Hospital
Project), Series A, 5% due 5/15/1995 1,728
AAA Aaa 3,250 Utah State Board of Regents, Student Loan Revenue Bonds, AMT,
Series D, 6.90% due 11/01/1994(c) 3,288
AAA Aaa 4,825 Utah State Building and Highway, GO, UT, 4.50% due 7/01/1994 4,825
Virginia--2.2% NR Aaa 2,000 Virginia Education Loan Authority, Revenue Refunding Bonds (Guaranteed
Student Loan Program), Series E, 4.625% due 3/01/1995 2,010
AAA Aaa 2,500 Virginia Port Authority Facilities, Revenue Refunding Bonds, 5% due
7/01/1995(c) 2,526
Virginia State Housing Development Authority, Commonwealth Mortgage
Revenue Bonds, AMT, Series B, Sub Series B-1:
AA+ Aa 5,275 5% due 7/01/1994 5,275
AA+ Aa 5,400 5.30% due 1/01/1995 5,412
AA+ Aa 2,975 5.50% due 1/01/1996 3,000
AA Aa 1,500 Virginia State Public Building Authority, Building Revenue Bonds,
Series C, 3.95% due 8/01/1995 1,504
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
Municipal Bonds Limited Maturity Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Washington--4.8% Port Seattle, Washington, Revenue Refunding Bonds:
AA- A1 $ 1,075 Series A, 4.25% due 4/01/1996 $ 1,068
AA- A1 3,000 Series B, 4% due 11/01/1995 2,996
SP1+ MIG1++ 7,655 Seattle, Washington, Metropolitan Municipality, Seattle Sewer
Revenue, BAN, 3.50% due 7/01/1995 7,640
A1+ VMIG1 5,000 Seattle, Washington, Municipal Light and Power Revenue Bonds
(Bond Purchase Agreement), Series A, 5.05% due 11/01/1994 5,030
AA Aa 7,250 Washington State, GO, Series R-93-B-1, 4.125% due 10/01/1997 7,134
Washington State Public Power Supply System, Revenue Refunding
Bonds, Series A:
AA Aa 8,000 (Nuclear Project No. 1), 4.20% due 7/01/1995 7,998
AA Aa 6,275 (Nuclear Project No. 2), 4.20% due 7/01/1995(g) 6,309
AA Aa 2,000 (Nuclear Project No. 2), 3.50% due 7/01/1996 1,951
AA Aa 4,890 (Nuclear Project No. 2), 3.75% due 7/01/1997 4,714
<PAGE> 152
Wisconsin--1.2% AA- A1 2,500 Milwaukee County, Wisconsin, GO, Series A, 6% due 12/01/1994 2,527
AA Aa 3,500 Milwaukee County, Wisconsin, Metropolitan Sewer District Revenue
Bonds, Series A, 5.25% due 9/01/1995 3,550
Wisconsin Housing and EDA, Housing Revenue Refunding Bonds,
Series C:
A A1 2,200 3.60% due 11/01/1995 2,175
A A1 2,795 4.30% due 11/01/1997 2,739
Wyoming--1.2% NR P1 11,700 Unita County, Wyoming, PCR, Refunding (Chevron USA Incorporated
Project), DDN, 3.25% due 8/15/2020(b) 11,700
Total Investments (Cost--$936,308)--99.9% 934,920
Other Assets Less Liabilities--0.1% 757
--------
Net Assets--100.0% $935,677
========
<PAGE> 153
<FN>
(a)Prerefunded.
(b)The interest rate is subject to change periodically based upon the
prevailing market rate. The interest rate shown is the rate in effect
at June 30, 1994.
(c)AMBAC Insured.
(d)MBIA Insured.
(e)FSA Insured.
(f)FGIC Insured.
(g)Escrowed to maturity.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche.
</FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 154
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
<CAPTION>
Limited
Insured National Maturity
As of June 30, 1994 Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $2,702,601,800 $1,597,539,473 $ 934,920,346
Cash 9,802,505 53,398 7,971,761
Receivables:
Securities sold 80,588,196 65,574,768 --
Interest 49,770,068 28,668,824 12,158,961
Capital shares sold 2,541,957 1,642,703 1,886,281
Prepaid registration fees and other assets (Note 1e) 76,710 55,688 39,846
-------------- -------------- -------------
Total assets 2,845,381,236 1,693,534,854 956,977,195
-------------- -------------- -------------
<PAGE> 155
Liabilities: Payables:
Securities purchased 23,200,000 21,648,397 12,866,592
Capital shares redeemed 8,078,154 5,699,836 6,993,374
Dividends to shareholders (Note 1f) 4,300,670 2,571,687 975,562
Investment adviser (Note 2) 856,903 665,520 258,042
Distributor (Note 2) 547,427 288,679 42,550
Accrued expenses and other liabilities 463,821 310,835 164,306
-------------- -------------- -------------
Total liabilities 37,446,975 31,184,954 21,300,426
-------------- -------------- -------------
Net Assets: Net assets $2,807,934,261 $1,662,349,900 $ 935,676,769
============== ============== =============
Net Assets Class A Common Stock, $0.10 par value++ $ 24,643,476 $ 11,941,084 $ 8,006,485
Consist of: Class B Common Stock, $0.10 par value++++ 11,001,115 4,558,341 1,474,492
Paid-in capital in excess of par 2,714,075,637 1,653,959,042 932,777,155
Undistributed realized capital gains
(losses)--net (Note 5) 45,898,099 28,352,719 (5,193,769)
Unrealized appreciation/depreciation on investments--net 12,315,934 (36,461,286) (1,387,594)
-------------- -------------- -------------
Net assets $2,807,934,261 $1,662,349,900 $ 935,676,769
============== ============== =============
Net Asset Class A:
Value: Net assets $1,941,741,107 $1,203,180,964 $ 790,142,342
============== ============== =============
Shares outstanding 246,434,764 119,410,837 80,064,850
============== ============== =============
Net asset value and redemption price per share $ 7.88 $ 10.08 $ 9.87
============== ============== =============
Class B:
Net assets $ 866,193,154 $ 459,168,936 $ 145,534,427
============== ============== =============
Shares outstanding 110,011,150 45,583,411 14,744,916
============== ============== =============
Net asset value and redemption price per share $ 7.87 $ 10.07 $ 9.87
============== ============== =============
<FN>
*Identified cost $2,690,285,866 $1,634,000,759 $ 936,307,940
============== ============== =============
++Authorized shares--Class A 500,000,000 375,000,000 150,000,000
============== ============== =============
++++Authorized shares--Class B 375,000,000 375,000,000 150,000,000
============== ============== =============
</FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 156
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
Limited
Insured National Maturity
For the Year Ended June 30, 1994 Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 183,856,750 $ 112,169,662 $ 40,921,727
(Note 1d): Other 226 1,522 812
-------------- -------------- -------------
Total income 183,856,976 112,171,184 40,922,539
-------------- -------------- -------------
Expenses: Investment advisory fees (Note 2) 11,040,540 8,514,268 3,305,839
Distribution fees--Class B (Note 2) 6,980,635 3,496,610 466,701
Transfer agent fees--Class A (Note 2) 656,700 490,579 163,948
Printing and shareholder reports 165,241 93,551 54,317
Transfer agent fees--Class B (Note 2) 333,290 202,133 31,266
Custodian fees 220,118 161,442 96,955
Accounting services (Note 2) 170,190 143,453 100,650
Registration fees (Note 1e) 79,615 104,423 178,362
Professional fees 71,762 40,697 36,001
Pricing services 62,080 37,290 29,099
Portfolio insurance 74,901 8,383 4,674
Directors' fees and expenses 27,619 12,004 8,512
Amortization of organization expenses (Note 1e) 6,857 6,070 --
Other 25,079 11,449 15,230
-------------- -------------- -------------
Total expenses 19,914,627 13,322,352 4,491,554
-------------- -------------- -------------
Investment income--net 163,942,349 98,848,832 36,430,985
-------------- -------------- -------------
Realized & Realized gain (loss) on investments--net 80,935,129 62,008,845 (968,336)
Unrealized Change in unrealized appreciation/depreciation on
Gain (Loss) on investments--net (275,252,365) (172,722,080) (13,063,534)
Investments--Net -------------- -------------- -------------
(Notes 1d & 3): Net Increase (Decrease) in Net Assets Resulting
from Operations $ (30,374,887) $ (11,864,403) $ 22,399,115
============== ============== =============
See Notes to Financial Statements.
