AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 1998
FILE NO. 2-57354
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
POST-EFFECTIVE AMENDMENT NO. 23
[X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X]
AMENDMENT NO. 22
[X]
(CHECK APPROPRIATE BOX OR BOXES)
---------------
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
ARTHUR ZEIKEL
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------
<TABLE>
<S> <C>
MICHAEL J. HENNEWINKEL, ESQ. LEONARD B. MACKEY, JR., ESQ.
FUND ASSET MANAGEMENT ROGERS & WELLS LLP
P.O. BOX 9011 200 PARK AVENUE
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, N.Y. 10166
</TABLE>
---------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
---------------
TITLE OF SECURITIES BEING REGISTERED: Class A Shares, Class B Shares, Class C
Shares and Class D Shares
of Common Stock of the Merrill Lynch Municipal Bond Fund, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO.
- ------------ LOCATION
<S> <C> <C>
PART A
Item 1. Cover Page ............................... Cover Page
Item 2. Synopsis ................................. Fee Tables
Item 3. Financial Highlights ..................... Financial Highlights; Additional Information --
Performance Data
Item 4. General Description of Registrant ........ Investment Objective and Policies; Investment Policies of
the Portfolios
Item 5. Management of the Fund ................... Fee Tables; Management of the Fund; Portfolio
Transactions; Additional Information
Item 5A. Management's Discussion of Fund
Performance .............................. *
Item 6. Capital Stock and Other Securities ....... Cover Page; Additional Information
Item 7. Purchase of Securities Being Offered ..... Cover Page; Merrill Lynch Select Pricing(SM) System; Fee
Table; Purchase of Shares; Net Asset Value
Item 8. Redemption or Repurchase ................. Merrill Lynch Select Pricing(SM) System; Fee Tables;
Redemption of Shares; Shareholder Services
Item 9. Pending Legal Proceedings ................ *
PART B
Item 10. Cover Page ............................... Cover Page
Item 11. Table of Contents ........................ Table of Contents
Item 12. General Information and History .......... Additional Information
Item 13. Investment Objectives and Policies ....... Investment Objective and Policies; Investment Restrictions
Item 14. Management of the Fund ................... Management of the Fund
Item 15. Control Persons and Principal Holders
of Securities ............................ Management of the Fund
Item 16. Investment Advisory and Other
Services ................................. Management of the Fund; Purchase of Shares
Item 17. Brokerage Allocation and Other
Practices ................................ Portfolio Transactions and Brokerage Commissions;
Financial Statements
Item 18. Capital Stock and Other Securities ....... Additional Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered ................. Purchase of Shares; Net Asset Value, Redemption of
Shares; Systematic Withdrawal Plans; Exchange Privilege;
Additional Information
Item 20. Tax Status ............................... Dividends, Distributions and Taxes
Item 21. Underwriters ............................. Purchase of Shares
Item 22. Calculations of Performance Data ......... Performance Data
Item 23. Financial Statements ..................... Annual Report dated June 30, 1998**
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
- ---------
* Item inapplicable or answer negative.
** Incorporated by reference into the Statement of Additional Information.
<PAGE>
PROSPECTUS
OCTOBER 20, 1998
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 that 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 debt obligations issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies and
instrumentalities, the interest on which, in the opinion of bond counsel to the
issuer, is exempt from Federal income tax (such obligations are herein referred
to as "Municipal Bonds"), principally consisting of state, municipal and public
authority securities. Each of the Portfolios pursues its investment objective
through separate investment policies described below:
INSURED PORTFOLIO invests primarily in long-term, higher rated 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 rated
Municipal Bonds that generally offer higher yields than the Insured Portfolio
but may be subject to greater risks than higher rated Municipal Bonds.
LIMITED MATURITY PORTFOLIO invests primarily in higher rated Municipal
Bonds with a maximum maturity not to exceed four years. Depending on market
conditions, the Municipal Bonds in this Portfolio are currently anticipated to
have an average maturity of less than two years. The Limited Maturity Portfolio
can be expected to offer the lowest yield of the three Portfolios, but it also
is expected to be subject to less market risk than the longer-term Portfolios.
FOR MORE INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE AND POLICIES,
PLEASE SEE "INVESTMENT OBJECTIVE AND POLICIES" ON PAGE 19.
----------------
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(SM) 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 (the "Distributor"), a division
of Princeton Funds Distributor, Inc. ("PFD"), P.O. Box 9081, Princeton, New
Jersey 08543-9081 [(609) 282-2800], or from securities dealers that 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 except that for retirement plans
the minimum initial purchase is $100 and the minimum subsequent purchase is $1,
and for participants in certain fee-based programs the minimum initial purchase
is $250 and the minimum subsequent purchase is $50. Merrill Lynch may charge
its customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Purchases and redemptions made directly through Financial Data
Services, Inc. (the "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 NOR HAS THE 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 (the "Commission") in a Statement of Additional Information, dated
October 20, 1998, and is available upon request and without charge, by calling
or writing the Fund at the address and telephone number set forth above. The
Commission maintains a Web site (http://www.sec.gov) that contains the
Statement of Additional Information, material incorporated by reference and
other information regarding the Fund. The Statement of Additional Information
is hereby incorporated by reference into this Prospectus.
----------------
Fund Asset Management -- Investment Adviser
Merrill Lynch Funds Distributor -- Distributor
<PAGE>
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)
---------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ................ 4.00%(c)
Sales Charge Imposed on Dividend Reinvestments ...... None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower) ...................... None(d)
Exchange Fee ........................................ None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Investment Advisory Fees(g) ......................... 0.36%
12b-1 Fees(h):
Account Maintenance Fees ........................... None
Distribution Fees(i) ............................... None
Other Expenses:
Shareholder Servicing Costs(j) ...................... 0.03%
Other ............................................... 0.03%
----------
Total Other Expenses ............................... 0.06%
----------
Total Fund Operating Expenses ........................ 0.42%
==========
<CAPTION>
CLASS B(b) CLASS C CLASS D
-------------------------------------- ---------------- ---------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ................ None None 4.00%(c)
Sales Charge Imposed on Dividend Reinvestments ...... None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower) ...................... 4.00% during the first year, 1.0% for one None(d)
decreasing 1.00% annually year(f)
thereafter to 0.0%
after the fourth year(e)
Exchange Fee ........................................ None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Investment Advisory Fees(g) ......................... 0.36% 0.36% 0.36%
12b-1 Fees(h):
Account Maintenance Fees ........................... 0.25% 0.25% 0.25%
Distribution Fees(i) ............................... 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:
Shareholder Servicing Costs(j) ...................... 0.04% 0.04% 0.03%
Other ............................................... 0.03% 0.03% 0.03%
---- ---- --------
Total Other Expenses ............................... 0.07% 0.07% 0.06%
---- ---- --------
Total Fund Operating Expenses ........................ 1.18% 1.23% 0.67%
==== ==== ========
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and participants in certain fee-based programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 32.
(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 34.
(c) Reduced for purchases of $25,000 and over and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A or Class D
purchases of $1,000,000 or more may not be subject to an initial sales
charge. See "Purchase of Shares -- Initial Sales Charge Alternatives --
Class A and Class D Shares" -- page 32.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.00% of amounts redeemed within the first year after purchase.
Such CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 43.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 43.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 43.
(g) See "Management of the Fund -- Management and Advisory Arrangements" --
page 27.
(h) See "Purchase of Shares -- Distribution Plans" -- page 38.
(i) Distribution fees reflect the maximum amount the Portfolio would
contractually be subject to pay. The actual amount incurred may be less if
prescribed limitations are met.
(j) See "Management of the Fund -- Transfer Agency Services" -- page 28.
2
<PAGE>
INSURED PORTFOLIO
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 on page 2, (2) a 5% annual return throughout the
periods and (3) redemption at the end of the period (including any
applicable CDSC for Class B and Class C shares):
Class A ........................................................... $ 44 $ 53 $ 63 $ 91
Class B ........................................................... $ 52 $ 57 $ 65 $143
Class C ........................................................... $ 23 $ 39 $ 68 $149
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 $ 65 $143
Class C ........................................................... $ 13 $ 39 $ 68 $149
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 investing in the Insured
Portfolio 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 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
charge permitted under the Conduct Rules of the National Association of
Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its customers a
processing fee (presently $5.35) for confirming purchases and redemptions.
Purchases and redemptions made directly through the Fund's transfer agent are
not subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
3
<PAGE>
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)
---------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ............... 4.00%(c)
Sales Charge Imposed on Dividend Reinvestments...... None
Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds,
whichever is lower) ............................... None(d)
Exchange Fee ....................................... None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS):
Investment Advisory Fees(g) ........................ 0.48%
12b-1 Fees(h):
Account Maintenance Fees .......................... None
Distribution Fees(i) .............................. None
Other Expenses:
Shareholder Servicing Costs(j) ..................... 0.04%
Other .............................................. 0.03%
----------
Total Other Expenses .............................. 0.07%
----------
Total Fund Operating Expenses ....................... 0.55%
==========
<CAPTION>
CLASS B(b) CLASS C CLASS D
-------------------------------------- ---------------- ---------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ............... None None 4.00%(c)
Sales Charge Imposed on Dividend Reinvestments...... None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds,
whichever is lower) ............................... 4.00% during the first year, 1.0% for one None(d)
decreasing 1.00% annually year(f)
thereafter to 0.0%
after the fourth year(e)
Exchange Fee ....................................... None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS):
Investment Advisory Fees(g) ........................ 0.48% 0.48% 0.48%
12b-1 Fees(h):
Account Maintenance Fees .......................... 0.25% 0.25% 0.25%
Distribution Fees(j) .............................. 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:
Shareholder Servicing Costs(i) ..................... 0.05% 0.04% 0.04%
Other .............................................. 0.03% 0.04% 0.03%
---- ---- --------
Total Other Expenses .............................. 0.08% 0.08% 0.07%
---- ---- --------
Total Fund Operating Expenses ....................... 1.31% 1.36% 0.80%
==== ==== ========
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and participants in certain fee-based programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 32.
(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 34
(c) Reduced for purchases of $25,000 and over and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A and Class
D purchases of $1,000,000 or more may not be subject to an initial sales
charge. See "Purchases of Shares -- Initial Sales Charge Alternatives --
Class A and Class D Shares" -- page 32.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
Such CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 43.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 43.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 43.
(g) See "Management of the Fund -- Management and Advisory Arrangements" page
27.
(h) See "Purchase of Shares -- Distribution Plans" -- page 38.
(i) Distribution fees reflect the maximum amount the Portfolio would
contractually be subject to pay. The actual amount incurred may be less if
prescribed limitations are met.
(j) See "Management of the Fund -- Transfer Agency Services" -- page 28.
4
<PAGE>
NATIONAL PORTFOLIO
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 on page 4, (2)
a 5% annual return throughout the periods and (3) redemption
at the end of the period (including any applicable CDSC for
Class B and Class C shares):
Class A ..................................................... $45 $57 $70 $106
Class B ..................................................... $53 $62 $72 $158
Class C ..................................................... $24 $43 $74 $164
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 $42 $72 $158
Class C ..................................................... $14 $43 $74 $164
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 investing in the National
Portfolio 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 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
charge permitted under the Conduct Rules of the NASD. Merrill Lynch may charge
its customers a processing fee (presently $5.35) for confirming purchases and
redemptions. Purchases and redemptions made directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares."
5
<PAGE>
LIMITED MATURITY 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)
---------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ................. 1.00%(c)
Sales Charge Imposed on Dividend Reinvestments ....... None
Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, whichever
is lower) ........................................... None(d)
Exchange Fee ......................................... None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS):
Investment Advisory Fee(g) ........................... 0.34%
12b-1 Fees(h):
Account Maintenance Fees ............................ None
Distribution Fees(i) ................................ None
Other Expenses:
Shareholder Servicing Costs(j) ....................... 0.02%
Other ................................................ 0.07%
------
Total Other Expenses ................................ 0.09%
------
Total Fund Operating Expenses ......................... 0.43%
======
<CAPTION>
CLASS B(b) CLASS C* CLASS D
-------------------------------------- ----------------- ---------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ................. None None 1.00%(c)
Sales Charge Imposed on Dividend Reinvestments ....... None None None
Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, whichever
is lower) ........................................... 1.00% during the first 1.00% for one None(d)
year, decreasing to year(f)
0.0% after the first
year(e)
Exchange Fee ......................................... None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS):
Investment Advisory Fee(g) ........................... 0.34% 0.34% 0.34%
12b-1 Fees(h):
Account Maintenance Fees ............................ 0.15% 0.15% 0.10%
Distribution Fees(i) ................................ 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:
Shareholder Servicing Costs(j) ....................... 0.03% 0.04% 0.03%
Other ................................................ 0.06% 0.06% 0.07%
----- ---- ------
Total Other Expenses ................................ 0.09% 0.10% 0.10%
----- ---- ------
Total Fund Operating Expenses ......................... 0.78% 0.79% 0.54%
===== ==== ======
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and participants in certain fee-based programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 32.
(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 34.
(c) Reduced for purchases of $100,000 and over and waived for purchases of
Class A shares in connection with certain fee-based programs. Class A and
Class D purchases of $1,000,000 or more may not be subject to an initial
sales charge. See "Purchases of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 32.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a
CDSC of 0.20% of amounts redeemed within the first year after purchase.
Such CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 43.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 43.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 43.
(g) See "Management of the Fund -- Management and Advisory Arrangements" --
page 27.
(h) See "Purchase of Shares -- Distribution Plans" -- page 38.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 28.
(j) See "Management of the Fund -- Transfer Agency Services" -- page 28.
* Class C shares of the Limited Maturity Portfolio are available only
through the Exchange Privilege. See page 44.
6
<PAGE>
LIMITED MATURITY PORTFOLIO
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 on page 6, (2) a 5% annual return throughout the
periods and (3) redemption at the end of the period (including any
applicable CDSC for Class B and Class C shares):
Class A ........................................................... $14 $24 $34 $64
Class B ........................................................... $18 $25 $43 $97
Class C* .......................................................... $18 $25 $44 $98
Class D ........................................................... $15 $27 $40 $77
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 $24 $34 $64
Class B ........................................................... $ 8 $25 $43 $97
Class C* .......................................................... $ 8 $25 $44 $98
Class D ........................................................... $15 $27 $40 $77
</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 investing in the Limited
Maturity Portfolio 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 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 charge permitted under the Conduct Rules of the NASD. Merrill
Lynch may charge its customers a processing fee (presently $5.35) for
confirming purchases and redemptions. Purchases and redemptions made directly
through the Fund's transfer agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares."
7
<PAGE>
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 Portfolio and National
Portfolio only, shares of 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 privilege 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 registered
investment companies advised by Merrill Lynch Asset Management, L.P. ("MLAM")
or Fund Asset Management, L.P. ("FAM" or the "Investment Adviser"), an
affiliate of MLAM. Funds advised by MLAM or FAM that utilize the Merrill Lynch
Select Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share 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 CDSCs, distribution fees 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 Privileges."
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 CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees 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 or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares."
8
<PAGE>
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 No No No
sales charge(2),(3)
- ---------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.50% B shares convert to
at a rate of 4.00% during the D shares automatically
first year, decreasing 1.00% after approximately
annually to 0.0%(4) ten years(5)
- ---------------------------------------------------------------------------------------------------
C 1.00% CDSC for one year 0.25% 0.55% No
decreasing to 0.0% after
the first year(6)
- ---------------------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(3)
- ---------------------------------------------------------------------------------------------------
</TABLE>
LIMITED MATURITY PORTFOLIO
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
A Maximum 1.00% initial No No No
sales charge(2),(3)
- ----------------------------------------------------------------------------------------------
B CDSC at a rate of 1.00% 0.15% 0.20% B shares convert to
during the first year, D shares automatically
decreasing to 0.0% after after approximately
the first year(4) ten years(5)
- ----------------------------------------------------------------------------------------------
C* 1.00% CDSC for one year 0.15% 0.20% No
decreasing to 0.0% after
- ----------------------------------------------------------------------------------------------
the first year(6)
D Maximum 1.00% initial 0.10% No No
sales charge(3)
- ----------------------------------------------------------------------------------------------
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. 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."
(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 and
waived for purchases of Class A shares in connection with certain
fee-based programs. Class A and Class D share purchases of $1,000,000 or
more may not be subject to an initial sales charge but instead may be
subject to a 1.0% CDSC for the Insured and National Portfolios and a 0.20%
CDSC for the Limited Maturity Portfolio, if redeemed within one year. See
"Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
9
<PAGE>
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class
B shares of certain other MLAM-advised mutual funds into which exchanges
may be made have an 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
* Class C shares of the Limited Maturity Portfolio are available only through
the Exchange Privilege. See page 44.
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 who currently own Class A shares of a Portfolio in a
shareholder account are entitled to purchase additional Class A shares of
that Portfolio in that account. Other eligible investors include
participants in certain fee-based programs. In addition, Class A shares
will be offered at net asset value to Merrill Lynch & Co., Inc. ("ML &
Co.") and its subsidiaries (the term "subsidiaries," when used herein
with respect to ML & Co., includes MLAM, FAM and certain other entities
directly or indirectly wholly owned and controlled by ML & Co.) 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 of $100,000 or over for the Limited Maturity Portfolio,
and waived for purchases by participants in certain fee-based programs.
Purchases of $1,000,000 or more may not be subject to an initial sales
charge but such purchases may be subject to a CDSC of 1.00% (for the
Insured and National Portfolios) or 0.20% (for the Limited Maturity
Portfolio) if the shares are redeemed within one year after purchase.
Such CDSC may be waived in connection with certain fee-based programs.
Sales charges also are reduced under a right of accumulation that 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 and 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. Class B shares are also subject to a CDSC if they are redeemed
within four years of purchase (in the case of the Insured Portfolio and
National Portfolio) or within one year of purchase (in the case of the
Limited Maturity Portfolio). Such CDSC may be modified in connection with
certain fee-based programs. 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 Federal
income tax purposes. Shares purchased through reinvestment of dividends
on Class B shares also will convert automatically
10
<PAGE>
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 1.00% CDSC if they are redeemed within one year of
purchase. Such CDSC may be waived in connection with certain fee-based
programs. Although Class C shares are subject to a 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 who purchases Class C shares will be subject to
account maintenance fees and higher 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 "Shareholder Services -- Exchange
Privileges."
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. The
maximum initial sales charge is 4.00% (for the Insured Portfolio and the
National Portfolio) and 1.00% (for the Limited Maturity Portfolio) and is
reduced for purchases of $25,000 or more for the Insured Portfolio or for
the National Portfolio, and is reduced for purchases of $100,000 or more
for the Limited Maturity Portfolio. 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 may not be subject to an initial sales charge but such
purchase may be subject to a CDSC of 1.00% (for the Insured and National
Portfolios) or 0.20% (for the Limited Maturity Portfolio) if the shares
are redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule for
Class A shares, except that there is no waiver for purchases in
connection with certain fee-based programs. 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 or
her 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
11
<PAGE>
initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors who 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 that may qualify the investor for reduced initial sales charges on
new initial sales charge purchases. In addition, the ongoing Class B 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>
FINANCIAL HIGHLIGHTS
The financial information in the table below in connection with shares of
the Insured Portfolio, the National Portfolio and the Limited Maturity
Portfolio has been audited in conjunction with the annual audits of the
financial statements of the Portfolios by Deloitte & Touche LLP, independent
auditors. Financial statements and the independent auditors' report thereon for
the fiscal year ended June 30, 1998 appear in the annual report of the Fund
(the "Annual Report") which has been incorporated by reference into the
Statement of Additional Information. Further information about the performance
of the Fund is also contained in the Annual Report, 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.
