-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pimh1QZFJV1zT+HhmgaYCzhyk+0knPpoATXsy49ReLar/xTiV16lK0PleMs7iImY igrDI0LjwEYMP8+63bWrqw== 0000950130-95-002225.txt : 19951101 0000950130-95-002225.hdr.sgml : 19951101 ACCESSION NUMBER: 0000950130-95-002225 CONFORMED SUBMISSION TYPE: 485B24E PUBLIC DOCUMENT COUNT: 32 FILED AS OF DATE: 19951031 EFFECTIVENESS DATE: 19951031 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH MUNICIPAL BOND FUND INC CENTRAL INDEX KEY: 0000225635 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 132896246 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 485B24E SEC ACT: 1933 Act SEC FILE NUMBER: 002-57354 FILM NUMBER: 95585752 FILING VALUES: FORM TYPE: 485B24E SEC ACT: 1940 Act SEC FILE NUMBER: 811-02688 FILM NUMBER: 95585753 BUSINESS ADDRESS: STREET 1: P O BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543 BUSINESS PHONE: 6092822026 FORMER COMPANY: FORMER CONFORMED NAME: ONE LIBERTY MUNICIPAL BOND FUND INC DATE OF NAME CHANGE: 19780622 485B24E 1 M/L MUNICIPAL BOND FUND, INC. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 31, 1995 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. 20 [X] AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] AMENDMENT NO. 19 [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 08543-9011 PRINCETON, NEW JERSEY (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2000 ARTHUR ZEIKEL MERRILL LYNCH MUNICIPAL BOND FUND, INC. P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 (NAME AND ADDRESS OF AGENT FOR SERVICE) PHILIP L. KIRSTEIN, ESQ. LEONARD B. MACKEY, JR., ESQ. FUND ASSET MANAGEMENT ROGERS & WELLS P.O. BOX 9011, PRINCETON, NEW 200 PARK AVENUE, NEW YORK, N.Y. JERSEY 08543-9011 10166 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. --------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED AMOUNT OF MAXIMUM MAXIMUM AMOUNT OF TITLE OF SECURITIES SHARES BEING OFFERING PRICE AGGREGATE REGISTRATION BEING REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE - --------------------------------------------------------------------------------- Shares of Insured Port- folio Common Stock, par value $0.10 per share.. 67,297,703 $ 8.09 $96,659* $100 - --------------------------------------------------------------------------------- Shares of Limited Matu- rity Common Stock, par value $0.10 per share.. 29,748,207 $ 9.94 $96,666** - --------------------------------------------------------------------------------- Shares of National Port- folio Common Stock, par value $0.10 per share.. 40,588,060 $10.23 $96,663***
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- * The calculation of the maximum aggregate offering price is made as of October 25, 1995 pursuant to Rule 24e-2 under the Investment Company Act of 1940. The total amount of Insured Portfolio Common Stock redeemed or repurchased during the Registrant's previous fiscal year was 86,861,055. Of this amount 19,575,300 have been used for reductions pursuant to Rule 24e- 2(a) or Rule 24f-2(c) under the Investment Company Act of 1940 in previous filings during the Registrant's current fiscal year. 67,285,755 shares of Insured Portfolio Common Stock redeemed during Registrant's previous fiscal year are being used for the reduction of the registration fee in this post- effective amendment to the Registration Statement. ** The calculation of the maximum aggregate offering price is made as of October 25, 1995 pursuant to Rule 24e-2 under the Investment Company Act of 1940. The total amount of shares of Limited Maturity Portfolio Common Stock redeemed or repurchased during Registrant's previous fiscal year was 47,007,678. Of such amount 17,269,196 shares have been used for reductions pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act of 1940 in previous filings during Registrant's current fiscal year. 29,738,482 shares of Limited Maturity Common Stock redeemed during Registrant's previous fiscal year are being used for the reduction of the registration fee in this post-effective amendment to the Registration Statement. *** The calculation of the maximum aggregate offering price is made as of October 25, 1995 pursuant to Rule 24e-2 under the Investment Company Act of 1940. The total amount of shares of National Portfolio Common Stock redeemed or repurchased during Registrant's previous fiscal year was 40,578,611. None of such shares have been used for reductions pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act of 1940 in previous filings during Registrant's current fiscal year. All 40,578,611 shares of National Portfolio Common Stock redeemed during Registrant's previous fiscal year are being used for reduction of the registration fee in this post-effective amendment to the Registration Statement. THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF CLASS A SHARES, CLASS B SHARES, CLASS C SHARES AND CLASS D SHARES OF THE INSURED PORTFOLIO SERIES, THE LIMITED MATURITY PORTFOLIO SERIES, AND THE HIGH YIELD PORTFOLIO SERIES COMMON STOCK. THE NOTICE REQUIRED BY SUCH RULE FOR THE REGISTRANT'S MOST RECENT YEAR WAS FILED ON AUGUST 21, 1995. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MERRILL LYNCH MUNICIPAL BOND FUND CROSS REFERENCE SHEET
FORM N-1A ITEM NO. LOCATION ---- -------- -------- PART A 1. Cover Page............................ Cover Page 2. Synopsis.............................. Fee Table 3. Financial Highlights.................. Financial Highlights; Additional Information-Performance Data 4. General Description of Registrant..... Investment Objective and Policies; Investment Policies of the Portfolios 5. Management of the Fund ............... Fee Table; Investment Adviser; Directors; Portfolio Transactions; Additional Information 5A. Management's Discussion of Fund Performance........................... 6. Capital Stock and Other Securities.... Cover Page; Dividends, Distributions and Taxes; Additional Information 7. Purchase of Securities Being Offered.. Cover Page; Merrill Lynch Select Pricing SM System; Fee Table; Purchase of Shares; Net Asset Value 8. Redemption or Repurchase.............. Merrill Lynch Select Pricing SM System; Fee Table; Redemption of Shares; Shareholder Services 9. Pending Legal Proceedings............. * PART B LOCATION -------- 10. Cover Page............................ Cover Page 11. Table of Contents..................... Table of Contents 12. General Information and History....... * 13. Investment Objectives and Policies.... Investment Objective and Policies; Investment Restrictions 14. Management of the Fund................ Management of the Fund 15. Control Persons and Principal Holders of Securities......................... Management of the Fund 16. Investment Advisory and Other Services.............................. Management of the Fund; Purchase of Shares 17. Brokerage Allocation and Other Practices............................. Portfolio Transactions and Brokerage; Financial Statements 18. Capital Stock and Other Securities.... Additional Information 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 20. Tax Status............................ Dividends, Distribution and Taxes 21. Underwriters.......................... Distributor 22. Calculations of Performance Data...... Performance Data 23. Financial Statements.................. Financial Statements
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. PROSPECTUS OCTOBER 31, 1995 MERRILL LYNCH MUNICIPAL BOND FUND, INC. P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800 Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is a professionally managed, diversified, open-end investment company which seeks to provide shareholders with as high a level of income exempt from Federal income taxes as is consistent with the investment policies of each of its Portfolios and prudent investment management. The Fund is a series fund and is comprised of three separate Portfolios, each of which invests primarily in a diversified portfolio of tax-exempt Municipal Bonds, principally consisting of state, municipal and public authority securities. Each of the Portfolios pursues its investment objective through the separate investment policies described below: Insured Portfolio invests primarily in long-term, investment grade Municipal Bonds, each of which is covered by portfolio insurance guaranteeing the timely payment of principal at maturity and interest. National Portfolio invests primarily in long-term medium to lower grade Municipal Bonds offering higher yields than the Insured Portfolio but also subject to greater risks than investment grade Municipal Bonds. Limited Maturity Portfolio invests in a portfolio primarily of investment grade Municipal Bonds with a maximum maturity not to exceed four years and, depending on market conditions, an average maturity of less than two years is anticipated. The Limited Maturity Portfolio can be expected to offer the lowest yield of the three Portfolios, but it will be subject to less market risk than the longer-term Portfolios. 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, Inc. (the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 (609 282-2800), or from securities dealers which have entered into selected dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). Class B and Class C shares of the Fund's Portfolios may only be purchased either directly from the Distributor or Merrill Lynch. See "Purchase of Shares" below. The minimum initial purchase for shares of each Portfolio is $1,000, and the minimum subsequent purchase in each Portfolio is $50. Merrill Lynch may charge its customers a processing fee (presently $4.85) for confirming purchases and repurchases. Purchases and redemptions directly through the Fund's transfer agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares." The net investment income of each Portfolio is declared daily and paid monthly. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- This Prospectus sets forth in concise form the information about the Fund that a prospective investor should know before investing in the Fund. Investors should read and retain this Prospectus for future reference. Additional information about the Fund has been filed with the Securities and Exchange Commission in a Statement of Additional Information, dated October 31, 1995, and is available upon request and without charge, by calling or writing the Fund at the address and telephone number set forth above. The Statement of Additional Information is hereby incorporated by reference into this Prospectus. ---------------- FUND ASSET MANAGEMENT -- INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR INSURED PORTFOLIO FEE TABLE A general comparison of the sales arrangements and other nonrecurring and recurring expenses applicable to shares of the Fund follows:
CLASS A(a) CLASS B(b) CLASS C(c) CLASS D(c) ---------- ---------- --------------- ---------- SHAREHOLDER TRANSACTION EXPENSES: Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)....... 4.00%(d) None None 4.00%(d) Sales Charge Imposed on Dividend Reinvestments......... None None None None Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, whichever is lower)................ None(e) 4.0% during the first year, 1% for one year None(e) decreasing 1.0% annually thereafter to 0.0% after the fourth year Exchange Fee........... None None None None ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)(F): Management Fees(g)..... 0.36% 0.36% 0.36% 0.36% 12b-1 Fees(h): Account Maintenance Fees.................. None 0.25% 0.25% 0.25% Distribution Fees...... None 0.50% 0.55% None (Class B shares convert to Class D shares automatically after approximately ten years and cease being subject to distribution fees) Other Expenses: Custodial Fees......... 0.01% 0.01% 0.01% 0.01% Shareholder Servicing Costs(i).............. 0.04% 0.05% 0.05% 0.04% Other.................. 0.02% 0.02% 0.02% 0.02% ----- ----- ----- ----- Total Other Expenses.. 0.07% 0.08% 0.08% 0.07% ----- ----- ----- ----- Total Fund Operating 0.43% 1.19% 1.24% 0.68% Expenses.............. ===== ===== ===== =====
- -------- (a) Class A shares are sold to a limited group of investors including existing Class A shareholders, and investment programs. See "Purchase of Shares-- Initial Sales Charge Alternatives--Class A and Class D Shares"--page 33. (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 36. (c) Prior to October 21, 1994, the Fund had not offered its Class C and Class D shares to the public. (d) Reduced for purchases of $25,000 and over. Class A or Class D purchases of $1,000,000 or more will not be subject to an initial sales charge. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D shares--page 33. (e) 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 will be subject to a CDSC of 1.0% of amounts redeemed within the first year of purchase. (f) Information for Class A and Class B shares is stated for the fiscal year ended June 30, 1995. Information for Class C and Class D shares is estimated for the fiscal year ending June 30, 1996. (g) See "Investment Adviser"--page 27. (h) See "Purchase of Shares--Distribution Plans"--page 39. (i) See "Investment Adviser--Transfer Agency Services"--page 28. 2 EXAMPLE:
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF: ------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------- ---------- ----------- An investor would pay the following expenses on a $1,000 investment including the maximum $40 initial sales charge (Class A and Class D shares only) and assuming (1) the Total Fund Operating Expenses for each class set forth above, (2) a 5% annual return throughout the periods and (3) redemption at the end of the period: Class A........................ $44 $53 $63 $ 92 Class B........................ $52 $58 $65 $144 Class C........................ $23 $39 $68 $150 Class D........................ $47 $61 $76 $121 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 $ 92 Class B........................ $12 $38 $65 $144 Class C........................ $13 $39 $68 $150 Class D........................ $47 $61 $76 $121
The foregoing Fee Table is intended to assist investors in understanding the costs and expenses that a shareholder in the Fund will bear directly or indirectly. The Example set forth above assumes reinvestment of all dividends and distributions and utilizes a 5% annual rate of return as mandated by Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who hold their shares for an extended period of time may pay more in Rule 12b-1 distribution fees than the economic equivalent of the maximum front-end sales charges permitted under the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its customers a processing fee (presently $4.85) for confirming purchases and redemptions. Purchases and redemptions directly through the Fund's transfer agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares." 3 NATIONAL PORTFOLIO FEE TABLE A general comparison of the sales arrangements and other nonrecurring and recurring expenses applicable to shares of the Fund follows:
CLASS A(a) CLASS B(b) CLASS C(c) CLASS D(c) ---------- ---------- --------------- ---------- SHAREHOLDER TRANSACTION EXPENSES: Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)....... 4.00%(d) None None 4.00%(d) Sales Charge Imposed on Dividend Reinvestments......... None None None None Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, whichever is lower)................ None(e) 4.0% during the first year, 1% for one year None(e) decreasing 1.0% annually thereafter to 0.0% after the fourth year Exchange Fee........... None None None None ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)(f): Investment Advisory Fees(g)............... 0.48% 0.48% 0.48% 0.48% 12b-1 Fees(h): Account Maintenance Fees.................. None 0.25% 0.25% 0.25% Distribution Fees...... None 0.50% 0.55% None (Class B shares convert to Class D shares automatically after approximately ten years and cease being subject to distribution fees) Other Expenses: Custodial Fees......... 0.01% 0.01% 0.01% 0.01% Shareholder Servicing Costs(i).............. 0.04% 0.05% 0.05% 0.04% Other.................. 0.03% 0.03% 0.03% 0.03% ----- ----- ----- ----- Total Other Expenses.. 0.08% 0.09% 0.09% 0.08% ----- ----- ----- ----- Total Fund Operating 0.56% 1.32% 1.37% 0.81% Expenses.............. ===== ===== ===== =====
- -------- (a) Class A shares are sold to a limited group of investors including existing Class A shareholders and investment programs. See "Purchase of Shares-- Initial Sales Charge Alternatives--Class A and Class D Shares"--page 33. (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 36. (c) Prior to October 21, 1994, the Fund had not offered its Class C and Class D shares to the public. (d) Reduced for purchases of $25,000 and over. Class A or Class D purchases of $1,000,000 or more will not be subject to an initial sales charge. See "Purchases of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares"--page 33. (e) 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 will be subject to a CDSC of 1.0% of amounts redeemed within the first year of purchase. (f) Information for Class A and Class B shares is stated for the fiscal year ended June 30, 1995. Information for Class C and Class D shares is estimated for the fiscal year ending June 30, 1996. (g) See "Investment Adviser"--page 27. (h) See "Purchase of Shares--Distribution Plans"--page 39. (i) See "Investment Adviser--Transfer Agency Services"--page 28. 4 EXAMPLE:
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF: ------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS --------- ---------- ---------- ----------- An investor would pay the following expenses on a $1,000 investment including the maximum $40 initial sales charge (Class A and Class D shares only) and assuming (1) the Total Fund Operating Expenses for each class set forth above, (2) a 5% annual return throughout the periods and (3) redemption at the end of the period: Class A........................ $46 $57 $70 $107 Class B........................ $53 $62 $72 $159 Class C........................ $24 $43 $75 $165 Class D........................ $48 $65 $83 $136 An investor would pay the following expenses on the same $1,000 investment assuming no redemption at the end of the period: Class A........................ $46 $57 $70 $107 Class B........................ $13 $42 $72 $159 Class C........................ $14 $43 $75 $165 Class D........................ $48 $65 $83 $136
The foregoing Fee Table is intended to assist investors in understanding the costs and expenses that a shareholder in the Fund will bear directly or indirectly. The Example set forth above assumes reinvestment of all dividends and distributions and utilizes a 5% annual rate of return as mandated by Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who hold their shares for an extended period of time may pay more in Rule 12b-1 distribution fees than the economic equivalent of the maximum front-end sales charges permitted under the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its customers a processing fee (presently $4.85) for confirming purchases and redemptions. Purchases and redemptions directly through the Fund's transfer agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares." 5 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:
CLASS A(a) CLASS B(b) CLASS C(c)* CLASS D(c) ---------- ---------- --------------- ---------- SHAREHOLDER TRANSACTION EXPENSES: Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)....... 1.00%(d) None None 1.00%(d) Sales Charge Imposed on Dividend Reinvestments......... None None None None Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, whichever is lower)................ None(e) 1.0% during the first year, 1% for one year None(e) decreasing to 0.0% after the first year Exchange Fee........... None None None None ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)(f): Investment Advisory Fee(g)................ 0.33% 0.33% 0.33% 0.33% 12b-1 Fees(h): Account Maintenance Fees.................. None 0.15% 0.15% 0.10% Distribution Fees...... None 0.20% 0.20% None (Class B shares convert to Class D shares automatically after approximately ten years and cease being subject to distribution fees) Other Expenses: Custodial Fees......... 0.01% 0.01% 0.01% 0.01% Shareholder Servicing Costs(i).............. 0.03% 0.05% 0.05% 0.03% Other.................. 0.04% 0.04% 0.04% 0.04% ----- ----- ----- ----- Total Other Expenses.. 0.08% 0.10% 0.10% 0.08% ----- ----- ----- ----- Total Fund Operating 0.41% 0.78% 0.78% 0.51% Expenses.............. ===== ===== ===== =====
- -------- (a) Class A shares are sold to a limited group of investors including existing Class A shareholders and investment programs. See "Purchase of Shares-- Initial Sales Charge Alternatives--Class A and Class D Shares"--page 33. (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 36. (c) Prior to October 21, 1994, the Fund had not offered its Class C and Class D shares to the public. (d) Reduced for purchases of $100,000 and over. Class A or Class D purchases of $100,000 or more will not be subject to an initial sales charge. See "Purchases of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares"--page 33. (e) 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 will be subject to a CDSC of .20% of amounts redeemed within the first year of purchase. (f) Information for Class A and Class B shares is stated for the fiscal year ended June 30, 1995. Information for Class C and Class D shares is estimated for the fiscal year ending June 30, 1996. (g) See "Investment Adviser"--page 27. (h) See "Purchase of Shares--Distribution Plans"-page 39. (i) See "Investment Adviser--Transfer Agency Services"--page 28. * Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. See page 49. 6 EXAMPLE:
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF: ------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS --------- ---------- ---------- ----------- An investor would pay the following expenses on a $1,000 investment including the maximum $10 initial sales charge (Class A and Class D shares only) and assuming (1) the Total Fund Operating Expenses for each class set forth above, (2) a 5% annual return throughout the periods and (3) redemption at the end of the period: Class A........................ $44 $53 $62 $ 90 Class B........................ $48 $45 $43 $ 97 Class C*....................... $18 $25 $43 $ 97 Class D........................ $45 $56 $67 $101 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 $62 $ 90 Class B........................ $ 8 $25 $43 $ 97 Class C*....................... $ 8 $25 $43 $ 97 Class D........................ $45 $56 $67 $101
- -------- * Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. The foregoing Fee Table is intended to assist investors in understanding the costs and expenses that a shareholder in the Fund will bear directly or indirectly. The Example set forth above assumes reinvestment of all dividends and distributions and utilizes a 5% annual rate of return as mandated by Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who hold their shares for an extended period of time may pay more in Rule 12b-1 distribution fees than the economic equivalent of the maximum front-end sales charges permitted under the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its customers a processing fee (presently $4.85) for confirming purchases and redemptions. Purchases and redemptions directly through the Fund's transfer agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares." 7 MERRILL LYNCH SELECT PRICING SM SYSTEM Each Portfolio of the Fund offers four classes of shares under the Merrill Lynch Select PricingSM System. The shares of each class may be purchased at a price equal to the next determined net asset value per share subject to the sales charges and ongoing fee arrangements described below. Shares of Class A and Class D are sold to investors choosing the initial sales charge alternatives, and shares of Class B and for the Insured and National Portfolios only Class C are sold to investors choosing the deferred sales charge alternatives. Class C shares of the Limited Maturity Portfolio are offered only through the exchange privilege and may not be purchased except through exchange of Class C shares of another Portfolio or another Fund. The Merrill Lynch Select PricingSM System is used by more than 50 mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM") or its affiliate, Fund Asset Management, L.P. ("FAM" or the "Investment Adviser"). Funds advised by MLAM or FAM are referred to herein as "MLAM-advised mutual funds." Each Class A, Class B, Class C or Class D share of one of the Fund's Portfolios represents an identical interest in the investment portfolio of the applicable Portfolio and has the same rights, except that Class B, Class C and Class D shares bear the expenses of the ongoing account maintenance fees and Class B and Class C shares bear the expenses of the ongoing distribution fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. The deferred sales charges and account maintenance fees that are imposed on Class B and Class C shares of a Portfolio, as well as the account maintenance fees that are imposed on the Class D shares, will be imposed directly against those classes and not against all assets of the relevant Portfolio and, accordingly, such charges will not affect the net asset value of any other class or have any impact on investors choosing another sales charge option. Dividends paid by a Portfolio for each class of shares will be calculated in the same manner at the same time and will differ only to the extent that account maintenance and distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Each class has different exchange privileges. See "Shareholder Services--Exchange Privilege." Investors should understand that the purpose and function of the initial sales charges with respect to the Class A and Class D shares are the same as those of the deferred sales charges with respect to the Class B and Class C shares in that the sales charges applicable to each class provide for the financing of the distribution of the shares of the Fund. The distribution- related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares. The following table sets forth a summary of the distribution arrangements for each class of shares under the Merrill Lynch Select PricingSM 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 PricingSM System that the investor believes is most beneficial under his particular circumstances. More detailed information as to each class of shares is set forth under "Purchase of Shares." 8 INSURED AND NATIONAL PORTFOLIOS
ACCOUNT MAINTENANCE DISTRIBUTION CONVERSION CLASS SALES CHARGE (1) FEE FEE FEATURE - ------------------------------------------------------------------------------------ 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 4.0% during the D shares automatically first year, decreasing 1.0% after approximately annually to 0.0% ten years (4) - ------------------------------------------------------------------------------------ C 1.0% CDSC for one year 0.25% 0.55% No decreasing to 0.0% after the first year - ------------------------------------------------------------------------------------ D Maximum 4.00% initial 0.25% No No sales charge (3)
LIMITED MATURITY PORTFOLIO