</TABLE>
<PAGE> 157
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
Insured Portfolio National Portfolio
--------------------------- ---------------------------
For the Year Ended June 30, For the Year Ended June 30,
--------------------------- ---------------------------
Increase (Decrease) in Net Assets: 1994 1993 1994 1993
<S> <C> <C> <C> <C> <C>
Operations: Investment income--net $ 163,942,349 $ 167,805,641 $ 98,848,832 $ 99,669,395
Realized gain (loss) on investments--net 80,935,129 67,994,693 62,008,845 38,689,103
Change in unrealized appreciation/
depreciation on investments--net (275,252,365) 101,260,716 (172,722,080) 49,677,981
-------------- -------------- -------------- --------------
Net increase (decrease) in net assets
resulting from operations (30,374,887) 337,061,050 (11,864,403) 188,036,479
-------------- -------------- -------------- --------------
Dividends & Investment income--net:
Distributions to Class A (119,441,701) (126,159,264) (75,680,507) (80,896,286)
Shareholders Class B (44,500,648) (41,646,377) (23,168,325) (18,773,109)
(Note 1f): Realized gain on investments--net:
Class A (57,171,047) (26,812,986) (36,128,677) (22,563,878)
Class B (24,972,443) (10,208,890) (12,798,152) (5,793,680)
-------------- -------------- -------------- --------------
Net decrease in net assets resulting from
dividends and distributions to shareholders (246,085,839) (204,827,517) (147,775,661) (128,026,953)
-------------- -------------- -------------- --------------
Capital Share Net increase (decrease) in net assets
Transactions derived from capital share transactions (52,099,956) 235,653,905 44,114,517 153,435,527
(Note 4): -------------- -------------- -------------- --------------
Net Assets: Total increase (decrease) in net assets (328,560,682) 367,887,438 (115,525,547) 213,445,053
Beginning of period 3,136,494,943 2,768,607,505 1,777,875,447 1,564,430,394
-------------- -------------- -------------- --------------
End of period $2,807,934,261 $3,136,494,943 $1,662,349,900 $1,777,875,447
============== ============== ============== ==============
<FN>
++Commencement of Operations.
</FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 158
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
Limited Maturity Portfolio
-------------------------------------
For the Year For the Period
Ended June 30, Nov. 2, 1992++ to
Increase (Decrease) in Net Assets: 1994 June 30, 1993
<S> <C> <C> <C>
Operations: Investment income--net $ 36,430,985 $ 31,371,404
Realized gain (loss) on investments--net (968,336) 2,133,811
Change in unrealized appreciation/
depreciation on investments--net (13,063,534) 4,480,891
-------------- --------------
Net increase (decrease) in net assets
resulting from operations 22,399,115 37,986,106
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (31,987,779) (30,211,746)
Shareholders Class B (4,443,206) (1,159,658)
(Note 1f): Realized gain on investments--net:
Class A -- --
Class B -- --
-------------- --------------
Net decrease in net assets resulting from
dividends and distributions to shareholders (36,430,985) (31,371,404)
-------------- --------------
Capital Share Net increase (decrease) in net assets
Transactions derived from capital share transactions 7,793,356 321,893,595
(Note 4): -------------- --------------
Net Assets: Total increase (decrease) in net assets (6,238,514) 328,508,297
Beginning of period 941,915,283 613,406,986
-------------- --------------
End of period $ 935,676,769 $ 941,915,283
============== ==============
<FN>
++Commencement of Operations.
</FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 159
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Insured Portfolio
-----------------------------------------------------------
The following per share data and ratios Class A
have been derived from information -----------------------------------------------------------
provided in the financial statements. For the Year Ended June 30,
-----------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 8.64 $ 8.26 $ 7.92 $ 7.86 $ 7.97
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .47 .50 .52 .54 .55
Realized and unrealized gain (loss) on
investments--net (.53) .49 .41 .12 (.11)
---------- ---------- ---------- ---------- ----------
Total from investment operations (.06) .99 .93 .66 .44
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.47) (.50) (.52) (.54) (.55)
Realized gain on investments--net (.23) (.11) (.07) (.06) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.70) (.61) (.59) (.60) (.55)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 7.88 $ 8.64 $ 8.26 $ 7.92 $ 7.86
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share (1.08%) 12.43% 12.11% 8.84% 5.76%
Return:* ========== ========== ========== ========== ==========
Ratios to Expenses, excluding distribution fees .42% .42% .44% .45% .46%
Average Net ========== ========== ========== ========== ==========
Assets: Expenses .42% .42% .44% .45% .46%
========== ========== ========== ========== ==========
Investment income--net 5.53% 5.94% 6.44% 6.90% 7.03%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $1,941,741 $2,225,188 $2,062,591 $1,984,307 $2,019,166
Data: ========== ========== ========== ========== ==========
Portfolio turnover 28.34% 43.86% 22.50% 33.12% 23.20%
========== ========== ========== ========== ==========
<PAGE> 160
<FN>
*Total investment returns exclude the effects of sales loads.