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
INSURED PORTFOLIO
-----------------------------------------------------------
CLASS A
-----------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
-----------------------------------------------------------
1998 1997 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year ............. $ 8.06 $ 7.91 $ 7.92 $ 7.88
--------- --------- --------- ---------
Investment income -- net ....................... .43 .45 .44 .46
Realized and unrealized gain (loss) on
investments -- net ............................ .20 .15 (.01) .18
--------- --------- ---------- ---------
Total from investment operations ............... .63 .60 .43 .64
--------- --------- ---------- ---------
Less dividends and distributions:
Investment income -- net ...................... (.43) (.45) (.44) (.46)
Realized gain on investments -- net ........... (.01) -- -- (.14)
---------- ---------- ---------- ----------
Total dividends and distributions .............. (.44) (.45) (.44) (.60)
---------- ---------- ---------- ----------
Net asset value, end of year ................... $ 8.25 $ 8.06 $ 7.91 $ 7.92
========== ========== ========== ==========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share ............. 8.05% 7.72% 5.51% 8.60%
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses ....................................... .42% .44% .43% .43%
========== ========== ========== ==========
Investment income -- net ....................... 5.29% 5.58% 5.55% 5.78%
========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ......... $1,377,025 $1,441,785 $1,572,835 $1,706,064
========== ========== ========== ==========
Portfolio turnover ............................. 102.89% 74.40% 78.49% 35.61%
========== ========== ========== ==========
<CAPTION>
INSURED PORTFOLIO
----------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------------------------
1994 1993 1992 1991 1990
--------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year ............. $ 8.64 $ 8.26 $ 7.92 $ 7.86 $ 7.97
--------- --------- --------- --------- ---------
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 RETURN:*
Based on net asset value per share ............. (1.08%) 12.43% 12.11% 8.84% 5.76%
========= ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses ....................................... .42% .42% .44% .45% .46%
========= ========== ========== ========== ==========
Investment income -- net ....................... 5.53% 5.94% 6.44% 6.90% 7.03%
========= ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ......... $1,941,741 $2,225,188 $2,062,591 $1,984,307 $2,019,166
========== ========== ========== ========== ==========
Portfolio turnover ............................. 28.34% 43.86% 22.50% 33.12% 23.20%
========== ========== ========== ========== ==========
<CAPTION>
INSURED
PORTFOLIO
--------------
CLASS A
--------------
FOR THE YEAR
ENDED JUNE 30,
---------------
1989
--------------
<S> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year ............. $ 7.69
---------
Investment income -- net ....................... .58
Realized and unrealized gain (loss) on
investments -- net ............................ .28
---------
Total from investment operations ............... .86
---------
Less dividends and distributions:
Investment income -- net ...................... (.58)
Realized gain on investments -- net ........... --
----------
Total dividends and distributions .............. (.58)
----------
Net asset value, end of year ................... $ 7.97
==========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share ............. 11.62%
==========
RATIOS TO AVERAGE NET ASSETS:
Expenses ....................................... .49%
==========
Investment income -- net ....................... 7.46%
==========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ......... $2,013,219
==========
Portfolio turnover ............................. 45.49%
==========
</TABLE>
- -------
* Total investment returns exclude the effects of sales loads.
13
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the Portfolio's financial statements:
<TABLE>
<CAPTION>
INSURED PORTFOLIO
-----------------------------------------------------------------
CLASS B
-----------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSET
VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period ............... $ 8.05 $ 7.91 $ 7.92 $ 7.87 $ 8.63
-------- -------- -------- -------- -------
Investment
income -- net ........ .37 .39 .38 .40 .40
Realized and
unrealized gain
(loss) on invest-
ments -- net ......... .20 .14 (.01) .19 (.53)
-------- -------- -------- -------- -------
Total from
investment
operations ........... .57 .53 .37 .59 (.13)
-------- -------- -------- -------- -------
Less dividends
and
distributions:
Investment
income
-- net .............. (.37) (.39) (.38) (.40) (.40)
Realized gain
on invest-
ments -- net......... (.01) -- -- (.14) (.23)
-------- -------- -------- -------- -------
Total dividends
and
distributions ........ (.38) (.39) (.38) (.54) (.63)
-------- -------- -------- -------- -------
Net asset value,
end of period ........ $ 8.24 $ 8.05 $ 7.91 $ 7.92 $ 7.87
======== ======== ======== ======== =======
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share....... 7.24% 6.78% 4.71% 7.91% (1.81%)
======== ======== ======== ======== =======
RATIOS TO AVERAGE
NET ASSETS:
Expenses .............. 1.18% 1.19% 1.19% 1.19% 1.17%
======== ======== ======== ======== =======
Investment
income -- net........ 4.53% 4.82% 4.80% 5.03% 4.78%
======== ======== ======== ======== =======
SUPPLEMENTAL
DATA:
Net assets, end of
period
(in thousands)........ $498,624 $560,105 $723,090 $782,748 $866,193
======== ======== ======== ======== ========
Portfolio turnover..... 102.89% 74.40% 78.49% 35.61% 28.34%
======== ======== ======== ======== ========
<CAPTION>
INSURED PORTFOLIO
------------------------------------------------------------------------------------------------------
CLASS B CLASS C
----------------------------------------------------------------- ------------------------------------
FOR THE
PERIOD
OCT. 21,
FOR THE YEAR ENDED JUNE 30, 1988+ TO FOR THE YEAR ENDED JUNE 30,
--------------------------- JUNE 30, -------------------------------
1993 1992 1991 1990 1989 1998 1997 1996
------------ ------------ ------------ ------------ ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSET
VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period ............... $ 8.26 $ 7.92 $ 7.86 $ 7.97 $ 7.81 $ 8.06 $ 7.91 $ 7.92
-------- -------- -------- -------- ------- -------- ------- -------
Investment
income -- net ........ .44 .46 .48 .49 .36 .37 .38 .38
Realized and
unrealized gain
(loss) on invest-
ments -- net ......... .48 .41 .12 (.11) .16 .19 .15 (.01)
-------- -------- -------- -------- ------- -------- ------- -------
Total from
investment
operations ........... .92 .87 .60 .38 .52 .56 .53 .37
-------- -------- -------- -------- ------- -------- ------- -------
Less dividends
and
distributions:
Investment
income
-- net .............. (.44) (.46) (.48) (.49) (.36) (.37) (.38) (.38)
Realized gain
on invest-
ments -- net......... (.11) (.07) (.06) -- -- (.01) -- --
-------- -------- -------- -------- -------- -------- ------- -------
Total dividends
and
distributions ........ (.55) (.53) (.54) (.49) (.36) (.38) (.38) (.38)
-------- -------- -------- -------- -------- -------- ------- -------
Net asset value,
end of period ........ $ 8.63 $ 8.26 $ 7.92 $ 7.86 $ 7.97 $ 8.24 $ 8.06 $ 7.91
======== ======== ======== ======== ======== ======== ======= =======
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share....... 11.45% 11.27% 8.02% 4.98% 6.88%# 7.05% 6.86% 4.65%
======== ======== ======== ======== ======== ======== ======= =======
RATIOS TO AVERAGE
NET ASSETS:
Expenses .............. 1.18% 1.19% 1.20% 1.22% 1.23%* 1.23% 1.25% 1.24%
======== ======== ======== ======== ======== ======== ======= =======
Investment
income -- net........ 5.17% 5.69% 6.13% 6.27% 6.58%* 4.48% 4.77% 4.75%
======== ======== ======== ======== ======== ======== ======= =======
SUPPLEMENTAL
DATA:
Net assets, end of
period
(in thousands)........ $911,307 $706,016 $537,755 $408,641 $ 175,707 $14,623 $11,922 $18,936
======== ======== ======== ======== ========= ======== ======= =======
Portfolio turnover..... 43.86% 22.50% 33.12% 23.20% 45.49% 102.89% 74.40% 78.49%
======== ======== ======== ======== ========= ======== ======= =======
<CAPTION>
INSURED PORTFOLIO
-------------------------------------------------------------
CLASS C CLASS D
----------- -----------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
OCT. 21, OCT. 21,
1994+ TO FOR THE YEAR ENDED JUNE 30, 1994+ TO
JUNE 30, --------------------------- JUNE 30,
1995 1998 1997 1996 1995
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSET
VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period ............... $ 7.68 $ 8.06 $ 7.91 $ 7.92 $ 7.68
------ -------- ------- ------- --------
Investment
income -- net ........ .27 .41 .43 .42 .29
Realized and
unrealized gain
(loss) on invest-
ments -- net ......... .38 .19 .15 (.01) .38
------ -------- ------- ------- --------
Total from
investment
operations ........... .65 .60 .58 .41 .67
------ -------- ------- ------- --------
Less dividends
and
distributions:
Investment
income
-- net .............. (.27) (.41) (.43) (.42) (.29)
Realized gain
on invest-
ments -- net......... (.14) (.01) -- -- (.14)
------ -------- ------- ------- ---------
Total dividends
and
distributions ........ (.41) (.42) (.43) (.42) (.43)
------ -------- ------- ------- ---------
Net asset value,
end of period ........ $ 7.92 $ 8.24 $ 8.06 $ 7.91 $ 7.92
====== ======== ======= ======= =========
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share....... 8.83%# 7.65% 7.46% 5.25% 9.24%#
====== ======== ======= ======= =========
RATIOS TO AVERAGE
NET ASSETS:
Expenses .............. 1.23%* .67% .69% .68% .68%*
====== ======== ======= ======= =========
Investment
income -- net........ 4.93%* 5.03% 5.33% 5.31% 5.50%*
====== ======== ======= ======= =========
SUPPLEMENTAL
DATA:
Net assets, end of
period
(in thousands)........ $7,756 $48,706 $38,422 $51,772 $ 26,015
====== ======== ======= ======= =========
Portfolio turnover..... 35.61% 102.89% 74.40% 78.49% 35.61%
======= ======== ======= ======= =========
</TABLE>
- -------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
# Aggregate total investment return.
14
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the Portfolio's financial statements:
<TABLE>
<CAPTION>
NATIONAL PORTFOLIO
---------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year ............. $ 10.38 $ 10.11 $ 10.02 $ 10.08 $ 11.02
------- -------- -------- --------- ---------
Investment income -- net ....................... .59 .60 .60 .60 .62
Realized and unrealized gain (loss) on
investments -- net ............................ .26 .27 .09 .15 (.64)
------- -------- -------- --------- ---------
Total from investment operations ............... .85 .87 .69 .75 (.02)
------- -------- -------- --------- ---------
Less dividends and distributions:
Investment income -- net ...................... (.59) (.60) (.60) (.60) (.62)
Realized gain on investments -- net ........... -- -- -- (.19) (.30)
In excess of realized gain on
investments -- net ........................... -- -- -- (.02) --
-------- -------- -------- ---------- ---------
Total dividends and distributions .............. (.59) (.60) (.60) (.81) (.92)
-------- -------- -------- ---------- ---------
Net asset value, end of year ................... $ 10.64 $ 10.38 $ 10.11 $ 10.02 $ 10.08
======== ======== ======== ========== =========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share ............. 8.36% 8.84% 6.98% 7.89% (.47%)
======== ======== ======== ========== =========
RATIOS TO AVERAGE NET ASSETS:
Expenses ....................................... .55% .55% .56% .56% .55%
======== ======== ======== ========== =========
Investment income -- net ....................... 5.58% 5.86% 5.89% 6.01% 5.72%
======== ======== ======== ========== =========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ......... $964,940 $983,650 $983,550 $1,059,440 $1,203,181
======== ======== ======== ========== ==========
Portfolio turnover ............................. 142.02% 99.52% 95.09% 103.65% 73.33%
======== ======== ======== ========== ==========
<CAPTION>
NATIONAL PORTFOLIO
--------------------------------------------------------------------------
CLASS A
--------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
--------------------------------------------------------------------------
1993 1992 1991 1990 1989
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year ............. $ 10.64 $ 10.17 $ 10.12 $ 10.31 $ 9.94
----------- --------- --------- --------- ---------
Investment income -- net ....................... .67 .71 .73 .74 .77
Realized and unrealized gain (loss) on
investments -- net ............................ .57 .58 .05 (.19) .37
----------- --------- --------- ---------- ---------
Total from investment operations ............... 1.24 1.29 .78 .55 1.14
----------- --------- --------- ---------- ---------
Less dividends and distributions:
Investment income -- net ...................... (.67) (.71) (.73) (.74) (.77)
Realized gain on investments -- net ........... (.19) (.11) -- -- --
In excess of realized gain on
investments -- net ........................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions .............. (.86) (.82) (.73) (.74) (.77)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ................... $ 11.02 $ 10.64 $ 10.17 $ 10.12 $ 10.31
========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share ............. 12.21% 13.09% 7.94% 5.53% 11.89%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses ....................................... .55% .55% .55% .55% .55%
========== ========== ========== ========== ==========
Investment income -- net ....................... 6.23% 6.80% 7.20% 7.27% 7.63%
========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ......... $1,353,805 $1,278,055 $1,255,820 $1,365,541 $1,445,116
========== ========== ========== ========== ==========
Portfolio turnover ............................. 65.43% 50.94% 75.25% 48.80% 76.73%
========== ========== ========== ========== ==========
</TABLE>
- -------
* Total investment returns exclude the effects of sales loads.
15
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the Portfolio's financial statements:
<TABLE>
<CAPTION>
NATIONAL PORTFOLIO
-----------------------------------------------------------------------------
CLASS B
-----------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
1998 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period .................... $ 10.37 $ 10.11 $ 10.02 $ 10.07 $ 11.02 $ 10.63
-------- -------- -------- -------- -------- --------
Investment
income -- net ............. .51 .52 .52 .52 .54 .59
Realized and
unrealized gain
(loss) on
investments --
net ....................... .26 .26 .09 .16 (.65) .58
-------- -------- -------- -------- -------- --------
Total from investment
operations ................ .77 .78 .61 .68 (.11) 1.17
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment
income -- net ............ (.51) (.52) (.52) (.52) (.54) (.59)
Realized gain on
investments --
net ...................... -- -- -- (.19) (.30) (.19)
In excess of
realized gain on
investments --
net ...................... -- -- -- (.02) -- --
-------- -------- -------- -------- -------- --------
Total dividends and
distributions ............. (.51) (.52) (.52) (.73) (.84) (.78)
-------- -------- -------- -------- -------- --------
Net asset value, end
of period ................. $ 10.63 $ 10.37 $ 10.11 $ 10.02 $ 10.07 $ 11.02
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share ........... 7.55% 7.92% 6.17% 7.28% ( 1.39%) 11.47%
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE
NET ASSETS:
Expenses ................... 1.31% 1.31% 1.32% 1.32% 1.30% 1.31%
======== ======== ======== ======== ======== ========
Investment
income -- net ............. 4.82% 5.10% 5.13% 5.25% 4.97% 5.46%
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands) ................ $406,798 $415,103 $399,341 $419,933 $459,169 $424,071
======== ======== ======== ======== ======== ========
Portfolio turnover ......... 142.02% 99.52% 95.09% 103.65% 73.33% 65.43%
======== ======== ======== ======== ======== ========
<CAPTION>
NATIONAL PORTFOLIO
------------------------------------------------------
CLASS B
-----------------------------------------------------
FOR THE
PERIOD
OCT. 21,
FOR THE YEAR ENDED JUNE 30, 1988+ TO
---------------------------------- JUNE 30,
1992 1991 1990 1989
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period .................... $ 10.16 $ 10.11 $ 10.30 $ 10.14
-------- -------- -------- ---------
Investment
income -- net ............. .63 .65 .66 .48
Realized and
unrealized gain
(loss) on
investments --
net ....................... .58 .05 (.19) .16
-------- -------- -------- ---------
Total from investment
operations ................ 1.21 .70 .47 .64
-------- -------- -------- ---------
Less dividends and
distributions:
Investment
income -- net ............ (.63) (.65) (.66) (.48)
Realized gain on
investments --
net ...................... (.11) -- -- --
In excess of
realized gain on
investments --
net ...................... -- -- -- --
-------- -------- -------- ----------
Total dividends and
distributions ............. (.74) (.65) (.66) (.48)
-------- -------- -------- ----------
Net asset value, end
of period ................. $ 10.63 $ 10.16 $ 10.11 $ 10.30
======== ======== ======== ==========
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share ........... 12.25% 7.14% 4.74% 6.48%#
======== ======== ======== ==========
RATIOS TO AVERAGE
NET ASSETS:
Expenses ................... 1.31% 1.31% 1.31% 1.31%*
======== ======== ======== ==========
Investment
income -- net ............. 6.03% 6.43% 6.52% 6.74%*
======== ======== ======== ==========
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands) ................ $286,375 $213,581 $179,362 $ 97,196
======== ======== ======== ==========
Portfolio turnover ......... 50.94% 75.25% 48.80% 76.73%
======== ======== ======== ==========
<CAPTION>
NATIONAL PORTFOLIO
----------------------------------------------------
CLASS C
----------------------------------------------------
FOR THE
PERIOD
OCT. 21,
FOR THE YEAR ENDED JUNE 30, 1994+ TO
----------------------------- JUNE 30,
1998 1997 1996 1995
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period .................... $ 10.38 $ 10.11 $ 10.03 $ 9.85
-------- -------- --------- --------
Investment
income -- net ............. .50 .52 .52 .36
Realized and
unrealized gain
(loss) on
investments --
net ....................... .26 .27 .08 .39
-------- -------- --------- --------
Total from investment
operations ................ .76 .79 .60 .75
-------- -------- --------- --------
Less dividends and
distributions:
Investment
income -- net ............ (.50) (.52) (.52) (.36)
Realized gain on
investments --
net ...................... -- -- -- (.19)
In excess of
realized gain on
investments --
net ...................... -- -- -- (.02)
-------- --------- --------- --------
Total dividends and
distributions ............. (.50) (.52) (.52) (.57)
-------- --------- --------- --------
Net asset value, end
of period ................. $ 10.64 $ 10.38 $ 10.11 $ 10.03
======== ========= ========= ========
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share ........... 7.49% 7.97% 6.01% 7.97%#
======== ========= ========= ========
RATIOS TO AVERAGE
NET ASSETS:
Expenses ................... 1.36% 1.36% 1.37% 1.37%*
======== ========= ========= ========
Investment
income -- net ............. 4.76% 5.04% 5.08% 5.21%*
======== ========= ========= ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands) ................ $41,087 $ 28,096 $ 13,291 $ 5,195
======== ========= ========= ========
Portfolio turnover ......... 142.02% 99.52% 95.09% 103.65%
======== ========= ========= ========
<CAPTION>
NATIONAL PORTFOLIO
---------------------------------------------------
CLASS D
---------------------------------------------------
FOR THE
PERIOD
OCT. 21,
FOR THE YEAR ENDED JUNE 30, 1994+ TO
--------------------------- JUNE 30,
1998 1997 1996 1995
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period .................... $ 10.39 $ 10.12 $ 10.03 $ 9.85
-------- -------- -------- --------
Investment
income -- net ............. .56 .58 .57 .40
Realized and
unrealized gain
(loss) on
investments --
net ....................... .25 .27 .09 .39
-------- -------- -------- --------
Total from investment
operations ................ .81 .85 .66 .79
-------- -------- -------- --------
Less dividends and
distributions:
Investment
income -- net ............ (.56) (.58) (.57) (.40)
Realized gain on
investments --
net ...................... -- -- -- (.19)
In excess of
realized gain on
investments --
net ...................... -- -- -- (.02)
-------- --------- --------- --------
Total dividends and
distributions ............. (.56) (.58) (.57) (.61)
-------- --------- --------- --------
Net asset value, end
of period ................. $ 10.64 $ 10.39 $ 10.12 $ 10.03
======== ========= ========= ========
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share ........... 7.99% 8.57% 6.71% 8.37%#
======== ========= ========= ========
RATIOS TO AVERAGE
NET ASSETS:
Expenses ................... .80% .80% .81% .81%*
======== ========= ========= ========
Investment
income -- net ............. 5.32% 5.60% 5.64% 5.78%*
======== ========= ========= ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands) ................ $68,162 $ 51,038 $ 43,884 $19,656
======== ========= ========= ========
Portfolio turnover ......... 142.02% 99.52% 95.09% 103.65 %
======== ========= ========= ========
</TABLE>
- -------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
16
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the Portfolio's financial statements:
<TABLE>
<CAPTION>
LIMITED MATURITY PORTFOLIO
---------------------------------------------------
CLASS A
---------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
---------------------------------------------------
1998 1997 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year ............. $ 9.93 $ 9.91 $ 9.92 $ 9.87
------- ------- ------- -------
Investment income -- net ....................... .39 .39 .38 .38
Realized and unrealized gain (loss) on
investments -- net ............................ .03 .04 (.01) .05
------- ------- -------- -------
Total from investment operations ............... .42 .43 .37 .43
------- ------- -------- -------
Less dividends and distributions:
Investment income -- net ...................... (.39) (.39) (.38) (.38)
Realized gain on investments -- net ........... -- (.02) -- --
-------- -------- -------- --------
Total dividends and distributions: ............. (.39) (.41) (.38) (.38)
-------- -------- -------- --------
Net asset value, end of year ................... $ 9.96 $ 9.93 $ 9.91 $ 9.92
======== ======== ======== ========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share ............. 4.26% 4.40% 3.75% 4.53%
======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses ....................................... 43% .39% .44% .41%
======== ======== ======== ========
Investment income -- net ....................... 3.88% 3.93% 3.83% 3.86%
======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ......... $295,641 $343,641 $417,097 $536,474
======== ======== ======== ========
Portfolio turnover ............................. 72.69% 61.90% 88.32% 37.33%
======== ======== ======== ========
<CAPTION>
LIMITED MATURITY PORTFOLIO
----------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year ............. $ 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 year ................... $ 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 ....................................... .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 year (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>
- -------
* Total investment returns exclude the effects of sales loads.