ACCOUNT MAINTENANCE DISTRIBUTION CONVERSION CLASS SALES CHARGE (1) FEE FEE FEATURE - -------------------------------------------------------------------------------- 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 ten years (4) - -------------------------------------------------------------------------------- C (5) 1.0% CDSC for one year 0.15% 0.20% No decreasing to 0.00% after the first year - -------------------------------------------------------------------------------- D Maximum 1.00% initial 0.10% No No sales charge (3)
- -------- (1) Initial sales charges are imposed at the time of purchase as a percentage of the offering price. Contingent deferred sales charges ("CDSCs") are imposed if the redemption occurs within the applicable CDSC time period. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. (2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares--Eligible Class A Investors." (3) Reduced for purchases of $25,000 or more for the Insured and National Portfolios and $100,000 or more for the Limited Maturity Portfolio. Class A and Class D share purchases of $1,000,000 or more will not be subject to an initial sales charge but instead will be subject to a 1.0% CDSC for the Insured and National Portfolios and a .20% CDSC for the Limited Maturity Portfiolio, for one year. See "Class A" and "Class D" below. (4) The conversion period for dividend reinvestment shares is modified. Also, Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made have a eight year conversion period. If Class B shares of the Fund are exchanged for Class B shares of another MLAM- advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. (5) Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. See p. 49. 9 Class A: Class A shares incur an initial sales charge when they are purchased and bear no ongoing distribution or account maintenance fees. Class A shares are offered to a limited group of investors and also will be issued upon reinvestment of dividends on outstanding Class A shares. Investors that currently own Class A shares 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 investment programs. In addition, Class A shares will be offered to Merrill Lynch & Co., Inc. and its subsidiaries (including MLAM) (the term "subsidiaries," when used herein with respect to Merrill Lynch & Co., Inc., includes MLAM, FAM and certain other entities indirectly by wholly-owned and controlled by Merrill Lynch & Co., Inc.) and their directors and employees and to members of the Boards of MLAM-advised mutual funds. The maximum initial sales charge is 4.00% for the Insured and National Portfolios and 1.00% for the Limited Maturity Portfolio and is reduced for purchases of $25,000 and over for the Insured and National Portfolios and for purchases of $100,000 or over for the Limited Maturity Portfolio. Purchases of $1,000,000 or more will not be subject to an initial sales charge but such purchases will be subject to a CDSC of 1.0% (for the Insured and National Portfolios) or .20% (for the Limited Maturity Portfolio) if the shares are redeemed within one year after purchase. Sales charges also are reduced under a right of accumulation which takes into account the investors's holdings of all classes of all MLAM-advised mutual funds. See "Purchase of Shares-- Initial Sales Charge Alternatives--Class A and Class D Shares." Class B: Class B shares do not incur a sales charge when they are purchased, but they are subject to an ongoing account maintenance fee of 0.25% (in the case of the Insured Portfolio and the National Portfolio) and 0.15% (in the case of the Limited Maturity Portfolio) of the Portfolio's average net assets attributable to the Class B shares, an ongoing distribution fee of 0.50% (in the case of the Insured Portfolio and the National Portfolio) and 0.20% (in the case of the Limited Maturity Portfolio) of the Portfolio's average net assets attributable to Class B shares and a CDSC if they are redeemed within four years of purchase (in the case of the Insured Portfolio and National Portfolio) and within one year of purchase (in the case of the Limited Maturity Portfolio). Approximately ten years after issuance, Class B shares of the Portfolio will convert automatically into Class D shares of the Portfolio, which are subject to an account maintenance fee but no distribution fee; Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made convert into Class D shares automatically after approximately eight years. If Class B shares of a Portfolio are exchanged for Class B shares of another MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. Automatic conversion of Class B shares into Class D shares will occur at least once a month on the basis of the relative net asset values of the shares of the two classes on the conversion date, without the imposition of any sales load, fee or other charge. Conversion of Class B shares to Class D shares will not be deemed a purchase or sale of the shares for Federal income tax purposes. Shares purchased through reinvestment of dividends on Class B shares also will convert automatically to Class D shares. The conversion period for dividend reinvestment shares is modified as described under "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class D Shares." 10 Class C: Class C shares do not incur a sales charge when they are purchased, but they are subject to an ongoing account maintenance fee of 0.25% (in the case of the Insured Portfolio and the National Portfolio) and 0.15% (in the case of the Limited Maturity Portfolio) of average net assets and an ongoing distribution fee of 0.55% (in the case of the Insured Portfolio and the National Portfolio) and 0.20% (in the case of the Limited Maturity Portfolio) of average net assets. Class C shares are also subject to a CDSC if they are redeemed within one year of purchase. Although Class C shares are subject to a 1.0% CDSC for only one year (as compared to four years for Class B of the Insured Portfolio and National Portfolio), Class C shares have no conversion feature and, accordingly, an investor that purchases Class C shares will be subject to distribution fees that will be imposed on Class C shares for an indefinite period subject to annual approval by the Fund's Board of Directors and regulatory limitations. Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. See p. 49. Class D: Class D shares incur an initial sales charge when they are purchased and are subject to an ongoing account maintenance fee of 0.25% (in the case of the Insured Portfolio and the National Portfolio) and 0.10% (in the case of the Limited Maturity Portfolio) of average net assets. Class D shares are not subject to an ongoing distribution fee or any CDSC when they are redeemed. Purchases of $1,000,000 or more will not be subject to an initial sales charge but such purchase will be subject to a CDSC of 1% (for the Insured and National Portfolios) or .20% (for the Limited Maturity Portfolio) if the shares are redeemed within one year after purchase. The schedule of initial sales charges and reductions for Class D shares is the same as the schedule for Class A shares. Class D shares also will be issued upon conversion of Class B shares as described above under "Class B." See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares." The following is a discussion of the factors that investors should consider in determining the method of purchasing shares under the Merrill Lynch Select PricingSM System that the investor believes is most beneficial under his particular circumstances. Initial Sales Charge Alternatives. Investors who prefer an initial sales charge alternative may elect to purchase Class D shares or, if an eligible investor, Class A shares. Investors choosing the initial sales charge alternative who are eligible to purchase Class A shares should purchase Class A shares rather than Class D shares because of the account maintenance fee imposed on Class D shares. Investors qualifying for significantly reduced initial sales charges may find the initial sales charge alternative particularly attractive because similar sales charge reductions are not available with respect to the deferred sales charges imposed in connection with purchases of Class B or Class C shares. Investors not qualifying for reduced initial sales charges who expect to maintain their investment for an extended period of time also may elect to purchase Class A or Class D shares, because over time the accumulated ongoing account maintenance and distribution fees on Class B or Class C shares may exceed the initial sales charge and, in the case of Class D shares, the account maintenance fee. Although some investors that previously purchased Class A shares may no longer be eligible to purchase Class A shares of other MLAM-advised mutual funds, those previously purchased Class A shares, together with Class B, Class C and Class D share holdings, will count toward a right of accumulation which may qualify the investor for reduced initial sales charges on new initial sales charge purchases. In addition, the ongoing Class B and Class C account maintenance and distribution fees will cause 11 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 FINANCIAL HIGHLIGHTS The financial information in the table below in connection with shares of the Insured Portfolio, National Portfolio and the Limited Maturity Portfolio has been audited in conjunction with the audits of the financial statements of the Portfolios by Deloitte & Touche LLP, independent auditors. Financial statements for the year ended June 30, 1995 and the independent auditors' report thereon are included in the Statement of Additional Information. Financial information is presented for Class C and Class D shares for the period October 21, 1994 (commencement of operations) to June 30, 1995. Further information about the performance of the Fund is contained in the Fund's most recent annual report to shareholders which may be obtained, without charge, by calling or by writing the Fund at the telephone number or address on the front cover of this Prospectus.
THE FOLLOWING PER SHARE INSURED PORTFOLIO DATA AND RATIOS HAVE ----------------------------------------------------------------------------------------------------------- BEEN DERIVED FROM CLASS A INFORMATION PROVIDED ----------------------------------------------------------------------------------------------------------- IN THE FINANCIAL FOR THE YEAR ENDED JUNE 30, STATEMENTS: ----------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN 1995 1994 1993 1992 1991 1990 1989 1988 1987 NET ASSET VALUE: ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year............ $ 7.88 $ 8.64 $ 8.26 $ 7.92 $ 7.86 $ 7.97 $ 7.69 $ 7.79 $ 7.84 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Investment income--net..... .46 .47 .50 .52 .54 .55 .58 .57 .60 Realized and unrealized gain (loss) on investments-- net............. .18 (.53) .49 .41 .12 (.11) .28 .00 (.04) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations...... .64 (.06) .99 .93 .66 .44 .86 .57 .56 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net.... (.46) (.47) (.50) (.52) (.54) (.55) (.58) (.57) (.60) Realized gains on investments-- net............ (.14) (.23) (.11) (.07) (.06) -- -- (.10) (.01) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions... (.60) (.70) (.61) (.59) (.60) (.55) (.58) (.67) (.61) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of year..... $ 7.92 $ 7.88 $ 8.64 $ 8.26 $ 7.92 $ 7.86 $ 7.97 $ 7.69 $ 7.79 ========== ========== ========== ========== ========== ========== ========== ========== ========== TOTAL INVESTMENT RETURN:* Based on net asset value per share........... 8.60% (1.08%) 12.43% 12.11% 8.84% 5.76% 11.62% 7.75% 6.94% ========== ========== ========== ========== ========== ========== ========== ========== ========== RATIOS TO AVERAGE NET ASSETS: Expenses......... .43% .42% .42% .44% .45% .46% .49% .52% .57% ========== ========== ========== ========== ========== ========== ========== ========== ========== Investment income--net..... 5.78% 5.53% 5.94% 6.44% 6.90% 7.03% 7.46% 7.55% 7.21% ========== ========== ========== ========== ========== ========== ========== ========== ========== SUPPLEMENTAL DATA: Net assets, end of year (in thousands)...... $1,706,064 $1,941,741 $2,225,188 $2,062,591 $1,984,307 $2,019,166 $2,013,219 $1,982,997 $2,238,480 ========== ========== ========== ========== ========== ========== ========== ========== ========== Portfolio turnover........ 35.61% 28.34% 43.86% 22.50% 33.12% 23.20% 45.49% 33.98% 63.55% ========== ========== ========== ========== ========== ========== ========== ========== ========== *Total investment returns exclude the effects of sales loads. THE FOLLOWING PER SHARE INSURED PORTFOLIO DATA AND RATIOS HAVE -------------------------------- BEEN DERIVED FROM CLASS A INFORMATION PROVIDED -------------------------------- IN THE FINANCIAL FOR THE YEAR ENDED JUNE 30, STATEMENTS: ---------- INCREASE (DECREASE) IN 1986 NET ASSET VALUE: ---------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year............ $ 7.36 ---------- Investment income--net..... .63 Realized and unrealized gain (loss) on investments-- net............. .48 ---------- Total from investment operations...... 1.11 ---------- Less dividends and distributions: Investment income--net.... (.63) Realized gains on investments-- net............ -- ---------- Total dividends and distributions... (.63) ---------- Net asset value, end of year..... $ 7.84 ========== TOTAL INVESTMENT RETURN:* Based on net asset value per share........... 15.62% ========== RATIOS TO AVERAGE NET ASSETS: Expenses......... .60% ========== Investment income--net..... 8.13% ========== SUPPLEMENTAL DATA: Net assets, end of year (in thousands)...... $1,741,727 ========== Portfolio turnover........ 43.70% ==========
- -------- * Total investment returns exclude the effects of sales loads. 13
THE FOLLOWING PER SHARE INSURED PORTFOLIO DATA AND RATIOS HAVE ------------------------------------------------------------------------------------------------- BEEN DERIVED FROM CLASS B CLASS C CLASS D INFORMATION PROVIDED --------------------------------------------------------------------------- -------- --------- IN THE FINANCIAL FOR THE PERIOD STATEMENTS: FOR THE YEAR ENDED JUNE 30, OCT. 21 1988+ FOR THE PERIOD ----------------------------------------------------------- TO JUNE 30, OCTOBER 21, 1994+ INCREASE (DECREASE) IN 1995 1994 1993 1992 1991 1990 1989 TO JUNE 30, 1995 NET ASSET VALUE: -------- -------- -------- -------- -------- -------- -------------- --------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.... $ 7.87 $ 8.63 $ 8.26 $ 7.92 $ 7.86 $ 7.97 $ 7.81 $ 7.68 $ 7.68 -------- -------- -------- -------- -------- -------- -------- -------- --------- Investment income-net... .40 .40 .44 .46 .48 .49 .36 .27 .29 Realized and unrealized gain (loss) on investments--net....... .19 (.53) .48 .41 .12 (.11) .16 .38 .38 -------- -------- -------- -------- -------- -------- -------- -------- --------- Total from investment operations............. .59 (.13) .92 .87 .60 .38 .52 .65 .67 -------- -------- -------- -------- -------- -------- -------- -------- --------- Less dividends and distributions: Investment income--net. (.40) (.40) (.44) (.46) (.48) (.49) (.36) (.27) (.29) Realized gains on investments--net...... (.14) (.23) (.11) (.07) (.06) -- -- (.14) (.14) -------- -------- -------- -------- -------- -------- -------- -------- --------- Total dividends and distributions.......... (.54) (.63) (.55) (.53) (.54) (.49) (.36) (.41) (.43) -------- -------- -------- -------- -------- -------- -------- -------- --------- Net asset value, end of period................. $ 7.92 $ 7.87 $ 8.63 $ 8.26 $ 7.92 $ 7.86 $ 7.97 $ 7.92 $ 7.92 ======== ======== ======== ======== ======== ======== ======== ======== ========= TOTAL INVESTMENT RETURN:** Based on net asset value per share.............. 7.91% (1.81%) 11.45% 11.27% 8.02% 4.98% 6.88%# 8.83%# 9.24%# ======== ======== ======== ======== ======== ======== ======== ======== ========= RATIOS TO AVERAGE NET ASSETS: Expenses, excluding account maintenance and distribution fees...... .44% .42% .43% .44% .45% .47% .48%* .43%* .43%* ======== ======== ======== ======== ======== ======== ======== ======== ========= Expenses................ 1.19% 1.17% 1.18% 1.19% 1.20% 1.22% 1.23%* 1.23%* .68%* ======== ======== ======== ======== ======== ======== ======== ======== ========= Investment income--net.. 5.03% 4.78% 5.17% 5.69% 6.13% 6.27% 6.58%* 4.93%* 5.50%* ======== ======== ======== ======== ======== ======== ======== ======== ========= SUPPLEMENTAL DATA: Net assets, end of period (in thousands).. $782,748 $866,193 $911,307 $706,016 $537,755 $408,641 $175,707 $ 7,756 $ 26,015 ======== ======== ======== ======== ======== ======== ======== ======== ========= Portfolio turnover...... 35.61% 28.34% 43.86% 22.50% 33.12% 23.20% 45.49% 35.61% 35.61% ======== ======== ======== ======== ======== ======== ======== ======== =========
- -------- * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of Operations. # Aggregate total investment return. 14
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE NATIONAL PORTFOLIO BEEN DERIVED FROM ----------------------------------------------------------------------------------------------------------- INFORMATION CLASS A PROVIDED ----------------------------------------------------------------------------------------------------------- IN THE FINANCIAL FOR THE YEAR ENDED JUNE 30, STATEMENTS: ----------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN 1995 1994 1993 1992 1991 1990 1989 1988 1987 NET ASSET VALUE: ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year............ $ 10.08 $ 11.02 $ 10.64 $ 10.17 $ 10.12 $ 10.31 $ 9.94 $ 10.12 $ 10.28 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Investment income--net..... .60 .62 .67 .71 .73 .74 .77 .76 .80 Realized and unrealized gain (loss) on investments-- net............. .15 (.64) .57 .58 .05 (.19) .37 (.11) .02 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations...... .75 (.02) 1.24 1.29 .78 .55 1.14 .65 .82 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net.... (.60) (.62) (.67) (.71) (.73) (.74) (.77) (.76) (.80) Realized gains on investments-- net............ (.19) (.30) (.19) (.11) -- -- -- (.07) (.18) In excess of realized gain on investments-- net............ (.02) -- -- -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions... (.81) (.92) (.86) (.82) (.73) (.74) (.77) (.83) (.98) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of year..... $ 10.02 $ 10.08 $ 11.02 $ 10.64 $ 10.17 $ 10.12 $ 10.31 $ 9.94 $ 10.12 ========== ========== ========== ========== ========== ========== ========== ========== ========== TOTAL INVESTMENT RETURN:* Based on net asset value per share........... 7.89% (.47%) 12.21% 13.09% 7.94% 5.53% 11.89% 6.89% 8.00% ========== ========== ========== ========== ========== ========== ========== ========== ========== RATIOS TO AVERAGE NET ASSETS: Expenses......... .56% .55% .55% .55% .55% .55% .55% .55% .55% ========== ========== ========== ========== ========== ========== ========== ========== ========== Investment income--net..... 6.01% 5.72% 6.23% 6.80% 7.20% 7.27% 7.63% 7.79% 7.56% ========== ========== ========== ========== ========== ========== ========== ========== ========== SUPPLEMENTAL DATA: Net assets, end of year (in thousands)...... $1,059,440 $1,203,181 $1,353,805 $1,278,055 $1,255,820 $1,365,541 $1,445,116 $1,467,982 $1,506,369 ========== ========== ========== ========== ========== ========== ========== ========== ========== Portfolio turnover........ 103.65% 73.33% 65.43% 50.94% 75.25% 48.80% 76.73% 72.77% 72.44% ========== ========== ========== ========== ========== ========== ========== ========== ========== THE FOLLOWING PER SHARE DATA AND RATIOS HAVE NATIONAL PORTFOLIO BEEN DERIVED FROM ------------------------------------------ INFORMATION CLASS A PROVIDED ------------------------------------------ IN THE FINANCIAL FOR THE YEAR ENDED JUNE 30, STATEMENTS: ------------------------------------------ INCREASE (DECREASE) IN 1986 NET ASSET VALUE: ---------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year............ $ 9.57 ---------- Investment income--net..... .86 Realized and unrealized gain (loss) on investments-- net............. .71 ---------- Total from investment operations...... 1.57 ---------- Less dividends and distributions: Investment income--net.... (.86) Realized gains on investments-- net............ -- In excess of realized gain on investments-- net............ -- ---------- Total dividends and distributions... (.86) ---------- Net asset value, end of year..... $ 10.28 ========== TOTAL INVESTMENT RETURN:* Based on net asset value per share........... 17.09% ========== RATIOS TO AVERAGE NET ASSETS: Expenses......... .56% ========== Investment income--net..... 8.41% ========== SUPPLEMENTAL DATA: Net assets, end of year (in thousands)...... $1,297,305 ========== Portfolio turnover........ 120.80% ==========
- -------- * Total investment returns exclude the effects of sales loads. 15
THE FOLLOWING PER SHARE NATIONAL PORTFOLIO DATA AND RATIOS HAVE --------------------------------------------------------------------------------------------- BEEN DERIVED FROM CLASS B CLASS C CLASS D INFORMATION PROVIDED --------------------------------------------------------------------------- ------- ------- IN THE FINANCIAL FOR THE PERIOD FOR THE PERIOD STATEMENTS: FOR THE YEAR ENDED JUNE 30, OCT. 21 1988+ OCT. 21, 1994+ ----------------------------------------------------------- TO JUNE 30, TO JUNE 30, INCREASE (DECREASE) IN 1995 1994 1993 1992 1991 1990 1989 1995 NET ASSET VALUE: -------- -------- -------- -------- -------- -------- -------------- ----------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.... $ 10.07 $ 11.02 $ 10.63 $ 10.16 $ 10.11 $ 10.30 $ 10.14 $ 9.85 $ 9.85 -------- -------- -------- -------- -------- -------- ------- ------ ------- Investment income--net.. .52 .54 .59 .63 .65 .66 .48 .36 .40 Realized and unrealized gain(loss) on investments--net....... .16 (.65) .58 .58 .05 (.19) .16 .39 .39 -------- -------- -------- -------- -------- -------- ------- ------ ------- Total from investment operations............. .68 (.11) 1.17 1.21 .70 .47 .64 .75 .79 -------- -------- -------- -------- -------- -------- ------- ------ ------- Less dividends and distributions: Investment income--net. (.52) (.54) (.59) (.63) (.65) (.66) (.48) (.36) (.40) Realized gains on investments--net...... (.19) (.30) (.19) (.11) -- -- -- (.19) (.19) In excess of realized gain on investments-- net................... (.02) -- -- -- -- -- -- (.02) (.02) -------- -------- -------- -------- -------- -------- ------- ------ ------- Total dividends and distributions.......... (.73) (.84) (.78) (.74) (.65) (.66) (.48) (.57) (.61) -------- -------- -------- -------- -------- -------- ------- ------ ------- Net asset value, end of period................. $ 10.02 $ 10.07 $ 11.02 $ 10.63 $ 10.16 $ 10.11 $ 10.30 $10.03 $ 10.03 ======== ======== ======== ======== ======== ======== ======= ====== ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share.............. 7.28% (1.39%) 11.47% 12.25% 7.14% 4.74% 6.48%# 7.97%# 8.37%# ======== ======== ======== ======== ======== ======== ======= ====== ======= RATIOS TO AVERAGE NET ASSETS: Expenses, excluding account maintenance and distribution fees...... .57% .55% .56% .56% .56% .56% .56%* .57%* .56%* ======== ======== ======== ======== ======== ======== ======= ====== ======= Expenses................ 1.32% 1.30% 1.31% 1.31% 1.31% 1.31% 1.31%* 1.37%* .81%* ======== ======== ======== ======== ======== ======== ======= ====== ======= Investment income-net... 5.25% 4.97% 5.46% 6.03% 6.43% 6.52% 6.74%* 5.21%* 5.78%* ======== ======== ======== ======== ======== ======== ======= ====== ======= SUPPLEMENTAL DATA: Net assets, end of period (in thousands).. $419,933 $459,169 $424,071 $286,375 $213,581 $179,362 $97,196 $5,195 $19,656 ======== ======== ======== ======== ======== ======== ======= ====== ======= Portfolio turnover...... 103.65% 73.33% 65.43% 50.94% 75.25% 48.80% 76.73% 103.65% 103.65% ======== ======== ======== ======== ======== ======== ======= ====== =======
- -------- * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 16
LIMITED MATURITY PORTFOLIO THE FOLLOWING PER SHARE -------------------------------------------------------------------------------------------------- DATA AND RATIOS HAVE BEEN CLASS A DERIVED FROM INFORMATION -------------------------------------------------------------------------------------------------- PROVIDED IN THE FINANCIAL FOR THE YEAR ENDED JUNE 30, STATEMENTS: -------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 NET ASSET VALUE: -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE: Net asset value, begin- ning of year........... $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71 $ 9.73 $ 9.75 $ 9.83 $ 9.87 $ 9.85 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Investment income--net.. .38 .37 .41 .50 .57 .60 .58 .53 .52 .60 Realized and unrealized gain (loss) on invest- ments--net............. .05 (.14) .10 .16 .04 (.02) (.02) (.07) (.04) .02 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations............. .43 .23 .51 .66 .61 .58 .56 .46 .48 .62 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Less dividends and dis- tributions: Investment income--net. (.38) (.37) (.41) (.50) (.57) (.60) (.58) (.53) (.52) (.60) Realized gain on in- vestments--net........ -- -- -- -- -- -- -- (.01) -- -- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total dividends and dis- tributions: (.38) (.37) (.41) (.50) (.57) (.60) (.58) (.54) (.52) (.60) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net asset value, end of year................... $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71 $ 9.73 $ 9.75 $ 9.83 $ 9.87 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== TOTAL INVESTMENT RE- TURN:* Based on net asset value per share.............. 4.53% 2.30% 5.28% 6.93% 6.45% 6.16% 5.96% 4.83% 4.99% 6.50% ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== RATIOS TO AVERAGE NET ASSETS: Expenses................ .41% .40% .41% .40% .40% .40% .41% .40% .40% .42% ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Investment income--net.. 3.86% 3.68% 4.13% 5.02% 5.88% 6.21% 6.00% 5.42% 5.27% 6.04% ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== SUPPLEMENTAL DATA: Net assets, end of year (in thousands)......... $536,474 $790,142 $846,736 $613,407 $350,549 $352,005 $385,794 $567,158 $792,229 $623,902 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Portfolio turnover...... 37.33% 45.67% 65.43% 96.32% 93.06% 106.44% 228.78% 146.01% 19.55% 7.94% ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
- -------- * Total investment returns exclude the effects of sales loads. 17