</FN>
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Insured Portfolio
-----------------------------------------------------------
The following per share data and ratios Class B
have been derived from information -----------------------------------------------------------
provided in the financial statements. For the Year Ended June 30,
-----------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 8.63 $ 8.26 $ 7.92 $ 7.86 $ 7.97
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .40 .44 .46 .48 .49
Realized and unrealized gain (loss) on
investments--net (.53) .48 .41 .12 (.11)
---------- ---------- ---------- ---------- ----------
Total from investment operations (.13) .92 .87 .60 .38
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.40) (.44) (.46) (.48) (.49)
Realized gain on investments--net (.23) (.11) (.07) (.06) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.63) (.55) (.53) (.54) (.49)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 7.87 $ 8.63 $ 8.26 $ 7.92 $ 7.86
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share (1.81%) 11.45% 11.27% 8.02% 4.98%
Return:* ========== ========== ========== ========== ==========
Ratios to Expenses, excluding distribution fees .42% .43% .44% .45% .47%
Average Net ========== ========== ========== ========== ==========
Assets: Expenses 1.17% 1.18% 1.19% 1.20% 1.22%
========== ========== ========== ========== ==========
Investment income--net 4.78% 5.17% 5.69% 6.13% 6.27%
========== ========== ========== ========== ==========
<PAGE> 161
Supplemental Net assets, end of year (in thousands) $ 866,193 $ 911,307 $ 706,016 $ 537,755 $ 408,641
Data: ========== ========== ========== ========== ==========
Portfolio turnover 28.34% 43.86% 22.50% 33.12% 23.20%
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effects of sales loads.
</FN>
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
National Portfolio
-----------------------------------------------------------
The following per share data and ratios Class A
have been derived from information -----------------------------------------------------------
provided in the financial statements. For the Year Ended June 30,
-----------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value beginning of year $ 11.02 $ 10.64 $ 10.17 $ 10.12 $ 10.31
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .62 .67 .71 .73 .74
Realized and unrealized gain (loss) on
investments--net (.64) .57 .58 .05 (.19)
---------- ---------- ---------- ---------- ----------
Total from investment operations (.02) 1.24 1.29 .78 .55
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.62) (.67) (.71) (.73) (.74)
Realized gain on investments--net (.30) (.19) (.11) -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.92) (.86) (.82) (.73) (.74)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 10.08 $ 11.02 $ 10.64 $ 10.17 $ 10.12
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share (0.47%) 12.21% 13.09% 7.94% 5.53%
Return:** ========== ========== ========== ========== ==========
<PAGE> 162
Ratios to Expenses, excluding distribution fees .55% .55% .55% .55% .55%
Average Net ========== ========== ========== ========== ==========
Assets: Expenses .55% .55% .55% .55% .55%
========== ========== ========== ========== ==========
Investment income--net 5.72% 6.23% 6.80% 7.20% 7.27%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $1,203,181 $1,353,805 $1,278,055 $1,255,820 $1,365,541
Data: ========== ========== ========== ========== ==========
Portfolio turnover 73.33% 65.43% 50.94% 75.25% 48.80%
========== ========== ========== ========== ==========
<CAPTION>
FINANCIAL HIGHLIGHTS (concluded)
National Portfolio
-----------------------------------------------------------
The following per share data and ratios Class B
have been derived from information -----------------------------------------------------------
provided in the financial statements. For the Year Ended June 30,
-----------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value beginning of year $ 11.02 $ 10.63 $ 10.16 $ 10.11 $ 10.30
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .54 .59 .63 .65 .66
Realized and unrealized gain (loss) on
investments--net (.65) .58 .58 .05 (.19)
---------- ---------- ---------- ---------- ----------
Total from investment operations (.11) 1.17 1.21 .70 .47
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.54) (.59) (.63) (.65) (.66)
Realized gain on investments--net (.30) (.19) (.11) -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.84) (.78) (.74) (.65) (.66)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 10.07 $ 11.02 $ 10.63 $ 10.16 $ 10.11
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share (1.39%) 11.47% 12.25% 7.14% 4.74%
Return:** ========== ========== ========== ========== ==========
Ratios to Expenses, excluding distribution fees .55% .56% .56% .56% .56%
Average Net ========== ========== ========== ========== ==========
Assets: Expenses 1.30% 1.31% 1.31% 1.31% 1.31%
========== ========== ========== ========== ==========
Investment income--net 4.97% 5.46% 6.03% 6.43% 6.52%
========== ========== ========== ========== ==========
<PAGE> 163
Supplemental Net assets, end of year (in thousands) $ 459,169 $ 424,071 $ 286,375 $ 213,581 $ 179,362
Data: ========== ========== ========== ========== ==========
Portfolio turnover 73.33% 65.43% 50.94% 75.25% 48.80%
========== ========== ========== ========== ==========
<CAPTION>
Limited Maturity Portfolio
-------------------------------------------------
Class A
-------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.01 $ 9.91 $ 9.75 $ 9.71 $ 9.73
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .37 .41 .50 .57 .60
Realized and unrealized gain (loss) on investments--net (.14) .10 .16 .04 (.02)
-------- -------- -------- -------- --------
Total from investment operations .23 .51 .66 .61 .58
-------- -------- -------- -------- --------
Less dividends:
Investment income--net (.37) (.41) (.50) (.57) (.60)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 2.30% 5.28% 6.93% 6.45% 6.16%
Return:** ======== ======== ======== ======== ========
Ratios to Expenses, excluding distribution fees .40% .41% .40% .40% .40%
Average Net ======== ======== ======== ======== ========
Assets: Expenses .40% .41% .40% .40% .40%
======== ======== ======== ======== ========
Investment income--net 3.68% 4.13% 5.02% 5.88% 6.21%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $790,142 $846,736 $613,407 $350,549 $352,005
Data: ======== ======== ======== ======== ========
Portfolio turnover 45.67% 65.43% 96.32% 93.06% 106.44%
======== ======== ======== ======== ========
<PAGE> 164
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Aggregate total investment return.