17
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
The following per share data and ratios have been derived from the
information provided in the Portfolio's financial statements.
<TABLE>
<CAPTION>
LIMITED MATURITY PORTFOLIO
-------------------------------------------------------------
CLASS B
-------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............. $ 9.94 $ 9.91 $ 9.92 $ 9.87 $ 10.01
------ ------- ------- ------- --------
Investment income -- net ......................... .35 .36 .35 .35 .33
Realized and unrealized gain (loss) on
investments -- net .............................. .03 .05 (.01) .05 (.14)
------ ------- ------- ------- --------
Total from investment operations ................. .38 .41 .34 .40 .19
------ ------- ------- ------- --------
Less dividends and distributions:
Investment income -- net ........................ (.35) (.36) (.35) (.35) (.33)
Realized gain on investments -- net ............. -- (.02) -- -- --
------- ------- ------- -------- --------
Total dividends and distributions ................ (.35) (.38) (.35) (.35) (.33)
------- ------- ------- -------- --------
Net asset value, end of period ................... $ 9.97 $ 9.94 $ 9.91 $ 9.92 $ 9.87
======= ======= ======= ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ............... 3.89% 4.13% 3.37% 4.14% 1.98%
======= ======= ======= ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... .78% .75% .80% .78% .76%
======= ======= ======= ======== ========
Investment income -- net ......................... 3.43% 3.58% 3.46% 3.50% 3.33%
======= ======= ======= ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) ......... $44,714 $54,275 $71,075 $129,581 $145,534
======= ======= ======= ======== ========
Portfolio turnover ............................... 72.69% 61.90% 88.32% 37.33% 45.67%
======= ======= ======= ======== ========
<CAPTION>
LIMITED MATURITY PORTFOLIO
-----------------------------------------------------------------------
CLASS B CLASS C CLASS D
------------- --------------------------- -----------
JUNE 30,
FOR THE FOR THE
PERIOD PERIOD
NOV. 2, OCT. 21, FOR THE YEAR
1992+ TO FOR THE YEAR ENDED JUNE 30, 1994+ TO ENDED JUNE 30,
JUNE 30, ------------------------------ JUNE 30, --------------
1993 1998 1997 1996 1995 1998
------------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............. $ 9.93 $ 9.91 $ 9.88 $ 9.92 $ 9.83 $ 9.94
-------- ------- ------- ------- ------ ------
Investment income -- net ......................... .24 .35 .35 .34 .25 .38
Realized and unrealized gain (loss) on
investments -- net .............................. .08 .03 .05 (.04) .09 .03
-------- ------- ------- -------- ------ ------
Total from investment operations ................. .32 .38 .40 .30 .34 .41
-------- ------- ------- -------- ------ ------
Less dividends and distributions:
Investment income -- net ........................ (.24) (.35) (.35) (.34) (.25) (.38)
Realized gain on investments -- net ............. -- -- (.02) -- -- --
--------- -------- -------- -------- ------ -------
Total dividends and distributions ................ (.24) (.35) (.37) (.34) (.25) (.38)
--------- -------- -------- -------- ------ -------
Net asset value, end of period ................... $ 10.01 $ 9.94 $ 9.91 $ 9.88 $ 9.92 $ 9.97
========= ======== ======== ======== ====== =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ............... 3.26%# 3.88% 4.11% 2.97% 3.52%# 4.16%
========= ======== ======== ======== ====== =======
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... .76%* .79% .75% .80% .70%* .54%
========= ======== ======== ======== ====== =======
Investment income -- net ......................... 3.60%* 4.27% 3.57% 3.41% 3.61%* 3.89%
========= ======== ======== ======== ====== =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) ......... $ 95,179 $ 86 $ 108 $ 94 $3,965 $68,562
========= ======== ======== ======== ====== =======
Portfolio turnover ............................... 65.43% 72.69% 61.90% 88.32% 37.33% 72.69%
========= ======== ======== ======== ====== =======
<CAPTION>
LIMITED MATURITY PORTFOLIO
-------------------------------------
CLASS D
-------------------------------------
FOR THE
PERIOD
OCT. 21,
FOR THE YEAR ENDED JUNE 30, 1994+ TO
JUNE 30,
1997 1996 1995
----------- ----------- -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............. $ 9.91 $ 9.93 $ 9.83
------- ------- --------
Investment income -- net ......................... .38 .37 .26
Realized and unrealized gain (loss) on
investments -- net .............................. .05 (.02) .10
------- ------- --------
Total from investment operations ................. .43 .35 .36
------- ------- --------
Less dividends and distributions:
Investment income -- net ........................ (.38) (.37) (.26)
Realized gain on investments -- net ............. (.02) -- --
------- ------- ---------
Total dividends and distributions ................ (.40) (.37) (.26)
------- ------- ---------
Net asset value, end of period ................... $ 9.94 $ 9.91 $ 9.93
======= ======= =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ............... 4.40% 3.55% 3.73%#
======= ======= =========
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... .48% .54% .53%*
======= ======= =========
Investment income -- net ......................... 3.84% 3.71% 3.78%*
======= ======= =========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) ......... $20,383 $15,886 $ 11,258
======= ======= =========
Portfolio turnover ............................... 61.90% 88.32% 37.33%
======= ======= =========
</TABLE>
- -------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
# Aggregate total investment return.
18
<PAGE>
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 (collectively, the "Portfolios" and
each, a "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 their political
subdivisions, agencies and instrumentalities, the interest on which, in the
opinion of bond counsel to the issuer, is exempt from Federal income tax.
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 certain 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 remaining maturities 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 that will constitute taxable income. In addition, the Fund may
invest in certain tax-exempt securities that are classified as "private activity
bonds," which may subject certain investors to an alternative minimum tax. (At
July 31, 1998, approximately 11.8% of the Insured Portfolio's, approximately
17.0% of the National Portfolio's and approximately 5.5% of the Limited Maturity
Portfolio's net assets were invested in "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 Insured Portfolio, the National Portfolio and the
Limited Maturity Portfolio are authorized to engage in transactions in
financial futures contracts only 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 potential 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 a comparatively high level liquidity because of its
redemption features and relieves the investor of the burdensome administrative
details involved in managing a portfolio of tax-exempt securities. These
potential benefits are at least partially offset by the fact that there are
expenses in operating an investment company such as the Fund. 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.
19
<PAGE>
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, financial and interest rate risk to which the Portfolio is
subject. Generally, Municipal Bonds with longer maturities tend to produce
higher yields and are subject to greater market fluctuations as a result of
changes in interest rates ("market risk") than are Municipal Bonds with shorter
maturities. In addition, lower rated Municipal Bonds generally will provide a
higher yield than higher rated Municipal Bonds of similar maturity but are also
generally subject to greater market risk and to a greater degree of risk with
respect to the ability of the issuer to meet its principal and interest
obligations ("financial risk"). A Portfolio's net asset value may fall when
interest rates rise and rise when interest rates fall. In general, Municipal
Bonds with longer maturities will be subject to greater volatility resulting
from interest rate fluctuation than will Municipal Bonds with shorter
maturities. ("interest rate risk"). Because of its empasis on investments in
Municipal Bonds, each portfolio should be considered as a means of diversifying
an investment portfolio and not in itself a balanced investment plan. See
"Appendix -- Description of Ratings" for information with respect to ratings
assigned to Municipal Bonds and Temporary Investments by rating agencies.
INSURED PORTFOLIO
The Insured Portfolio invests primarily in higher quality (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 ("S&P") (AAA, AA, A and BBB) or Moody's Investors Service,
Inc. ("Moody's") (Aaa, Aa, A and Baa) in the case of long-term debt, rated MIG
1 through MIG 4 by Moody's or in the four highest bond ratings of, or rated
SP-1 through SP-2 by, S&P in the case of short-term notes, and rated P-1 or P-2
in the case of Moody's or A-1 through A-2 by S&P in the case of tax-exempt
commercial paper. Depending on market conditions, it is expected that Municipal
Bonds with maturities beyond five years will comprise a major portion of this
Portfolio.
The Insured Portfolio will 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.
20
<PAGE>
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 that 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 Portfolio. It is the
intention of the Insured Portfolio to retain any Insured Municipal Bonds that
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 that are not
in default. In certain circumstances, however, the Fund's management may
determine that an alternate 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 that were in default at the end of the
Fund's last fiscal year, such Insured Municipal Bonds were effectively valued at
par. The Insured Portfolio's ability to manage its portfolio will be limited to
the extent it holds defaulted Insured Municipal Bonds, 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 Portfolio's method of valuing defaulted Insured
Municipal Bonds and Insured Municipal Bonds that have a significant risk of
default. Further information with respect to 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
Insured 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 Bonds 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
0.08% to 0.20% 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 primarily in a portfolio of medium to lower
rated Municipal Bonds with maturities beyond five years. This Portfolio
normally can be expected to offer the highest yields of the three Portfolios,
but also be subject to the highest market and financial risks. Because
investment in medium to lower rated Municipal Bonds entails relatively greater
risks of loss of income or principal than an investment in higher rated
securities, an investment in the National Portfolio may not be appropriate for
all investors. Investors should consider these risks before investing.
Although the investment policies of the National Portfolio are not
governed by specific rating categories, the Fund will seek to invest primarily
in medium and lower grade Municipal Bonds, including short-term tax-exempt
notes, tax-exempt commercial paper and tax-exempt variable rate demand notes.
Medium grade long-term debt obligations are those rated A and BBB by S&P or A
and Baa by Moody's, and unrated obligations that the Investment Adviser
believes are of comparable quality. Lower rated obligations (commonly known as
"junk bonds") are those rated below BBB or Baa, and unrated obligations that
the Investment Adviser believes are 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
21
<PAGE>
may consist of obligations that 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 National Portfolio to invest
over 35% of its assets in securities rated below Baa by Moody's or in securities
rated below BBB by S&P.
Junk bonds are generally considered 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 risk of default,
volatility of price and risks to principal and income 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 rated debt securities. The National Portfolio will not invest in debt
securities in the lowest rating categories (those rated CC or lower by S&P 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 that 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 market value as a percentage of net assets, by
S&P rating category, of the securities held by the National Portfolio at July
31, 1998:
<TABLE>
<CAPTION>
% NET
RATING ASSETS
- -------------------- ---------
<S> <C>
AAA .............. 48.9
AA ............... 15.9
A ................ 10.9
BBB .............. 8.3
BB ............... 2.1
NR* .............. 10.4
</TABLE>
- --------
* Bonds that are not rated by S&P. Such bonds may be rated by nationally
recognized statistical rating organizations other than S&P, or may not be
rated by any of such organizations. With respect to the percentage of the
Portfolio's assets invested in such securities, the Investment Adviser
believes that 3.2% are of comparable quality to bonds rated AAA, 0.3% are of
comparable quality to bonds rated A, 3.4% are of comparable quality to bonds
rated BBB, 2.7% are of comparable quality to bonds rated BB and 0.8% are of
comparable quality to bonds rated B. This determination is based on the
Investment Adviser's own internal evaluation and does not necessarily
reflect how such securities would be rated by S&P if it were to rate the
securities.
It is currently anticipated 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 primarily in a portfolio 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 that 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 may generally be
expected to offer a lower yield than the other Portfolios. Interest rates on
short-term Municipal Bonds may fluctuate more widely from time to time than
interest rates on longer-term Municipal Bonds. However, because of the
22
<PAGE>
shorter maturities, the market value of the Municipal Bonds held by the Limited
Maturity Portfolio may generally be expected to fluctuate less as a result of
changes in prevailing interest rates.
The Limited Maturity Portfolio will invest primarily in Municipal Bonds
rated at the date of purchase in the four highest rating categories by S&P
(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 3, or rated SP-1+ through SP-2 by
S&P 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-3 by S&P in the case of tax-exempt
commercial paper. The Limited Maturity Portfolio will primarily 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 that, after being purchased by the
Portfolio, are downgraded to a rating lower than those set forth above.
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 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 of 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. A
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 the Investment Adviser deems
it 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
23
<PAGE>
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 that
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.
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 "Additional Information -- Dividends and
Distributions" and "Additional Information -- Federal Income Taxes."
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
24
<PAGE>
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 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 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 that 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 that 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 that 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 that 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
25
<PAGE>
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 a Portfolio's net
assets. Margin deposits may consist of cash or securities acceptable to the
broker and the relevant contract market.
When a Portfolio purchases a futures contract, it will maintain an amount
of cash, cash equivalents or commercial paper or other liquid securities in a
segregated account with the Fund's custodian, so that the amount 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 the 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.
INDEXED AND INVERSE FLOATING OBLIGATIONS
The Fund may invest in a variety of instruments that 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. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an index.
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. Also, the Fund may invest in so-called "inverse
floating obligations" or "residual interest bonds" on which the variable
long-term interest rates typically decline as short-term market rates increase
and increase as short-term market rates decline. The Fund may purchase in the
secondary market synthetically created inverse floating rate bonds evidenced by
custodial or trust receipts. Generally, interest rates on inverse floating rate
bonds will decrease when short-term rates increase and will increase when
short-term rates decrease. Such securities have the effect of providing a
degree of investment leverage, since they may increase or decrease in value in
response to changes, as an illustration, in market interest rates at a rate
which is a multiple (typically two) of the rate at which fixed-rate long-term
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 Investment Adviser believes
that indexed and inverse floating obligations represent a flexible portfolio
management instrument for the Fund that allows the Investment Adviser to vary
the degree of investment leverage relatively efficiently under different
26
<PAGE>
market conditions. Certain investments in such obligations may be illiquid. The
Fund may not invest in such illiquid securities if such investments, together
with other illiquid investments, would exceed 15% 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 15% 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.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act"). 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.
The Directors are:
ARTHUR ZEIKEL* -- Chairman of the Investment Adviser and its affiliate,
MLAM; Chairman and Director of Princeton Services, Inc. ("Princeton Services")
and Executive Vice President of ML & Co.
RONALD W. FORBES -- Professor of Finance, School of Business State
University of New York at Albany.
CYNTHIA A. MONTGOMERY -- Professor of Competition and Strategy, Harvard
Business School.
CHARLES C. REILLY -- Self-employed financial consultant; former President
and Chief Investment Officer of Versus Capital, Inc.; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc.
KEVIN A. RYAN -- Professor of Education, Boston University; Founder and
current Director of The Boston University Center for Advancement of Ethics and
Character.
RICHARD R. WEST -- Dean Emeritus, New York University Leonard N. Stern
School of Business Administration.
- --------
* Interested person, as defined in the Investment Company Act, of the
Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Investment Adviser to the Fund is FAM, an affiliate of MLAM, an
indirect subsidiary of ML & Co., a financial services holding company and the
parent of Merrill Lynch. The address of FAM is P.O. Box 9011, Princeton, New
Jersey 08543-9011. The Asset Management Group of ML & Co. (which includes the
Investment Adviser) acts as the investment adviser for more than 100 registered
investment companies and offers portfolio management services to individuals
and institutions. As of August, 1998, the Asset Management Group had a total of
approximately $474 billion in investment company and other portfolio assets
under management. This amount includes assets managed for certain affiliates of
FAM.
27
<PAGE>
The Fund has entered into an investment advisory agreement with FAM (the
"Investment Advisory Agreement"). The Investment Advisory Agreement provides
that, subject to the supervision of the Directors of the Fund, the Investment
Adviser is responsible for the actual management of the Fund's portfolio. In
this connection, the Investment Adviser constantly reviews the Fund's holdings
in light of its own research and analysis and that from other relevant sources.
The responsibility for making decisions to buy, sell or hold a particular
security rests with the Investment Adviser. The Investment Adviser performs
certain other administrative services for the Fund and provides all of the
office space, facilities, equipment and necessary personnel for management of
the Fund.
For its services as Investment Adviser, the Fund pays FAM a monthly fee
based upon the aggregate average net assets of the three Portfolios. For the
fiscal year ended June 30, 1998, the fee paid by the Fund to FAM was
$15,777,401, of which $7,298,381 was received with respect to the Insured
Portfolio (representing 0.36% of its average net assets), $7,125,632 was
received with respect to the National Portfolio (representing 0.48% of its
average net assets) and $1,353,388 was received with respect to the Limited
Maturity Portfolio (representing 0.34% 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 fiscal year ended June
30, 1998 were $26,587,536, of which $12,846,181 was attributable to the Insured
Portfolio (representing 0.42%, 1.18%, 1.23%, and 0.67% of average net assets
for Class A, Class B, Class C and Class D shares, respectively), $11,787,693
was attributable to the National Portfolio representing 0.55%, 1.31%, 1.36%,
and 0.80% of average net assets for Class A, Class B, Class C and Class D
shares, respectively), and $1,953,662 was attributable to the Limited Maturity
Portfolio (representing 0.43%, 0.78%, 0.79%, and 0.54% of average net assets
for Class A, Class B, Class C and Class D shares, respectively). FAM was not
required to reduce its fee or reimburse any of the Fund's expenses for the
fiscal year ended June 30, 1998.
The Fund pays certain expenses incurred in its operations including, among
other things, taxes; expenses for legal and auditing services; and costs of
printing proxies, stock certificates, shareholder reports, prospectuses and
statements of additional information. Also, accounting services are provided to
the Fund by the Investment Adviser and the Fund reimburses the Investment
Adviser for its costs in connection with such services. For the fiscal year
ended June 30, 1998, the Fund reimbursed the Investment Adviser $422,404 for
accounting services, of which $221,591 was received with respect to the Insured
Portfolio, $170,810 was received with respect to the National Portfolio and
$30,003 was received with respect to the Limited Maturity Portfolio.
Kenneth A. Jacob has served as First Vice President of the Investment
Adviser since 1997, as Vice President of the Investment Adviser from 1984 to
1997 and as the Portfolio Manager for the Insured Portfolio since 1995, and is
primarily responsible for its day-to-day management. Peter J. Hayes has served
as First Vice President of the Investment Adviser since 1997, as Vice President
of the Investment Adviser from 1988 to 1997, and as the Portfolio Manager for
the Limited Maturity Portfolio since 1987, and is primarily responsible for its
day-to-day management. Walter O'Connor has served as Vice President of MLAM
since 1993 and as the Portfolio Manager for the National Portfolio since 1996,
and is primarily responsible for its day-to-day management.