LIMITED MATURITY PORTFOLIO -------------------------------------------------- CLASS B CLASS C CLASS D THE FOLLOWING PER SHARE ------------------------------ ------- ------- DATA AND RATIOS HAVE FOR THE FOR THE BEEN DERIVED FROM PERIOD PERIOD INFORMATION PROVIDED IN FOR THE YEAR ENDED NOV. 2, OCTOBER 21, THE FINANCIAL JUNE 30, 1992+ TO 1994+ TO STATEMENTS: -------------------- JUNE 30, JUNE 30, INCREASED (DECREASED) IN 1995 1994 1993 1995 NET ASSET VALUE: --------- --------- -------- ----------------- PER SHARE OPERATING PER- FORMANCE: Net asset value, begin- ning of period......... $ 9.87 $ 10.01 $ 9.93 $ 9.83 $ 9.83 --------- --------- ------- ------ ------- Investment income--net.. .35 .33 .24 .25 .26 Realized and unrealized gain (loss) on investments--net....... .05 (.14) .08 .09 .10 --------- --------- ------- ------ ------- Total from investment operations............. .40 .19 .32 .34 .36 --------- --------- ------- ------ ------- Less dividends from in- vestment income--net... (.35) (.33) (.24) (.25) (.26) --------- --------- ------- ------ ------- Net asset value, end of period................. $ 9.92 $ 9.87 $ 10.01 $ 9.92 $ 9.93 ========= ========= ======= ====== ======= TOTAL INVESTMENT RE- TURN:** Based on net asset value per share.............. 4.14% 1.98% 3.26%# 3.52%# 3.73%# ========= ========= ======= ====== ======= RATIOS TO AVERAGE NET ASSETS: Expenses, excluding ac- count maintenance and distribution fees...... .43% .41% .41%* .49%* .43%* ========= ========= ======= ====== ======= Expenses................ .78% .76% .76%* .70%* .53%* ========= ========= ======= ====== ======= Investment income--net.. 3.50% 3.33% 3.60%* 3.61%* 3.78%* ========= ========= ======= ====== ======= SUPPLEMENTAL DATA: Net assets, end of pe- riod (in thousands).... $ 129,581 $ 145,534 $95,179 $3,965 $11,258 ========= ========= ======= ====== ======= Portfolio turnover...... 37.33% 45.67% 65.43% 37.33% 37.33% ========= ========= ======= ====== =======
- -------- * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of Operations. # Aggregate total investment return. Further information about the Fund's performance is contained in the Fund's Annual Report which may be obtained, without charge, upon request. 18 INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Fund is to provide shareholders with as high a level of income exempt from federal income taxes as is consistent with the investment policies of each Portfolio and prudent investment management. The Fund is comprised of three separate portfolios, Insured Portfolio, National Portfolio and Limited Maturity Portfolio, each of which is, in effect, a separate fund issuing its own shares. Each Portfolio seeks to achieve its objective by investing in a diversified portfolio of obligations issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities, the interest from which is exempt from federal income tax (such obligations are herein referred to as "Municipal Bonds"). Municipal Bonds include general obligations bonds; revenue or special obligation bonds, industrial development bonds, variable rate demand notes, and short-term tax- exempt municipal obligations such as tax anticipation notes. Each Portfolio at all times, except during temporary defensive periods, maintains at least 80% of its net assets invested in Municipal Bonds. In addition, each Portfolio may not purchase securities other than Municipal Bonds and Temporary Investments described below. These are fundamental policies of each Portfolio and may not be changed without a vote of the majority of the outstanding shares of the Portfolio. Each Portfolio currently contemplates that it will not invest more than 25% of its total assets (taken at market value) in Municipal Bonds whose issuers are located in the same state. There can be no assurance that the objective of any Portfolio can be attained. While the Fund does not intend to realize taxable investment income, each Portfolio has the authority to invest as much as 20% of its net assets on a temporary basis in taxable money market securities with a remaining maturity not in excess of one year from the date of purchase ("Temporary Investments") for liquidity purposes or as a temporary investment of cash pending investment of such cash in Municipal Bonds. In addition, the Fund reserves the right to invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment of the Investment Adviser, market conditions warrant. Temporary Investments consist of U.S. Government securities, U.S. Government agency securities, domestic bank certificates of deposit and bankers' acceptances, short-term corporate debt securities such as commercial paper, and repurchase agreements. From time to time, the Fund may realize capital gains, which will constitute taxable income. In addition, the Fund may invest in certain tax-exempt securities which are classified as "private activity bonds," which may subject certain investors to an alternative minimum tax. (At June 30, 1995, approximately 18.67% of the Insured Portfolio's, approximately 17.91% of the National Portfolio's and approximately 8.98% 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 National Portfolio and the Limited Maturity Portfolio are authorized to engage in transactions in financial futures contracts for hedging purposes. For a more complete description of futures transactions, see "Financial Futures Contracts and Derivatives" below and the Statement of Additional Information. Investment in the Fund offers several benefits. The Fund offers investors the opportunity to receive income exempt from federal income taxes from a diversified, professionally managed portfolio of Municipal Bonds. The Fund also provides liquidity because of its redemption features and relieves the investor of the burdensome administrative details involved in managing a portfolio of tax-exempt securities. The benefits are at least partially offset by the fact that there are expenses in operating an investment company. Such expenses 19 consist primarily of the investment advisory fee and operational expenses, including, in the case of the Insured Portfolio, premiums for insurance on portfolio securities. 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 yield and are subject to greater market fluctuations as a result of changes in interest rates ("market risk") than are Municipal Bonds with shorter maturities. Generally, lower rated Municipal Bonds will provide a higher yield than higher rated Municipal Bonds of similar maturity but are subject to greater market risk and are also subject to a greater degree of risk with respect to the ability of the issuer to meet its principal and interest obligations ("financial risk"). 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"). See "Additional Information--Rating Information" for information with respect to ratings assigned to Municipal Bonds and Temporary Investments by rating agencies. INSURED PORTFOLIO The Insured Portfolio may invest in investment grade Municipal Bonds covered by portfolio insurance guaranteeing the timely payment of principal at maturity and interest. Investment grade Municipal Bonds are those rated at the date of purchase in the four highest rating categories of Standard & Poor's Corporation (AAA, AA, A and BBB) or Moody's Investors Service, Inc. (Aaa, Aa, A and Baa) in the case of long-term debt, rated MIG 1 through MIG 4 by Moody's Investors Service or in the four highest bond ratings of, or rated SP-1+ through SP-2 by, Standard & Poor's Corporation in the case of short-term notes, and rated P-1 or P-2 in the case of Moody's Investors Service or A-1+ through A-2 by Standard & Poor's Corporation in the case of tax-exempt commercial paper. Depending on market conditions, it is expected that Municipal Bonds with maturities beyond five years will comprise a major portion of this Portfolio. The Insured Portfolio may invest only in Municipal Bonds that, at the time of purchase, either (1) are insured under an insurance policy purchased by the Fund or (2) are insured under an insurance policy obtained by the issuer thereof or any other party from an insurance carrier meeting the criteria of the Fund set forth below. The Fund has purchased from AMBAC Indemnity Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation ("MBIA") and Financial Security Assurance Inc. ("FSA"), separate Mutual Fund Insurance Policies (the "Policies"), each of which guarantees the payment of principal and interest on specified eligible Municipal Bonds purchased by the Insured Portfolio ("Insured Municipal Bonds"). Consequently, some of the Insured Municipal Bonds in the Insured Portfolio may be insured by AMBAC, while others may be insured by MBIA or FSA. The Policies generally have the same characteristics and features. A Municipal Bond is eligible for coverage if it meets certain requirements of the insurance company set forth in a Policy. Additional information regarding these eligibility requirements is set forth in the Statement of Additional Information. In the event interest or principal on an Insured Municipal Bond is not paid when due, AMBAC or MBIA or FSA (depending on which Policy covers the bond) is obligated 20 under its Policy to make payment not later than 30 days after it has been notified by, and provided with documentation from, the Fund that such nonpayment has occurred. The insurance feature reduces financial risk, but the cost thereof and the restrictions on investments imposed by the guidelines in the insurance policy reduce the yield to shareholders. The Policies will be effective only as to Insured Municipal Bonds beneficially owned by the Insured Portfolio. In the event of a sale of any Municipal Bonds held by the Insured Portfolio, the issuer of the relevant Policy is liable only for those payments of interest and principal which are then due and owing. The Policies do not guarantee the market value of the Insured Municipal Bonds or the value of the shares of the Insured Portfolio. It is the intention of the Insured Portfolio, however, to retain any insured securities which are in default or in significant risk of default and to place a value on the insurance, which ordinarily will be the difference between the market value of the defaulted security and the market value of similar securities which are not in default. In certain circumstances, however, the Fund's management may determine that an alternative value for the insurance, such as the difference between the market value of the defaulted security and its par value, is more appropriate. As the result of the value placed on the insurance with respect to securities held in the Insured Portfolio which were in default at the end of the Fund's last fiscal year, such securities were effectively valued at par. The Insured Portfolio will be unable to manage the portfolio to the extent it holds defaulted securities, which may limit its ability in certain circumstances to purchase other Municipal Bonds. See "Net Asset Value" in the Statement of Additional Information for a more complete description of the Insured Portfolios method of valuing defaulted securities and securities which have a significant risk of default. Further information with respect to the portfolio insurance is also set forth in the Statement of Additional Information. AMBAC, MBIA and FSA may not withdraw coverage on securities insured by their Policies and held by the Insured Portfolio so long as they remain in the Portfolio. AMBAC, MBIA and FSA may not cancel their Policies for any reason except failure to pay premiums when due. AMBAC and FSA have reserved the right at any time upon written notice to the Fund to refuse to insure any additional municipal securities purchased by the Insured Portfolio after the effective date of such notice. The Board of Directors of the Fund has reserved the right to terminate any of the Policies if it determines that the benefits to the Insured Portfolio of having its portfolio insured are not justified by the expense involved. The premiums for the Policies are paid by the Insured Portfolio and the yield on the Portfolio is reduced thereby. The Investment Adviser estimates that the current cost of the annual premiums will range from approximately .08% to .20% of the average net assets of the Insured Portfolio. The estimate is based on the expected composition of the Portfolio. NATIONAL PORTFOLIO The National Portfolio invests in a portfolio primarily of medium to lower grade Municipal Bonds with maturities beyond five years. This Portfolio normally can be expected to offer the highest yields of the three Portfolios, but it will also be subject to the highest market and financial risks. Because an investment in the National Portfolio entails relatively greater risks, it may not be an appropriate investment for all investors. The investment policies of the National Portfolio are not governed by specific rating categories. Management of the Fund will seek primarily medium and lower grade Municipal Bonds, including short-term tax-exempt notes, tax- exempt commercial paper and variable rate tax-exempt demand notes. Medium grade 21 long-term debt obligations are those rated A and BBB by Standard & Poor's or A and Baa by Moody's and unrated obligations of comparable quality. Lower grade obligations (commonly known as "junk bonds") are those rated below BBB or Baa and unrated obligations of comparable quality. Lower grade obligations will generally be more speculative with respect to the capacity of the issuer to make interest and principal payments. Because issuers of Municipal Bonds having these characteristics may choose not to have their obligations rated, it is possible that a substantial portion of the National Portfolio's portfolio may consist of obligations which are not rated. Unrated bonds are not necessarily of lower quality than rated bonds, but the market for rated bonds is often broader. It is not the present intention of the Portfolio to invest over 35% of its assets in securities rated below Baa by Moody's or in securities rated below BBB by Standard & Poor's. Junk bonds are considered by Standard & Poor's and Moody's to have varying degrees of speculative characteristics. Consequently, although junk bonds can be expected to provide higher yields, such securities may be subject to greater market price fluctuations and risk of loss of principal than lower yielding, higher rated debt securities. Investments in junk bonds will be made only when, in the judgment of the Fund's management, such securities provide attractive total return potential relative to the risk of such securities, as compared to higher quality debt securities. The National Portfolio will not invest in debt securities in the lowest rating categories (those rated CC or lower by Standard & Poor's or Ca or lower by Moody's) unless the Fund's management believes that the financial condition of the issuer or the protection afforded the particular securities is stronger than would otherwise be indicated by such low ratings. The National Portfolio does not intend to purchase debt securities that are in default or which the Fund's management believes will be in default. The Statement of Additional Information contains a more detailed description of the risks involved in purchasing junk bonds. The table below shows the average monthly dollar-weighted market value, by Standard & Poor's rating category, of the securities held by the National Portfolio during the year ended June 30, 1995:
% MARKET VALUE % NET MUNICIPAL RATING ASSETS BONDS ------ ------ --------- AAA............................................................ 28.2 28.8 AA............................................................. 26.1 26.7 A.............................................................. 19.1 19.5 BBB............................................................ 8.0 8.2 BB............................................................. 6.8 7.0 NR*............................................................ 9.6 9.8 ---- ---- 92.3 100 ==== ====
- -------- * Bonds which are not rated by Standard & Poor's (including bonds not rated by any nationally recognized statistical rating organization). With respect to the percentage of the Portfolio's assets invested in such securities, the Investment Adviser believes that 2.0% are of comparable quality to bonds rated AAA, .01% are of comparable quality to bonds rated AA, 0.3% are of comparable quality to bonds rated A, 3.3% are of comparable quality to bonds rated BBB, 3.9% are of comparable quality to bonds rated BB. This determination is based on the Investment Adviser's own internal evaluation and does not necessarily reflect how such securities would be rated by Standard & Poor's or any other rating agency if such an agency were to rate the security. It is expected that the National Portfolio will consist primarily of revenue bonds emphasizing hospital, health care, public utility and housing issues. 22 LIMITED MATURITY PORTFOLIO The Limited Maturity Portfolio invests in a portfolio primarily of short-term investment grade Municipal Bonds. Municipal Bonds in the Limited Maturity Portfolio will be either Municipal Bonds with a remaining maturity of less than four years or short-term municipal notes, which typically are issued with a maturity of not more than one year. The Limited Maturity Portfolio will treat Municipal Bonds which it has the option to require the issuer to redeem within four years as having a remaining maturity of less than four years, even if the period to the stated maturity date of such Bonds is greater than four years. Municipal notes include tax anticipation notes, bond anticipation notes and revenue anticipation notes. The Limited Maturity Portfolio can be expected to offer a lower yield than the longer-term Portfolios. Interest rates on short- term Municipal Bonds may fluctuate more widely from time to time than interest rates on long-term Municipal Bonds. However, because of the shorter maturities, the market value of the Municipal Bonds held by the Limited Maturity Portfolio can be expected to fluctuate less in value as a result of changes in interest rates. The Limited Maturity Portfolio will invest only in Municipal Bonds rated at the date of purchase in the four highest ratings of Standard & Poor's (AAA, AA, A and BBB) or Moody's (Aaa, Aa, A and Baa) in the case of long-term debt, rated by Moody's as MIG 1 through MIG 4 or in the four highest bond ratings of, or rated SP-1+ through SP-2 by, Standard & Poor's in the case of short-term tax- exempt notes, and rated by Moody's P-1 through P-2 or rated A-1+ through A-3 by Standard & Poor's in the case of tax-exempt commercial paper. The Limited Maturity Portfolio will also invest in other Municipal Bonds deemed to qualify for such ratings and in variable rate tax-exempt demand notes. Securities rated in the lowest of these categories are considered to have some speculative characteristics. The Limited Maturity Portfolio may continue to hold securities which, after being purchased by the Portfolio, are downgraded to a rating lower than those set forth above. 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 and interest on such industrial revenue bonds depends solely on the ability of the user of the facilities financed by the bonds to 23 meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment. The Portfolio may also include "moral obligation" bonds which are normally issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality in question. Municipal Bonds may at times be purchased or sold on a delayed delivery basis or a when-issued basis. These transactions arise when securities are purchased or sold by a Portfolio with payment and delivery taking place in the future, often a month or more after the purchase. The payment obligation and the interest rate are each fixed at the time the buyer enters into the commitment. The Fund will only make commitments to purchase such securities with the intention of actually acquiring the securities, but the Fund may sell these securities prior to the settlement date if it is deemed advisable. Purchasing Municipal Bonds on a when-issued basis involves the risk that the yields available in the market when the delivery takes place may actually be higher than those obtained in the transaction itself; if yields so increase, the value of the when-issued obligation will generally decrease. When a Portfolio engages in when-issued and delayed delivery transactions, the Portfolio relies on the buyer or seller, as the case may be, to consummate the trade. Failure of the buyer or seller to do so may result in the Portfolio's missing the opportunity of obtaining a price considered to be advantageous. The Fund will maintain a separate account as its custodian bank consisting of cash or liquid Municipal Bonds (valued on a daily basis) equal at all times to the amount of the when- issued commitment. Variable rate demand notes ("VRDNs") are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. The interest rates are adjustable at intervals ranging from daily up to six months to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDN at approximately the par value of the VRDN upon the adjustment date. The adjustments are typically based upon the prime rate of a bank or some other appropriate interest rate adjustment index. The Fund may also invest in VRDNs in the form of participation interests ("Participating VRDNs") in variable rate tax-exempt obligations held by a financial institution, typically a commercial bank ("institution"). Participating VRDNs provide the Fund with a specified undivided interest (up to 100%) of the underlying obligation and the right to demand payment of the unpaid principal balance plus accrued interest on the Participating VRDNs from the institution upon a specified number of days' notice, not to exceed seven days. In addition, the Participating VRDN is backed by an irrevocable letter of credit or guaranty of the institution. The Fund has an undivided interest in the underlying obligation and thus participates on the same basis as the institution in such obligation except that the institution typically retains fees out of the interest paid on the obligation for servicing the obligation, providing the letter of credit and issuing the repurchase commitment. The Fund has been advised by its counsel to the effect that the interest received on Participating VRDNs will be treated as interest from tax-exempt obligations as long as the Fund does not invest more than a limited amount (not more than 20%) of its total assets in such investments and certain other conditions are met. It is contemplated that the Fund will not invest more than a limited amount of its total assets in Participating VRDNs. 24 Yields on Municipal Bonds are dependent on a variety of factors, including the general condition of the money market and of the municipal bond market, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The ability of a Portfolio to achieve its investment objective is also dependent on the continuing ability of the issuers of the Municipal Bonds in which the Portfolio invests to meet their obligations for the payment of interest and principal when due. There are variations in the risks involved in holding Municipal Bonds, within a particular classification and between classifications, depending on numerous factors. Furthermore, the rights of holders of Municipal Bonds and the obligations of the issuers of such Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar laws and court decisions affecting the rights of creditors generally and such laws, if any, that may be enacted by Congress or state legislatures imposing a moratorium on the payment of principal and interest or imposing other constraints or conditions on the payment of principal of and interest on Municipal Bonds. From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on Municipal Bonds. It may be expected that similar proposals may be introduced in the future. If such a proposal were enacted, the ability of the Portfolios to pay "exempt-interest" dividends might be adversely affected and the Fund would re-evaluate its investment objective and policies and consider changes in its structure. See "Dividends, Distributions and Taxes." FORWARD COMMITMENTS Each Portfolio may purchase Municipal Bonds on a forward commitment basis at fixed purchase terms. The purchase will be recorded on the date the Portfolio enters into the commitment and the value of the security will thereafter be reflected in the calculation of the Portfolio's net asset value. The value of the security on the delivery date may be more or less than its purchase price. A separate account of the Portfolio will be established with its custodian consisting of cash or liquid Municipal Bonds having a market value at all times at least equal to the amount of the forward commitment. FINANCIAL FUTURES CONTRACTS AND DERIVATIVES The National Portfolio and the Limited Maturity Portfolio (collectively, the "Portfolios") are authorized to purchase and sell certain financial futures contracts ("futures contracts") and options on such futures contracts solely for the purpose of hedging their investments in Municipal Bonds against declines in value and to hedge against increases in the cost of securities the Portfolios intend to purchase. A financial futures contract obligates the seller of a contract to deliver and the purchaser of a contract to take delivery of the type of financial instrument covered by the contract or, in the case of index-based futures contracts, to make and accept a cash settlement, at a specific future time for a specified price. A sale of financial futures contracts may provide a hedge against a decline in the value of portfolio securities because such depreciation may be offset, in whole or in part, by an increase in the value of the position in the futures contracts. A purchase of financial futures contracts may provide a hedge against an increase in the cost of securities intended to be purchased, because such appreciation may be offset, in whole or in part, by an increase in the value of the position in the futures contracts. The Portfolios intend to trade in futures contracts based upon The Bond Buyer Municipal Bond Index, a price-weighted measure of the market value of 40 large, recently issued tax-exempt bonds, and to engage in transactions in exchange- traded futures contracts on U.S. Treasury securities and options on such futures. If 25 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 which may become available, if the Investment Adviser believes such contracts would be appropriate for hedging the Portfolios' investments in Municipal Bonds. Utilization of futures or option contracts involves the risk of imperfect correlation in movements in the price of such contracts and movements in the price of the security or securities which are the subject of the hedge. If the price of the futures or option contract moves more or less than the price of the security or securities that are the subject of the hedge, a Portfolio will experience a gain or loss which will not be completely offset by movements in the price of such security, which could occur as a result of many factors, including where the securities underlying futures or option contracts have different maturities, ratings, or geographic mixes than the security being hedged. In addition, the correlation may be affected by additions to or deletions from the index which serves as a basis for an index futures contract. The trading of futures contracts or options on futures contracts based on indexes of securities also involves a risk of imperfect correlation between the value of the futures contracts and the value of the underlying index. The anticipated spread between such values or in the correlation between the futures contract and the underlying security may be affected by differences in markets, such as margin requirements, market liquidity and the participation of speculators in the futures markets. Moreover, when a Portfolio enters into transactions in futures contracts on U.S. Treasury securities, or options on such contracts, the underlying securities will not correspond to securities held by the Portfolio. Finally, in the case of futures contracts on U.S. Treasury securities and options on such futures contracts, the anticipated correlation of price movements between U.S. Treasury securities underlying the futures or options and Municipal Bonds may be adversely affected by economic, political, legislative or other developments which have a disparate impact on the respective markets for such securities. Under regulations of the Commodity Futures Trading Commission ("CFTC"), the futures trading activities described herein will not result in the Portfolios' being deemed to be "commodity pools," as defined under such regulations, provided that certain restrictions are adhered to. In particular, among other requirements, the Portfolios may either (a) purchase and sell futures contracts only for bona fide hedging purposes, as defined under CFTC regulations, or (b) limit any transaction not qualifying as bona fide hedging so that the sum of the amount of initial margin deposits and premiums paid on such positions would not exceed 5% of the market value of the Portfolio's net assets. Margin deposits may consist of cash or securities acceptable to the broker and the relevant contract market. 