See Notes to Financial Statements.
<CAPTION>
Limited Maturity Portfolio
--------------------------
Class B
--------------------------
For the
For the Period
The following per share data and ratios have been derived Year Nov. 2,
from information provided in the financial statements. Ended 1992++ to
June 30, June 30,
Increase (Decrease) in Net Asset Value: 1994 1993
<S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.01 $ 9.93
Operating -------- --------
Performance: Investment income--net .33 .24
Realized and unrealized gain (loss) on investments--net (.14) .08
-------- --------
Total from investment operations .19 .32
-------- --------
Less dividends:
Investment income--net (.33) (.24)
-------- --------
Net asset value, end of period $ 9.87 $ 10.01
======== ========
Total Investment Based on net asset value per share 1.98% 3.26%++++
Return:** ======== ========
Ratios to Expenses, excluding distribution fees .41% .41%*
Average Net ======== ========
Assets: Expenses .76% .76%*
======== ========
Investment income--net 3.33% 3.60%*
======== ========
Supplemental Net assets, end of period (in thousands) $145,534 $ 95,179
Data: ======== ========
Portfolio turnover 45.67% 65.43%
======== ========
<PAGE> 165
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Aggregate total investment return.
</FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 166
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. The Fund's
Portfolios offer Class A and Class B Shares. Class A Shares are
sold with a front-end sales charge. Class B Shares may be subject
to a contingent deferred sales charge. Both classes of shares
have identical voting, dividend, liquidation and other rights and
the same terms and conditions, except that Class B Shares bear
certain expenses related to the distribution of such shares and
have exclusive voting rights with respect to matters relating to
such distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a)Valuation of investments--Insured Portfolio: Where bonds in
the Portfolio have not been insured pursuant to policies obtained
by the issuer, the Fund has obtained insurance with respect to
the payment of interest and principal of each bond. Such
insurance is valid as long as the bonds are held by the Fund.
All Portfolios: Municipal bonds and money market securities are
traded primarily in the over-the-counter markets and are valued
at the most recent bid price or yield equivalent as obtained from
dealers that make markets in such securities. Positions in
futures contracts are valued at closing prices as of the close of
such exchanges. Options, which are traded on exchanges, are
valued at their last sale price as of the close of such exchanges
or, lacking any sales, at the last available bid price. Assets
for which market quotations are not readily available are valued
at fair value on a consistent basis using methods determined in
good faith by the Fund's Board of Directors, including valuations
furnished by a pricing service retained by the Fund, which may
utilize a matrix system for valuations.
<PAGE> 167
(b)Financial futures contracts--The National and Limited
Maturity Portfolios (the "Portfolios") may purchase or sell interest
rate futures contracts and options on such futures contracts for the
purpose of hedging the market risk on existing or the intended purchase
of securities. Futures contracts are contracts for delayed delivery
of securities at a specific future date and at a specific price
or yield. Upon entering into a contract, the Portfolios deposit
and maintain as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the
contract, the Portfolios agree to receive from or pay to the
broker an amount of cash equal to the daily fluctuation in value
of the contract. Such receipts or payments are known as variation
margin and are recorded by the Portfolios as unrealized gains or
losses. When the contract is closed, the Portfolios record a
realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the
time it was closed.
(c)Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income
tax provision is required.
(d)Security transactions and investment income--Security
transactions are recorded on the dates the transactions are
entered into (the trade dates). Interest income is recognized on
the accrual basis. Discounts and market premiums are amortized
into interest income. Realized gains and losses on security
transactions are determined on the identified cost basis.
(e) Deferred organization expenses and prepaid registration
fees--Deferred organization expenses are charged to expenses on a
straight-line basis over a five-year period. Costs related to the
organization of the second class of shares are charged to expense
over a period not exceeding five years. Prepaid registration fees
are charged to expenses as the related shares are issued.
(f)Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of
capital gains are recorded on the ex-dividend dates.