TRANSFER AGENCY SERVICES
The Transfer Agent, which is a subsidiary of ML & Co., 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, the Transfer Agent is responsible
for the issuance,
28
<PAGE>
transfer and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent receives
an annual fee of up to $11.00 per Class A or Class D account and up to $14.00
per Class B or Class C account and is entitled to reimbursement for certain
transaction charges and out-of-pocket expenses incurred by the Transfer Agent
under the Transfer Agency Agreement. Additionally, a $.20 monthly closed account
charge will be assessed to all accounts that close during the calendar year.
Application of this fee will commence the month following the month the account
is closed. At the end of the calendar year, no further fees will be due. For
purposes of the Transfer Agency Agreement, the term "account" includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class on a recordkeeping system, provided the recordkeeping system is maintained
by a subsidiary of ML & Co. For the fiscal year ended June 30, 1998, the
Insured, National and Limited Maturity Portfolios of the Fund incurred fees
totaling $1,329,667, pursuant to the Transfer Agency Agreement.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act of 1940 (the "Investment Company Act"),
that incorporates the Code of Ethics of the Investment Adviser (together, the
"Codes"). The Codes significantly restrict the personal investing activities of
all employees of the Investment Adviser and, as described below, impose
additional, more onerous, restrictions on the Fund's investment personnel.
The Codes require that all employees of the Investment Adviser preclear
any personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on
short-term trading in securities. In addition, no employee may purchase or sell
any security which at the time is being purchased or sold (as the case may be),
or to the knowledge of the employee is being considered for purchase or sale,
by any fund advised by the Investment Adviser. Furthermore, the Codes provide
for trading "blackout periods" which prohibit trading by investment personnel
of the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
PURCHASE OF SHARES
The Distributor, an affiliate of both the Investment Adviser and Merrill
Lynch, acts as the Distributor of the shares of each Portfolio. 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, that are
eligible to sell shares. The Fund is offering shares of its Portfolios in four
classes 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 (the "deferred sales
charge alternative") 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
"Additional Information -- Determination of Net Asset Value." The minimum
initial purchase in each Portfolio is $1,000 and the minimum subsequent
purchase in each Portfolio is $50 except that (i) for retirement plans, the
minimum initial purchase is $100 and the minimum subsequent purchase is $1 and
(ii) for shareholders who are participants in a Mutual Funds Advisor ("MFA")
Program administered by Merrill Lynch the minimum initial purchase is
29
<PAGE>
$250. Merrill Lynch may charge its customers a processing fee (currently $5.35)
to confirm a sale of shares. Purchases made directly through the Fund's transfer
agent are not subject to the processing fee.
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., Eastern 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.
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 alternatives 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 MLAM-advised
mutual fund. Because retirement plans qualified under Section 401 of the
Internal Revenue Code of 1986, as amended (the "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.
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 CDSC 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 an identical interest 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, distribution fees 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 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 (except that Class
B shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). 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 and distribution fees with respect to Class B and
Class C shares in that the sales charges and distribution fees 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
30
<PAGE>
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, that are eligible to sell
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.
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 4.00% during the first year, automatically after
decreasing 1.00% annually to 0.0%(4) approximately ten years(5)
- ----------------------------------------------------------------------------------------------------------------
C 1.00% CDSC for one year decreasing 0.25% 0.55% No
to 0.0% after the first year(6)
- ----------------------------------------------------------------------------------------------------------------
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>
A Maximum 1.00% initial sales No No No
charge(2),(3)
- ----------------------------------------------------------------------------------------------------------------
B CDSC at a rate of 1.00% during the 0.15% 0.20% B shares convert to D shares
first year, decreasing to 0.0% after automatically after
the first year(4) approximately ten years(5)
- ----------------------------------------------------------------------------------------------------------------
C* 1.00% CDSC for one year decreasing 0.15% 0.20% No
to 0.0% after the first year(6)
- ----------------------------------------------------------------------------------------------------------------
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 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."
(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 and
waived for purchases of Class A shares by participants in certain
fee-based programs. Class A and Class D share purchases of $1,000,000 or
more may not be subject to an initial sales charge but instead may be
subject to a 1.0% CDSC for the Insured and National Portfolios and 0.20%
CDSC for the Limited Maturity Portfolio, for one year. See "Class A" and
"Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class
B shares of certain other MLAM-advised mutual funds into which exchanges
may be made have an 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
* Class C shares of the Limited Maturity Portfolio are available only
through the Exchange Privilege. See page 44.
31
<PAGE>
INITIAL SALES CHARGE ALTERATIONS -- 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 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 0.00 0.00
</TABLE>
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.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994, but such purchases
may be subject to a 1.00% CDSC for the Insured and National Portfolios and
a 0.20% CDSC for the Limited Maturity Portfolio, if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection with
certain fee-based programs.
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, as amended (the "Securities Act"), and subject to
liability as such. The Distributor will retain the entire sales charge on
orders placed directly with it. The proceeds from account maintenance fees are
used to compensate Merrill Lynch for providing continuing account maintenance
activities.
32
<PAGE>
During the fiscal year ended June 30, 1998, the Insured Portfolio, the
National Portfolio and the Limited Maturity Portfolio sold 2,602,916, 4,266,519
and 1,637,467 Class A shares, respectively, for aggregate net proceeds of
$21,473,195, $45,187,344 and $16,313,195, 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 period were $204,924, $144,059, and
$7,852, of which Merrill Lynch received $181,328 for the Insured Portfolio,
$128,510 for the National Portfolio and $6,977, for the Limited Maturity
Portfolio, and the Distributor received $23,596(1) for the Insured Portfolio,
$15,549(2) for the National Portfolio and $875(3) for the Limited Maturity
Portfolio. For the fiscal year ended June 30, 1998, the Distributor did not
receive any CDSCs with respect to redemption within one year after purchase of
Class A shares purchased subject to a front-end sales charge waiver for the
Insured and the Limited Maturity Portfolios, and received $3,330 with respect
to the National Portfolio.
During the fiscal year ended June 30, 1998, the Insured Portfolio, the
National Portfolio and the Limited Maturity Portfolio sold 23,577,522,
24,013,327, and 6,883,210 Class D shares, respectively, for aggregate net
proceeds of $193,830,379, $254,654,607 and $68,670,633, respectively. The gross
sales charges for the sale of Class D shares of the Insured Portfolio, the
National Portfolio and the Limited Maturity Portfolio for that period were
$76,976, $123,483, and $14,989, of which the Merrill Lynch received $69,238 for
the Insured Portfolio, $109,861 for the National Portfolio and $13,480, for the
Limited Maturity Portfolio, and the Distributor received $7,738(4), for the
Insured Portfolio, $13,622(5) for the National Portfolio and $1,509 for the
Limited Maturity Portfolio. For the fiscal year ended June 30, 1998, the
Distributor received CDSC proceeds of $37,656 with respect to redemption within
one year after purchase of Class D shares purchased subject to a front-end
sales charge waiver for the Limited Maturity Portfolio. For the same period the
Distributor did not receive any CDSC proceeds with respect to redemption within
one year after purchase of Class D shares purchased subject to a front-end
sales charge waiver for the Insured and National Portfolios.
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 of a
Portfolio in a shareholder account, including participants in the Merrill Lynch
Blueprint(SM) program, are entitled to purchase additional Class A shares of
that Portfolio in that account. Class A shares are available at net asset value
to corporate warranty insurance reserve fund programs and U.S. branches of
foreign banking institutions, provided that the program or branch 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, collective investment
trusts for which Merrill Lynch Trust Company serves as trustee, certain Merrill
Lynch investment programs that offer pricing alternatives for securities
transactions and purchases made in connection with certain fee-based programs.
In addition, Class A shares will be offered at net asset value to ML & Co. and
its subsidiaries and their directors and employees and to members of the Boards
of MLAM-advised mutual funds, including the Fund. Certain persons who acquired
shares of certain MLAM-advised closed-end funds in their initial offerings 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 closed-end funds that commenced operations prior to October 21, 1994).
In addition,
- --------
(1) Includes $923.73 in direct commissions received by MLFD.
(2) Includes $346.26 in direct commissions received by MLFD.
(3) Includes $181.45 in direct commissions received by MLFD.
(4) Includes $626.52 in direct commissions received by MLFD.
(5) Includes $0.00 in direct commissions received by MLFD.
33
<PAGE>
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. and, if certain conditions set forth in the Statement of
Additional Information are met, to shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who
wish to reinvest the net proceeds from a sale of certain of their shares of
common stock pursuant to a tender offer conducted by such funds in shares of
the Fund and certain other MLAM-advised mutual funds.
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 under "Eligible Class A Investors." See "Shareholder
Services -- Fee-Based Programs."
Provided applicable threshold requirements are met, Class D shares are
offered at net asset value to Employee Access(SM) Accounts available through
authorized employers. Subject to certain conditions, Class A and Class D shares
are offered at net asset value to shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc.,
and Class A shares are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc., who wish to reinvest in shares of the
Fund the net proceeds from a sale of certain of their shares of common stock,
pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch 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.
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.
EMPLOYEE ACCESS(SM) ACCOUNTS. Class A or Class D shares are offered at net
asset value to Employee Access(SM) Accounts available through employers that
provide employer sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum investments for
such accounts is $500, except that the initial minimum investments for shares
purchased for such accounts pursuant to the Automatic Investment Program is
$50.
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 charged on redemption and Class B
shares of the Limited Maturity Portfolio are subject to a one year CDSC, while
Class C shares of each Portfolio are subject only to a one year 1.00% CDSC.
Approximately ten years after Class B shares are issued, such Class B shares,
together with Class B shares issued upon dividend
34
<PAGE>
reinvestment with respect to those shares, are automatically converted into
Class D shares of the relevant Portfolio and thereafter will be subject to
lower continuing fees. See "Conversion of Class B Shares to Class D Shares"
below. Class C shares of the Limited Maturity Portfolio are available only
through the Exchange Privilege. 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 equal to 0.50% and
0.55%, respectively, of net assets. Class B and Class C shares of the Limited
Maturity Portfolio are subject to a distribution fee of 0.20% of net assets.
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 the dealers' 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 shares of a Portfolio 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. Class B shareholders of 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 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.
35
<PAGE>
The following table sets forth the rates of the CDSC on Class B shares
applicable for the period starting October 21, 1994:
<TABLE>
<CAPTION>
INSURED OR CDSC AS A
NATIONAL PORTFOLIO; PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ------------------------------------- ------------------
<S> <C>
0-1 ............................... 4.00%
1-2 ............................... 3.00%
2-3 ............................... 2.00%
3-4 ............................... 1.00%
4 and thereafter .................. 0.00%
</TABLE>
<TABLE>
<CAPTION>
LIMITED MATURITY CDSC AS A
PORTFOLIO; PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ------------------------------------- ------------------
<S> <C>
0-1 ............................... 1.0%
1 and thereafter .................. 0.0%
</TABLE>
For the fiscal year ended June 30, 1998, the Distributor received $930,762
in CDSCs with respect to redemptions of Class B shares, amounting to $351,356,
$554,547 and $24,859 in the Insured, National and Limited Maturity Portfolios,
respectively, all of which were paid to Merrill Lynch. Additional CDSCs payable
to the Distributor may have been waived or converted to a contingent obligation
in connection with a shareholder's participation in certain fee-based programs.
In determining whether a CDSC 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 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.
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 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 2.00% (the applicable rate in the third year after
purchase for shares purchased on or after October 21, 1994).
Additional information concerning the waiver of the Class B CDSC is set
forth in the Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES -- CLASS C SHARES. Class C shares that
are redeemed within one year of purchase may be subject to a 1.00% 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
36
<PAGE>
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 Class C CDSC may be waived in connection with certain
fee-based programs. See "Shareholder Services -- Fee-Based Programs."
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 ......................... 1.00%
thereafter .................. 0.00%
</TABLE>
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be made 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.
For the fiscal year ended June 30, 1998, the Distributor received $11,942
in CDSCs with respect to redemptions of Class C shares, amounting to $2,099,
$8,715 and $1,128 in the Insured, National and Limited Maturity Portfolios,
respectively, all of which were paid to Merrill Lynch. Additional CDSCs payable
to the Distributor may have been waived or converted to a contingent obligation
in connection with a shareholder's participation in certain fee-based programs.
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.
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.
37
<PAGE>
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.
The Conversion Period also may be modified in connection with certain
fee-based programs. See "Shareholder Services -- Fee-Based Programs."
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 .75% and .80% for the Class B and Class C shares, respectively,
of the Insured and National Portfolios and .35% 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 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 (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.
38
<PAGE>
For the fiscal year ended June 30, 1998, the Insured, National and Limited
Maturity Portfolios paid the Distributor $3,988,230, $3,075,384, and $171,526,
respectively, pursuant to the Class B Distribution Plan (based on average net
assets subject to the Class B Distribution Plan of approximately $531.8
million, $410.1 million, and $49.0 million, respectively), all of which were
paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended June 30, 1998, the Insured, National and Limited
Maturity Portfolios paid the Distributor $108,808, $266,883, and $566,
respectively, pursuant to the Class C Distribution Plan (based on average net
assets subject to the Class C Distribution Plan of approximately $13.6 million,
$33.4 million, and $0.2 million, respectively), all of which were paid to
Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class C shares. For the fiscal year
ended June 30, 1998, the Insured, National and Limited Maturity Portfolios paid
the Distributor $131,950, $175,476, and $39,089, respectively, pursuant to the
Class D Distribution Plan (based on average net assets subject to the Class D
Distribution Plan of approximately $52.8 million, $70.2 million, and $32.1
million, respectively), all of which were paid to Merrill Lynch for providing
account maintenance services in connection with Class D shares.
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 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 CDSCs 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 and the CDSCs, and
expenses consist of financial consultant compensation.
As of December 31, 1997, the last date for which fully allocated accrual
data is available, the fully allocated accrual revenues incurred by the
Distributor and Merrill Lynch since October 21, 1988 (commencement of
operations) with respect to Class B shares of the Insured Portfolio exceeded
fully allocated expenses for that period by $6,498,000 (representing 1.22% of
the Insured Portfolio's Class B net assets at that date), and the fully
allocated accrual revenues incurred by the Distributor and Merrill Lynch during
that period with respect to Class B shares of the National Portfolio exceeded
the fully allocated accrual expenses for that period by $1,708,000
(representing 3.42% of the National Portfolio's Class B net assets at that
date). The fully allocated accrual revenues incurred by the Distributor and
Merrill Lynch during the period from November 2, 1992 (commencement of
operations) to December 31, 1997, with respect to Class B shares of the Limited
Maturity Portfolio exceeded fully allocated expenses by $1,369,000
(representing 2.76% of the Limited Maturity Portfolio's Class B net assets at
that date). As of June 30, 1998, direct cash revenues received with respect to
the Class B shares of the Insured Portfolio for the period since October 21,
1988 (commencement of operations) exceeded direct cash expenses by $33,872,923
(representing 6.79% of Insured Portfolio Class B net assets at that date) and
direct cash revenues received with respect to Class B shares of the National
Portfolio for the same period exceeded direct cash expenses by $17,306,363
(representing 4.25% of National Portfolio Class B net assets at that date). As
of June 30, 1998, direct cash revenues received with respect to the Class B
shares of the Limited Maturity Portfolio for the period since November 2, 1992
(commencement of operations) exceeded direct cash expenses by $1,739,969
(representing 3.89% of Limited Maturity Portfolio Class B net assets at that
date).
39
<PAGE>
With respect to Class C shares, as of December 31, 1997, 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 21, 1994
(commencement of operations) with respect to Class C shares of the Insured
Portfolio exceeded fully allocated revenues for that period by $225,067
(representing 1.67% of the Insured Portfolio's Class C net assets at that
date), and the fully allocated accrual expenses incurred by the Distributor and
Merrill Lynch during that period with respect to Class C shares of the National
Portfolio exceeded the fully allocated accrual expenses for that period by
$100,000 (representing 0.30% of the National Portfolio's Class C net assets at
that date) and the fully allocated accrual expenses incurred by the Distributor
and Merrill Lynch during that period with respect to Class C shares of the
Limited Maturity Portfolio exceeded the fully allocated accrual revenues for
that period by $16,000 (representing 9.70% of the Limited Maturity Portfolio's
Class C net assets at that date). As of June 30, 1998, direct cash revenues
received with respect to the Class C shares of the Insured Portfolio for the
period since October 21, 1994 (commencement of operations) exceeded direct cash
expenses by $225,067 (representing 1.54% of Insured Portfolio Class C net
assets at that date), and the direct cash revenues received with respect to the
Class C shares of the National Portfolio for the same period exceeded direct
cash expenses by $312,453 (representing 0.76% of National Portfolio Class C net
assets at that date) and the direct cash revenues with respect to Class C
shares of the Limited Maturity Portfolio exceeded direct cash expenses by $851
(representing 0.98% of Limited Maturity Portfolio Class C 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 Conduct Rules of the 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 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;
40
<PAGE>
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 CDSC that 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 whose shares are held at the Transfer Agent wishing to
redeem shares may do so by tendering the shares directly to the Transfer Agent,
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida
32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., 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(s) 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 that 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
certificates, 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.
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 as it has assured
itself that good payment (E.G., cash, Federal funds, or a certified check drawn
on a United States bank) has been collected for the purchase of such shares.
Normally this delay will not exceed ten 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
41
<PAGE>
is received by the dealer prior to the close of business on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the day received and is received
by the Fund from the dealer not later than 4:30 p.m., Eastern time, on the same
day. Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 4:30 p.m., Eastern 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). Securities dealers that do not have selected dealer agreements with the
Distributor 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 $5.35) to confirm a repurchase of shares. Redemptions made
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, as the case may be, shares of the same
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
by sending a notice of exercise along with a check for the amount to be
reinstated to the Transfer Agent within 30 days after the date the request for
redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or 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.
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 purchases and the reinvestment of ordinary income
dividends 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 that has
entered into a selected dealer agreement with the Distributor or by mail
directly to the Transfer Agent.
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, at
the Transfer Agent. Shareholders considering transferring their Class A or
Class D shares from
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<PAGE>
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 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) or CBA(R) account may participate in the CMA(R) or CBA(R) 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.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a
"Program"), may permit the purchase of Class A shares at net asset value. Under
specified circumstances, participants in certain Programs may deposit other
classes of shares that will be exchanged for Class A shares. Initial or
deferred sales charges otherwise due in connection with such exchanges may be
waived or modified, as may the Conversion Period applicable to the deposited
shares. Termination of participation in a Program may result in the redemption
of shares held therein or the automatic exchange thereof to another class at
net asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
1-800-MER-FUND or (800) 637-3863.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are automatically reinvested
in full and fractional shares of the respective Portfolio, without a sales
charge at the net asset value of the shares of the respective Portfolio as of
the close of business on the payable date of the dividend or distribution. 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
43
<PAGE>
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, except that any dividend
or distribution of less than $10 payable to an account maintained directly with
the Fund's Transfer Agent will not be paid in cash but will be reinvested in
shares of the Fund. The Fund is not responsible for any failure of delivery to
the shareholder's addresses of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks. 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
A shareholder of any of the three Portfolios may elect to receive
systematic withdrawal payments from his or her Investment Account of Class A,
Class B, Class C or Class D shares in the form of payments by check or through
automatic payment by direct deposit to his or her bank account on either a
monthly or calendar quarterly basis. A shareholder whose shares are held within
a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(R) or
CBA(R) Systematic Redemption Program, subject to certain conditions. With
respect to redemptions of Class B and Class C shares pursuant to a systematic
withdrawal plan, the maximum number of Class B or Class C shares that can be
redeemed from an account annually shall not exceed 10% of the value of shares
of such class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Contingent
Deferred Sales Charge -- Class B Shares" and "Contingent Deferred Sales Charges
- -- Class C Shares." Where the systematic withdrawal plan is applied to Class B
Shares, upon conversion of the last Class B shares in an account to Class D
shares, the systematic withdrawal plan will automatically be applied thereafter
to Class D shares. See "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares."