26 When either Portfolio purchases a futures contract, it will maintain an amount of cash, cash equivalents or commercial paper or other short-term high grade fixed income securities in a segregated account with the Fund's custodian, so that the amount so segregated plus the amount of initial margin and option premiums held in the account of its broker equals the value represented by the futures contract, as reflected by its daily settlement price, thereby ensuring that the use of such futures contract is unleveraged. It is not anticipated that transactions in futures contracts will have the effect of increasing portfolio turnover. Reference is made to the Statement of Additional Information for further information on financial futures contracts. The Fund may invest in a variety of instruments which may be characterized as "Derivative Securities." The Fund may invest in Municipal Bonds the return on which is based on a particular index of value or interest rates. For example, the Fund may invest in Municipal Bonds that pay interest based on an index of Municipal Bond interest rates or based on the value of gold or some other commodity. The principal amount payable upon maturity of certain Municipal Bonds also may be based on the value of an index. Also, the Fund may invest in so-called "inverse floating obligations" or "residual interest bonds" on which the interest rates typically decline as market rates increase and increase as market rates decline. To the extent the Fund invests in these types of Municipal Bonds, the Fund's return on such Municipal Bonds will be subject to risk with respect to the value of the particular index. Such securities have the effect of providing a degree of investment leverage, since they may increase or decrease in value in response to changes, as an illustration, in market interest rates at a rate which is a multiple (typically two) of the rate at which fixed-rate long-term exempt securities increase or decrease in response to such changes. As a result, the market values of such securities will generally be more volatile than the market values of fixed-rate tax exempt securities. To seek to limit the volatility of these securities, the Fund may purchase inverse floating obligations with shorter term maturities or which contain limitations on the extent to which the interest rate may vary. The Manager believes that indexed and inverse floating obligations represent a flexible portfolio management instrument for the Fund which allows the Manager to vary the degree of investment leverage relatively efficiently under different market conditions. Certain investments in such obligations may be illiquid. The Fund may not invest in such illiquid obligations if such investments, together with other illiquid investments, would exceed 10% of the Fund's net assets. INVESTMENT RESTRICTIONS The Fund has adopted a number of restrictions and policies relating to the investment of its assets and its activities, which are fundamental policies of the Fund and may not be changed without the approval of the holders of a majority of the Fund's outstanding voting securities (including a majority of the shares of each Portfolio). One such restriction prohibits the Fund from entering into a repurchase agreement if, as a result thereof, more than 10% of the total assets of any Portfolio (taken at market value at the time of each investment) would be subject to repurchase agreements maturing in more than seven days. Investors are referred to the Statement of Additional Information for a complete description of such restrictions and policies. INVESTMENT ADVISER The investment adviser to the Fund is Fund Asset Management, L.P. ("FAM"), an affiliate of Merrill Lynch Asset Management L.P. ("MLAM"), an indirect subsidiary of Merrill Lynch & Co., Inc., a financial services holding company and the parent of Merrill Lynch. The address of FAM is P.O. Box 9011, Princeton, 27 New Jersey 08543-9011. FAM or MLAM acts as the Investment Adviser for more than 130 registered investment companies. As of September 30, 1995, the Investment Adviser and MLAM had a total of $189.4 billion in investment company and other portfolio assets under management, including accounts of certain affiliates of the investment adviser. Kenneth A. Jacob has served as the Portfolio Manager for the Insured and National Portfolios since 1995 and is primarily responsible for the Fund's day- to-day management of those portfolios. He has served as Vice President of the Investment Adviser since 1984. Peter J. Hayes has served as the Portfolio Manager for the Limited Maturity Portfolio since 1995 and has served as a Vice President of the Investment Adviser since 1988. FAM, subject to the general supervision of the Fund's Board of Directors, renders investment advice to the Fund and is responsible for the overall management of the Fund's business affairs. The responsibility for making decisions to buy, sell or hold a particular security rests with FAM. For the year ended June 30, 1995, FAM received in fees from the Fund $19,535,878, of which $9,408,013 was received with respect to the Insured Portfolio (representing 0.36% of its average net assets), $7,415,203 was received with respect to the National Portfolio (representing 0.48% of its average net assets) and $2,712,662 was received with respect to the Limited Maturity Portfolio (representing 0.33% of its average net assets). The Investment Advisory Agreement obligates each Portfolio to pay certain expenses incurred in its operation and a portion of the Fund's general administrative expenses allocated on the basis of the asset size of the respective Portfolios. The Fund's total expenses for the year ended June 30, 1995 were $33,362,687, of which $17,372,151 was attributable to the Insured Portfolio (representing .43% of average net assets for Class A shares, 1.19% of average net assets for Class B shares, 1.23% of average net assets for Class C shares, and .68% of average net assets for Class D shares). $12,052,998 was attributable to the National Portfolio (representing .56% of average net assets for Class A shares, 1.32% of average net assets for Class B shares, 1.37% of average net assets for Class C shares, and .81% of average net assets for Class D shares), and $3,937,538 was attributable to the Limited Maturity Portfolio (representing .41% of average net assets for Class A shares, .78% of average net assets for Class B shares, .70% of average net assets for Class C shares, and .53% of average net assets for Class D shares). FAM was not required to reduce its fee or reimburse any of the Fund's expenses for the 1995 fiscal year. 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, 1995, the Fund reimbursed the Investment Adviser $383,875 for accounting services of which $179,937 was attributable to the Insured Portfolio, $112,483 was received with respect to the National Portfolio and $91,455 was received with respect to the Limited Maturity Portfolio. TRANSFER AGENCY SERVICES Merrill Lynch Financial Data Services, Inc. ("FDS"), which is a wholly owned subsidiary of Merrill Lynch & Co., Inc., acts as the Fund's Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency Agreement, FDS is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement, FDS 28 receives an annual fee of $11.00 per shareholder account for Class A or Class D shares of the Portfolios and $14.00 per shareholder account for Class B or Class C shares of the Portfolios, and is entitled to reimbursement for out-of- pocket expenses incurred by it under the Transfer Agency Agreement. For the year ended June 30, 1995, the Insured, National and Limited Maturity Portfolios of the Fund incurred fees of $1,012,108, $727,946 and $303,802, respectively, pursuant to the Transfer Agency Agreement. At September 30, 1995, the Fund had 64,162 Class A shareholder accounts, 41,666 Class B shareholder accounts, 1,036 Class C shareholder accounts and 917 Class D shareholder accounts. At these levels of accounts, the annual fee payable to the Transfer Agent would aggregate approximately $1,313,697 plus out-of-pocket expenses. 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 which 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 fund 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). DIRECTORS The Directors of the Fund consist of six individuals, five of whom are not "interested persons" of the Fund as defined in the Investment Company Act of 1940. The Directors of the Fund are responsible for the overall supervision of the operations of the Fund and perform the various duties imposed on the directors of investment companies by the Investment Company Act of 1940. The Directors of the Fund are: Arthur Zeikel*--President of MLAM and FAM, Executive Vice President of Merrill Lynch & Co, Inc. ("ML & Co.") Director of the Distributor; President and Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice President of Merrill Lynch; Director of the Distributor. Ronald W. Forbes--Associate Professor of Finance, School of Business, State University of New York at Albany. Cynthia A. Montgomery--Professor, Harvard Business School since 1989. Charles C. Reilly--Adjunct Professor, Columbia University Graduate School of Business. Kevin A. Ryan--Professor of Education at Boston University since 1982. Founder and current Director of the Boston University Center for Advancement of Ethics and Character. Richard R. West--Professor of Finance at New York University School of Business Administration. - -------- * Interested person, as defined in the Investment Company Act of 1940, of the Fund. 29 PURCHASE OF SHARES Each Portfolio offers its shares in four classes at a public offering price equal to the net asset value plus varying sales charges as set forth below. Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of both the Investment Adviser and Merrill Lynch, acts as the Distributor of the shares. Class C shares of the Limited Maturity Portfolio are offered only through the Exchange Privilege. See p. 49. Shares may be purchased directly from the Distributor or from other securities dealers, including Merrill Lynch, with whom the Distributor has entered into selected dealer agreements; however, only Class A and Class D shares may be available for purchase through securities dealers, other than Merrill Lynch, which are eligible to sell shares. The Fund is offering shares in four classes of its Portfolios at a public offering price equal to the next determined net asset value per share plus sales charges imposed either at the time of purchase (the "initial sales charge alternative") or on a deferred basis depending upon the class of shares selected by the investor under the Merrill Lynch Select Pricing SM System, as described below. Net asset value per share will be determined in the manner set forth under "Net Asset Value." The minimum initial purchase in each Portfolio is $1,000 and the minimum subsequent purchase in each Portfolio is $50. Merrill Lynch may charge its customers an processing fee (currently $4.85) to confirm a sale of shares. Purchases directly through the Fund's transfer agent are not subject to the processing fee. Because retirement plans qualified under Section 401 of the Internal Revenue Code will be unable to benefit from the tax-exempt dividends of the Fund, the shares of the Fund may not be suitable investments for such retirement plans. Each of the Portfolios issues four classes of shares under the Merrill Lynch Select Pricing SM System, which permits each investor to choose the method of purchasing shares that the investor believes is most beneficial given the amount of the purchase, the length of time the investor expects to hold the shares and other relevant circumstances. Shares of Class A and Class D shares are sold to investors choosing the initial sales charge alternative and shares of Class B and Class C shares are sold to investors choosing the deferred sales charge alternatives. Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege and may not be purchased except through exchange of Class C shares of another Portfolio or another Fund. Investors should determine whether under their particular circumstances it is more advantageous to incur the initial sales charge or to have the initial purchase price invested with the Portfolio with the investment thereafter being subject to a contingent deferred sales charge and ongoing distribution fees. A discussion of the factors that investors should consider in determining the method of purchasing shares under the Merrill Lynch Select Pricing SM System is set forth under the Merrill Lynch Select Pricing SM System on page 8. Each Class A, Class B, Class C and Class D share of a Portfolio represents identical interests in the Portfolio and has the same rights, except that Class B, Class C and Class D shares bear the expenses of the ongoing account maintenance fees, and Class B and Class C shares bear the expenses of the ongoing distribution fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. The deferred sales charges and account maintenance fees that are imposed on Class B and Class C shares, as well as the account maintenance fees that are imposed on Class D shares, will be imposed directly against those classes and not against all assets of the Fund and, accordingly, such charges will not affect the net asset value of any other class or have any impact on investors choosing another sales charge 30 option. Dividends paid by a Portfolio for each class of shares will be calculated in the same manner at the same time and will differ only to the extent that account maintenance and distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Class B, Class C and Class D shares each have exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted with respect to such class pursuant to which account maintenance and/or distribution fees are paid. See "Distribution Plans" below. Each class has different exchange privileges. See "Shareholder Services--Exchange Privileges". Investors should understand that the purpose and function of the initial sales charges with respect to Class A and Class D shares are the same as those of the deferred sales charges with respect to Class B and Class C shares in that the sales charges applicable to each class provide for the financing of the distribution of the shares of the Fund. The distribution-related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares. Investors are advised that only Class A and Class D shares may be available for purchase through securities dealers, other than Merrill Lynch, which are eligible to sell shares. 31 The following tables set forth a summary of the distribution arrangements for each class of shares under the Merrill Lynch Select Pricing SM System. INSURED AND NATIONAL PORTFOLIOS
ACCOUNT MAINTENANCE DISTRIBUTION CONVERSION CLASS SALES CHARGE(1) FEE FEE FEATURE - --------------------------------------------------------------------------------------- A Maximum 4.00% initial sales No No No charge(2)(3) - --------------------------------------------------------------------------------------- B CDSC for a period of 4 years, 0.25% 0.50% B shares convert to at a rate of 4.0% during the D shares automatically first year, decreasing 1.0% after approximately annually to 0.0% ten years(4) - --------------------------------------------------------------------------------------- C 1.0% CDSC for one year 0.25% 0.55% No decreasing to 0.00% after the first year - --------------------------------------------------------------------------------------- D Maximum 4.00% initial 0.25% No No sales charge(3)
LIMITED MATURITY PORTFOLIO
ACCOUNT MAINTENANCE DISTRIBUTION CONVERSION CLASS SALES CHARGE(1) FEE FEE FEATURE - --------------------------------------------------------------------------------------- A Maximum 1.00% initial sales No No No 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 the after approximately first year ten years(4) - --------------------------------------------------------------------------------------- C(5) 1.0% CDSC for one year 0.15% 0.20% No decreasing to 0.00% after the first year - --------------------------------------------------------------------------------------- D Maximum 1.00% initial 0.10% No No sales charge(3)
- -------- (1) Initial sales charges are imposed at the time of purchase as a percentage of the offering price. CDSCs may be imposed if the redemption occurs within the applicable CDSC time period. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. (2) Offered only to eligible investors. See "Initial Sales Charge Alternatives--Class A and Class D Shares--Eligible Class A Investors." (3) Reduced for purchases of $25,000 or more for the Insured and National Portfolios. Reduced for purchases of $100,000 or more for Limited Maturity Portfolio. Class A and Class D share purchases of $1,000,000 or more will not be subject to an initial sales charge but instead will be subject to a 1.0% CDSC for the Insured and National Portfolios and .20% CDSC for the Limited Maturity Portfolio, for one year. (4) The conversion period for dividend reinvestment shares is modified. Also, Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made have a eight-year conversion period. If Class B shares of a Portfolio are exchanged for Class B shares of another MLAM- advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. (5) Class C shares of the Limited Maturity Portfolio are offered only through the Exchange Privilege. See p. 49. 32 INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES Investors choosing the initial sales charge alternatives who are eligible to purchase Class A shares should purchase Class A shares rather than Class D shares because there is an account maintenance fee imposed on Class D shares. The initial sales charges, computed as indicated below, are reduced on larger purchases. The Distributor may reallow discounts to securities dealers with whom it has agreements and retain the balance over such discount. At times the Distributor may reallow the entire sales charge to selected dealers, in which case such dealers may be deemed to be underwriters within the meaning of the Securities Act of 1933 and subject to liability as such. The Distributor will retain the entire sales charge on orders placed directly with it. The public offering price of Class A and Class D shares of the Portfolios, for purchasers choosing the initial sales charge alternative, is the next determined net asset value plus varying sales charges (i.e., sales loads), as set forth below: CLASS A AND CLASS D SHARES OF INSURED AND NATIONAL PORTFOLIOS
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 - ------------------ --------------- ------------------- ------------------- Less than $25,000....... 4.00% 4.17% 3.75% $25,000 but less than $50,000................ 3.75 3.90 3.50 $50,000 but less than $100,000............... 3.25 3.36 3.00 $100,000 but less than $250,000............... 2.50 2.56 2.25 $250,000 but less than $1,000,000............. 1.50 1.52 1.25 $1,000,000 and over**... 0.00 .00 .00
CLASS A AND CLASS D SHARES OF LIMITED MATURITY PORTFOLIO
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 - ------------------ --------------- ------------------- ------------------- 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
- -------- * Rounded to the nearest one-hundredth percent. ** The initial sales charges 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 will be subject to a CDSC of 1% for the Insured and National Portfolios and 0.20% for the Limited Maturity Portfolio, if the shares are redeemed within one year after purchase. Class A purchases made prior to October 21, 1994 may be subject to a CDSC if the shares are redeemed within one year of purchase at the following rates: .75% on purchases of $1,000,000 to $2,500,000; .40% on purchases of $2,500,001 to $3,500,000; .25% on purchases of $3,500,001 to $5,000,000; and .20% on purchases of more than $5,000,000 for the Insured Portfolio and National Portfolio in lieu of paying an initial sales charge. Class A purchases of the Limited Maturity Portfolio made prior to October 21, 1994 may be subject to a CDSC of 0.20% on purchases of more than $1,000,000 if the shares are redeemed within one year of purchase in lieu of paying the initial sales charge. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. 33 The Distributor may reallow discounts to selected dealers and retain the balance over such discounts. At times the Distributor may reallow the entire sales charge to such dealers. Since securities dealers selling Class A shares of the Fund will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act of 1933, as amended (the "Securities Act"). During the fiscal year ended June 30, 1995, the Insured Portfolio, the National Portfolio and the Limited Maturity Portfolio sold 17,244,995, 3,950,018 and 5,989,549 Class A shares, respectively, for aggregate net proceeds of $133,588,440, $38,999,667 and $58,950,508, 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 $349,009, $236,395, $79,531 of which Merrill Lynch received $316,110 for the Insured Portfolio, $214,728 for the National Portfolio and $70,749 for the Limited Maturity Portfolio and the Distributor received $32,899 for the Insured Portfolio, $21,667 for the National Portfolio and $8,782 for the Limited Maturity Portfolio. For the fiscal year ended June 30, 1995, the Distributor did not receive any CDSCs for the Insured and National Portfolios with respect to Class A shares but did receive CDSC's of $13,802 for the Limited Maturity Portfolio with respect to redemption of Class A shares all of which were paid to Merrill Lynch. For the period October 21, 1994 (commencement of operations) through June 30, 1995, the Insured Portfolio, the National Portfolio and the Limited Maturity Portfolio sold 5,713,054, 5,900,638, and 2,889,627 Class D shares, respectively, for aggregate net proceeds of $43,851,761, $57,599,450 and $28,392,515, 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 $113,008, $121,419, and $12,074, of which the Distributor received $10,320 for the Insured Portfolio, $6,515 for the National Portfolio, $635 for the Limited Maturity Portfolio and Merrill Lynch received $102,688 for the Insured Portfolio, $114,904 for the National Portfolio and $11,439 for the Limited Maturity Portfolio. For the period October 21, 1994 (commencement of operations) to June 30, 1995 the Distributor did not receive any CDSC's for redemption of Class D shares of the Insured and National Portfolios, but did receive CDSC's of $800 for the Limited Maturity Portfolio with respect to redemptions of Class D shares all of which were paid to Merrill Lynch. 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 BlueprintSM 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 provided that the program has $3 million or more initially invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares at net asset value are participants in certain investment programs, including TMASM Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services and certain purchases made in connection with the Merrill Lynch Mutual Fund Adviser program. In addition, Class A shares will be offered at net asset value to Merrill Lynch & Co., Inc. and its subsidiaries and their directors and employees and to members of the Boards of MLAM-advised investment companies, including the Fund. Certain persons who acquired shares of certain MLAM-advised closed-end funds who wish to reinvest the net proceeds from a sale of their closed-end fund shares of common stock in shares of the Fund also may purchase Class A shares of the Fund if certain conditions set forth in the Statement of Additional Information are met. For example, Class A shares of the Fund and certain other MLAM-advised mutual funds are offered at net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. who wish to reinvest the net proceeds from a sale of certain of their shares of common stock of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of such funds. 34 As to purchase orders received by selected dealers prior to the close of the New York Stock Exchange, which includes orders received after the close on the previous day, the applicable offering price will be based on the net asset value determined on the day the order is placed with the Distributor, provided the order is received by the Distributor prior to 4:30 P.M., New York City time, on that day. Any order may be rejected by the Distributor or the Fund. Neither the Distributor nor the dealers are permitted to withhold placing orders to benefit themselves by a price change. The Fund reserves the right to suspend the sale of its shares to the public in response to conditions in the Municipal Bond markets, or otherwise. Payment by Wire. To purchase shares by wiring Federal Funds, payment should be wired to The Bank of New York, New York City. Shareholders should give their financial institutions the following wiring instructions, ABA #021000018, DDA #902233, Merrill Lynch Financial Data Services, Inc. For all communications regarding existing accounts, please indicate the name of the Portfolio, the shareholder's account number, and the shareholder's name. Instructions for new accounts should specify name, address and social security number of each person in whose name the shares are to be registered and the name of the Portfolio. Failure to submit the required information may delay investment. If Federal Funds are received by the Transfer Agent by 11:00 A.M., shares of the Portfolio will be issued that day based upon the net asset value of the Portfolio determined as of the close of regular trading on the New York Stock Exchange that day. Shares begin accruing dividends so long as they are issued and outstanding. Shares are issued and outstanding as of the settlement date of a purchase order to the settlement date of a redemption order. Since purchases of shares of the Fund are normally effected on the basis of a five-business-day settlement procedure, this method of payment provides an expeditious method of investing in the Portfolios of the Fund. Many of the Municipal Bonds in which a Portfolio invests do not trade on the basis of one-day settlements, and, since the only municipal securities that a Portfolio may acquire on a one-day settlement offer lower yields, if a substantial amount is invested by wire transfer this may have the effect of decreasing the yield in that Portfolio. The Fund is not responsible for delays in the wiring system. The minimum purchase for payment by wire is $1,000, except that the minimum purchase for payment by wire for new accounts is $5,000. Reduced Initial Sales Charges. No initial sales charges are imposed upon Class A and Class D shares issued as a result of the automatic reinvestment of dividends or capital gains distributions. Class A and Class D sales charges also may be reduced under a Right of Accumulation and a Letter of Intention. Class A shares are offered at net asset value to certain eligible Class A investors as set forth above under "Eligible Class A Investors." Class D shares are also offered at net asset value without sales charge to an investor who has a business relationship with a financial consultant if certain conditions set forth in the Statement of Additional Information are met. Class D shares may be offered at net asset value in connection with the acquisition of assets of other investment companies. 