<PAGE> 168
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Fund Asset Management, L.P. ("FAM"). Effective January 1, 1994
the investment advisory business of FAM was reorganized from a
corporation to a limited partnership. Both prior to and after the
reorganization, ultimate control of FAM was vested with Merrill
Lynch & Co., Inc. ("ML & Co."). The general partner of FAM is
Princeton Services, Inc., an indirect wholly-owned subsidiary
of ML & Co. The limited partners are ML & Co. and Fund Asset
Management, Inc. ("FAMI"), which is also an indirect wholly-owned
subsidiary of ML & Co. The Fund also entered into Distribution
Agreements and a Distribution Plan with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Investment Management, Inc.
FAM is responsible for the management of the Fund's Portfolios
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund.
For such services, FAM receives at the end of each month a fee
with respect to each Portfolio at the annual rates set forth
below which are based upon the average daily value of the Fund's
net assets.
Rate of Advisory Fee
Aggregate of Average Daily Limited
Net Assets of the Three Insured National Maturity
Combined Portfolios Portfolio Portfolio Portfolio
Not exceeding $250 million 0.40 % 0.50 % 0.40 %
In excess of $250 million but not
exceeding $400 million. 0.375 0.475 0.375
In excess of $400 million but not
exceeding $550 million 0.375 0.475 0.35
In excess of $550 million but not
exceeding $1.5 billion 0.375 0.475 0.325
In excess of $1.5 billion 0.35 0.475 0.325
The Investment Advisory Agreement obligates FAM to reimburse the
Fund to the extent that the Fund's expenses (excluding interest,
taxes, distribution fees, brokerage fees and commissions and
extraordinary items) exceed 2.5% of the Fund's first $30 million
of average daily net assets, 2.0% of the Fund's next $70 million
of average daily net assets, and 1.5% of the average daily net
assets in excess thereof. No fee payment will be made to FAM with
respect to any Portfolio during any fiscal year which will cause
the expenses of such Portfolio to exceed the pro rata expense
limitation applicable to such Portfolio at the time of such payment.
<PAGE> 169
The Fund has adopted a Plan of Distribution (the "Plan") pursuant
to Rule 12b-1 under the Investment Company Act of 1940 pursuant
to which MLFD receives a distribution fee from the Fund for the sale
of Class B Shares of the Portfolios at the end of each month at
the annual rate of 0.50% (in the case of the Insured Portfolio
and the National Portfolio) or 0.25% (in the case of the Limited
Maturity Portfolio) and an account maintenance fee at the annual
rate of 0.25% (in the case of the Insured Portfolio and the
National Portfolio) or 0.10% (in the case of the Limited Maturity
Portfolio) of the average daily net assets of the Class B Shares
of the respective Portfolios. Pursuant to a sub-agreement with the
Distributor, Merrill Lynch also provides the account maintenance
and distribution services to the Fund. The ongoing account maintenance
fee compensates the Distributor and Merrill Lynch for providing
account maintenance services to Class B shareholders. This fee is
to compensate the Distributor for services provided and the expenses
borne by it under the Plan. As authorized by the Plan, the Distributor
has entered into an agreement with Merrill Lynch, Pierce, Fenner &
Smith Inc. ("MLPF&S"), an affiliate of Merrill Lynch Investment
Management, Inc., which provides for the compensation of MLPF&S
for providing distribution-related services to the Fund.
For the year ended June 30, 1994, MLFD earned underwriting
discounts, and MLPF&S earned dealer concessions on sales of the
Fund's Class A Shares as follows:
Insured National Limited Maturity
Portfolio Portfolio Portfolio
MLFD $1,456,474 $103,594 $657,688
MLPF&S 151,583 977,865 88,660
MLPF&S received contingent deferred sales charges of $2,370,916
relating to transactions in Class B Shares, amounting to
$1,469,123, $718,890 and $190,903 in the Insured, National and
Limited Maturity Portfolios, respectively.