EXCHANGE PRIVILEGES
U.S. 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 the 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 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.
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<PAGE>
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 that 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 for the newly
acquired shares of the other fund or Portfolio.
Class A and Class D shares will also be exchangeable for Class A shares,
and Class B and Class C shares also will be exchangeable for Class B shares, of
Summit Cash Reserves Fund, a series of Financial Institutions Series Trust,
which is a Merrill Lynch-sponsored money market fund specifically designated as
available for exchange by holders of Class A, Class B, Class C and Class D
shares. Class A shares of Summit Cash Reserves Fund have an exchange privilege
back into Class A or Class D shares of MLAM-advised funds; Class B shares of
Summit Cash Reserves Fund have an exchange privilege back into Class B or Class
C shares of MLAM-advised funds. The period of time that Class B shares of
Summit Cash Reserves Fund are held will count toward satisfaction of the
holding period requirement for purposes of reducing any CDSC payable on
redemption and, with respect to Class B shares, toward satisfaction of any
Conversion Period. Class B shares of Summit Cash Reserves Fund will be subject
to a distribution fee at an annual rate of 0.75% of average daily net assets of
such Class B shares. The exchange privilege described in this paragraph does
not apply with respect to certain Merrill Lynch fee-based programs, for which
alternative exchange arrangements may exist. Please see your Merrill Lynch
Financial Consultant for further information.
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.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services -- Exchange Privilege" in
the Statement of Additional Information.
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
45
<PAGE>
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 the portfolio securities transactions of each Portfolio
consists primarily of dealer or underwriter spreads. Under the Investment
Company 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 during the
existence of any underwriting syndicate of which Merrill Lynch is a member or
in a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Board of Directors which either comply
with rules adopted by the Securities and Exchange Commission (the "Commission")
or with interpretations of the Commission staff. An affiliated person of the
Fund may serve as its broker in over-the-counter transactions conducted on an
agency basis.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
The net investment income of each Portfolio is declared as dividends daily
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, Class C and Class D
account maintenance and Class B and Class C 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, 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 that
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 that it distributes to its shareholders.
46
<PAGE>
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 that 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.
Exempt-interest dividends are included, however, in determining the portion, if
any, of a person's Social Security benefits and railroad retirement benefits
subject to Federal income tax. The recipient of tax-exempt income is required
to report such income on his or her Federal income tax return. However, a
shareholder is advised to consult his or her 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) of the Code 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 gains from the sale or exchange of a capital
asset held for more than one year, regardless of a shareholder's holding period
for shares of the Portfolio. In addition, if, after April 30, 1993, a Portfolio
acquired 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 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
47
<PAGE>
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 or her 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.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of each Portfolio is
determined once daily by the Investment Adviser, Monday through Friday,
immediately after the declaration of dividends as of 15 minutes after the close
of business on the New York Stock Exchange (the "NYSE") (generally 4:00 p.m.,
Eastern time), on each day that the NYSE is open for trading or on any other
day on which there is sufficient trading in portfolio securities that the net
asset value of a Portfolio's shares may be materially affected. The NYSE is not
open on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value per share of each Portfolio is computed by
dividing the sum of the value of the portfolio securities held by such
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 and 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
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<PAGE>
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 (although not necessarily meet)
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of expense accrual differentials 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.
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 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 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 its 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
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<PAGE>
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, 1998 was:
<TABLE>
<CAPTION>
LIMITED
MATURITY
INSURED PORTFOLIO NATIONAL PORTFOLIO PORTFOLIO
------------------- -------------------- ----------
<S> <C> <C> <C>
Class A .............. 4.50% 4.55% 3.55%
Class B .............. 3.93% 3.98% 3.23%
Class C .............. 3.88% 3.93% 3.20%
Class D .............. 4.26% 4.31% 3.45%
</TABLE>
The tax equivalent yield for the same period (based on a tax rate of 28%)
was:
<TABLE>
<CAPTION>
LIMITED
MATURITY
INSURED PORTFOLIO NATIONAL PORTFOLIO PORTFOLIO
------------------- -------------------- ----------
<S> <C> <C> <C>
Class A .............. 6.25% 6.32% 4.93%
Class B .............. 5.46% 5.53% 4.49%
Class C .............. 5.39% 5.46% 4.44%
Class D .............. 5.92% 5.99% 4.79%
</TABLE>
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 Portfolio, the
Portfolio's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in a
Portfolio 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 Index, the Value Line Composite Index, the Dow Jones Industrial
Average, other market indices 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, FORTUNE Magazine or other industry publications. When
comparing its performance to a market index, the Fund may refer to various
statistical measures derived from the historic performances of the Fund and the
index, such as standard deviation and beta. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "Management of
the Fund -- Transfer Agency Services."
CUSTODIAN
The Bank of New York, 90 Washington Street, 12th Floor, New York, New York
10286, is the Fund's Custodian.
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<PAGE>
COUNSEL AND AUDITOR
Rogers & Wells LLP, 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.
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 Commission under the Securities Act with
respect to the securities offered hereby, certain portions of which have been
omitted pursuant to the rules and regulations of the Commission. The Statement
of Additional Information, dated October 20, 1998, 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 Commission in
Washington, D.C. To the knowledge of the Fund, no person or entity owned
beneficially 5% or more of any class of the Fund's shares on September 30,
1998.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Fund could be adversely
affected if the computer systems used by the Investment Adviser or other Fund
service providers do not properly address this problem prior to January 1,
2000. The Investment Adviser has established a dedicated group to analyze these
issues and to implement any systems modifications necessary to prepare for the
Year 2000. Currently, the Investment Adviser does not anticipate that the
transition to the Year 2000 will have any material impact on its ability to
continue to service the Fund at current levels. In addition, the Investment
Adviser has sought assurances from the Fund's other service providers that they
are taking all necessary steps to ensure that their computer systems will
accurately reflect the Year 2000, and the Investment Adviser will continue to
monitor the situation. At this time, however, no assurance can be given that
the Fund's other service providers have anticipated every step necessary to
avoid any adverse effect on the Fund attributable to the Year 2000 Problem.
51
<PAGE>
[This page intentionally left blank.]
52
<PAGE>
MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 1)
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM)
PROGRAM APPLICATION BY CALLING (800) 637-3766.
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
<TABLE>
<S> <C> <C> <C> <C>
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 D shares
</TABLE>
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.
2.
3.
4.
5.
6.
Name
First Name Initial Last Name
Name of Co-Owner (if any).................................................
First Name Initial Last Name
Address................................................................ ..
(Zip Code)
Date................................................................... ..
Occupation............................................................. ..
Signature of Owner
Name and Address of Employer........................................... ..
Signature of Co-Owner (if any)
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
ORDINARY INCOME DIVIDENDS
SELECT [ ] Reinvest
ONE: [ ] Cash
LONG-TERM CAPITAL GAINS
SELECT [ ] Reinvest
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.
53
<PAGE>
MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
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)
, 19............
Date of initial purchase
Dear Sir/Madam:
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 acts as distributor over the next 13-month period which will equal
or exceed:
<TABLE>
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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 this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor 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 parties, 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..................................................................
Account Number............................................................
(2) Name..................................................................
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.
P.O. Box 45289
Jacksonville, FL 32232-5289
We hereby authorize Merrill Lynch Funds Distributor to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
Dealer Name and Address
By:.................................................................... ..
Authorized Signature of Dealer
- ------------
- ------------
Branch-Code
----------------
----------------
F/C No.
F/C Last Name
- ------------
- ------------ ---------------------
---------------------
Dealer's Customer Account No.
54
<PAGE>
MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 2)
1. ACCOUNT REGISTRATION
Name of Owner.............................................................
Name of Co-Owner (if any).................................................
Address...................................................................
..
Social Security No.
or Taxpayer Identification No.
Account Number....... ..
(if existing account)
2. SYSTEMATIC WITHDRAWAL PLAN -- (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of [ ] Class A, [ ] Class B*, Class C* or [ ] Class D of the Insured Portfolio,
[ ] Class A, [ ] Class B*, Class C* or [ ] Class D shares of the National
Portfolio, or [ ] Class A, [ ] Class B*, Class C* 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 THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU: $------ of
(check one) [ ] Class A, [ ] Class B*, Class C* 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 MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE 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.
* ANNUAL WITHDRAWAL CANNOT EXCEED 10% OF THE VALUE OF SHARES OF SUCH CLASS HELD
IN THE ACCOUNT AT THE TIME THE ELECTION TO JOIN THE SYSTEMATIC WITHDRAWAL PLAN
IS MADE.
55
<PAGE>
MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 2) --
(CONTINUED)
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.
*Not available for the Limited Maturity Portfolio.
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 ------
or as soon thereafter as possible. (month)
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.
56
<PAGE>
APPENDIX
DESCRIPTIONS OF RATINGS
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.
57
<PAGE>
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.
SHORT-TERM NOTES: The three ratings of Moody's for short-term notes are MIG
1, MIG 2 and MIG 3. 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.
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 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.
58
<PAGE>
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
B
CCC
CC
Debt rated "BB," "B," "CCC" and "CC" are regarded, on balance, as
predominantlyspeculative with respect to capacity to pay interest and
repay principal in accordance with the terms 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 out-weighed 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.
DESCRIPTIONS OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. 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."
59
<PAGE>
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 NOTE RATINGS
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of Payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 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.
60
<PAGE>
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<PAGE>
[This page intentionally left blank.]
<PAGE>
INVESTMENT ADVISER
Fund Asset Management
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, a division of
Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
(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:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
LEGAL COUNSEL
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
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
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fee Tables ............................................ 2
Merrill Lynch Select Pricing(SM) System ............... 8
Financial Highlights .................................. 13
Investment Objective and Policies ..................... 19
Investment Policies of the Portfolios ................. 20
Insured Portfolio ................................... 20
National Portfolio .................................. 21
Limited Maturity Portfolio .......................... 22
Description of Municipal Bonds ...................... 23
Forward Commitments ................................. 24
Financial Futures Contracts and Derivatives ......... 25
Indexed and Inverse Floating Obligations ............ 26
Investment Restrictions ............................. 27
Management of the Fund ................................ 27
Board of Directors .................................. 27
Management and Advisory Arrangements ................ 27
Transfer Agency Services ............................ 28
Code of Ethics ...................................... 29
Purchase of Shares .................................... 29
Initial Sales Charge Alternatives -- Class A and
Class D Shares ................................... 32
Deferred Sales Charge Alternatives -- Class B and
Class C Shares ................................... 34
Distribution Plans .................................. 38
Limitations on the Payment of Deferred Sales
Charges .......................................... 40
Redemption of Shares .................................. 41
Redemption .......................................... 41
Repurchase .......................................... 41
Reinstatement Privilege -- Class A and Class D
Shares ........................................... 42
Shareholder Services .................................. 42
Investment Account .................................. 42
Automatic Investment Plan ........................... 43
Fee-Based Programs .................................. 43
Automatic Reinvestment of Dividends and Capital
Gains Distribution ............................... 43
Systematic Withdrawal Plans ......................... 44
Exchange Privileges ................................. 44
Portfolio Transactions ................................ 45
Additional Information ................................ 46
Dividends and Distributions ......................... 46
Federal Income Taxes ................................ 46
State and Local Taxes ............................... 48
Determination of Net Asset Value .................... 48
Performance Data .................................... 49
Transfer Agent ...................................... 50
Custodian ........................................... 50
Counsel and Auditor ................................. 51
Shareholder Reports ................................. 51
Additional Information .............................. 51
Year 2000 Issues .................................... 51
Authorization Form .................................... 53
</TABLE>
Code # 10051-1098
(Merrill Lynch logo)
Merrill Lynch
Municipal Bond Fund, Inc.
(graphic)
Prospectus
October 20, 1998
Distributor:
Merrill Lynch Funds Distributor
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
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 that 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 debt obligations issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies and
instrumentalities, the interest on which, in the opinion of bond counsel to the
issuer, is exempt from Federal income tax (such obligations are herein referred
to as "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 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.
----------------
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 20, 1998, which has been filed with the Securities
and Exchange Commission (the "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 -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is October 20, 1998.
<PAGE>
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, 1998, the average maturity of the Insured Portfolio, National
Portfolio and the Limited Maturity Portfolio was approximately 17.95 years,
20.53 years and 1.86 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 discussed 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 principal at maturity and interest
on all Municipal Bonds that 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 that are rated below
Baa by Moody's Investors Service, Inc. ("Moody's") or below BBB by Standard &
Poor's ("S&P") or that, 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 S&P
or Moody's as one of several factors in its independent credit analysis of
issuers.
Junk bonds are considered by S&P 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. Investors should consider these risks carefully before
investing. 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 S&P 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 that 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, especially if such issuers are
highly leveraged. In addition, the market for high-yield municipal securities is
relatively new
2
<PAGE>
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 Insured Portfolio, the National Portfolio and the Limited Maturity
Portfolio (collectively, the "Portfolios" and each, a "Portfolio") 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 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 that in the opinion of management, may
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
3
<PAGE>
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 not actually
leveraged.
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 reached 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 that is not fully or partially offset by an increase
in the value of portfolio securities. As a result, the participating
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 Contracts" below for a further discussion of the risks of
futures trading.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below 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 affected
(which for this purpose and under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares).
Under the fundamental investment restrictions, none of the Portfolios of
the Fund may:
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
<PAGE>
4. Purchase or sell real estate, except that to the extent permitted by
applicable law, each Portfolio of 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 each Portfolio of 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.
7. Borrow money, except that (i) each Portfolio of 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) each
Portfolio of the Fund may, to the extent permitted by applicable law,
borrow up to an additional 5% of its total assets for temporary purposes,
(iii) each Portfolio of the Fund may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio
securities and (iv) each Portfolio of 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 a Portfolio
of 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 a Portfolio of 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.
The Fund has also adopted certain non-fundamental investment restrictions,
which may be changed by the Board of Directors without approval by the Fund's
shareholders.
Under the non-fundamental investment restrictions, none of the Portfolios
of the Fund may:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of
the Investment Company Act, at any time its shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.
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 that cannot be readily resold because of legal
or contractual restrictions or that cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition
5
<PAGE>
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 that the Board of Directors of the Fund has otherwise determined
to be liquid pursuant to applicable law. Securities purchased in accordance
with Rule 144A under the Securities Act (a "Rule 144A Security") and
determined to be liquid by the Fund's Board of Directors are not subject to
the limitations set forth in this investment restriction.
d. 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, executive officers and portfolio managers of the Fund,
their ages and their principal occupations for at least the last five years are
set forth below. Unless otherwise noted, the address of each Director, officer
and portfolio manager is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66) -- PRESIDENT AND DIRECTOR(1)(2) -- Chairman of Merrill
Lynch Asset Management, L.P. ("MLAM") and of Fund Asset Management, L.P.
("FAM") (which terms as used herein include their corporate predecessors)
since 1997; President of MLAM and FAM from 1977 to 1997; Chairman of Princeton
Services, Inc. ("Princeton Services") since 1997 and Director thereof since
1993; President of Princeton Services from 1993 to 1997; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990.
RONALD W. FORBES (58) -- DIRECTOR(2) -- 1400 Washington Avenue, Albany,
New York 12222. Professor of Finance, School of Business, State University of
New York at Albany since 1989.
CYNTHIA A. MONTGOMERY (46) -- 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 from 1985 to 1989; Assistant Professor,
Graduate School of Business Administration, The University of Michigan from
1979 to 1985; Director, UNUM Corporation since 1990 and Director of Newell Co.
since 1995.
CHARLES C. REILLY (67) -- DIRECTOR(2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 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; Adjunct
Professor, Columbia University Graduate School of Business, from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television from 1986 to 1997.
KEVIN A. RYAN (65) -- DIRECTOR(2) -- 127 Commonwealth Avenue, Chestnut
Hill, Massachusetts 02167. Founder and current Director of The Boston
University Center for the Advancement of Ethics and Character; Professor of
Education at Boston University since 1982; formerly taught on the faculties of
The University of Chicago, Stanford University and Ohio State University.
RICHARD R. WEST (60) -- DIRECTOR(2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984 and Dean from 1984 to 1993, and currently Dean
Emeritus of New York University, Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado
Realty Trust, Inc. (real estate holding company), and Alexander's Inc. (real
estate company).
6
<PAGE>
TERRY K. GLENN (58) -- EXECUTIVE VICE PRESIDENT(1)(2) -- Executive Vice
President of MLAM and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of Princeton Funds Distributor, Inc.
since 1986 and Director thereof since 1991.
VINCENT R. GIORDANO (54) -- SENIOR VICE PRESIDENT(1)(2) -- Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993; portfolio manager of the Investment Adviser
since 1977 and Vice President from 1980 to 1984.
DONALD C. BURKE (38) -- VICE PRESIDENT(1)(2) -- First Vice President of
MLAM since 1997; Vice President and Director of Taxation of MLAM since 1990.
KENNETH A. JACOB (47) -- VICE PRESIDENT AND PORTFOLIO MANAGER(1)(2) --
First Vice President of MLAM since 1997; Vice President of the Investment
Adviser since 1984; employee of MLAM since 1978.
GERALD M. RICHARD (49) -- 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; Vice President of the Princeton
Funds Distributor, Inc. since 1981 and Treasurer since 1984.
PETER J. HAYES (39) -- VICE PRESIDENT AND PORTFOLIO MANAGER(1)(2) -- First
Vice President of MLAM since 1997; Vice President of MLAM since 1988.
WALTER O'CONNOR (36) -- VICE PRESIDENT AND PORTFOLIO MANAGER(1)(2) --
Director of MLAM since 1997; Vice President of MLAM since 1993; Assistant Vice
President of MLAM from 1991 to 1993; Assistant Vice President of Prudential
Securities from 1984 to 1991.
BARBARA G. FRASER (54) -- SECRETARY(1)(2) -- First Vice President of MLAM
since 1996; Vice President of the Investment Adviser and MLAM since 1994.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such a Director or officer is a Director or officer of certain other
investment companies for which the Investment Adviser or MLAM acts as
investment adviser.
COMPENSATION OF DIRECTORS
At August 31, 1998, the Directors and officers of the Fund as a group (14
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At that date, Mr. Zeikel, an officer and Director of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding Common Stock
of ML & Co.
Pursuant to the terms of the Investment Advisory Agreement, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all Directors of the Fund who are affiliated persons of the
Investment Adviser. The Fund pays each Director not affiliated with the
Investment Adviser (each a "non-interested Director") an annual fee of $3,000
plus a fee of $400 per meeting attended, together with such Director's actual
out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit and Nominating Committee (the "Committee"),
which consists of all of the non-interested Directors with a fee of $2,900 per
year. The Chairman of the Audit Committee is paid an additional annual fee of
$1,000. For the fiscal year ended June 30, 1998, fees and expenses paid to the
non-interested Directors of the Fund aggregated $41,087.
The following table sets forth the compensation paid by the Fund to the
non-affiliated Directors for the fiscal year ended June 30, 1998 and the
aggregate compensation paid by all investment companies advised by MLAM and its
affiliate, FAM ("MLAM/FAM-Advised Funds") to the non-affiliated Directors for
the calendar year ended December 31, 1997:
7
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM FUND AND
PENSION OR RETIREMENT MLAM/FAM-ADVISED
COMPENSATION BENEFITS ACCRUED AS FUNDS PAID TO
DIRECTOR/TRUSTEE FROM FUND PART OF FUND EXPENSE DIRECTOR(1)
- ------------------------------- ------------- ---------------------- -----------------
<S> <C> <C> <C>
Ronald W. Forbes .............. $ 7,900.00 None $153,500
Cynthia A. Montgomery ......... 7,900.00 None 153,500
Charles C. Reilly ............. 8,900.00 None 313,000
Kevin A. Ryan ................. 7,900.00 None 153,500
Richard R. West ............... 7,900.00 None 299,000
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM-Advised Funds as follows: Mr.