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. 35 Employee Access AccountsSM. Class A or Class D shares are offered at net asset value to Employee Access 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 and Class B shares of the Limited Maturity Portfolio are subject to a one year CDSC, while Class C shares are subject only to a one year 1.0% CDSC. On the other hand, approximately ten years after Class B shares are issued, such Class B shares, together with shares issued upon dividend reinvestment with respect to those shares, are automatically converted into Class D shares of the relevant Portfolio and thereafter will be subject to lower continuing fees. Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. See "Conversion of Class B Shares to Class D Shares" below. Both Class B and Class C shares of each Portfolio are subject to an account maintenance fee of 0.25% (in the case of the National and Insured Portfolios) and 0.15% (in the case of the Limited Maturity Portfolio) of net assets. Class B and Class C shares of the Insured and National Portfolios are subject to distribution fees 0.50% and 0.55%, respectively of the net assets. Class B and Class C shares of the Limited Maturity portfolio are subject to a distribution fee of 0.20%. See "Distribution Plans." The proceeds from account maintenance fees are used to compensate Merrill Lynch for providing continuing account maintenance activities. Class B and Class C shares are sold without an initial sales charge so that the Fund will receive the full amount of the investor's purchase payment. Merrill Lynch compensates its financial consultants for selling Class B and Class C shares at the time of purchase from its own funds. See "Distribution Plans" below. Proceeds from the CDSC and the distribution fee are paid to the Distributor and are used in whole or in part by the Distributor to defray the expenses of dealers (including Merrill Lynch) related to providing distribution-related services to the Fund in connection with the sale of the Class B and Class C shares, such as the payment of compensation to financial consultants for selling Class B and Class C shares, from its own funds. The combination of the CDSC and the ongoing distribution fee facilitates the ability of the Fund to sell the Class B and Class C shares without a sales charge being deducted at the time of purchase. Approximately ten years after issuance, Class B of a Portfolio shares will convert automatically into Class D shares of that Portfolio, which are subject to an account maintenance fee but no distribution fee; Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made convert into Class D shares automatically after approximately eight years. If Class B shares of the Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. 36 Imposition of the CDSC and the distribution fee on Class B and Class C shares is limited by the NASD asset-based sales charge rule. See "Limitations on the Payment of Deferred Sales Charges" below. The proceeds from the ongoing account maintenance fee are used to compensate Merrill Lynch for providing continuing account maintenance activities. Class B shareholders on the Fund exercising the exchange privilege described under "Shareholder Services--Exchange Privileges" will continue to be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares acquired as a result of the exchange. Contingent Deferred Sales Charge--Class B Shares. Class B shares of the Insured and National Portfolios redeemed within four years of purchase for the National and Insured Portfolios and Class B shares of the Limited Maturity Portfolio redeemed within one year of purchase, may be subject to a CDSC at the rates set forth below charged as a percentage of the dollar amount subject thereto. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no CDSC will be assessed on the redemption of shares received upon the reinvestment of dividends or capital gains distributions. The following table sets forth the rates of the contingent deferred sales charge on Class B shares applicable for the period starting October 21, 1994:
CONTINGENT DEFERRED INSURED OR SALES CHARGE AS A NATIONAL PORTFOLIO: PERCENTAGE OF YEAR SINCE PURCHASE DOLLAR AMOUNT PAYMENT MADE SUBJECT TO CHARGE ------------------- ------------------- 0-1................................................. 4.0% 1-2................................................. 3.0% 2-3................................................. 2.0% 3-4................................................. 1.0% 4 and thereafter.................................... 0.0%
CONTINGENT DEFERRED LIMITED MATURITY SALES CHARGE AS A PORTFOLIO: PERCENTAGE OF YEAR SINCE PURCHASE DOLLAR AMOUNT PAYMENT MADE SUBJECT TO CHARGE ------------------- ------------------- 0-1................................................. 1.0% 1 and thereafter.................................... 0.0%
In determining whether a contingent deferred sales charge is applicable to a redemption, the calculation will be made in a manner that results in the lowest possible applicable rate being charged. Therefore, with respect to the Insured and National Portfolios, it will be assumed that the redemption is first of shares held for over four years or shares acquired pursuant to reinvestment of dividends or distributions and then of shares held longest during the applicable four-year period. It will be assumed, with respect to the Limited Maturity Portfolio, that the redemption is of shares held for over one year or shares acquired pursuant to reinvestment of dividends or distributions. The charge will not be applied to dollar amounts representing an increase in the net asset value since the time of purchase. A transfer of shares from a shareholder's account to another account will be assumed to be made in the same order as a redemption. 37 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 2.0% (the applicable rate in the third year after purchase). The Class B CDSC is waived on redemptions of shares following the death or disability (as defined in the Internal Revenue Code) of a shareholder. The Class B CDSC also is waived on redemptions of shares placing purchase orders through Merrill Lynch Blueprint SM Program. Additional information concerning the waiver of the Class B CDSC is set forth in the Statement of Additional Information. The CDSC is also waived for any Class B shares that were acquired and held at the time of the redemption in an Employee Access Account available through employers providing eligible 401(K) plans. For the fiscal year ended June 30, 1995, the Distributor received $3,263,991 in contingent deferred sales charges for Class B shares, amounting to $1,840,608, $1,036,339, and $387,044 in the Insured, National and Limited Maturity Portfolios, respectively, all of which were paid to Merrill Lynch. Contingent Deferred Sales Charges--Class C Shares. Class C shares which are redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no Class C CDSC will be assessed on shares derived from reinvestment of dividends or capital gains distributions. The following table sets forth the rates of the contingent deferred sales charge on the Class C shares of the Insured, National and Limited Maturity Portfolios:
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF YEAR SINCE PURCHASE DOLLAR AMOUNT PAYMENT MADE SUBJECT TO CHARGE ------------------- ------------------- 0-1.................................................. 1.0% thereafter........................................... 0.0%
In determining whether a Class C CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest possible rate being charged. Therefore, it will be assumed that the 38 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 period October 21, 1994 (commencement of operations) to June 30, 1995, the Distributor received $11,241 in contingent deferred sales charges for Class C shares, amounting to $5,361, $3,219 and $2,661 in the Insured, National and Limited Maturity Portfolios, respectively, all of which were paid to Merrill Lynch. 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. In general, Class B shares of equity MLAM-advised mutual funds will convert approximately eight years after initial purchase, and Class B shares of taxable and tax-exempt fixed income MLAM-advised mutual funds will convert approximately ten years after initial purchase. If, during the Conversion Period, a shareholder exchanges Class B shares with an eight-year Conversion Period for Class B shares with a ten-year Conversion Period, or vice versa, the Conversion Period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. DISTRIBUTION PLANS The Fund has adopted separate distribution plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a "Distribution Plan") with respect to the account 39 maintenance and/or distribution fees paid by the Fund to the Distributor with respect to such classes. The Class B and Class C Distribution Plans provide for the payment of account maintenance fees and distribution fees, and the Class D Distribution Plan provides for the payment of account maintenance fees. The Distribution Plans for Class B, Class C and Class D shares each provide that the Fund pays the Distributor an account maintenance fee relating to the shares of the relevant class of a Portfolio, accrued daily and paid monthly, at the annual rate of 0.25% (in the case of the Class B, Class C and Class D shares of the Insured Portfolio and the National Portfolio) and 0.15% (in the case of Class B and Class C shares of the Limited Maturity) and 0.10% (in the case of the Class D shares of the Limited Maturity Portfolio) of the average daily net assets of the Portfolio attributable to shares of the relevant class in order to compensate the Distributor and Merrill Lynch (pursuant to a sub- agreement) in connection with account maintenance activities. The Distribution Plans for Class B and Class C shares each provide that the Fund also pays the Distributor a distribution fee relating to the shares of the relevant class of a Portfolio, accrued daily and paid monthly, at the annual rate of 0.50% and 0.55% for the Class B and Class C shares, respectively, of the Insured and National Portfolios and 0.20% for the Class B and Class C shares of the Limited Maturity Portfolio of the average daily net assets of the Portfolio attributable to the shares of the relevant class in order to compensate the Distributor and Merrill Lynch (pursuant to a sub- agreement) for providing shareholder and distribution services, and bearing certain distribution-related expenses of the Fund, including payments to financial consultants for selling Class B and Class C shares of the Portfolio. The Distribution Plans relating to Class B and Class C shares are designed to permit an investor to purchase Class B and Class C shares through dealers without the assessment of an initial sales charge and at the same time permit the dealer to compensate its financial consultants in connection with the sale of the Class B and Class C shares. In this regard, the purpose and function of the ongoing distribution fees and the CDSC are the same as those of the initial sales charge with respect to the Class A and Class D shares of the Fund in that the deferred sales charges provide for the financing of the distribution of the Fund's Class B and Class C shares. Prior to July 6, 1993, the Fund paid the Distributor an ongoing distribution fee, accrued daily and paid monthly, at the annual rate of 0.75% (in the case of the Insured Portfolio and National Portfolio) and 0.35% (in the case of the Limited Maturity Portfolio) of the average daily net assets of the Class B shares of the respective Portfolio's (the "Prior Plan") to compensate the Distributor and Merrill Lynch for providing account maintenance and distribution-related activities and services to Class B shareholders. The fee rate payable and the services provided under the Prior Plan are identical to the aggregate fee rate payable and the services provided under the Distribution Plan, the difference being that the account maintenance and distribution services have been unbundled. For the fiscal year ended June 30, 1995, the Insured, National, and Limited Maturity Portfolios paid the Distributor $6,068,445, $3,222,144 and $509,545, respectively, pursuant to the Prior Plan and the Class B Distribution Plan (based on average net assets subject to the Prior Plan and the Class B Distribution Plan of approximately $804.6 million, $427.3 million, and $144.8 million, respectively) all of which was paid to Merrill Lynch for providing account maintenance and distribution- related activities and services in connection with Class B shares. For the fiscal period ended October 21, 1994 (commencement of operations) through June 30, 1995, the Insured, National and Limited Maturity Portfolios paid the Distributor $19,066, $13,868 and $2,688, respectively, pursuant to the Prior Plan and the Class C Distribution Plan (based on average net assets subject to the Prior Plan and the Class C Distribution Plan of approximately $3.5 million, $1.7 million and $1.8 million, respectively) all of which was paid to Merrill Lynch 40 for providing account maintenance and distribution-related activities and services in connection with Class C shares. For the fiscal period ended October 21, 1994 (commencement of operations) through June 30, 1995, the Insured, National and Limited Maturity Portfolios paid the Distributor $29,774, $24,626 and $4,973, respectively, pursuant to the Prior Plan and the Class D Distribution Plan (based on average net assets subject to the Prior Plan and the Class D Distribution Plan of approximately $17.2 million, $9.8 million and $7.2 million, respectively) all of which was paid to Merrill Lynch for providing account maintenance services in connection with Class D shares. At September 30, 1995 the net assets of the Insured, National, and Limited Maturity Portfolios subject to the Class B Distribution Plan aggregated $761.7 million, $408.4 million and $98.1 million, respectively. At this asset level, the annual fee payable pursuant to the Class B Distribution Plan would aggregate approximately $5.7 million, $3.1 million and $343,261, respectively. At September 30, 1995 the net assets of the Insured, National and Limited Maturity Portfolios subject to the Class C Distribution Plan aggregated $9.5 million, $6.9 million and $1.0 million, respectively. At this asset level, the annual fee payable pursuant to the Class C Distribution Plan would aggregate approximately $75,867, $54,918 and $3,596, respectively. At September 30, 1995 the net assets of the Insured, National and Limited Maturity Portfolios subject to the Class D Distribution Plan aggregated $31.7 million, $22.5 million and $14.7 million, respectively. At this asset level, the annual fee payable pursuant to the Class D Distribution Plan would aggregate approximately $79,192, $56,249 and $14,706, respectively. The Class B and Class C Distribution Plans are designed to permit an investor to purchase Class B and Class C shares through dealers without assessment of a front-end sales load and at the same time permit the dealer to compensate its financial consultants in connection with the sale of the Class B shares. In this regard, the purpose and function of the distribution fee and the CDSC are the same as those of the initial sales charge with respect to the Class A shares and Class D shares of the Portfolio in that the deferred sales charges provide for the financing of the distribution of such Portfolio's Class B 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 contingent deferred sales charges and certain other related revenues, and expenses consist of financial consultant compensation, branch office and regional operation center selling and transaction procession expenses, advertising, sales promotion and marketing expenses, corporate overhead and interest expense. On the direct expense and revenue/cash basis, revenues consist of the account maintenance fees, distribution fees, the contingent deferred sales charges and expenses consist of financial consultant compensation. As of December 31, 1994, 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, 1988 (commencement of operations) with respect to Class B shares of the Insured Portfolio exceeded fully allocated accrual revenues for that period by $3,284,000 (0.49% of the Insured Portfolio's 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 B shares of the National Portfolio exceeded fully allocated accrual revenues 41 for that period by $3,101,000 (0.77% of the National Portfolio's net assets at that date). The fully allocated accrual expenses incurred by the Distributor and Merrill Lynch during the period from November 2, 1992 to December 31, 1994 with respect to Class B shares of the Limited Maturity Portfolio exceeded revenues by $151,000 (0.10% of the Limited Maturity Portfolio's net assets at that date). As of June 30, 1995, direct cash revenues received with respect to the Insured Portfolio for the period since October 21, 1988 (commencement of operations) exceeded direct cash expenses incurred with respect to the Insured Portfolio by $20,157,194 (2.58% of the Insured Portfolio's net assets at that date), and direct cash revenues received with respect to the National Portfolio for the same period exceeded direct cash expenses incurred with respect to the National Portfolio by $8,819,060 (2.10% of the National Portfolio's net assets at that date). As of June 30, 1995, direct cash revenues received with respect to the Limited Maturity Portfolio for the period since November 2, 1992 (commencement of operations) exceeded direct cash expenses incurred with respect to the Limited Maturity Portfolio by $1,011,353 (.78% of the Limited Maturity Portfolio's net assets at that date). With respect to Class C shares, from commencement of operations on October 21, 1994 to June 30, 1995 direct cash revenues of the Insured Portfolio, exceeded direct cash expenses by $12,822 (.17% of the Insured Portfolio net assets at that date); direct cash revenues received with respect to the National Portfolio exceeded direct cash expenses by $9,140 (.18% of the National Portfolio net assets at that date); direct cash revenues received with respect to the Limited Maturity Fund exceeded direct cash expenses by $5,344 (.13% of the Limited Maturity Portfolio net assets at that date. The Fund has no obligation with respect to distribution and/or account maintenance related expenses incurred by the Distributor and Merrill Lynch in connection with the Class B, Class C and Class D shares, and there is no assurance that the Board of Directors of the Fund will approve the continuation of the Distribution Plans from year to year. However, the Distributor intends to seek annual continuation of the Distribution Plans. In their review of the Distribution Plans, the Directors will be asked to take into consideration expenses incurred in connection with the account maintenance and/or distribution of each Class of a Portfolio separately. The initial sales charges, the account maintenance fee, the distribution fee and/or the CDSCs received with respect to the one class of a Portfolio will not be used to subsidize the sale of shares of another class of the same Portfolio or of any class of another Portfolio. Payments of the distribution fee on Class B shares will terminate upon conversion of those Class B shares into Class D shares as set forth under "Deferred Sales Charge Alternatives--Class B and Class C Shares--Conversion of Class B to Class D Shares." LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES The maximum sales charge rule in the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain asset-based sales charges such as the Fund's distribution fee and the CDSC borne by the Class B and Class C but not the account maintenance fees. The 42 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; however, the Fund will continue to make payments of the account maintenance fees. In certain circumstances the amount payable pursuant to the voluntary maximum may exceed the amount payable under the NASD formula. In such circumstances payment in excess of the amount payable under the NASD formula will not be made. REDEMPTION OF SHARES The Fund is required to redeem for cash all shares of each Portfolio upon receipt of a written request in proper form. The redemption price is the net asset value per share of the Portfolio next determined after the initial receipt of proper notice of redemption. Except for any contingent deferred sales load which may be applicable, there will be no charge for redemption if the redemption request is sent directly to the Transfer Agent. Shareholders liquidating their holdings will receive upon redemption all dividends declared through the date of redemption. The value of shares at the time of redemption may be more or less than the shareholder's cost, depending on the market value of the securities held by the relevant Portfolio at such time. If a shareholder redeems all of the shares in his account, he will receive, in addition to the net asset value of the shares redeemed, a separate check representing all dividends declared but unpaid. If a shareholder redeems a portion of the shares in his account, the dividends declared but unpaid on the shares redeemed will be distributed on the next dividend payment date. As set forth below, special procedures are available pursuant to which shareholders may redeem by check. REDEMPTION A shareholder wishing to redeem shares may do so by tendering the shares directly to the Transfer Agent, Merrill Lynch Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered other than by mail should be delivered to Merrill Lynch 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 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 43 is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, the existence and validity of which may be verified by the Transfer Agent through the use of industry publications. Notarized signatures are not sufficient. Examples of eligible guarantor institutions include most commercial banks and other broker dealers (including for example, Merrill Lynch branch offices). Information regarding other financial institutions which qualify as "eligible guarantor institutions" may be obtained from the Transfer Agent. In certain instances, the Transfer Agent may require additional documents such as, but not limited to, trust instruments, death certifica tes, appointments as executor or administrator, or certificates of corporate authority. For shareholders redeeming directly with the Transfer Agent, payment will be mailed within seven days of receipt of a proper notice of redemption. At various times the Fund may be requested to redeem shares of a Portfolio for which it has not yet received good payment. The Fund may delay or cause to be delayed the mailing of a redemption check until such time, not exceeding ten days, as it has assured itself that good payment (e.g., cash or certified check drawn on a United States bank) has been collected for the purchase of such shares. Normally this delay will not exceed 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 is received by the dealer prior to the close of business on the New York Stock Exchange on the day received and is received by the Fund from the dealer not later than 4:30 P.M., New York City time, on the same day. Dealers have the responsibility of submitting such repurchase requests to the Fund not later than 4:30 P.M., New York City time, in order to obtain that day's closing price. These repurchase arrangements are for the convenience of shareholders and do not involve a charge by the Fund (other than any applicable CDSC); however, securities dealers may impose a charge on the shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its customers a processing fee (currently $4.85) to confirm a repurchase of shares. Redemptions directly through the Fund's Transfer Agent are not subject to the processing fee. The Fund reserves the right to reject any order for repurchase. The exercise of this right of rejection might adversely affect shareholders seeking redemption through the repurchase procedure. For shareholders redeeming through their listed securities dealer, payment for full and fractional shares will be made by the securities dealer within seven days of the proper tender of the certificates, if any, and stock power or letter requesting redemption, in each instance with signatures guaranteed as noted above. REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES As described in further detail in the Statement of Additional Information, holders of Class A or Class D shares of any of the three Portfolios who have redeemed their shares have a one-time privilege to reinstate their accounts by purchasing Class A or Class D shares of the same Portfolio, and class, as the case may be, in which they had invested at net asset value without a sales charge up to the dollar amount redeemed. 44 DIVIDENDS, DISTRIBUTIONS AND TAXES 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 which are taxable to shareholders as described below are subject to income tax whether they are reinvested in shares of any Portfolio or received in cash. FEDERAL INCOME TAXES Each Portfolio of the Fund generally will be treated as a separate corporation for federal income tax purposes. Each Portfolio has qualified and expects to continue to qualify for the special tax treatment afforded regulated investment companies under the Internal Revenue Code of 1986, as amended (the "Code"). If each Portfolio qualifies for that tax treatment, it will not be subject to federal income tax on that part of its net ordinary income and net realized long-term capital gains which it distributes to its shareholders. Each Portfolio has qualified and expects to continue to qualify to pay "exempt-interest" dividends as defined in the Code. If it so qualifies, dividends or any part thereof (other than any capital gain distributions) paid by the Portfolio which are attributable to interest on tax-exempt obligations and designated by the Portfolio as exempt-interest dividends in a written notice mailed to the Portfolio's shareholders within sixty days after the close of its taxable year may be treated by shareholders for all purposes as items of interest excludable from their gross income under Section 103(a) of the Code. The recipient of tax-exempt income is required to report such income on his federal income tax return. However, a shareholder is advised to consult his tax adviser with respect to whether exempt-interest dividends retain the exclusion under Section 103(a) if such shareholder would be treated as a "substantial user" under Section 147(a)(1) with respect to some or all of the tax-exempt obligations held by the Portfolio. The Code provides that interest on indebtedness incurred or continued to purchase or carry shares of the Portfolio is not deductible to the extent attributable to exempt-interest dividends. Also, any losses realized by individuals who dispose of shares of the Fund within six months of their purchase are disallowed to the extent of any exempt- interest dividends received with respect to such shares. 