Financial Data Services, Inc. ("FDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, FAMI, MLFD, FDS, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the year ended June 30, 1994 were as follows:
<PAGE> 170
Purchases Sales
Insured Portfolio $ 819,735,196 $ 1,269,238,817
National Portfolio 1,217,057,053 1,382,174,524
Limited Maturity Portfolio 478,060,792 393,735,111
Net realized and unrealized gains (losses) as of June 30, 1994
were as follows:
Realized Unrealized
Insured Portfolio Gains Gains
Long-term investments $ 80,935,129 $ 12,315,934
-------------- ---------------
Total $ 80,935,129 $ 12,315,934
============== ===============
Realized Unrealized
National Portfolio Gains Losses
Long-term investments $ 43,882,749 $ (36,461,286)
Short-term investments 297,749 --
Financial future contracts on options 17,828,347 --
-------------- ---------------
Total $ 62,008,845 $ (36,461,286)
============== ===============
Realized Unrealized
Limited Maturity Portfolio Losses Losses
Long-term investments $ (903,904) $ (1,387,594)
Short-term investments (64,432) --
-------------- ---------------
Total $ (968,336) $ (1,387,594)
============== ===============
As of June 30, 1994, net unrealized appreciation/depreciation for
Federal income tax purposes were as follows:
Gross Gross Net Unrealized
Unrealized Unrealized Appreciation
Appreciation Depreciation (Depreciation)
Insured Portfolio $105,945,234 $93,629,300 $ 12,315,934
National Portfolio 37,049,072 73,510,358 (36,461,286)
Limited Maturity Portfolio 3,054,399 4,441,993 (1,387,594)
<PAGE> 171
The aggregate cost of investments at June 30, 1994 for Federal
income tax purposes was $2,690,285,866 for the Insured Portfolio,
$1,634,000,759 for the National Portfolio, and $936,307,940 for
the Limited Maturity Portfolio.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions for the years ended June 30, 1994 and June 30, 1993
were ($52,099,956) and $235,653,905, respectively, for the Insured
Portfolio; $44,114,517 and $153,435,527, respectively, for the
National Portfolio and $7,793,356 and $321,893,595, respectively,
for the Limited Maturity Portfolio.
Transactions in capital shares for Class A and Class B Shares
were as follows:
Insured Portfolio
Class A Shares for the Year Dollar
Ended June 30, 1994 Shares Amount
Shares sold 33,131,876 $ 280,935,110
Shares issued to shareholders in
reinvestment of dividends and
distributions 9,445,296 80,198,475
----------- --------------
Total issued 42,577,172 361,133,585
Shares redeemed (53,818,184) (453,958,624)
----------- --------------
Net decrease (11,241,012) $ (92,825,039)
=========== ==============
Insured Portfolio
Class A Shares for the Year Dollar
Ended June 30, 1993 Shares Amount
Shares sold 32,564,428 $ 274,538,370
Shares issued to shareholders in
reinvestment of dividends and
distributions 8,286,565 69,474,166
----------- --------------
Total issued 40,850,993 344,012,536
Shares redeemed (32,853,753) (276,837,512)
----------- --------------
Net increase 7,997,240 $ 67,175,024
=========== ==============
<PAGE> 172
Insured Portfolio
Class B Shares for the Year Dollar
Ended June 30, 1994 Shares Amount
Shares sold 21,671,550 $ 184,351,353
Shares issued to shareholders in
reinvestment of dividends and
distributions 4,290,552 36,402,265
----------- --------------
Total issued 25,962,102 220,753,618
Shares redeemed (21,552,384) (180,028,535)
----------- --------------
Net increase 4,409,718 $ 40,725,083
=========== ==============
Insured Portfolio
Class B Shares for the Year Dollar
Ended June 30, 1993 Shares Amount
Shares sold 32,402,900 $ 272,169,578
Shares issued to shareholders in
reinvestment of dividends and
distributions 3,185,099 26,690,639
----------- --------------
Total issued 35,587,999 298,860,217
Shares redeemed (15,508,409) (130,381,336)
----------- --------------
Net increase 20,079,590 $ 168,478,881
=========== ==============
National Portfolio
Class A Shares for the Year Dollar
Ended June 30, 1994 Shares Amount
Shares sold 8,490,083 $ 92,184,282
Shares issued to shareholders in
reinvestment of dividends and
distributions 5,189,718 56,058,472
----------- --------------
Total issued 13,679,801 148,242,754
Shares redeemed (17,141,264) (182,785,636)
----------- --------------
Net decrease (3,461,463) $ (34,542,882)
=========== ==============
<PAGE> 173
National Portfolio
Class A Shares for the Year Dollar
Ended June 30, 1993 Shares Amount
Shares sold 11,991,383 $ 128,971,704
Shares issued to shareholders in
reinvestment of dividends and
distributions 4,869,454 52,127,903
----------- --------------
Total issued 16,860,837 181,099,607
Shares redeemed (14,162,108) (152,405,959)
----------- --------------
Net increase 2,698,729 $ 28,693,648
=========== ==============
National Portfolio
Class B Shares for the Year Dollar
Ended June 30, 1994 Shares Amount
Shares sold 14,847,862 $ 161,270,898
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,710,325 18,453,990
----------- --------------
Total issued 16,558,187 179,724,888
Shares redeemed (9,473,731) (101,067,489)