Forbes (33 registered investment companies consisting of 46 portfolios);
Ms. Montgomery (33 registered investment companies consisting of 46
portfolios); Mr. Reilly (55 registered investment companies consisting of
65 portfolios); Mr. Ryan (33 registered investment companies consisting of
46 portfolios); and Mr. West (54 registered investment companies
consisting of 75 portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
FAM, a subsidiary of ML & Co., acts as the investment adviser for the Fund
and provides the Fund with management services. Subject to the supervision of
the Board of Directors of the Fund, 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, the
Investment Adviser receives at the end of each month a fee with respect to each
Portfolio. The fee for each Portfolio is determined based on the annual advisory
fee rates for that Portfolio set forth in the table below. These fee rates are
applied to the average daily net assets of each Portfolio, with the reduced
rates shown below applicable to portions of the assets of each Portfolio 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
(each such amount being a "breakpoint level"). The portion of the assets of a
Portfolio to which the rate at each breakpoint level applies will be determined
on a "uniform percentage" basis. The uniform percentage applicable to a
breakpoint level is determined by dividing the amount of the aggregate of the
average daily net assets of the three combined Portfolios that falls within that
breakpoint level by the aggregate of the average daily net assets of the three
combined Portfolios. The amount of the fee for a Portfolio at each breakpoint
level is determined by multiplying the average daily net assets of that
Portfolio by the uniform percentage applicable to that breakpoint level and
multiplying the product by the advisory fee rate.
8
<PAGE>
<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>
For the fiscal year ended June 30, 1996, FAM received $8,850,984 from the
Insured Portfolio, $7,014,416 from the National Portfolio and $1,899,352 from
the Limited Maturity Portfolio as advisory fees. For the fiscal year ended June
30, 1997, FAM received $8,042,098 from the Insured Portfolio, $6,961,453 from
the National Portfolio and $1,552,369 from the Limited Maturity Portfolio as
advisory fees. For the fiscal year ended June 30, 1998, FAM received $7,298,381
from the Insured Portfolio, $7,125,632 from the National Portfolio and
$1,353,388 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
ML & Co. 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 that 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), 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 fiscal year ended June 30, 1998, the Fund reimbursed FAM $422,404
for such services of which $221,591 was attributable to the Insured Portfolio,
$170,810 was received with respect to the National Portfolio and $30,003 was
received with respect to the Limited Maturity Portfolio. 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 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 Plans" in the
Prospectus.
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the Investment
Company Act because of their ownership of its voting securities or their power
to exercise a controlling influence over its management or policies.
9
<PAGE>
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 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 Directors or shareholders (as applicable) of any Portfolio fail to
approve the continuance of the Investment Advisory Agreement as set forth
above, the Investment Advisory Agreement will continue in effect as to any
other Portfolio if the Directors or shareholders (as applicable) of such
Portfolio have approved the contract as set forth above.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares. The Fund has entered into
separate distribution agreements (the "Distribution Agreements") with the
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor, Inc.
(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.
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 (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). Each class has different exchange privileges. See
"Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLAM or FAM, an affiliate of MLAM.
Funds advised by MLAM or FAM that utilize the Merrill Lynch Select Pricing(SM)
System are referred to herein as "MLAM-advised mutual funds."
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
The Fund sells its Class A and Class D shares through the Distributor and
Merrill Lynch as dealers. For the fiscal year ended June 30, 1998, Class A
gross sales charges aggregated $356,835, of which the Distributor received
$40,020 and Merrill Lynch received $316,815. During the fiscal year ended June
30, 1998, the Distributor received CDSCs of $3,330 with respect to redemptions
within one year after purchase of Class A shares purchased
10
<PAGE>
subject to a front-end sales charge waiver. For the fiscal year ended June 30,
1997, Class A gross sales charges aggregated $371,198, of which the Distributor
received $42,330 and Merrill Lynch received $328,868. During the fiscal year
ended June 30, 1997, the Distributor received no CDSCs with respect to
redemptions within one year after purchase of Class A shares purchased subject
to a front-end sales charge waiver. For the fiscal year ended June 30, 1996,
Class A gross sales charges aggregated $531,864, of which the Distributor
received $60,672, and Merrill Lynch received $471,192. During the fiscal year
ended June 30, 1996, the Distributor received CDSC's of $7,073 with respect to
redemptions within one year after purchase of Class A shares purchased subject
to a front-end sales charge waiver.
For the fiscal year ended June 30, 1998, Class D gross sales charges
aggregated $215,448, of which the Distributor received $22,869 and Merrill
Lynch received $192,579. During the fiscal year ended June 30, 1998, the
Distributor received CDSCs of $37,656 with respect to redemptions within one
year after purchase of Class D shares purchased subject to a front-end sales
charge waiver. For the fiscal year ended June 30, 1997, Class D gross sales
charges aggregated $209,269, of which the Distributor received $21,222 and
Merrill Lynch received $188,047. During the fiscal year ended, June 30, 1997
the Distributor received CDSCs of $358,940 with respect to redemptions within
one year after purchase of Class D shares purchased subject to a front-end
sales charge waiver. For the fiscal year ended June 30, 1996, Class D gross
sales charges aggregated $271,962 of which the Distributor received $29,110 and
Merrill Lynch received $242,852. During the fiscal year ended June 30, 1996,
the distributor received $10,531 with respect to redemptions within one year
after purchase of Class D shares purchased subject to a front-end sales charge
waiver. All of such sales charges were attributable to payments of initial
sales charges in connection with purchases of Class D shares of the Portfolios.
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.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the fund in
connection with a tender
11
<PAGE>
offer conducted by the eligible fund and reinvest the proceeds immediately in
the designated class of shares of the Fund. This investment option is available
only with respect to eligible shares as to which no Early Withdrawal Charge or
CDSC (each as defined in the eligible fund's prospectus) is applicable. Purchase
orders from eligible fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related tender offer terminates
and will be effected at the net asset value of the designed class of the Fund on
such day.
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 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, but does not include purchases
by any such company that 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
12
<PAGE>
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 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.
EMPLOYEE ACCESS(SM) ACCOUNTS. Class A or Class D shares are offered at net
asset value to Employee Access(SM) Accounts available through employers that
provide employer sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum investment for
such accounts is $500, except that the initial minimum investment for shares
purchased for such accounts pursuant to the Automatic Investment Program is
$50.
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.
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.
13
<PAGE>
PURCHASE PRIVILEGES OF CERTAIN PERSONS. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly
wholly owned and controlled by ML & Co.), 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 sponsored 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 may not be subject to an initial sales charge. Such purchases
may instead 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 that might result from an acquisition of assets having net unrealized
appreciation that 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 that (i) meet the investment objectives and policies
14
<PAGE>
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 that have
invested a minimum of $25 million in such shares.
FEE-BASED INVESTMENT PROGRAMS. Certain Merrill Lynch fee-based investment
programs, including pricing alternatives for securities transactions, (each
referred to in this paragraph as a "Program") may permit the purchase of Class
A shares at net asset value. Under specified circumstances, participants in
certain Programs may deposit other classes of shares, which will be exchanged
for Class A shares. Initial or deferred sales charges otherwise due in
connection with such exchanges may be waived or modified. Termination of
participation in a Program may result in the redemption of such shares or the
automatic exchange thereof to another class at net asset value. In addition,
upon termination of participation in a Program, shares that have been held for
less than specified periods within such Program may be subject to a fee based
upon the current value of such shares. These Programs also generally prohibit
such shares from being transferred to another account at Merrill Lynch, to
another broker-dealer or to the Transfer Agent. Except in limited circumstances
(which may also involve an exchange as described above), such shares must be
redeemed and another class of shares purchased (which may involve the
imposition of initial or deferred sales charges and distribution and account
maintenance fees) in order for the investment not to be subject to Program
fees. Additional information regarding a specific Program (including charges
and limitations on transferability applicable to shares that may be held in
such Program) is available in the Program's client agreement and from the
Transfer Agent at (800) MER-FUND or (800) 637-3863.
DISTRIBUTION PLANS
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.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. 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 (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
15
<PAGE>
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.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules 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 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, 1998
with respect to the Class B and Class C 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 operations) to June 30, 1998 for the Class B shares of the
National and Insured Portfolios, for the period November 2, 1992 (commencement
of operations) to June 30, 1998 for Class B shares of the Limited Maturity
Portfolio, and for the period October 21, 1994 (commencement of operations) to
June 30, 1998 for the Insured, National and Limited Maturity Portfolios.
16
<PAGE>
DATA CALCULATED AS OF JUNE 30, 1998
INSURED PORTFOLIO
<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)
------------- ---------- ------------ ----------- ---------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
- -------
Under NASD Rule as Adopted ......... $1,305,071 $81,567 $43,864 $125,431 $41,376 $84,055 $2,493
Under Distributor's Voluntary
Waiver ............................ $1,305,071 $81,567 $ 6,525 $ 88,092 $41,376 $46,716 $2,493
CLASS C
- -------
Under NASD Rule as Adopted ......... $ 28,006 $ 1,750 $ 367 $ 2,117 $ 275 $ 1,842 $ 80
</TABLE>
NATIONAL PORTFOLIO
<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)
---------- ---------- ------------ --------- ---------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
- -------
Under NASD Rule as Adopted ......... $734,996 $45,937 $21,389 $67,326 $21,840 $45,486 $2,034
Under Distributor's Voluntary
Waiver ............................ $734,996 $45,937 $ 3,675 $49,612 $21,840 $27,772 $2,034
CLASS C
- -------
Under NASD Rule as Adopted ......... $ 44,504 $ 2,781 $ 407 $ 3,188 $ 383 $ 2,805 $ 226
</TABLE>
LIMITED MATURITY PORTFOLIO
<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)
---------- ---------- ------------ --------- ---------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
- -------
Under NASD Rule as Adopted ......... $181,398 $11,337 $5,020 $16,357 $1,936 $14,421 $ 89
Under Distributor's Voluntary
Waiver ............................ $181,398 $11,337 $ 907 $12,244 $1,936 $10,308 $ 89
CLASS C
- -------
Under NASD Rule as Adopted ......... $ 3,361 $ 210 $ 75 $ 285 $ 9 $ 276 $172
</TABLE>
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(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. This figure may include CDSCs that were deferred when a shareholder
redeemed shares prior to the expiration of the applicable CDSC period and
invested the proceeds, without the imposition of a sales charge, in Class
A shares in conjunction with the Shareholder's participation in the
Merrill Lynch Mutual Funds Advisor ("MFA") program. The CDSC is booked as
a contingent obligation that may be payable if the shareholder terminates
participation in the MFA program.
(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.
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REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund Shares. The right to
redeem shares or to receive payment with respect to any such redemption may be
suspended for more than seven days for any period during which trading on the
New York Stock Exchange (the "NYSE") is restricted as determined by the
Commission or the NYSE 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 Commission may by order permit
for the protection of shareholders of each Portfolio.
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. Alternatively, the reinstatement
privilege may be exercised through the investor's Merrill Lynch Financial
Consultant within 30 days after the date the request for redemption was
accepted by the Transfer Agent or Distributor.
DEFERRED SALES CHARGE -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares," while under most
circumstances, 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 CDSC,
the charge is waived on redemptions of Class B shares in certain instances,
including in connection with certain post-retirement withdrawals from an
Individual Retirement Account ("IRA") or other retirement plan or following the
death or disability of a Class B shareholder. Redemptions for which the waiver
applies in the case of such withdrawal are: (a) any partial or complete
redemption in connection with a tax-free distribution following retirement
under a tax-deferred retirement plan or attaining age 59- 1/2 in the case of an
IRA or other retirement plan, or part of a series of equal periodic payments
(not less frequently than annually) made for the life (or life expectancy) or
any redemption resulting from the tax-free return of an excess contribution to
an IRA; or, (b) any partial or complete redemption following the death or
disability (as defined in the Code) of a Class B shareholder (including one who
owns the Class B shares 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 fiscal year ended June 30, 1998, the Distributor received CDSCs of
$351,356 for the Insured Portfolio, $554,547 for the National Portfolio and
$24,859 for the Limited Maturity Portfolio, with regard to redemptions of Class
B shares, all of which were paid to Merrill Lynch. For the fiscal year ended
June 30, 1997, the Distributor received CDSCs of $979,435 for the Insured
Portfolio, $868,705 for the National Portfolio, and $58,475 for the
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<PAGE>
Limited Maturity Portfolio, with regard to redemptions of Class B shares, all
of which were paid to Merrill Lynch. For the fiscal year ended June 30, 1996,
the Distributor received CDSCs of $1,033,602 for the Insured Portfolio,
$771,851 for the National Portfolio, and $106,430 for the Limited Maturity
Portfolio, with regard to redemptions of Class B shares, all of which were paid
to Merrill Lynch. Additional CDSCs payable to the Distributor may have been
waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
For the fiscal year ended June 30, 1998, the Distributor received CDSCs of
$2,099 for the Insured Portfolio, $8,715 for the National Portfolio and $1,128
for the Limited Maturity Portfolio, with regard to redemptions of Class C
shares, all of which were paid to Merrill Lynch. For the fiscal year ended June
30, 1997, the Distributor received CDSCs of $6,915 for the Insured Portfolio,
$10,273 for the National Portfolio, and $395 for the Limited Maturity
Portfolio, with regard to redemptions of Class C shares, all of which were paid
to Merrill Lynch. For the fiscal year ended June 30, 1996, the Distributor
received CDSCs of $7,257 for the Insured Portfolio, $6,455 for the National
Portfolio, and $2,130 for the Limited Maturity Portfolio, with regard to
redemptions of Class C shares, all of which were paid to Merrill Lynch.
All of such contingent deferred sales charges were attributable to
payments made in connection with redemptions of Class B and Class C 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 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.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each class of each Portfolio of the
Fund is determined once daily, Monday through Friday, as of 15 minutes after
the close of business on the NYSE (generally, 4:00 p.m., Eastern time), on each
day on which the NYSE is open for trading. The NYSE is not open on New Year's
Day, Martin Luther King, Jr. Day, Presidents' 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,
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<PAGE>
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, although not necessarily meet, 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.
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 that 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 that
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. 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 that were in
default at the end of the Fund's last fiscal year, the insurance feature was
valued in an amount that, when combined with the market value of the bonds,
resulted in the bonds' having an effective value of par.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Under the Investment Company Act, 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 Commission. Since over-the-counter ("OTC") 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
20
<PAGE>
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, 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 Commission. During the
fiscal year ended June 30, 1998, the Fund purchased $35,127,750 of Municipal
Bonds in a total of 5 transactions, $34,627,750 of which in 4 transactions were
made by the Limited Maturity Portfolio and $500,000 in 1 transaction was made
by the National Portfolio, pursuant to an exemptive order or such a rule.
During the fiscal years ended June 30, 1996 and June 30, 1997, the Fund did not
engage in any transactions pursuant to such order. For the fiscal years ended
June 30, 1996, June 30, 1997, and June 30, 1998 the National Portfolio paid
total brokerage commissions of $315,000, $20,250, $29,400 and $33,800
respectively, none of which was paid to Merrill Lynch. For the same fiscal
periods, the Insured Portfolio and the Limited Maturity Portfolio paid no
brokerage commissions.
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.
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. The portfolio turnover rates for the Insured Portfolio for the
fiscal years ended June 30, 1998, June 30, 1997 and June 30, 1996 were 102.89%,
74.40% and 78.49%, respectively. The portfolio turnover rates for the National
Portfolio for the fiscal years ended June 30, 1998, June 30, 1997 and June 30,
1996 were 142.02%, 99.52% and 95.09%, respectively. The portfolio turnover rates
for the Limited Maturity Portfolio for the fiscal years ended June 30, 1998,
June 30, 1997 and June 30, 1996 were 72.69%, 61.90% and 88.32%, respectively.
Due to the decrease in interest rates, there has been an increase in market
activity resulting in a large new issue calendar, which, in turn, has caused the
portfolio managers to substantially restructure certain portfolios. High
portfolio turnover involves correspondingly higher transaction costs in the form
of commissions and dealer spreads, which are borne directly by the applicable
portfolio.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Reference is made to "Additional Information -- Dividends and
Distributions" and "Additional Information -- 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
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<PAGE>
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 or her 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.
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.
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<PAGE>
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 (as described
below on page 29) is treated as a sale of the exchanged shares and a purchase
of the acquired shares for Federal income tax purposes and, depending upon the
circumstances, a short-, mid- 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 or her Social Security Number or Taxpayer Identification Number and
that he is not subject to the backup withholding tax if he or she 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 or to
her 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 mid- or 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 shareholder's
alternative
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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, 1998, the Fund had a net capital loss carryforward as follows:
Approximately $10,677,000 in the National Portfolio, all of which expires in
2004; and approximately $2,327,000 in the Limited Maturity Portfolio, of which
$22,000 expires in 1999, $25,000 expires in 2002 and $2,280,000 expires in
2003. These amounts will be available to offset like amounts of any future
taxable gains. Expired capital loss carryforward in the amount of $2,413,650
has been reclassified to paid-in capital in excess of par.
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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services, described below, that
are designed to facilitate investment in its shares. Full details as to each of
such services and copies of the various plans described below can be obtained
from the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to United States investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends and
long-term capital gains distributions. The quarterly statements will also show
any other activity in the account since the preceding statement. Shareholders
will receive separate transaction confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gains distributions. A
shareholder may make additions to his Investment Account at any time by mailing
a check directly to the Transfer Agent.
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Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of 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.
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 so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an 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. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he or she be issued certificates for his or her shares, and
then must turn the certificates over to the new firm for re-registration as
described in the preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to the Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder. For
investors who buy shares of the Fund through Blueprint, no minimum charge to
the investors' bank account is required. Investors who maintain CMA(R) or
CBA(R) accounts may arrange to have periodic investments made in the Fund, in
the CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100
or more ($1 for retirement accounts) through the CMA(R) or CBA(R) Automated
Investment Program. The Automatic Investment Plan is not available for Class C
shares of the Limited Maturity Portfolio.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund, without sales charge, as
of the close of business on the NYSE on the ex-dividend date of such 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 or direct deposited on or about the payment date.
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch, or notify the Transfer
Agent in writing or by telephone ((800)-MER-FUND) if the shareholder's account
is maintained with the Transfer Agent, that they no longer wish to have their
dividends and/or distributions reinvested in shares of the Fund or vice versa
and, commencing ten days after the receipt by the Transfer Agent of such
notice, those instructions will be effected.