45 Each Portfolio may realize capital gains, which will constitute taxable income. Any distributions designated as capital gain dividends, i.e., as being made from the Portfolio's net long-term capital gains (whether from tax-exempt or taxable obligations) in a written notice furnished annually to shareholders are taxable to shareholders as long-term capital gains, regardless of a shareholder's holding period for shares of the Portfolio. In addition, if, after April 30, 1993, a Portfolio acquires tax-exempt obligations having market discount (generally, obligations acquired for a price less than their principal amount), any gain on the disposition or retirement of such obligations will be treated as ordinary income to the extent of accrued market discount. Dividends paid by each Portfolio from its taxable income (i.e., interest on money market securities) and distributions of net realized short-term capital gains (whether from tax-exempt or taxable obligations) are taxable to shareholders as ordinary income. Some shareholders may be subject to a 31% withholding tax ("backup withholding") on reportable dividends, capital gains distributions and redemption payments. Backup withholding is not required with respect to dividends representing "exempt-interest." Generally, shareholders subject to backup withholding will be those for whom no certified taxpayer identification number is on file with the Fund or who, to the Fund's knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalties of perjury that such number is correct and that he is not otherwise subject to backup withholding. No gain or loss will be recognized by Class B shareholders on the conversion of their Class B shares into Class D shares. A shareholder's basis in the Class D shares acquired will be the same as such shareholder's basis in the Class B shares converted, and the holding period of the acquired Class D shares will include the holding period for the converted Class B shares. A loss realized on a sale or exchange of shares of the Fund will be disallowed if other Fund shares are acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Individual shareholders of the Fund may be subject to alternative minimum tax to the extent the Fund holds "private activity" bonds. The Fund expects that it will hold private activity bonds; however, in general, an individual shareholder filing a joint return who does not have any tax preference items subject to the alternative minimum tax other than income received from the Fund derived from private activity bonds would have to receive more than $45,000 of such income from the Fund before becoming subject to the alternative minimum tax. Exempt-interest dividends paid by the Fund, whether or not attributable to private activity bonds, may increase a corporate shareholder's alternative minimum taxable income. In addition, the payment of exempt- interest dividends may increase a corporate shareholder's liability for the environmental tax imposed on a corporation's alternative minimum taxable income (computed without regard to either the alternative tax net operating loss deduction or the environmental tax deduction) at a rate of $12 per $10,000 (0.12%) of alternative minimum taxable income in excess of $2,000,000. The tax will be imposed even if the corporation is not required to pay an alternative minimum tax. 46 The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury Regulations currently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury Regulations promulgated thereunder. The Code and these Regulations are subject to change by legislative or administrative action either prospectively or retroactively. The Statement of Additional Information sets forth additional information regarding other tax aspects of investment in the Fund. Ordinary income and capital gains dividends may also be subject to State and local taxes. STATE AND LOCAL TAXES Depending upon the extent of the Fund's activities in those states and localities in which its offices are maintained or in which its agents or independent contractors are located, the Fund may be subject to the tax laws of such states or localities. In addition, the exemption of interest income for federal income tax purposes does not necessarily result in exemption under the income or other tax laws of any state or local taxing authority. The laws of the several states and local taxing authorities vary with respect to the taxation of such interest income, and each holder of shares of the Fund is advised to consult his own tax adviser in that regard. The Fund will report annually the percentage of interest income received by each Portfolio during the preceding year on tax-exempt obligations, indicating, on a state-by-state basis, the source of such income. PORTFOLIO TRANSACTIONS No Portfolio has any obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities. Municipal Bonds and money market securities in which each Portfolio invests are traded primarily in the over-the-counter market. Where possible, each Portfolio deals directly with the dealers who make a market in the securities involved except in those circumstances where better prices and execution are available elsewhere. It is the policy of the Fund to obtain the best net results taking into account such factors as price (including the applicable dealer spread), the size, type and difficulty of the transaction involved, the firm's general execution and operational facilities, and the firm's risk in positioning the securities involved and the provision of supplemental investment research by the firm. While the Fund generally seeks reasonably competitive spreads or commissions, the Fund will not necessarily be paying the lowest spread or commission available. Municipal Bonds and money market securities are generally traded on a net basis and do not normally involve either brokerage commissions or transfer taxes. The cost of portfolio securities transactions of each Portfolio consists primarily of dealer or underwriter spreads. Under the 1940 Act, persons affiliated with the Fund, including Merrill Lynch, are prohibited from dealing with the Fund as a principal in the purchase and sale of securities. The Fund has obtained an exemptive order permitting it to engage in certain principal transactions involving high-quality short-term Municipal Bonds. In addition, the Fund may not purchase Municipal Bonds from any underwriting syndicate of which Merrill Lynch is a member except pursuant to procedures approved by the Board of Directors which comply with rules adopted by the Securities and Exchange Commission. Affiliated persons of the Fund may serve as its broker in over-the-counter transactions conducted on an agency basis. 47 SHAREHOLDER SERVICES Each Portfolio offers a number of shareholder services designed to facilitate investment in its shares at no extra cost to the investor. Below is a description of these services. Full details as to each of these services and copies of the various plans described below can be obtained from the Fund. INVESTMENT ACCOUNT Each shareholder whose account is maintained with the Transfer Agent has an Investment Account and will receive a statement, at least quarterly, from the Transfer Agent. These statements will serve as transaction confirmations for automatic investment purchase and the reinvestment of ordinary income and long- term capital gains distributions. These statements will also show any other activity in the account since the preceding statement. After the end of each year, shareholders will receive federal income tax information regarding dividends and capital gain distributions. A shareholder may make additions to his Investment Account at any time by purchasing shares at the applicable public offering price either through a securities dealer which has entered into a selected dealers agreement with the Distributor or by mail directly to the Transfer Agent, acting as agent for the Distributor. Shareholders also may maintain their accounts through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage account, an Investment Account in the transferring shareholder's name will be opened automatically, without charge, at the Transfer Agent. Shareholders considering transferring their Class A or Class D shares from Merrill Lynch to another brokerage firm or financial institution should be aware that, if the firm to which the Class A or Class D shares are to be transferred will not take delivery of shares of the Fund, a shareholder either must redeem the Class A or Class D shares (paying any applicable CDSC) so that the cash proceeds can be transferred to the account at the new firm or such shareholder must continue to maintain an Investment Account at the Transfer Agent for those Class A or Class D shares. Shareholders interested in transferring their Class B or Class C shares from Merrill Lynch and who do not wish to have an Investment Account maintained for such shares at the Transfer Agent may request their new brokerage firm to maintain such shares in an account registered in the name of the brokerage firm for the benefit of the shareholder at the Transfer Agent. Share certificates are issued only for full shares and only upon the specific request of the shareholder. Certificates representing all or only part of the full shares in an Investment Account may be requested by a shareholder directly from the Transfer Agent. AUTOMATIC INVESTMENT PLAN An Automatic Investment Plan is available whereby the Transfer Agent is authorized through pre-authorized checks of $50 or more to charge the regular bank account of the shareholder on a monthly basis to provide systematic additions of shares of the Fund to the shareholder's Investment Account. Shareholders whose positions in any Portfolio of the Fund are maintained in a CMA(R) account may participate in the CMA Automated Investment Program, through which investments in any Portfolio of the Fund may be made on a regularly scheduled basis ranging from weekly to semiannually in amounts of $100 or more. AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS Unless specified instructions are given as to the method of payment of monthly dividends and annual capital gains distributions, they will automatically be reinvested in additional shares of the respective 48 Portfolio. Such reinvestment will be at the net asset value of the shares of the respective Portfolio, without sales charge, as of the close of business on the payable date of the dividend or distribution. Shareholders may elect in writing to receive either their income dividends or capital gains distributions, or both, in cash, in which event payment will be mailed by the Transfer Agent as soon as practicable after the payment date, which is the last day of each month. A shareholder may at any time, by written notification to Merrill Lynch if the shareholder's account is maintained with Merrill Lynch or by written notification or by telephone (1-800-MER-FUND) to the Transfer Agent if the shareholder's account is maintained with the Transfer Agent, elect to have subsequent dividends or capital gains distributions, or both, paid in cash, rather than reinvested, in which event payment will be mailed on or about the payment date. Cash payments can also be directed to the shareholder's bank account. No CDSC will be imposed upon redemption of shares issued as a result of the automatic reinvestment of dividends or capital gains distributions. SYSTEMATIC WITHDRAWAL PLANS As described in further detail in the Statement of Additional Information, a holder of Class A or Class D shares of any of the three Portfolios may elect to make systematic withdrawals from his or her Investment Account on either a monthly or calendar quarterly basis. EXCHANGE PRIVILEGES Shareholders of each class of shares of a Portfolio who have held all or part of their shares in the Portfolio for at least 15 days may exchange their shares for shares of certain other Portfolios of the Fund, or with certain other MLAM-advised mutual funds. Under the Merrill Lynch Select Pricing SM System, Class A shareholders may exchange Class A shares of a Portfolio for Class A shares of another Portfolio or a second MLAM-advised mutual fund if the shareholder holds any Class A shares of the other Portfolio or second fund in his account in which the exchange is made at the time of the exchange or is otherwise eligible to purchase Class A shares of the other Portfolio or second fund. If the Class A shareholder wants to exchange Class A shares for shares of other Portfolio or a second MLAM-advised mutual fund, and the shareholder does not hold Class A shares of the other Portfolio or second fund in his account at that time of the exchange and is not otherwise eligible to acquire Class A shares of the other Portfolio or second fund, the shareholder will receive Class D shares of the other Portfolio or second fund as a result of the exchange. Class D shares also may be exchanged for Class A shares of another Portfolio or a second MLAM-advised mutual fund at any time as long as, at the time of the exchange, the shareholder holds Class A shares of the second fund in the account in which the exchange is made or is otherwise eligible to purchase Class A shares of the other Portfolio or second fund. Exchanges of Class A and Class D shares are made on the basis of the relative net asset values per Class A or Class D share, respectively, plus an amount equal to the difference, if any, between the sales charge previously paid on the Class A or Class D shares being exchanged and the sales charge payable at the time of the exchange on the shares being acquired. Class B, Class C and Class D shares of a Portfolio will be exchangeable with shares of the same class of another Portfolio or other MLAM-advised mutual funds. Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. 49 Shares of a Portfolio which are subject to a CDSC will be exchangeable on the basis of relative net asset value per share without the payment of any CDSC that might otherwise be due upon redemption of the shares of the Portfolio. For purposes of computing the CDSC that may be payable upon a disposition of the shares acquired in the exchange, the holding period for the previously owned shares of the Portfolio is "tacked" to the holding period of the newly acquired shares of the other fund or Portfolio. Class A, Class B, Class C and Class D shares also will be exchangeable for shares of certain MLAM-advised money market funds specifically designated as available for exchange by holders of Class A, Class B, Class C or Class D shares. The period of time that Class A, Class B, Class C or Class D shares are held in a money market fund, however, will not count toward satisfaction of the holding period requirement for reduction of any CDSC imposed on such shares, if any, and, with respect to Class B shares, toward satisfaction of the Conversion Period. Class B shareholders of a Portfolio exercising the exchange privilege will continue to be subject to the CDSC schedule applicable to that Portfolio if such schedule is higher than the CDSC schedule relating to the new Class B shares. In addition, Class B shares of a Portfolio acquired through use of the exchange privilege will be subject to the CDSC schedule applicable to that Portfolio if such schedule is higher than the CDSC schedule relating to the Class B shares of the MLAM-advised mutual fund from which the exchange has been made. Exercise of the exchange privilege is treated as a sale for Federal income tax purposes. For further information, see "Shareholder Services--Exchange Privileges" in the Statement of Additional Information. Each Portfolio's exchange privilege is also modified with respect to purchases of Class A and Class D shares under the MFA program. First, the initial allocation of assets is made under the MFA program. Then, any subsequent exchange under the MFA program of Class A or Class D shares of an MLAM-advised mutual fund for Class A or Class D shares of a Portfolio of the Fund will be made solely on the basis of the relative net asset values of the shares being exchanged. Therefore, there will not be a charge for any difference between the sales charge previously paid on the shares of the other MLAM-advised mutual fund and the sales charge payable on the shares of the Fund being acquired in the exchange under the MFA program. ADDITIONAL INFORMATION DETERMINATION OF NET ASSET VALUE The net asset value of the shares of all classes of each Portfolio is determined once daily by FAM immediately after the declaration of dividends as of 15 minutes after the close of business on the New York Stock Exchange (generally 4:00 P.M., New York City time), on each day that the New York Stock Exchange is open for trading. The net asset value per share is computed by dividing the sum of the value of the portfolio securities held by each Portfolio plus any cash or other assets minus all liabilities by the total number of shares outstanding at such time, rounded to the nearest cent. Expenses, including the investment advisory fees payable to FAM, account maintenance and/or distribution fees payable to the distributor are accrued daily. The per share net asset value of Class A shares of a Portfolio generally will be higher than the per share net asset value of shares of the other classes of that Portfolio, reflecting the daily expense accruals of the account maintenance, distribution and higher transfer agency fees applicable with respect to Class B and Class C shares and the daily expense accruals of the account maintenance and higher transfer agency fees applicable 50 with respect to Class D shares. Moreover, the per share net asset value of Class D shares generally will be higher than the per share net asset value of Class B and Class C shares, reflecting the daily expense accruals of distribution and higher transfer agency fees applicable with respect to Class B and Class C shares. It is expected, however, that the per share net asset value of the four classes of a Portfolio will tend to converge (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. PERFORMANCE DATA From time to time the Fund may include its average annual total return, yield and tax equivalent yield for various specified time periods in advertisements or information furnished to present or prospective shareholders. Average annual total return, yield and tax equivalent yield are computed separately for the Class A, Class B, Class C and Class D shares of the Portfolios in accordance with formulas specified by the Securities and Exchange Commission. Average annual total return quotations for the specified periods will be computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return will be computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses, including any CDSC that would be applicable to a complete redemption of the investment at the end of the specified period, such as in the case of Class B and Class C shares and the maximum sales charge in the case of Class A and Class D shares. Dividends paid with respect to all shares of a Portfolio, to the extent any dividends are paid, will be calculated in the same manner at the same time on the same day and will be in the same amount, except that distribution fees, account maintenance fees and any incremental transfer agency costs relating to a class of shares will be borne exclusively by that class. The Fund will include performance data for all classes of shares of the Portfolios in any advertisement or information including performance data for such Portfolios. The Fund also may quote total return and aggregate total return performance data for various specified time periods. Such data will be calculated substantially as described above, except that (1) the rates of return calculated will not be average annual rates, but rather, actual annual, annualized or aggregate rates of return and (2) the maximum applicable sales charge will not be included. Actual annual or annualized total return data generally will be lower than average annual total return data since the average annual rates of return reflect compounding; aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time. See "Purchase of Shares." The Fund's total return may be expressed either as a percentage or as a dollar amount in order to illustrate such total return on a hypothetical investment in the Fund at the beginning of each specified period. Yield quotations will be computed based on a 30-day period by dividing (a) the net income based on the yield of each security earned during the period by (b) the average daily number of shares outstanding during the period that were entitled to receive dividends multiplied by the maximum offering price per share on the last day of the period. Tax equivalent yield quotations will be computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b) one minus a stated tax rate and adding the result to that part, if any, of the Fund's yield that is not tax-exempt. The yield for the 30-day period ending June 30, 1995 for National Portfolio Class A shares was 5.39%, 4.84% for Class B shares, 4.79% for Class C shares and 5.14% for 51 Class D shares. The yield for the 30-day period ending June 30, 1995 for Insured Portfolio Class A shares was 5.07%, 4.50% for Class B shares, 4.54% for Class C shares and 4.83% for Class D shares and for Limited Maturity Portfolio Class A shares was 3.66%, 3.33% for Class B shares, 3.49% for Class C shares and 3.56% for Class D shares. The tax-equivalent yield for the same period (based on a tax rate of 28%) for National Portfolio Class A shares was 7.49%, 6.72% for the Class B shares, 6.65% for Class C shares and 7.14% for Class D shares. The tax equivalent yield for the same period (based on a tax rate of 28%) for Insured Portfolio Class A shares was 7.04%, 6.25% for the Class B shares, 6.31% for Class C shares and 6.71% for Class D shares. The tax equivalent yield for the same period (based on a tax rate of 28%) for Limited Maturity Portfolio Class A shares was 5.08%, 4.63% for Class B shares, 4.85% for Class C shares and 4.94% for Class D shares. Total return, yield and tax equivalent yield figures are based on the Fund's historical performance and are not intended to indicate future performance. The Fund's total return, yield and tax equivalent yield will vary depending on market conditions, the securities comprising the 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 Composite Stock Price Index, the Value Line Composite Index, the Dow Jones Industrial Average, or performance data contained in publications such as Lipper Analytical Services, Inc., Morningstar Publications, Inc., Money Magazine, U.S. News & World Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine or Fortune Magazine. As with other performance data, performance comparisons should not be considered indicative of the Fund's relative performance for any future period. RATING INFORMATION Descriptions of Moody's Investors Service, Inc.'s Municipal Bond Ratings Aaa-Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa-Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A-Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. 52 Baa-Bonds which are rated Baa are considered medium grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba-Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B-Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa-Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca-Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C-Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Conditional Rating: Bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operation experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting condition attaches. Parenthetical rating denotes probable credit stature upon completion of construction or elimination of basis of condition. Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa through B in its municipal bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and a modifier 3 indicates that the issue ranks in the lower end of its generic rating category. Short-term Notes: The four ratings of Moody's for short-term notes are MIG 1, MIG 2, MIG 3 and MIG 4. MIG 1 denotes best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing; MIG 2 denotes high quality. Margins of protection are ample although not so large as in the preceding group; MIG 3 denotes favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established; MIG 4 denotes adequate quality. Protection commonly regarded as required of an investment security is present and although not distinctly or predominantly speculative, there is specific risk. 53 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 Ratings Group'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. 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 al- though they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debts in higher rated categories.
54 BBB Debt rated "BBB" are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. BB Debt rated "BB," "B," "CCC" and "CC" are regarded, on balance, as predominantly B speculative with respect to capacity to pay interest and repay principal in ac- CCC cordance with the terms of the obligation. "BB" indicates the lowest degree of CC speculation and "CC" the highest of speculation. While such debts will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. C The rating "C" is reserved for income bonds on which no interest is being paid. D Debt rated "D" is in default, and payment of interest and/or repayment of princi- pal 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 informa- tion on which to base a rating or that Standard & Poor's does not rate a particu- lar type of obligation as a matter of policy.
Descriptions of Standard & Poor's Ratings Group's Commercial Paper Ratings A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. The four categories are as follows: A Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers 1, 2 and 3 to indicate the relative degree of safety. A-1 This designation indicates that the degree of safety regarding timely payment is very strong. A-2 Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as high as for issues designated "A-1." A-3 Issues carrying this designation have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues rated "B" are regarded as having only an adequate capacity for timely pay- ment. 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.