----------- --------------
Net increase 7,084,456 $ 78,657,399
=========== ==============
National Portfolio
Class B Shares for the Year Dollar
Ended June 30, 1993 Shares Amount
Shares sold 17,460,542 $ 188,034,227
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,136,290 12,165,013
----------- --------------
Total issued 18,596,832 200,199,240
Shares redeemed (7,032,886) (75,457,361)
----------- --------------
Net increase 11,563,946 $ 124,741,879
=========== ==============
<PAGE> 174
Limited Maturity Portfolio
Class A Shares for the Year Dollar
Ended June 30, 1994 Shares Amount
Shares sold 37,619,639 $ 375,440,124
Shares issued to shareholders in
reinvestment of dividends 1,983,800 19,748,994
----------- --------------
Total issued 39,603,439 395,189,118
Shares redeemed (44,144,662) (439,707,786)
----------- --------------
Net decrease (4,541,223) $ (44,518,668)
=========== ==============
Limited Maturity Portfolio
Class A Shares for the Year Dollar
Ended June 30, 1993 Shares Amount
Shares sold 56,244,112 $ 561,589,090
Shares issued to shareholders in
reinvestment of dividends 1,844,279 18,415,744
----------- --------------
Total issued 58,088,391 580,004,834
Shares redeemed (35,373,885) (353,118,455)
----------- --------------
Net increase 22,714,506 $ 226,886,379
=========== ==============
Limited Maturity Portfolio
Class B Shares for the Year Dollar
Ended June 30, 1994 Shares Amount
Shares sold 10,622,252 $ 105,858,053
Shares issued to shareholders in
reinvestment of dividends 284,833 2,836,330
----------- --------------
Total issued 10,907,085 108,694,383
Shares redeemed (5,671,375) (56,382,359)
----------- --------------
Net increase 5,235,710 $ 52,312,024
=========== ==============
<PAGE> 175
Limited Maturity Portfolio
Class B Shares for the Period Dollar
Nov. 2, 1992++ to June 30, 1993 Shares Amount
Shares sold 10,536,340 $ 105,289,015
Shares issued to shareholders in
reinvestment of dividends 69,735 697,915
----------- --------------
Total issued 10,606,075 105,986,930
Shares redeemed (1,096,869) (10,979,714)
----------- --------------
Net increase 9,509,206 $ 95,007,216
=========== ==============
++Commencement of Operations.
5. Capital Loss Carryforward:
At June 30, 1994, the Fund had a net capital loss carryforward of
approximately $4,250,000 in the Limited Maturity Portfolio, of
which $1,416,000 expires in 1997, $2,787,000 expires in 1998,
$22,000 expires in 1999 and $25,000 expires in 2002. These will
be available to offset like amounts of any future taxable gains.
<PAGE> 176
INVESTMENT ADVISER
Fund Asset Management
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
(609) 282-2800
CUSTODIAN
The Bank of New York
90 Washington Street, 12th Floor
New York, New York 10286
TRANSFER AGENT
Financial Data Services, Inc.
ADMINISTRATIVE OFFICES
TRANSFER AGENCY
Mutual Funds Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
MAILING ADDRESS
P.O. Box 45289
Jacksonville, Florida 32223-5289
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
<PAGE> 177
<TABLE>
<CAPTION>
<S> <C>
====================================================== ======================================================
Statement of
Additional Information
TABLE OF CONTENTS
Page
----
Investment Objective and Policies..... 2
Insurance on Portfolio Securities... 2
Risk Factors In Transactions In
Junk Bonds........................ 2
Transactions In Futures Contracts... 3
Current Investment Restrictions....... 4
Management of the Fund................ 8
Directors and Officers.............. 8
Investment Advisory Arrangements.... 10
Net Asset Value....................... 12
Portfolio Transactions ............... 13
Purchase of Shares.................... 14
Alternative Sales Arrangement....... 14
Initial Sales Charge Alternatives- (ART APPEARS HERE)
Class A and Class D Shares........ 14
Deferred Sales Charge Alternative-
Class B Shares.................... 18
Limitations on the Payment of
Deferred Sales Charges............ 19
Redemption of Shares.................. 22
Reinstatement Privilege............. 22
Deferred Sales Charge-Class B Shares 22
Dividends, Distributions and Taxes.... 23
Systematic Withdrawal Plans........... 26
Exchange Privilege.................... 27
Performance Data ..................... 38
Additional Information ............... 41 MERRILL LYNCH
Description of Municipal Bonds...... 41 MUNICIPAL BOND
Description of Temporary Investments 43 FUND, INC.
Insurance on Portfolio Securities... 43
Description of Financial Futures
Contracts ........................ 45
Computation of Offering Price per
Share............................. 49
Independent Auditors' Report.......... 51
Financial Statements.................. 52
Code #10130-1094
Distributor:
Merrill Lynch
Funds Distributor, Inc.
October 21, 1994
====================================================== ======================================================
</TABLE>
<PAGE> 178
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR submission file due to ASCII-incompatibility and cross-references
this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