25
<PAGE>
SYSTEMATIC WITHDRAWAL PLANS
A shareholder of any of the three Portfolios may elect to make systematic
withdrawals from an Investment Account of Class A, Class B, Class C or Class D
shares in the form of payments by check or through automatic payment by direct
deposit to such shareholder's bank account on either a monthly or calendar
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired shares of the Fund having a value, based on cost
or the current offering price, of $5,000 or more, and monthly withdrawals are
available for shareholders with shares having 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 the dollar amount and class of shares to be redeemed. Redemptions
will be made at net asset value as determined once daily by FAM immediately
after the declaration of dividends as of 15 minutes after the close of business
on the NYSE (generally 4:00 p.m. Eastern time) on the 24th day of each month or
the 24th day of the last month of each quarter, whichever is applicable. If the
NYSE is not open for business on that day, the 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 shares in the
Investment Account are reinvested automatically in shares of the Fund. A
shareholder's Systematic Withdrawal Plan may be terminated at any time, without
a charge or penalty, by the shareholder, the Fund, the 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 reduced correspondingly. Purchases of additional shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for shares of the Fund from investors who maintain a Systematic Withdrawal Plan
unless such purchase 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. With respect to redemptions of Class B and Class C shares pursuant
to a systematic withdrawal plan, the maximum number of Class B or Class C
shares that can be redeemed from an account annually shall not exceed 10% of
the value of shares of such class in that account at the time the election to
join the systematic withdrawal plan was made. Any CDSC that otherwise might be
due on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares --
Contingent Deferred Sales Charge -- Class B Shares" and "Contingent Deferred
Sales Charges -- Class C Shares" in the Prospectus. Where the systematic
withdrawal plan is applied to Class B Shares, upon conversion of the last Class
B shares in an account to Class D shares, the systematic withdrawal plan will
automatically be applied thereafter to Class D shares. See "Purchase of Shares
- -- Deferred Sales Charge Alternatives -- Class B and Class C Shares --
Conversion of Class B Shares to Class D Shares" in the Prospectus; if an
investor wishes to change the amount being withdrawn in a systematic withdrawal
plan the investor should contact his or her Financial Consultant.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to the shareholder's
account five business days after the date the shares are redeemed all
redemptions are made at net asset value. A shareholder may elect to have his or
her shares
26
<PAGE>
redeemed on the first, second, third or fourth Monday of each month, in the case
of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) 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 CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
EXCHANGE PRIVILEGE
U.S. Shareholders of each class of shares of a Portfolio of the Fund have
an exchange privilege (the "Exchange Privilege") with other Portfolios of the
Fund and with certain other MLAM-advised mutual funds listed below. 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 the 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 MLAM-advised mutual
fund as more fully described below. Class A and Class D shares also will be
exchangeable for Class A shares, and Class B and Class C shares also will be
exchangeable for Class B shares, of Summit Cash Reserves Fund, a series of
Financial Institutions Series Trust, which is a Merill Lynch-sponsored money
market fund specifically designated as available for exchange by holders of
Class A, Class B, Class C and Class D shares as more fully described below. The
Exchange Privilege available to participants in the Merrill Lynch Blueprint(SM)
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.
27
<PAGE>
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 redemption of the outstanding shares.
Class B shareholders of a Portfolio exercising the Exchange Privilege will
continue to be subject to that Portfolio's CDSC 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 or Class C 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 CDSC 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 their shares into shares of Summit Cash
Reserves Fund, ("Summit"). Class A and Class D shares will be exchangeable for
Class A shares of Summit, and Class B and Class C shares will be exchangeable
for Class B shares of Summit. Class A shares of Summit have an exchange
privilege back into Class A or Class D shares of MLAM-advised funds; Class B
shares of Summit have an exchange privilege back into Class B shares or Class C
shares of MLAM-advised funds. The period of time that Class B shares of Summit
are held will count toward satisfaction of the holding period requirement for
purposes of reducing any CDSC and, with respect to Class B shares, toward
satisfaction of any conversion period. Class B shares of Summit will be subject
to a distribution fee at an annual rate of 0.75% of average daily net assets of
such Class B shares. The exchange privilege described in this paragraph does
not apply with respect to certain Merrill Lynch fee-based programs, for which
alternative exchange arrangements may exist. Please see your Merrill Lynch
Financial Consultant for further information.
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" above.
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
28
<PAGE>
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 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 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 each class of shares of
each Portfolio for the periods indicated.
29
<PAGE>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<TABLE>
<CAPTION>
EXPRESSED AS A PERCENTAGE BASED ON REDEEMABLE VALUE OF A HYPOTHETICAL
A HYPOTHETICAL $1,000 INVESTMENT $1,000 INVESTMENT AT THE END OF THE PERIOD
--------------------------------------- ------------------------------------------------
LIMITED LIMITED
INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ---------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
One Year Ended June 30, 1998
Class A .......................... 3.72% 4.03% 3.22% $ 1,037.20 $ 1,040.30 $ 1,032.20
Class B .......................... 3.24 3.55 2.89 1,032.40 1,035.50 1,028.90
Class C .......................... 6.05 6.49 2.88 1,060.50 1,064.90 1,028.80
Class D .......................... 3.34 3.67 3.12 1,033.40 1,036.70 1,031.20
Five Years Ended June 30, 1998
Class A .......................... 4.84% 5.40% 3.63% $ 1,266.50 $ 1,300.70 $ 1,195.40
Class B .......................... 4.90 5.45 3.50% 1,270.40 1,303.60 1,187.70
Ten Years Ended June 30, 1998
Class A .......................... 7.45% 7.72% 4.89% $ 2,051.00 $ 2,103.50 $ 1,611.30
Class B 10/21/88-6/30/98 ......... 6.90 7.13 -- 1,909.40 1,948.60 --
Class B 11/02/92-6/30/98 ......... -- -- 3.67 -- -- 1,226.40
Inception (October 21, 1994) to
June 30, 1998
Class C .......................... 7.43% 8.00% 3.93% $ 1,302.90 $ 1,328.40 $ 1,152.70
Class D .......................... 6.84 7.40 4.01 1,276.70 1,301.60 1,156.20
</TABLE>
30
<PAGE>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
LIMITED LIMITED
INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY
YEAR ENDED JUNE 30, PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------- ----------- ----------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1998
(Class A) ........................... 8.05% 8.36% 4.26% $ 1,080.50 $ 1,083.60 $ 1,042.60
(Class B) ........................... 7.24 7.55 3.89 1,072.40 1,075.50 1,038.90
(Class C) ........................... 7.05 7.49 3.88 1,070.50 1,074.90 1,038.80
(Class D) ........................... 7.65 7.99 4.16 1,076.50 1,079.90 1,041.60
1997
(Class A) ........................... 7.72 8.84 4.40 1,077.20 1,088.40 1,044.00
(Class B) ........................... 6.78 7.92 4.13 1,067.80 1,079.20 1,041.30
(Class C) ........................... 6.86 7.97 4.11 1,068.60 1,079.70 1,041.10
(Class D) ........................... 7.46 8.57 4.40 1,074.60 1,085.70 1,044.00
1996
(Class A) ........................... 5.51 6.98 3.75 1,055.10 1,069.80 1,037.50
(Class B) ........................... 4.71 6.17 3.37 1,047.10 1,061.70 1,033.70
(Class C) ........................... 4.65 6.01 2.97 1,046.50 1,060.10 1,029.70
(Class D) ........................... 5.25 6.71 3.55 1,052.50 1,067.10 1,035.50
1995
(Class A) ........................... 8.60 7.89 4.53 1,086.00 1,078.90 1,045.30
(Class B) ........................... 7.91 7.28 4.14 1,079.10 1,072.80 1,041.40
(Class C)*** ........................ 8.83 7.97 3.52 1,088.30 1,079.70 1,035.20
(Class D)*** ........................ 9.24 8.37 3.73 1,092.40 1,083.70 1,037.30
1994
(Class A) ........................... ( 1.08) (0.47) 2.30 989.20 995.30 1,023.00
(Class B) ........................... ( 1.81) (1.39) 1.98 981.90 986.10 1,019.80
1993
(Class A) ........................... 12.41 12.19 5.28 1,124.10 1,121.90 1,052.80
(Class B)** ......................... 11.44 11.45 3.26 1,114.40 1,114.50 1,032.60
1992
(Class A) ........................... 12.11 13.09 6.93 1,121.10 1,130.90 1,069.30
(Class B) ........................... 11.27 12.25 -- 1,112.70 1,122.50 --
1991
(Class A) ........................... 8.84 7.94 6.45 1,088.40 1,079.40 1,064.50
(Class B) ........................... 8.02 7.14 -- 1,080.20 1,071.40 --
1990
(Class A) ........................... 5.76 5.53 6.16 1,057.60 1,055.30 1,061.60
(Class B) ........................... 4.98 4.74 -- 1,049.80 1,047.40 --
1989
(Class A) ........................... 11.62 11.89 5.96 1,116.20 1,118.90 1,059.60
(Class B)(10/21/88-6/30/89) ......... 6.88 6.48 -- 1,068.80 1,064.80 --
1988 ................................. 7.75 6.89 4.83 1,077.50 1,068.90 1,048.30
1987 ................................. 6.94 7.99 4.99 1,069.40 1,079.90 1,049.90
1986 ................................. 15.62 17.09 6.50 1,156.20 1,170.90 1,065.00
1985 ................................. 22.21 22.36 8.72 1,222.10 1,223.60 1,087.20
1984 ................................. 3.00 4.44 5.58 1,030.00 1,044.40 1,055.80
1983 ................................. 31.60 32.66 8.59 1,316.00 1,326.60 1,085.90
1982 ................................. ( .33) 2.73 7.96 996.70 1,027.30 1,079.60
1981 ................................. (10.27) (2.72) 4.55 897.30 972.80 1,045.50
1980* ................................ ( 5.88) 4.21 5.91 941.20 1,042.10 1,059.10
</TABLE>
- --------
* November 2, 1979 (commencement of operations) for National and Limited
Maturity Portfolios.
** November 2, 1992 (commencement of operations) for Limited Maturity
Portfolio.
*** October 21, 1994 (commencement of operations) for Class C and Class D
Shares.
31
<PAGE>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<TABLE>
<CAPTION>
LIMITED LIMITED
INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY
YEAR ENDED JUNE 30, PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------- ----------- ----------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
From Inception to June 30, 1998**
Class A ........................ 289.64% 401.88% 181.42% $ 3,896.40 $ 5,018.80 $ 2,814.20
Class B ........................ 90.94 94.86 22.64 1,909.40 1,948.60 1,226.40
Class C ........................ 30.29 32.84 15.27 1,302.90 1,328.40 1,152.70
Class D ........................ 27.67 30.16 15.62 1,276.70 1,301.60 1,156.20
</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. Commencement of
operations is October 21, 1994 for Class C and Class D shares of each
Portfolio.
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 following table sets forth the yield for the 30-day period ending June
30, 1998 for each class of each Portfolio.
<TABLE>
<CAPTION>
FOR THE PERIOD ENDING JUNE 30, 1998
------------------------------------------------------------------------
YIELD
------------------------------------------------------------------------
INSURED PORTFOLIO NATIONAL PORTFOLIO LIMITED MATURITY PORTFOLIO
------------------- -------------------- ---------------------------
<S> <C> <C> <C>
Class A ............ 4.50% 4.55% 3.55%
Class B ............ 3.93% 3.98% 3.23%
Class C ............ 3.88% 3.93% 3.20%
Class D ............ 4.26% 4.31% 3.45%
</TABLE>
32
<PAGE>
The tax equivalent yield for the same period (based on a tax rate of 28%) was:
<TABLE>
<CAPTION>
INSURED PORTFOLIO NATIONAL PORTFOLIO LIMITED MATURITY PORTFOLIO
------------------- -------------------- ---------------------------
<S> <C> <C> <C>
Class A ............ 6.25% 6.32% 4.93%
Class B ............ 5.46% 5.53% 4.49%
Class C ............ 5.39% 5.46% 4.44%
Class D ............ 5.92% 5.99% 4.79%
</TABLE>
Total return, yield and tax equivalent yield figures are based on each
Portfolio's historical performance and are not intended to indicate future
performance. Each Portfolio's total return, yield and tax equivalent yield will
vary depending on market conditions, the securities comprising the Portfolio,
the Portfolio's operating expenses and the amount of realized and unrealized
net capital gains or losses during the period. The value of an investment in a
Portfolio will fluctuate and an investor's shares, when redeemed, may be worth
more or less than their original cost.
ADDITIONAL INFORMATION
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), National
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 (except that Class B shareholders
have certain voting rights with respect to the Class D Distribution Plan). Only
shares of each respective Portfolio are entitled to vote on matters concerning
only that Portfolio.
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 the Prospectus. Holders of shares of any
Portfolio
33
<PAGE>
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."
DESCRIPTION OF TEMPORARY INVESTMENTS
The short-term money market securities in which the Portfolios may invest
as 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. 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 ("S&P") or "Prime" by Moody's Investors Service, Inc. ("Moody's") or, if
not rated, issued by companies having an outstanding debt issue rated at least
"A" by S&P 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 S&P 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" in the Prospectus). During the fiscal year
ended June 30, 1998, the premium for the Policies aggregated $19,947 or
approximately .001% 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
that 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, MBIA nor FSA has any
obligation to insure any issue held by the Insured Portfolio which is
34
<PAGE>
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, 1998, the admitted assets
of AMBAC were approximately $3,072.5 million (unaudited) with a qualified
capital of approximately $1,773.8 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,
1998, the total admitted assets (unaudited) of FSA were approximately $1,470.7
million with a total capital and surplus (unaudited) of approximately $831.5
million as reported to the Insurance Department of the State of New York.
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,
1998, the total admitted assets of MBIA were approximately $6,048.5 million
(unaudited) with total capital and surplus of approximately $3,401.4 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.
35
<PAGE>
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 Portfolios may sell futures contracts in anticipation of a decline in
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 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.
36
<PAGE>
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- or higher by S&P or A or higher
by Moody's 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.
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 nonrefundable 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
37
<PAGE>
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 that reflects 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
nonqualifying 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 liquid 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.
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.
38
<PAGE>
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
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 , Class B, Class C and Class D shares of
the Insured, National and Limited Maturity, based on the value of each
Portfolio's net assets and the number of shares outstanding as of June 30, 1998,
is calculated as set forth below.
39
<PAGE>
INSURED PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Assets .................................. $1,377,025,019 $498,623,414 $14,623,383 $48,705,812
============== ============ =========== ===========
Number of Shares Outstanding ................ 166,991,356 60,509,332 1,774,077 5,909,708
============== ============ =========== ===========
Net Asset Value Per Share
(net assets divided by number of shares
outstanding) ............................... $ 8.25 $ 8.24 $ 8.24 $ 8.24
Sales Charge (Class A and Class D shares:
4.00% of offering price (4.17% of net asset
value per share))* ......................... .34 ** ** .34
-------------- ------------- ------------ -----------
Offering Price .............................. $ 8.59 $ 8.24 $ 8.24 $ 8.58
============== ============ =========== ===========
NATIONAL PORTFOLIO:
CLASS A CLASS B CLASS C CLASS D
------------------- ----------------- ---------------- ----------------
Net Assets .................................. $ 964,940,007 $406,797,899 $41,087,135 $68,162,424
============== ============= ============ ============
Number of Shares Outstanding ................ 90,724,493 38,261,083 3,862,380 6,406,178
============== ============= ============ ============
Net Asset Value Per Share (net assets divided
by number of shares outstanding) ........... $ 10.64 $ 10.63 $ 10.64 $ 10.64
Sales Charge (Class A and Class D shares:
4.00% of offering price (4.17% of net asset
value per share))* ......................... .44 ** ** .44
-------------- -------------- ------------- ------------
Offering Price .............................. $ 11.08 $ 10.63 $ 10.64 $ 11.08
============== ============= ============ ============
LIMITED MATURITY PORTFOLIO:
CLASS A CLASS B CLASS C CLASS D
------------------- ----------------- ---------------- ----------------
Net Assets .................................. $ 295,640,497 $ 44,713,800 $ 86,039 $68,562,336
============== ============= ============ ============
Number of Shares Outstanding ................ 29,669,282 4,486,438 8,659 6,878,580
============== ============= ============ ============
Net Asset Value Per Share (net assets divided
by number of shares outstanding) ........... $ 9.96 $ 9.97 $ 9.94 9.97
Sales Charge (Class A and Class D shares:
1.00% of offering price (1.01% of the net
asset value per share))* ................... .10 ** ** .10
-------------- -------------- ------------- ------------
Offering Price .............................. $ 10.06 $ 9.97 $ 9.94 $ 10.07
============== ============= ============ ============
</TABLE>
- --------
* 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 four years of
purchase (for Class B shares of Insured Portfolio and National Portfolio)
or within one year of purchase (for Class B shares of Limited Maturity
Portfolio and Class C shares). See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" in the Prospectus and
"Redemption of Shares -- Deferred Sales Charge -- Class B and Class C
Shares" herein.
FINANCIAL STATEMENTS
The Fund's audited financial statements are included in its 1998 annual
report to shareholders, which is incorporated by reference in this Statement of
Additional Information. You may request a copy of the annual report at no
charge by calling 1-800-456-4587 Ext. 789 between 8:00 a.m. and 8:00 p.m. on
any business day.
40
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies ........................ 2
Insurance on Portfolio Securities ...................... 2
Risk Factors In Transactions In Junk Bonds ............. 2
Transactions In Futures Contracts ...................... 3
Investment Restrictions .................................. 4
Management of the Fund ................................... 6
Directors and Officers ................................. 6
Compensation of Directors .............................. 7
Management and Advisory Arrangements ................... 8
Purchase of Shares ....................................... 10
Initial Sales Charge Alternatives -- Class A and
Class D Shares ...................................... 10
Reduced Initial Sales Charges -- Class A and Class D
Shares .............................................. 12
Distribution Plans ..................................... 15
Limitations on the Payment of Deferred
Sales Charges ....................................... 16
Redemption of Shares ..................................... 18
Reinstatement Privilege ................................ 18
Deferred Sales Charge -- Class B and Class C
Shares .............................................. 18
Determination of Net Asset Value ......................... 19
Portfolio Transactions and Brokerage Commissions ......... 20
Dividends, Distributions and Taxes ....................... 21
Shareholder Services ..................................... 24
Investment Account ..................................... 24
Automatic Investment Plans ............................. 25
Automatic Reinvestment of Dividends and Capital
Gains Distributions ................................. 25
Systematic Withdrawal Plans ............................ 26
Exchange Privilege ..................................... 27
Performance Data ......................................... 29
Additional Information ................................... 33
Organization of the Fund ............................... 33
Description of Temporary Investments ................... 34
Insurance on Portfolio Securities ...................... 34
Description of Financial Futures Contracts ............. 36
Computation of Offering Price Per Share ................ 39
Financial Statements ..................................... 40
</TABLE>
Code # 10130-1098
(Merrill Lynch logo)
Merrill Lynch
Municipal Bond Fund, Inc.
(graphic)
Statement of
Additional
Information
October 20, 1998
Distributor:
Merrill Lynch
Funds Distributor
<PAGE>
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
Contained in Part A:
Financial Highlights for each of the years in the ten year period ended
June 30, 1998.
Incorporated by reference in Part B:
Schedules of Investments, as of June 30, 1998.
Statements of Assets and Liabilities, as of June 30, 1998.
Statements of Operations for the year ended June 30, 1998.
Statements of Changes in Net Assets for each of the years in the two year
period ended June 30, 1998.
Financial Highlights for each of the years in the five year period ended
June 30, 1998.
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ -------------------------------------------------------------------------------------------------------
<S> <C>
1(a) -- Articles of Incorporation (incorporated by reference to Exhibit 1 to Post-Effective Amendment
No. 4 to Registrant's Registration Statement on Form N-1, filed October 31, 1980 (Post-Effective
Amendment No. 4)).
(b) -- Articles of Amendment (incorporated by reference to Exhibit 1 to Post-Effective Amendment
No. 13 to Registrant's Registration Statement on Form N-1A, filed October 12, 1988
(Post-Effective Amendment No. 13)).
(c) -- Articles Supplementary to the Articles of Incorporation increasing the authorized capital stock of
the Insured Portfolio (incorporated by reference to Exhibit 1(c) to Post-Effective Amendment
No. 15 to Registrant's Registration Statement on Form N-1A, filed October 29, 1990
(Post-Effective Amendment No. 15)).
(d) -- Articles Supplementary to the Articles of Incorporation establishing Class B Common Stock of
Limited Maturity Portfolio (incorporated by reference to Exhibit 1(d) to Post-Effective Amendment
No. 16, filed September 1, 1992).
2 -- By-Laws (incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 13).
3 -- Inapplicable.
4(a) -- Specimen certificates for Class A shares of Insured Portfolio Series and National Portfolio Series
Common Stock of Registrant (incorporated by reference to Exhibit 4 to Post-Effective Amendment
No. 13).
(b) -- Specimen certificates for Class B shares of Insured Portfolio Series and National Portfolio Series
Common Stock of Registrant (incorporated by reference to Exhibit 4 to Post-Effective Amendment
No. 13).