55 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 Ratings Group'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. ORGANIZATION OF THE FUND The Fund, a Maryland corporation, is a diversified, open-end management investment company that commenced operations on October 21, 1977. Prior to September 21, 1979, the Fund consisted solely of the Insured Portfolio. Currently, the Fund is comprised of three separate Portfolios: Insured Portfolio, National Portfolio and Limited Maturity Portfolio. The authorized capital stock of the Fund consists of 3,850,000,000 shares of Common Stock, divided into three series, each of which is divided into four classes, having a par value of $0.10 per share. The shares of Insured Portfolio Series Common Stock (500,000,000 Class A, 375,000,000 Class B shares, 375,000,000 Class C shares, 500,000,000 Class D shares authorized), High Yield Portfolio Series Common Stock (375,000,000 Class A, 375,000,000 Class B shares, 375,000,000 Class C shares, 375,000,000 Class D shares authorized), which does business under the name "National Portfolio," and Limited Maturity Portfolio Series Common Stock (150,000,000 Class A, 150,000,000 Class B shares, 150,000,000 Class C shares, 150,000,000 Class D shares authorized) are divided into four classes, designated Class A, Class B, Class C and Class D Common Stock. Each Class A, Class B, Class C and Class D share of common stock of each of the Portfolios represents an interest in the same assets of such Portfolio and are identical in all respects to the shares of the other classes except that the Class B, Class C and Class D shares bear certain expenses related to the account maintenance associated with such shares, and Class B and Class C shares bear certain expenses related to the distribution of such shares. Each Class of shares of a Portfolio has exclusive voting rights with respect to matters relating to account maintenance services and distribution expenditures relative to that Portfolio, as 56 applicable. Only shares of each respective Portfolio are entitled to vote on matters concerning only that Portfolio. The Fund has received an order from the Securities and Exchange Commission permitting the issuance and sale of multiple classes of shares of the Portfolios. The Directors of the Fund may classify and reclassify the shares of the Fund into additional series or classes of Common Stock at a future date. The creation of additional classes would require an additional order from the Securities and Exchange Commission. There is no assurance that such an additional order will be issued. Each issued and outstanding share is entitled to one vote and to participate equally in dividends and distributions declared by the respective Portfolios and in net assets of the respective Portfolios upon liquidation or dissolution remaining after satisfaction of outstanding liabilities, except, as noted above, the Class B, Class C and Class D shares of the Portfolios bear certain expenses related to the distribution of such shares. The shares of each Portfolio, when issued, will be fully paid and nonassessable, have no preference, pre-emptive, conversion, exchange or similar rights. Shares have the conversion rights described in this Prospectus. Holders of shares of any Portfolio are entitled to redeem their shares as set forth under "Redemption of Shares." Shares do not have cumulative voting rights, and the holders of more than 50% of the shares of the Fund voting for the election of Directors can elect all of the Directors of the Fund if they choose to do so and in such event the holders of the remaining shares would not be able to elect any Directors. Stock certificates will be issued by the Transfer Agent only on specific request. Certificates for fractional shares are not issued in any case. Shareholders are entitled to redeem their shares as set forth under "Redemption of Shares." CUSTODIAN The Bank of New York, 90 Washington Street, 12th Floor, New York, New York 10286, is the Fund's custodian. COUNSEL AND AUDITOR Rogers & Wells, Counsel to the Fund, passes upon legal matters for the Fund in connection with the shares offered by this Prospectus. Deloitte & Touche LLP, independent auditors, are auditors of the Fund. SHAREHOLDER REPORTS The Fund issues to its shareholders quarterly reports containing unaudited financial statements and annual reports containing financial statements examined by auditors approved annually by the Directors. Only one copy of each shareholder report and certain shareholder communications will be mailed to each identified shareholder regardless of the number of accounts such shareholder has. If a shareholder wishes to receive separate copies of each report and communication for each of the shareholder's related accounts the shareholder should notify in writing: Merrill Lynch 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 Merrill Lynch Financial Data Services, Inc. at 800-637-3863. 57 ADDITIONAL INFORMATION This Prospectus does not contain all the information included in the Registration Statement filed with the Securities and Exchange Commission under the Securities Act of 1933 with respect to the securities offered hereby, certain portions of which have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Statement of Additional Information, dated October 21, 1995, which forms a part of the Registration Statement, is incorporated by reference into this Prospectus. The Statement of Additional Information may be obtained without charge as provided on the cover page of this Prospectus. The Registration Statement, including the exhibits filed therewith, may be examined at the office of the Securities and Exchange Commission in Washington, D.C. 58 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) 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 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 Merrill Lynch Financial Data Services, Inc., as an initial investment (minimum $1,000). I understand that this purchase will be executed at the applicable offering price next to be determined after this Application is received by you. B. I already own shares of the following Merrill Lynch mutual funds that would qualify for the right of accumulation as outlined in the Statement of Additional Information: (Please list all funds. Use a separate sheet of paper if necessary.) 1. .................................. 4. .................................. 2. .................................. 5. .................................. 3. .................................. 6. .................................. Name........................................................................... First Name Initial Last Name Name of Co-Owner (if any)...................................................... First Name Initial Last Name Address.......................................... Date........................ ................................................. (Zip Code) Occupation........................... Name and Address of Employer ........ ..................................... ..................................... ..................................... ..................................... Signature of Owner Signature of Co-Owner (if any) - ------------------------------------------------------------------------------- 2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS Long-Term Capital Ordinary Income Dividends Gains [_] Reinvest Select One: [_] Cash Select One: [_] Reinvest [_] 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 MERRILL LYNCH 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. 59 - ------------------------------------------------------------------------------- 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...... Dear Sir/Madam: Date of Initial Purchase Although I am not obligated to do so, I intend to purchase shares of Merrill Lynch Municipal Bond Fund or any other investment company with an initial sales charge or deferred sales charge for which the Merrill Lynch Funds Distributor, Inc. acts as distributor over the next 13-month period which will equal or exceed: Insured Portfolio [_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000 National Portfolio [_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000 Limited Maturity Portfolio [_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to the amount checked above, as described in the Merrill Lynch Municipal Bond Fund Prospectus. I agree to the terms and conditions of the Letter of Intention. I hereby irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my attorney, with full power of substitution, to surrender for redemption any or all shares of Merrill Lynch Municipal Bond Fund held as security. By .................................. ..................................... Signature of Owner Signature of Co-Owner (If registered in joint names, both must sign) In making purchases under this letter, the following are the related accounts on which reduced offering prices are to apply: (1) Name............................. (2) Name............................. Account Number....................... Account Number....................... - ------------------------------------------------------------------------------- 5. FOR DEALER ONLY Branch Office, Address, Stamp We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as - - - our agent in connection with transactions under this - - - authorization form and agree to notify the Distributor of any purchases made under a Letter of Intention or Systematic Withdrawal Plan. We guarantee the shareholder's signature. This form, when completed, should be mailed to: Merrill Lynch Municipal Bond Fund c/o Merrill Lynch Financial Data Services, Inc. P.O. Box 45289 Jacksonville, FL 32232-5289 ..................................... Dealer Name and Address By: ................................. Authorized Signature of Dealer [ ][ ][ ] [ ][ ][ ][ ] Branch Code F/C No. ............... F/C Last Name [ ][ ][ ] [ ][ ][ ][ ][ ] Dealer's Customer A/C No. 60 - ------------------------------------------------------------------------------- MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 2) - ------------------------------------------------------------------------------- 1. ACCOUNT REGISTRATION Name of Owner...................... [ ][ ][ ] [ ][ ] [ ][ ][ ][ ] Social Security No. or Name of Co-Owner (if any).......... Taxpayer Identification Number Address............................ Account Number .................... (if existing account) ............................... - ------------------------------------------------------------------------------- 2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION) Minimum Requirements: $10,000 for monthly disbursements, $5,000 for quarterly, of [_] Class A or [_] Class D of the Insured Portfolio, [_] Class A or [_] Class D shares of the National Portfolio, or [_] Class A or [_] Class D shares of the Limited Maturity Portfolio in Merrill Lynch Municipal Bond Fund at cost or current offering price. Withdrawals to be made either (check one) [_] Monthly on the 24th day of each month, or [_] Quarterly on the 24th day of March, June, September and December. If the 24th falls on a weekend or holiday, the next succeeding business day will be utilized. Begin systematic withdrawal on or as soon as possible thereafter. (month) SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [_] $ or [_] % of the current value of [_] Class A or [_] Class D shares in the account. SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account (check one and complete part (a) or (b) below): Draw checks payable (check one) (A)I HEREBY AUTHORIZE PAYMENT BY CHECK [_] as indicated in Item 1. [_] to the order of.......................................................... Mail to (check one) [_] the address indicated in Item 1. [_] Name (please print)...................................................... Address ....................................................................... .......................................................................... Signature of Owner................................ Date.................. Signature of Co-Owner (if any)............................................ (B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY ACCOUNT. I 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. 61 - ------------------------------------------------------------------------------- 3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN I hereby request that Merrill Lynch 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. AUTHORIZATION TO HONOR ACH DEBITS MERRILL LYNCH FINANCIAL DATA DRAWN BY MERRILL LYNCH FINANCIAL SERVICES, INC. DATA SERVICES, INC. You are hereby authorized to draw an To...............................Bank ACH debit each month on my bank (Investor's Bank) account for investment in Merrill Lynch Municipal Bond Fund as Bank Address........................ indicated below: City..... State..... Zip Code..... Amount of each ACH debit $........ Account number.................... As a convenience to me, I hereby request and authorize you to pay and Please date and invest ACH debits charge to my account ACH debits on the 20th of each month beginning drawn on my account by and payable ..................................... to Merrill Lynch Financial Data ..............................(Month) Services, Inc. I agree that your or as soon thereafter as possible. rights in respect to each such debit shall be the same as if it were a I agree that you are drawing these check drawn on you and signed ACH debits voluntarily at my request personally by me. This authority is and that you shall not be liable for to remain in effect until revoked any loss arising from any delay in personally by me in writing. Until preparing or failure to prepare any you receive such notice, you shall such debit. If I change banks or be fully protected in honoring any desire to terminate or suspend this such debit. I further agree that if program, I agree to notify you any such debit be dishonored, promptly in writing. I hereby whether with or without cause and authorize you to take any action to whether intentionally or correct erroneous ACH debits of my inadvertently, you shall be under no bank account or purchases of fund liability. shares including liquidating shares of the Fund and credit my bank ............ ..................... account. I further agree that if a Date Signature of check or debit is not honored upon Depositor presentation, Merrill Lynch Financial Data Services, Inc. is authorized to ............ ..................... discontinue immediately the Automatic Bank Signature of Depositor Investment Plan and to liquidate Account (If joint account, sufficient shares held in my account Number both must sign) to offset the purchase made with the dishonored debit. ............ ..................... Date Signature of Depositor ...................... 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. 62 INVESTMENT ADVISER Fund Asset Management P.O. Box 9011 Princeton, New Jersey 08543-9011 DISTRIBUTOR Merrill Lynch 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 Merrill Lynch 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 200 Park Avenue New York, New York 10166 INDEPENDENT AUDITORS Deloitte & Touche LLP 117 Campus Drive Princeton, New Jersey 08540 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
PAGE ---- 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................................................ 23 Description of Municipal Bonds............................................ 23 Forward Commitments....................................................... 25 Financial Futures Contracts and Derivatives............................... 25 Investment Restrictions................................................... 27 Investment Adviser......................................................... 27 Transfer Agency Services.................................................. 28 Code of Ethics............................................................ 29 Directors.................................................................. 29 Purchase of Shares......................................................... 30 Initial Sales Charge Alternatives--Class A and Class D Shares............. 33 Deferred Sales Charge Alternatives--Class B and Class C Shares............ 36 Distribution Plans........................................................ 39 Limitations on the Payment of Deferred Sales Charges...................... 42 Redemption of Shares....................................................... 43 Redemption................................................................ 43 Repurchase................................................................ 44 Reinstatement Privilege--Class A and Class D Shares....................... 44 Dividends, Distributions and Taxes......................................... 45 Dividends and Distributions............................................... 45 Federal Income Taxes...................................................... 45 State and Local Taxes..................................................... 47 Portfolio Transactions..................................................... 47 Shareholder Services....................................................... 48 Investment Account........................................................ 48 Automatic Investment Plan................................................. 48 Automatic Reinvestment of Dividends and Capital Gains Distributions....... 48 Systematic Withdrawal Plans............................................... 49 Exchange Privileges....................................................... 49 Additional Information..................................................... 50 Determination of Net Asset Value.......................................... 50 Performance Data.......................................................... 51 Rating Information........................................................ 52 Organization of the Fund.................................................. 56 Custodian................................................................. 57 Counsel and Auditor....................................................... 57 Shareholder Reports....................................................... 57 Additional Information.................................................... 58 Authorization Form......................................................... 59
Code #10051-1095 LOGO MERRILL LYNCH Merrill Lynch Municipal Bond Fund [ART] PROSPECTUS October 31, 1995 Distributor: Merrill Lynch Funds Distributor, Inc. This prospectus should be retained for future reference. STATEMENT OF ADDITIONAL INFORMATION OCTOBER 31, 1995 MERRILL LYNCH MUNICIPAL BOND FUND, INC. P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 * PHONE NO. (609) 282-2800 ---------------- Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is a professionally managed, diversified, open-end investment company which seeks to provide shareholders with as high a level of income exempt from Federal income taxes as is consistent with the investment policies of each of its Portfolios and prudent investment management. The Fund is comprised of three separate Portfolios: the Insured Portfolio, the National Portfolio and the Limited Maturity Portfolio, each of which invests primarily in a diversified portfolio of tax-exempt Municipal Bonds, principally consisting of state, municipal and public authority securities. The Fund is a series fund and is comprised of three separate Portfolios. Each Portfolio is, in effect, a separate fund issuing its own shares. Pursuant to the Merrill Lynch Select 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 except that Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. The Merrill Lynch Select Pricing System permits an investor to choose the method of purchasing shares that the investor believes is most beneficial, given the amount of the purchase, the length of time the investor expects to hold the shares and other relevant circumstances. ---------------- This Statement of Additional Information of the Fund is not a prospectus and should be read in conjunction with the Prospectus of the Fund (the "Prospectus") dated October 31, 1995, which has been filed with the Securities and Exchange Commission and is available upon oral or written request without charge. Copies of the Prospectus can be obtained by calling or writing the Fund at the above telephone number or address. This Statement of Additional Information has been incorporated by reference into the Prospectus. ---------------- FUND ASSET MANAGEMENT -- INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR ---------------- 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, 1995, the average maturity of the Insured Portfolio, National Portfolio and the Limited Maturity Portfolio was approximately 21.1 years, 22.6 years and 1.4 years, respectively. INSURANCE ON PORTFOLIO SECURITIES Reference is made to the discussion of the Insured Portfolio under "Investment Policies of the Portfolios" in the Prospectus. As stated in the Prospectus, the Fund has purchased from AMBAC Indemnity Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation ("MBIA") and Financial Security Assurance Inc. ("FSA") separate Mutual Fund Insurance Policies (the "Policies"). The Policies guarantee the payment of the principal at maturity and interest on all Municipal Bonds which are purchased by the Insured Portfolio at a time when they are eligible for insurance. Municipal Bonds are eligible for insurance if they are, at the time of purchase by the Insured Portfolio, identified separately or by category in qualitative guidelines furnished by AMBAC, MBIA or FSA and are in compliance with the aggregate limitations on amounts set forth in such guidelines. AMBAC, MBIA and/or FSA may withdraw particular securities from the classifications of securities eligible for insurance while continuing to insure previously acquired bonds of such ineligible issues so long as they remain in the Insured Portfolio and may limit the aggregate amount of each issue or category of municipal securities thereof. The restrictions on investment imposed by the eligibility requirement of the Policies may reduce the yield of the Insured Portfolio. RISK FACTORS IN TRANSACTIONS IN JUNK BONDS The National Portfolio may invest in Municipal Bonds which are rated below Baa by Moody's Investors Service Inc. ("Moody's") or below BBB by Standard & Poor's Ratings Group ("Standard & Poor's") or which, in the Investment Adviser's judgment, possess similar credit characteristics ("junk bonds"). See "Additional Information--Rating Information" in the Prospectus for additional information regarding ratings of debt securities. The Investment Adviser considers the ratings assigned by Standard & Poor's or Moody's as one of several factors in its independent credit analysis of issuers. Junk bonds are considered by Standard & Poor's and Moody's to have varying degrees of speculative characteristics. Consequently, although junk bonds can be expected to provide higher yields, such securities may be subject to greater market price fluctuations and risk of loss of principal than lower yielding, higher rated debt securities. Investments in junk bonds will be made only when, in the judgment of the Investment Adviser, such securities provide attractive total return potential relative to the risk of such securities, as compared to higher quality debt securities. The National Portfolio will not invest in debt securities in the lowest rating categories (those rated CC or lower by Standard & Poor's or Ca or lower by Moody's) unless the Investment Adviser believes that the financial condition of the issuer or the protection afforded the particular securities is stronger than would otherwise be indicated by such low ratings. The National Portfolio 2 does not intend to purchase debt securities that are in default or which the Investment Adviser believes will be in default. Issuers of junk bonds may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of high yield securities may be more likely to experience financial stress, especially if such issuers are highly leveraged. In addition, the market for high yield municipal securities is relatively new and has not weathered a major economic recession, and it is unknown what effects such a recession might have on such securities. During such a period, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments, or the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the holders of junk bonds because such securities may be unsecured and may be subordinated to other creditors of the issuer. Junk bonds frequently have call or redemption features that would permit an issuer to repurchase the security from the National Portfolio. If a call were exercised by the issuer during a period of declining interest rates, the National Portfolio likely would have to replace such called security with a lower yielding security, thus decreasing the net investment income to the National Portfolio and dividends to shareholders. The National Portfolio may have difficulty disposing of certain junk bonds because there may be a thin trading market for such securities. Because not all dealers maintain markets in all junk bonds, there is no established secondary market for many of these securities, and the National Portfolio anticipates that such securities could be sold only to a limited number of dealers or institutional investors. To the extent that a secondary trading market for junk bonds does exist, it is generally not as liquid as the secondary market for higher rated securities. Reduced secondary market liquidity may have an adverse impact on market price and the National Portfolio's ability to dispose of particular issues when necessary to meet its liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. Reduced secondary market liquidity for certain securities also may make it more difficult for the National Portfolio to obtain accurate market quotations for purposes of valuing its portfolio. Market quotations are generally available on many junk bonds only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. It is expected that a significant portion of the junk bonds acquired by the National Portfolio will be purchased upon issuance, which may involve special risks because the securities so acquired are new issues. In such instances the National Portfolio may be a substantial purchaser of the issue and therefore have the opportunity to participate in structuring the terms of the offering. Although this may enable the National Portfolio to seek to protect itself against certain of such risks, the considerations discussed herein would nevertheless remain applicable. Adverse publicity and investor perceptions, which may not be based on fundamental analysis, also may decrease the value and liquidity of junk bonds, particularly in a thinly traded market. Factors adversely affecting the market value of such securities are likely to affect adversely the National Portfolio's net asset 3 value. In addition, the National Portfolio may incur additional expenses to the extent that it is required to seek recovery upon a default on a portfolio holding or participate in the restructuring of the obligation. TRANSACTIONS IN FUTURES CONTRACTS The National Portfolio and the Limited Maturity Portfolio (collectively, the "Portfolios") may engage in the purchase and sale of futures contracts on an index of municipal bonds or on U.S. Treasury securities, or options on such futures contracts, for hedging purposes only. The Portfolios may sell such futures contracts in anticipation of a decline in the value of municipal bonds held by them or may purchase such futures contracts in anticipation of an increase in the cost of municipal bonds they intend to acquire. The Portfolios also are authorized to purchase and sell other financial futures contracts which in the opinion of management provide an appropriate hedge for some or all of the Fund's portfolio securities. Because of low initial margin deposits made upon the opening of a futures position, futures transactions involve substantial leverage. As a result, relatively small movements in the price of the futures contract can result in substantial unrealized gains or losses. Because the Portfolios will engage in the purchase and sale of financial futures contracts solely for hedging purposes, however, any losses incurred in connection therewith should, if the hedging strategy is successful, be offset in whole or in part by increases in the value of securities held by the Portfolios or decreases in the price of securities the Portfolios intend to acquire. Further, the Portfolios will maintain cash, cash equivalents and high-grade securities with the Fund's custodian, so that the amount segregated plus the initial margin equals the value represented by the futures contract purchased by the Portfolios, thereby ensuring that such transactions are actually unleveraged. Municipal bond index futures contracts commenced trading in June 1985, and it is possible that trading in such futures contracts will be less liquid than that in other futures contracts. The trading of futures contracts and options thereon is subject to certain market risks, such as trading halts, suspensions, exchange or clearing house equipment failures, government intervention or other disruptions of normal trading activity, which could at times make it difficult or impossible to liquidate existing positions. The liquidity of the market in futures contracts may be further adversely affected by "daily price fluctuation limits" established by contract markets, which limit the amount of a fluctuation in the price of a futures contract or option thereon during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open positions at prices beyond the limit. Prices of existing contracts have in the past moved the daily limit on a number of consecutive trading days. The Portfolios will enter into a futures position only if, in the judgment of the Investment Adviser, there appears to be an actively traded market for such futures contracts. The successful use of transactions in futures contracts and options thereon depends on the ability of the Investment Adviser correctly to forecast the direction and extent of price movements of these instruments, as well as price movements of the securities held by the Portfolios within a given time frame. To the extent these price movements are not correctly forecast or move in a direction opposite to that anticipated, the Portfolios may realize a loss on the hedging transaction which is not fully or partially offset by an increase in the value of portfolio securities. As a result, either Portfolio's total return for such period may be less than if it had not engaged in the hedging transaction. See "Additional Information--Description of Financial Futures Contract" below for a further discussion of the risks of futures trading. 4 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 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. 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 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. 5 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. 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. b. Make short sales of securities or maintain a short position, except to the extent permitted by applicable law. The Fund currently does not intend to engage in short sales, except short sales "against the box." c. Invest in securities which cannot be readily resold because of legal or contractual restrictions or which cannot otherwise be marketed, redeemed or put to the issuer or a third party, if at the time of acquisition more than 15% of its total assets would be invested in such securities. This restriction shall not apply to securities which mature within seven days or securities which the Board of Directors of the Fund has otherwise determined to be liquid pursuant to applicable law. Notwithstanding the 15% limitation herein, to the extent the laws of any state in which the Fund's shares are registered or qualified for sale require a lower limitation, the Fund will observe such limitation. As of the date hereof, therefore, a Portfolio will not invest more than 10% of its total assets in securities which are subject to this investment restriction (c). d. Invest in warrants if, at the time of acquisition, its investments in warrants, valued at the lower of cost or market value, would exceed 5% of the Portfolio's net assets; included within such limitation, but not to exceed 2% of the Portfolio's net assets, are warrants which are not listed on the New York Stock Exchange or American Stock Exchange or a major foreign exchange. For purposes of this restriction, warrants acquired by the Portfolio in units or attached to securities may be deemed to be without value. e. Invest in securities of companies having a record, together with predecessors, of less than three years of continuous operation, if more than 5% of the Fund's total assets would be invested in such securities. This restriction shall not apply to mortgage-backed securities, asset-backed securities or obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. f. Purchase or retain the securities of any issuer, if those individual officers and directors of the Fund, the officers and general partner of the Investment Adviser, the directors of such general partner or the officers and directors of any subsidiary thereof each owning beneficially more than one-half of one percent of the securities of such issuer own in the aggregate more than 5% of the securities of such issuer. 6 g. Invest in real estate limited partnership interests or interests in oil, gas or other mineral leases, or exploration or development programs, except that the Portfolio may invest in securities issued by companies that engage in oil, gas or other mineral exploration or development activities. h. Write, purchase or sell puts, calls, straddles, spreads or combinations thereof, except to the extent permitted in the Fund's Prospectus and Statement of Additional Information, as they may be amended from time to time. Notwithstanding fundamental investment restriction (7) above, the Fund currently does not intend to borrow amounts in any Portfolio in excess of 10% of the total assets of such Portfolio, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes such as the redemption of Fund shares. In addition, the Fund will not purchase securities while borrowings are outstanding. MANAGEMENT OF THE FUND DIRECTORS AND OFFICERS The directors and executive officers of the Fund, 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 and officer is P.O. Box 9011, Princeton, New Jersey 08543-9011. Arthur Zeikel (63)--President and Director(1)(2)--President and Director of the Investment Adviser (which term as used herein includes its corporate predecessors) since 1977; President of MLAM (which term as used herein includes its corporate predecessors) since 1977; President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice President of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") since 1990 and Executive Vice President of Merrill Lynch & Co. ("ML & Co.") since 1990 and Senior Vice President from 1985 to 1990; and Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor"). Ronald W. Forbes (55)--Director(2)--1400 Washington Avenue, Albany, New York 12222. Associate Professor of Finance, School of Business, State University of New York at Albany, Member, Task Force on Municipal Securities Markets, Twentieth Century Fund; Consultant, Public Finance Banking, Shearson Lehman Brothers, Inc. Cynthia A. Montgomery (43)--Director(2)--Harvard Business School, Soldiers Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School, since 1989; Associate Professor, J.L. Kellogg Graduate School of Management, Northwestern University, 1985-1989; Assistant Professor, Graduate School of Business Administration, the University of Michigan, 1979-1985; Director, UNUM Corporation. Charles C. Reilly (64)--Director(2)--9 Hampton Harbor Road, Hampton Bays, New York 11946. Adjunct Professor, Columbia University Graduate School of Business, since 1990; Adjunct Professor, Wharton School, University of Pennsylvania, 1990; President and Chief Investment Officer of Versus Capital, Inc. from 1979 to 1990; Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990. 7 Kevin A. Ryan (63)--Director(2)--127 Commonwealth Avenue, Chestnut Hill, Massachusetts 02167, Professor of Education at Boston University since 1982. Founder and current Director, Boston University Center for Advancement of Ethics and Character, since 1989; formerly taught on the faculties of the University of Chicago, Stanford University and The Ohio State University. Richard R. West (57)--Director(2)--482 Tepi Drive, Southbury, Connecticut 06488. Professor of Finance at New York University School of Business Administration since 1993. Dean of New York University School of Business Administration from 1984 to 1993; Professor of Finance at the Amos Tuck School of Business Administration, Dartmouth College, from 1976 to 1984 and Dean from 1976 to 1983; Director, Vornado, Inc. (real estate holding company), Constar International, Inc. (manufacturer of plastic containers), Alexander's Inc. (department stores), and Smith Corona Corporation (manufacturer of typewriters and word processors). Terry K. Glenn (55)--Executive Vice President(1)(2)--Executive Vice President of the Investment Adviser and MLAM since 1983 and Director since 1992; Executive Vice President and Director of Princeton Services since 1993; President and Director of the Distributor since 1986. Vincent R. Giordano (51)--Senior Vice President(1)(2)--Senior Vice President of the Investment Adviser and MLAM since 1984; Portfolio manager of the Investment Adviser since 1977 and Vice President from 1980 to 1984. Donald C. Burke (35)--Vice President(2)--Vice President and Director of Taxation of MLAM since 1990; employee of Deloitte & Touche LLP from 1981 to 1990. Kenneth A. Jacob (44)--Vice President(1)(2)--Vice President of the Investment Adviser since 1984 and portfolio manager since 1982; employed by the Investment Adviser since 1978. Gerald M. Richard (46)--Treasurer(1)(2)--Senior Vice President and Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President and Treasurer of Princeton Services since 1993; Treasurer of the Distributor since 1984; Vice President of the Distributor since 1981 and Treasurer of the Distributor since 1984. Mark B. Goldfus (38)--Secretary(2)--Vice President of FAM and MLAM since 1985. - -------- (1) Interested person, as defined in the Investment Company Act of 1940, of the Fund. (2) Mr. Zeikel is a director or trustee and officer, Messrs. Forbes, Reilly, Ryan and West and Ms. Montgomery are directors or trustees, and the officers of the Fund are officers and/or directors or trustees, of certain other investment companies for which the Investment Adviser or MLAM acts as investment adviser (see "Investment Advisory and Other Services"). 8 The following table sets forth for the fiscal year ended June 30, 1995, compensation paid by the Fund to the non-interested Directors and for the calendar year ended December 31, 1994, the aggregate compensation paid by all investment companies (including the Fund) advised by MLAM and its affiliate, FAM ("MLAM/FAM Advised Funds") to the non-interested Directors:
AGGREGATE PENSION OR COMPENSATION FROM RETIREMENT FUND AND BENEFIT ACCRUED MLAM/FAM ADVISED COMPENSATION AS PART OF FUND FUNDS PAID TO DIRECTOR/TRUSTEE FROM THE FUND EXPENSE TRUSTEE/DIRECTOR(1) ---------------- ------------- --------------- ------------------- Ronald W. Forbes............. $10,000 None $154,400 Cynthia A. Montgomery........ 7,400 None 133,817 Charles C. Reilly............ 10,000 None 276,900 Kevin A. Ryan................ 10,000 None 154,400 Richard R. West.............. 11,000 None 300,900
- -------- (1) In addition to the Fund, the Directors served on the boards of other MLAM/FAM Advised Funds as follows: Ronald W. Forbes (36 funds); Cynthia A. Montgomery (36 funds); Charles C. Reilly (53 funds); Kevin A. Ryan (36 funds); Richard R. West (53 funds). At September 30, 1995, the Directors and Officers of the Company as a group (12 persons) owned an aggregate of less than 1% of the outstanding shares of the Company. At such date Mr. Zeikel, a Director and Officer of the Company, and the other officers of the Company owned less than 1% of the outstanding shares of Common Stock of ML & Co. The Fund has an Audit Committee consisting of all of the directors of the Fund who are not interested persons of the Fund. Each director of the Fund who is not an officer or employee of ML & Co. or its subsidiaries receives an annual fee of $4,000 plus $800 per meeting of the Board of Directors attended and an annual fee of $2,000 for serving on the Audit Committee. In addition, the Fund pays all Directors' actual out-of- pocket expenses relating to attendance at meetings of the Board of Directors of the Fund or of any committee thereof. Mr. West is paid an additional annual fee of $1,000 for serving as Chairman of the Audit Committee. For the year ended June 30, 1995, fees and expenses paid to the unaffiliated directors of the Fund aggregated $50,617. No officer or employee of ML & Co., Inc. or its subsidiaries receives any compensation from the Fund for acting as a director or officer of the Fund. The Fund requires no employees other than its officers, all of whom are compensated by FAM or the Distributor. INVESTMENT ADVISORY ARRANGEMENTS Fund Asset Management, L.P. ("FAM"), a subsidiary of MLAM, an indirect subsidiary of Merrill Lynch & Co., Inc., acts as the investment adviser for the Fund and provides the Fund with management services. While FAM is at all times subject to the direction of the Board of Directors of the Fund, under the Investment Advisory Agreement, FAM is responsible for the actual management of each Portfolio and constantly reviews the holdings of each Portfolio in light of its own research analysis and analyses from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with FAM. FAM provides the portfolio managers for each Portfolio, who consider analyses from various sources, 9 make the necessary investment decisions and place transactions accordingly. FAM is also obligated to perform certain administrative and management services for the Fund and is obligated to provide all the office space, facilities, equipment and personnel necessary to perform its duties under the Agreement. Securities held by the Fund may also be held by other funds for which FAM or MLAM acts as an adviser or by investment advisory clients of MLAM. If purchases or sales of securities for the Fund or other funds for which FAM or MLAM acts as investment adviser or for their advisory clients arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Investment Adviser or MLAM during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. Advisory Fee. As compensation for its services to the Portfolios, FAM receives at the end of each month a fee with respect to each Portfolio at the annual rates set forth below, which are based upon the average daily value of the Fund's net assets. The rates are subject to reduction to the extent that the aggregate of the average daily net assets of the three combined Portfolios exceeds $250 million, $400 million, $550 million and $1.5 billion, respectively. The reductions will be applicable to each Portfolio regardless of size on a "uniform percentage" basis. Determination of the portion of the net assets of each Portfolio to which the reduced rate is applicable is made by multiplying the net assets of that Portfolio by the "uniform percentages," derived by dividing the amount by which the combined assets of all Portfolios exceeds the various applicable breakpoints by such combined assets. In addition, although under the Investment Advisory Agreement FAM is entitled to a fee with respect to the Insured Portfolio at an annual rate of 0.375% when the Fund's aggregate net assets exceed $1.5 billion, as reflected in the table below, FAM has agreed to waive such fee in excess of an annual rate of 0.35%.