(c) -- Specimen certificates for Class A shares of Limited Maturity Portfolio Series Common Stock of
Registrant (incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 4).
5 -- Advisory Agreement between Registrant and Fund Asset Management, Inc. (incorporated by
reference to Exhibit 5 to Post-Effective Amendment No. 4).
6(a) -- Form of Amended Class A Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (now known as Princeton Funds Distributor, Inc.) (including form of Selected
Dealers Agreement incorporated by reference to Exhibit 6 to Post-Effective Amendment No. 20, filed
October 31, 1995).
(b) -- Form of Class C Distribution Agreement between Registrant and Merrill Lynch Funds Distributor
Inc. (now known as Princeton Funds Distributor, Inc.) (including form of Selected Dealers
Agreement, incorporated by reference to Exhibit 6 to Post-Effective Amendment No. 20).
(c) -- Form of Class D Distribution Agreement between Registrant and Merrill Lynch Funds Distributor,
Inc. (now known as Princeton Funds Distributor, Inc.) (including form of Selected Dealers
Agreement, incorporated by reference to Exhibit 6 to Post-Effective Amendment No. 20).
7 -- Inapplicable.
8 -- Custodian Agreement between Registrant and The Bank of New York (incorporated by reference
to Exhibit 8 to Post-Effective Amendment No. 4).
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<S> <C>
9(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement
between Insured Portfolio of Registrant and Financial Data Services, Inc. (incorporated by
reference to Exhibit 9 to Post-Effective Amendment No. 13).
(b) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement
between National Portfolio of Registrant and Financial Data Services, Inc. (incorporated by
reference to Exhibit 9 to Post-Effective Amendment No. 13).
(c) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement
between Limited Maturity Portfolio of Registrant and Financial Data Services, Inc.
(incorporated by reference to Post-Effective Amendment No. 13).
10 -- Inapplicable.
11 -- Consent of Deloitte & Touche LLP (included herein).
12 -- Inapplicable.
13(a) -- Letter from Fund Asset Management, Inc. with respect to the purchase of 10,257 shares of
Registrant's Common Stock (incorporated by reference to Exhibit 13 to Post-Effective Amendment
No. 3 to Registrant's Registration Statement on Form N-1A, filed August 10, 1979).
(b) -- Letter from Fund Asset Management, L.P. with respect to the purchase of shares of Registrant's
Class C and Class D Common Stock of the Insured Portfolio (incorporated by reference to Exhibit
13 to Post-Effective Amendment No. 20).
(c) -- Letter from Fund Asset Management, L.P. with respect to the purchase of shares of Registrant's
Class C and Class D Common Stock of the National Portfolio (incorporated by reference to
Exhibit 13 to Post-Effective Amendment No. 20).
(d) -- Letter from Fund Asset Management, L.P. with respect to the purchase of shares of Registrant's
Class C and Class D Common Stock of the Limited Maturity Portfolio (incorporated by reference
to Exhibit 13 to Post-Effective Amendment No. 20).
14 -- Inapplicable.
15(a) -- Amended and Restated Class B Distribution Plan of Registrant (including Class B Distribution
Plan Sub-Agreement incorporated by reference to Exhibit 15 to Post-Effective Amendment
No. 20).
(b) -- Form of Class C Distribution Plan of Registrant (including Class C Distribution Plan
Sub-Agreement, incorporated by reference to Exhibit 15 to Post-Effective Amendment No. 20).
(c) -- Form of Class D Distribution Plan of Registrant (including Class D Distribution Plan
Sub-Agreement) (incorporated by reference to Exhibit 15 to Post-Effective Amendment No. 20).
16(a) -- Schedule for computation of each performance quotation for the Class B shares of the Insured
Portfolio and National Portfolio provided in the Registration Statement in response to Item 22
(incorporated by reference to Exhibit 16 to Post-Effective Amendment No. 14 to Registrant's
Registration Statement on Form N-1A, filed October 27, 1989 (Post-Effective Amendment
No. 14)).
(b) -- Schedule for computation of each performance quotation for the Class A shares of the Insured
Portfolio and National Portfolio and the shares of the Limited Maturity Portfolio provided in the
Registration Statement in response to Item 22 (incorporated by reference to Exhibit 16 to
Post-Effective Amendment No. 13).
(c) -- Schedule for computation of each performance quotation for the Class B shares of the Limited
Maturity Portfolio provided in Registration Statement in response to Item 22 (incorporated by
reference to Exhibit 16 to Post-Effective Amendment No. 14).
(d) -- Schedule for computation of each performance quotation for the Class C shares of each Portfolio
provided in the Registration Statement in response to Item 22 (incorporated by reference to
Exhibit 16 to Post-Effective Amendment No. 20).
(e) -- Schedule for computation of each performance quotation for the Class D shares of each Portfolio
provided in the Registration Statement in response to Item 22. (incorporated by reference to
Exhibit 16 to Post-Effective Amendment No. 20).
17(a) -- Financial Data Schedule for each class of shares of the National Portfolio, included herein.
(b) -- Financial Data Schedule for each class of shares of the Insured Portfolio, included herein.
(c) -- Financial Data Schedule for each class of shares of the Limited Maturity Portfolio, included
herein.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT.
Inapplicable.
C-2
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS AUGUST 31, 1998
------------------------------- ----------------
<S> <C> <C>
Insured Portfolio Series -- Class A Common Stock .......... 23,056
Class B Common Stock .......... 13,458
Class C Common Stock .......... 396
Class D Common Stock .......... 859
National Portfolio Series -- Class A Common Stock .......... 22,361
Class B Common Stock .......... 12,412
Class C Common Stock .......... 1,176
Class D Common Stock .......... 1,319
Limited Maturity Portfolio -- Class A Common Stock .......... 4,391
Class B Common Stock .......... 1,274
Class C Common Stock .......... 13
Class D Common Stock .......... 826
</TABLE>
- ---------
Note: The number of holders shown in the table above includes holders of record
plus beneficial owners whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch").
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B, Class C
and Class D Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "Investment
Company Act"), may be concerned, Article VI of the Registrant's By-Laws
provides that such payments will be made only on the following conditions: (i)
advances may be made only on receipt of a written affirmation of such person's
good faith belief that the standard of conduct necessary for indemnification
has been met and a written undertaking to repay any such advance if it is
ultimately determined that the standard of conduct has not been met; and
(ii)(a) such promise must be secured by a security for the undertaking in form
and amount acceptable to the Registrant, (b) the Registrant is insured against
losses arising by receipt by the advance, or (c) a majority of a quorum of the
Registrant's disinterested non-party Directors, or an independent legal counsel
in a written opinion, shall determine, based upon a review of readily available
facts, that at the time the advance is proposed to be made, there is reason to
believe that the person seeking indemnification will ultimately be found to be
entitled to indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Shares
Distribution Agreements relating to the securities being offered hereby, the
Registrant agrees to indemnify the Distributor and each person, if any, who
controls the Distributor within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), against certain types of civil liabilities
arising in connection with the Registration Statement or Prospectus and
Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, officers and controlling persons of the
Registrant and the principal underwriter pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a Director,
officer, or controlling person of the Registrant and the principal underwriter
in connection with the successful defense of any action, suit or proceeding) is
asserted by such Director, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of FAM, acts
as investment adviser for the following open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset
C-3
<PAGE>
Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Technology Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch Global
Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global
Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth
Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government
Bond Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal
Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Real Estate Fund,
Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury
Money Fund, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley,
a division of MLAM); and the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch
Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill Lynch
World Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio, two
investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Puerto Rico Tax Exempt Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc. and The
Municipal Fund Accumulation Program, Inc.; and the following closed-end
registered investment companies: Apex Municipal Fund, Inc., Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Corporate High Yield Fund III,
Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies
Fund III, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc.,
MuniHoldings Florida Insured Fund II, MuniHoldings Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings California Insured
Fund, Inc., MuniHoldings California Insured Fund II, Inc., MuniHoldings
California Insured Fund III, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund, MuniHoldings New Jersey Insured Fund II,
Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund III,
MuniHoldings New York Insured Fund II, Inc., MuniHoldings New York Fund, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield
New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., and Worldwide DollarVest Fund, Inc.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for
Institutions Series and Merrill Lynch Intermediate Government Bond Fund is One
Financial Center, 23rd Floor, Boston, Massachusetts 02111-2665. The address of
the Manager, FAM, Princeton Services, Inc. ("Princeton Services") and Princeton
Administrators L.P. is also P.O. Box 9011, Princeton, New Jersey 08543-9011.
The address of Princeton Funds Distribution, Inc. ("PFD") and of Merrill Lynch
Funds Distributor ("MLFD") a division of Princeton Funds Distribution, Inc.
("PFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of
Merrill Lynch Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill
Lynch & Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250
Vesey Street, New York, New York 10281-1201. The address of the Fund's transfer
agent Financial Data Services, Inc. ("FDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
C-4
<PAGE>
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since December 1, 1994 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Glenn is Executive Vice President and Mr. Richard is Treasurer of all or
substantially all of the investment companies described in the preceding
paragraphs and Messrs. Giordano, Harvey, Kirstein and Monagle are directors,
trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------------- -------------------------- ------------------------------------------------------
<S> <C> <C>
ML & Co. .................... Limited Partner Financial Services Holding Company; Limited Partner
of MLAM.
Princeton Services .......... General Partner General Partner of MLAM.
Arthur Zeikel ............... Chairman Chairman of MLAM; Chairman and Director of
Princeton Services; Executive Vice President of
ML & Co.
Jeffrey M. Peek ............. President President of MLAM; President and Director of
Princeton Services; Executive Vice President of
ML & Co.
Terry K. Glenn .............. Executive Vice President Executive Vice President of MLAM; Executive Vice
President and Director of Princeton Services;
President and Director of Princeton Funds
Distributor, Inc.; Director of FDS; President of
Princeton Administrators, L.P.
Linda L. Federici ........... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
Vincent R. Giordano ......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
Elizabeth Griffin ........... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
Norman R. Harvey ............ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
Michael J. Hennewinkel ...... Senior Vice President, Senior Vice President, Secretary and General Counsel
Secretary and General of MLAM; Senior Vice President of Princeton
Counsel Services.
Philip L. Kirstein .......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President, Director and Secretary of Princeton
Services.
Ronald M. Kloss ............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
Debra W. Landsman-Yaros ..... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Vice President of
Princeton Funds Distributor, Inc.
Stephen M.M. Miller ......... Senior Vice President Executive Vice President of Princeton Administrators,
L.P.; Senior Vice President of Princeton Services.
Joseph T. Monagle, Jr. ...... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
Michael L. Quinn ............ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Managing Director
and First Vice President of Merrill Lynch from 1989
to 1995.
Brian A. Murdock ............ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
Gerald M. Richard ........... Senior Vice President and Senior Vice President and Treasurer of MLAM; Senior
Treasurer Vice President and Treasurer of Princeton Services;
Vice President and Treasurer of Princeton Funds
Distributor, Inc.
Ronald L. Welburn ........... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
</TABLE>
C-5
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD, a division of Princeton Funds Distributor, Inc. acts as the
principal underwriter for the Registrant. MLFD acts as the principal
underwriter for each of the open-end registered investment companies referred
to in Item 28, except CMA Money Fund, CMA Government Securities Fund, CMA
Tax-Exempt Fund, CBA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc., The Municipal
Fund Accumulation Program, Inc., MLFD also acts as principal underwriter for
the following closed-end registered investment companies: Merrill Lynch High
Income Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc.
and Merrill Lynch Senior Floating Rate Fund, Inc. A separate division of
Princeton Funds Distributor, Inc. acts as the principal underwriter of a number
of other investment companies.
(b) Set forth below is information concerning each director and officer of
Princeton Funds Distributor Inc. The principal business address of each such
person is P.O. Box 9081, Princeton, New Jersey 08543-9081, except that the
address of Messrs. Crook, Breen, Fatseas and Wasel is One Financial Center, 23rd
Floor, Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
- --------------------------------- ------------------------------ -------------------------
<S> <C> <C>
Terry K. Glenn .................. President Executive Vice President
Michael G. Clark ................ Vice President None
Robert W. Crook ................. Senior Vice President None
Michael J. Brady ................ Vice President None
William M. Breen ................ Vice President None
James T. Fatseas ................ Vice President None
Debra W. Landsman-Yaros ......... Vice President None
Michelle T. Lau ................. Vice President None
Gerald M. Richard ............... Vice President and Treasurer Treasurer
Salvatore Venezia ............... Vice President None
William Wasel ................... Vice President None
Robert Harris ................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act, and the rules thereunder will be
maintained at the offices of the Registrant, 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, and its transfer agent Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund --
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under the caption "Management of the Fund --
Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, Registrant is
not a party to any management-related services contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for this Post-Effective Amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Township of Plainsboro
and State of New Jersey on the 20 day of October, 1998.
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
(Registrant)
By: /S/ GERALD M. RICHARD
-------------------------------------
GERALD M. RICHARD, TREASURER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------- ----------------------------------- -----------------
<S> <C> <C>
ARTHUR ZEIKEL* President and Director
----------------------------------- (Principal Executive Officer)
ARTHUR ZEIKEL
/S/ GERALD M. RICHARD Treasurer (Principal Financial October 20, 1998
----------------------------------- and Accounting Officer)
(GERALD M. RICHARD)
RONALD W. FORBES* Director
-----------------------------------
(RONALD W. FORBES)
CYNTHIA A. MONTGOMERY* Director
-----------------------------------
(CYNTHIA A. MONTGOMERY)
CHARLES C. REILLY* Director
-----------------------------------
(CHARLES C. REILLY)
KEVIN A. RYAN* Director
-----------------------------------
(KEVIN A. RYAN)
RICHARD R. WEST* Director
-----------------------------------
(RICHARD R. WEST)
*By: /S/ GERALD M. RICHARD October 20, 1998
-------------------------------
GERALD M. RICHARD, ATTORNEY-IN-FACT
</TABLE>
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------------------------------
<S> <C> <C>
11 -- Consent of Deloitte & Touche LLP Independent Auditors
17(a) -- Financial Data Schedule for each class of shares of the National Portfolio
(b) -- Financial Data Schedule for each class of shares of the Insured Portfolio
(c) -- Financial Data Schedule for each class of shares of the Limited Maturity Portfolio
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> ML MUNI BOND - NATL. PORT. - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 1409192239
<INVESTMENTS-AT-VALUE> 1497350555
<RECEIVABLES> 23631218
<ASSETS-OTHER> 318211
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1521299984
<PAYABLE-FOR-SECURITIES> 34751868
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5560651
<TOTAL-LIABILITIES> 40312519
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1412297440
<SHARES-COMMON-STOCK> 90724493
<SHARES-COMMON-PRIOR> 94784980
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (19468291)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 88158316
<NET-ASSETS> 964940007
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 91583829
<OTHER-INCOME> 0
<EXPENSES-NET> (11787693)
<NET-INVESTMENT-INCOME> 79796136
<REALIZED-GAINS-CURRENT> 39111030
<APPREC-INCREASE-CURRENT> (2308236)
<NET-CHANGE-FROM-OPS> 116598930
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (54724558)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4266519
<NUMBER-OF-SHARES-REDEEMED> (10854978)
<SHARES-REINVESTED> 2527972
<NET-CHANGE-IN-ASSETS> 3100509
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (58579321)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7125632
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11787693
<AVERAGE-NET-ASSETS> 981515725
<PER-SHARE-NAV-BEGIN> 10.38
<PER-SHARE-NII> .59
<PER-SHARE-GAIN-APPREC> .26
<PER-SHARE-DIVIDEND> (.59)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.64
<EXPENSE-RATIO> .55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> ML MUNI BOND - NATL. PORT. - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 1409192239
<INVESTMENTS-AT-VALUE> 1497350555
<RECEIVABLES> 23631218
<ASSETS-OTHER> 318211
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1521299984
<PAYABLE-FOR-SECURITIES> 34751868
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5560651
<TOTAL-LIABILITIES> 40312519
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1412297440
<SHARES-COMMON-STOCK> 38261083
<SHARES-COMMON-PRIOR> 40014114
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (19468291)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 88158316
<NET-ASSETS> 406797899
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 91583829
<OTHER-INCOME> 0
<EXPENSES-NET> (11787693)
<NET-INVESTMENT-INCOME> 79796136
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<NAME> ML MUNI BOND - NATL. PORT. - CLASS C
<S> <C>
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<SERIES>
<NUMBER> 014
<NAME> ML MUNI BOND - NATL. PORT. - CLASS D
<S> <C>
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<TABLE> <S> <C>
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<SERIES>
<NUMBER> 021
<NAME> ML MUNI BOND - INSURED PORT. - CLASS A
<S> <C>
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> ML MUNI BOND - INSURED PORT. - CLASS B
<S> <C>
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 023
<NAME> ML MUNI BOND - INSURED PORT. - CLASS C
<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 024
<NAME> ML MUNI BOND - INSURED PORT. - CLASS D
<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 031
<NAME> ML MUNI BOND - LTD. MAT. PORT. - CLASS A
<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 032
<NAME> ML MUNI BOND - LTD. MAT. PORT. - CLASS B
<S> <C>
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<TABLE> <S> <C>
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<SERIES>
<NUMBER> 033
<NAME> ML MUNI BOND - LTD. MAT. PORT. - CLASS C
<S> <C>
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<PAID-IN-CAPITAL-COMMON> 408614814
<SHARES-COMMON-STOCK> 8659
<SHARES-COMMON-PRIOR> 10849
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2065259)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2453117
<NET-ASSETS> 86039
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17512313
<OTHER-INCOME> 0
<EXPENSES-NET> (1953662)
<NET-INVESTMENT-INCOME> 15558651
<REALIZED-GAINS-CURRENT> 395414
<APPREC-INCREASE-CURRENT> 789704
<NET-CHANGE-FROM-OPS> 16743769
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5682)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 212120
<NUMBER-OF-SHARES-REDEEMED> (214575)
<SHARES-REINVESTED> 265
<NET-CHANGE-IN-ASSETS> (9404126)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4564588)
<OVERDISTRIB-NII-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 9.91
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<PER-SHARE-NAV-END> 9.94
<EXPENSE-RATIO> .79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 034
<NAME> ML MUNI BOND - LTD. MAT. PORT. - CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 430338328
<INVESTMENTS-AT-VALUE> 432791445
<RECEIVABLES> 6278196
<ASSETS-OTHER> 122781
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 439192422
<PAYABLE-FOR-SECURITIES> 25000847
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5188903
<TOTAL-LIABILITIES> 30189750
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 408614814
<SHARES-COMMON-STOCK> 6878580
<SHARES-COMMON-PRIOR> 2050790
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2065259)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2453117
<NET-ASSETS> 68562336
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17512313
<OTHER-INCOME> 0
<EXPENSES-NET> (1953662)
<NET-INVESTMENT-INCOME> 15558651
<REALIZED-GAINS-CURRENT> 395414
<APPREC-INCREASE-CURRENT> 789704
<NET-CHANGE-FROM-OPS> 16743769
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1473883)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9446699
<NUMBER-OF-SHARES-REDEEMED> (4689176)
<SHARES-REINVESTED> 70267
<NET-CHANGE-IN-ASSETS> (9404126)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4564588)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1353388
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1953662
<AVERAGE-NET-ASSETS> 39089141
<PER-SHARE-NAV-BEGIN> 9.94
<PER-SHARE-NII> .38
<PER-SHARE-GAIN-APPREC> .03
<PER-SHARE-DIVIDEND> (.38)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.97
<EXPENSE-RATIO> .54
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Municipal Bond Fund, Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 23 to Registration Statement No. 2-57354 of our report dated August 14,
1998 appearing in the annual report to shareholders of Merrill Lynch Municipal
Bond Fund, Inc. for the year ended June 30, 1998, and to the reference to us
under the caption "Financial Highlights" in the Prospectus, which is a part of
such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
October 16, 1998