RATE OF ADVISORY FEE ----------------------------- LIMITED AGGREGATE OF AVERAGE DAILY NET ASSETS OF THE INSURED NATIONAL MATURITY THREE COMBINED PORTFOLIOS PORTFOLIO PORTFOLIO PORTFOLIO - -------------------------------------------- --------- --------- --------- Not exceeding $250 million...................... 0.40 % 0.50 % 0.40 % In excess of $250 million but not exceeding $400 million........................................ 0.375 0.475 0.375 In excess of $400 million but not exceeding $550 million........................................ 0.375 0.475 0.35 In excess of $550 million but not exceeding $1.5 billion........................................ 0.375 0.475 0.325 In excess of $1.5 billion....................... 0.35 0.475 0.325
At the date of this Statement of Additional Information, the only state which imposes limitations on the expenses of the Fund is the State of California. California's annual expense limitations require that FAM reimburse each Portfolio for advisory fees received by it from the Fund, to the extent that such Portfolio's aggregate ordinary operating expenses (excluding interest, taxes, brokerage fees and commissions, extraordinary charges such as litigation costs and a percentage of distribution fees) exceed in any fiscal year 2.5% of the Portfolio's first $30,000,000 of average net assets, 2.0% of the next $70,000,000 of its average net assets and 1.5% of the remaining net assets. No fee payment will be made to FAM with respect to any Portfolio during any fiscal year which will cause the expenses of such Portfolio to exceed the pro rata expense limitation applicable to such Portfolio at the time of such payment. 10 For the year ended June 30, 1993, FAM received $10,497,116 from the Insured Portfolio, $7,817,631 from the National Portfolio and $2,526,397 from the Limited Maturity Portfolio as advisory fees. For the year ended June 30, 1994, FAM received $11,040,540 from the Insured Portfolio, $8,514,268 from the National Portfolio and $3,305,839 from the Limited Maturity Portfolio as advisory fees. For the year ended June 30, 1995, FAM received $9,408,013 from the Insured Portfolio, $7,415,203 from the National Portfolio and $2,712,662 from the Limited Maturity Portfolio as advisory fees. Payment of Expenses. The Investment Advisory Agreement obligates FAM to provide investment advisory services and to pay all compensation of and furnish office space for officers and employees of the Fund connected with economic research, investment research, trading and investment management of the Fund, as well as the fees of all directors of the Fund who are affiliated persons of Merrill Lynch & Co., Inc. or any of its subsidiaries. Each Portfolio pays all other expenses incurred in its operation and a portion of the Fund's general administrative expenses allocated on the basis of the asset size of the respective Portfolios. Expenses that will be borne directly by the Portfolios include redemption expenses, expenses of portfolio transactions, shareholder servicing costs, portfolio insurance maintained and paid by the Insured Portfolio, expenses of registering the shares under Federal and state securities laws, pricing costs (including the daily calculation of net asset value), interest, certain taxes, charges of the Custodian and Transfer Agent and other expenses attributable to a particular Portfolio. Expenses which will be allocated on the basis of the size of the respective Portfolios include directors' fees, legal expenses, state franchise taxes, auditing services, costs of printing proxies, stock certificates, shareholder reports and prospectuses (except to the extent paid by the Distributor), Securities and Exchange Commission fees, accounting costs and other expenses properly payable by the Fund and allocable on the basis of the size of the respective Portfolios. Accounting services are provided for the Fund by FAM, and the Fund reimburses FAM for its costs in connection with such services. During the year ended June 30, 1995, the Fund reimbursed FAM $383,875 for such services. Depending upon the nature of a lawsuit, litigation costs may be directly applicable to the Portfolios or allocated on the basis of the size of the respective Portfolios. The Board of Directors has determined that this is an appropriate method of allocation of expenses. As required by the Distribution Agreement, the Distributor will pay certain of the expenses of each Portfolio incurred in connection with the offering of shares of each Portfolio, including the expense of printing the prospectuses used in connection with the continuous offering of shares by each Portfolio. See "Purchase of Shares--Distribution Agreement" in the Prospectus. Duration and Termination. Unless earlier terminated as described below, the Investment Advisory Agreement will continue in effect from year to year if approved annually (a) by the Board of Directors of the Fund or by a majority of the outstanding voting shares of each Portfolio and (b) by a majority of the Directors who are not parties to such contract or interested persons (as defined in the Investment Company Act of 1940) of any such party. Such contract terminates upon assignment and may be terminated without penalty on 60 days' written notice at the option of either party thereto or by the vote of the shareholders of the Fund. If the shareholders of any Portfolio fail to approve the continuance of the Investment Advisory Agreement, the Investment Advisory Agreement will continue in effect as to any other Portfolio if the shareholders of such Portfolio have approved the contract. 11 DETERMINATION OF NET ASSET VALUE The net asset value of the shares of the Company is determined once daily Monday through Friday as of 15 minutes after the close of business on the New York Stock Exchange (generally, 4:00 P.M., New York City time), on each day during which the New York Stock Exchange is open for trading. The New York Stock Exchange is not open on New Year's 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, 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 which are in default, or in significant risk of default, in the payment of principal or interest until the default has been cured or the principal and interest are paid by the issuer or the insurer. In accordance with such guidelines, FAM will consider the following factors in determining the effective value of Insured Municipal Bonds in the Insured Portfolio which are in default or in significant risk of default, in the payment of principal or interest: (1) the market value of the bonds; (2) the market value of securities of similar issuers whose securities carry similar interest rates; and (3) the value of the insurance guaranteeing interest and principal payments. Absent unusual or unforeseen circumstances, the value ascribed to the insurance feature of the bonds would be the difference between the market value of the bonds and the market value of securities of a similar nature which are not in default or significant risk of default. It is the position of the Board of Directors that this is a fair method of valuing the insurance feature and reflects a proper valuation method in accordance with the provisions of the Investment Company Act of 1940. This method of valuing securities will mean that shareholders of the Insured Portfolio, whether they decide to redeem or decide to retain their investment in the Insured Portfolio, will in normal circumstances 12 receive the benefit of the insurance. Because of the unusual circumstances surrounding the bonds held in the Insured Portfolio which were in default at the end of the Fund's last fiscal year, the insurance feature was valued in an amount which, when combined with the market value of the bonds, resulted in the bonds' having an effective value of par. PORTFOLIO TRANSACTIONS Under the Investment Company Act of 1940, persons affiliated with the Fund are prohibited from dealing with the Fund as a principal in the purchase and sale of securities unless an exemptive order allowing such transactions is obtained from the Securities and Exchange Commission. Since over-the-counter transactions are usually principal transactions, affiliated persons of the Fund, including Merrill Lynch, may not serve as a dealer in connection with transactions with the Fund. However, the Fund has obtained an exemptive order permitting it to engage in certain principal transactions involving high quality short-term Municipal Bonds. Affiliated persons of the Fund may serve as its broker in over-the-counter transactions conducted on an agency basis. Certain court decisions have raised questions as to the extent to which investment companies should seek exemptions under the Investment Company Act in order to seek to recapture underwriting and dealer spreads from affiliated entities. The Directors have considered the possibilities of seeking to recapture spreads for the benefit of the Fund and, after considering factors deemed relevant, have made a determination not to seek such recapture at this time. The Board will reconsider this matter from time to time. Under the Investment Company Act of 1940, the Fund may not purchase Municipal Bonds from any underwriting syndicate of which Merrill Lynch is a member except pursuant to an exemptive order or rules adopted by the Securities and Exchange Commission. During the year ended June 30, 1994, the Fund purchased $230,231,897 of Municipal Bonds in 77 transactions pursuant to an exemptive order or such a rule. During the year ended June 30, 1995, the Fund purchased $79,188,750 of Municipal Bonds in 20 transactions pursuant to an exemptive order or such a rule. The Fund does not expect to use any particular dealer in the execution of transactions for its Portfolios, but, subject to obtaining the best net results, dealers who provide supplemental investment research (such as economic data and market forecasts) to FAM may receive orders for transactions by any Portfolio. Information so received will be in addition to and not in lieu of the services required to be performed by FAM under its Investment Advisory Agreement and FAM's expenses will not necessarily be reduced as a result of the receipt of such supplemental information. FAM expects that the portfolio turnover rate for the Insured Portfolio and the National Portfolio should not generally exceed 100%. Because of the short- term nature of the Limited Maturity Portfolio, its turnover rate may be substantially higher. In any particular year, however, market conditions could result in portfolio activity of a Portfolio at a greater or lesser rate than anticipated. PURCHASE OF SHARES The Fund has entered into separate distribution agreements (the "Distribution Agreements") with the Distributor in connection with the offering of each class of shares of the three Portfolios. The Distribution Agreements obligate the Distributor to pay certain expenses in connection with the offering of the Fund's shares. After the prospectuses, statements of additional information and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of copies thereof 13 used in connection with the offering to dealers and investors. The Distributor also pays for other supplementary sales literature and advertising costs. The Distribution Agreements are subject to the same renewal requirements and termination provisions as the Investment Advisory Agreement described above. ALTERNATIVE SALES ARRANGEMENTS The Fund is a series fund comprised of three separate Portfolios. All three Portfolios are divided into four classes of shares under the Merrill Lynch Select PricingSM System. Class A and Class D shares of the three Portfolios are sold to investors choosing the initial sales charge alternative and Class B and Class C shares are sold to investors choosing the deferred sales charge alternative. Each Class A, Class B, Class C and Class D share of a Portfolio represents an identical interest in the investment portfolio of the Portfolio, has the same rights and is identical in all respects to the other classes of shares, except that Class B, Class C and Class D shares of the Portfolio bear the expenses of the ongoing account maintenance fees and Class B and Class C shares bear the expenses of the ongoing distribution fees and the additional transfer agency costs resulting from the deferred sales charge arrangements. Class B, Class C and Class D shares each have exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted with respect to such class pursuant to which the distribution fee is paid. Each class has different exchange privileges. See "Exchange Privilege." INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES For the year ended June 30, 1995, Class A gross sales charges were $664,935, of which the Distributor received $63,348, and Merrill Lynch received $601,587. For the year ended June 30, 1994, Class A gross sales charges were $3,435,864, of which the Distributor received $343,837 and Merrill Lynch received $3,092,027. For the year ended June 30, 1993, Class A gross sales charges were $5,700,495, of which the Distributor received $496,721 and Merrill Lynch received $5,203,774. All of such sales charges were attributable to payments of initial sales charges in connection with purchases of Class A shares of the Portfolios. For the period October 21, 1994 (commencement of operations) to June 30, 1995, Class D sales charges were $246,501 of which the Distributor received $17,470 and Merrill Lynch received $229,031. All of such sales charges were attributable to payments of initial sales charges in connection with purchases of Class D shares of the Portfolios. REDUCED INITIAL SALES CHARGES--CLASS A AND CLASS D SHARES As set forth in the Prospectus, a reduced sales charge is available for any purchase in excess of $25,000 (in the case of the Insured Portfolio and National Portfolio) and $100,000 for the Limited Maturity Portfolio of Class A or Class D shares of a Portfolio. The term "purchase" as used in the Prospectus and Statement of Additional Information in connection with investment in Class A and Class D shares of the Fund refers to a single purchase by an individual, or to concurrent purchases, which in the aggregate are at least equal to the prescribed amounts by an individual, his spouse and their children under the age of 21 years purchasing shares for his or their own account and to single purchases by a trustee or fiduciary purchasing shares for a single trust or estate or single fiduciary account although more than one beneficiary is involved. The term "purchase" also includes purchases by any "company," as that term is defined in the Investment Company Act of 1940, but does not include purchases by any such company which has not been in existence for at least six months or has no purpose other than the purchase of shares of the Fund or shares of other registered 14 investment companies at a discount; provided, however, that it will not include purchases by any group of individuals whose sole organizational nexus is that the participants therein are credit card holders of a company, policyholders of an insurance company, customers of either a bank or broker-dealer or clients of an investment adviser. Right of Accumulation. Reduced sales charges are applicable through a right of accumulation under which investors are permitted to purchase shares of any of the three Portfolios subject to an initial sales charge at the offering price applicable to the total of (a) the public offering price of the shares then being purchased plus (b) an amount equal to the then current net asset value or cost, whichever is higher, of the purchaser's combined holdings of all classes of the shares of all of the Portfolios and of other MLAM-advised mutual funds. For any such right of accumulation to be made available, the Distributor must be provided at the time of purchase, by the purchaser or the purchaser's securities dealer, with sufficient information to permit confirmation of qualification, and acceptance of the purchase order is subject to such confirmation. The right of accumulation may be amended or terminated at any time. Shares held in the name of a nominee or custodian under pension, profit- sharing or other employee benefits plans may not be combined with other shares to qualify for the right of accumulation. Letter of Intention. Reduced sales charges are applicable to purchases of Class A and Class D shares of the Portfolios, or any other MLAM-advised mutual funds, where purchases of such shares aggregating $25,000 or more for the Insured Portfolio and National Portfolio or $100,000 or more for the Limited Maturity Portfolio are made through any dealer within a 13-month period starting with the first purchase pursuant to a Letter of Intention in the form provided by the Distributor. The Letter of Intention is not a binding obligation to purchase any amount of Class A or Class D shares, but its execution will result in the purchaser's paying a lower sales charge at the appropriate quantity purchase level. The Letter of Intention is available only to investors whose accounts are maintained at the Fund's Transfer Agent. A purchase not originally made pursuant to a Letter of Intention may be included under a subsequent letter executed within 90 days of such purchase if the Distributor is informed in writing of this intent within such 90-day period. The value of Class A and Class D shares of the Portfolios and of other MLAM- advised mutual funds (or eligible shares) presently held, at cost or maximum offering price (whichever is higher) on the date of the first purchase under the Letter of Intention, may be included as a credit toward the completion of such Letter, but the reduced sales charge applicable to the amount covered by the Letter of Intention will be applied only to new purchases. If the total amount of shares purchased does not equal the amount stated in the Letter of Intention (minimum of $25,000 for the National and Insured Portfolio or $100,000 for the Limited Maturity Portfolio), the investor will be notified and must pay, within 20 days of the expiration of such Letter, the difference between the sales charge on Class A or Class D shares purchased at the reduced rate and the sales charge applicable to the shares actually purchased through the Letter. Class A and Class D shares equal to five percent of the intended amount will be held in escrow during the 13-month period (while remaining registered in the name of the purchaser) for this purpose and will be involuntarily redeemed to pay the additional sales charge, if necessary. The first purchase under the Letter of Intention must be at least five percent of the dollar amount of such Letter. If during the term of such Letter a purchase brings the total amount invested to an amount equal to or in excess of the amount indicated in the Letter, the purchaser will be entitled on that purchase and subsequent purchases to the reduced percentage sales charge 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 15 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 Accounts SM. Class A or Class D shares are offered at net asset value to Employee Access 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. Employer Sponsored Non-Qualified After-Tax Savings and Investment Programs. Class A and Class D shares are offered at net asset value to employer sponsored non-qualified After-Tax Savings and Investment programs maintained on the Merrill Lynch Group Employee Services system, provided the program, or certain other plans or programs sponsored by the employer, has $5 million or more in existing plan assets initially invested in portfolios, mutual funds or trusts advised by the Investment Adviser or an affiliate. Class A and Class D shares are also offered at net asset value to After-Tax Savings and Investment programs, provided the program has accumulated $5 million or more in existing assets invested in mutual funds advised by the Investment Adviser or an affiliated adviser charging a front-end sales charge or contingent deferred sales charge. In this case as well, assets of certain other plans sponsored by the same sponsor or an affiliated sponsor may be aggregated. The Class A and Class D shares share reduced load breakpoints also apply to these aggregated assets. After-Tax Savings and Investment programs are also offered Class A or Class D shares at net asset value, provided such plan initially has 1,000 or more employees eligible to participate in the plan. Employees eligible to participate in such plans of the same sponsoring employer or its affiliates may be aggregated. The minimum initial and subsequent purchase requirements are waived in connection with all the above- referenced plans. Merrill Lynch Blueprint SM Program. Class D shares of any of the three Portfolios are offered to participants in the Merrill Lynch Blueprint SM Program ("Blueprint"). In addition, participants in Blueprint who own Class A shares of a Portfolio may purchase additional Class A shares of the Portfolio through Blueprint. Blueprint is directed to small investors, group IRAs and participants in certain affinity groups such as credit unions and trade associations. Investors placing orders to purchase Class A or Class D shares of a Portfolio through Blueprint will acquire the shares at net asset value plus a sales charge calculated in accordance with Blueprint sales charge schedule (i.e., up to $5,000 at 0.80% for Limited Maturity Portfolio, up to $5,000 at 3.5% for the Insured Portfolio or National Portfolio, and $5,000.01 or more at the standard disclosed sales charge rate in the Prospectus). However, services, including the exchange privilege, available to Class A or Class D shareholders through Blueprint may differ from those available to other investors. Class A and Class D shares are offered at net asset value, to Blueprint participants through the Merrill Lynch Directed IRA Rollover Program ("IRA Rollover Program") available from Merrill Lynch Business Financial Services, a business unit of Merrill Lynch. Orders for purchases and redemptions of Class A or Class D shares of the Portfolios may be grouped for execution purposes which, in some circumstances, may involve the execution of such orders two business days following the day such orders are placed. The minimum initial 16 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. Closed-End Fund Investment Option. Class A shares of the Fund and other MLAM- advised mutual funds ("Eligible Class A Shares") are offered at net asset value to shareholders of certain closed-end funds advised by MLAM or the Investment Adviser who purchased such closed-end fund shares prior to October 21, 1994 and wish to reinvest the net proceeds from a sale of their closed-end fund shares of common stock in Eligible Class A shares, if the conditions set forth below are satisfied. Alternatively, closed-end fund shareholders who purchased such shares on or after October 21, 1994 and wish to reinvest the net proceeds from a sale of their closed-end fund shares are offered Class A shares (if eligible to purchase Class A shares) or Class D shares of the Fund and other MLAM- advised mutual funds ("Eligible Class D Shares"), if the following conditions are met. First, the sale of the closed-end fund shares must be made through Merrill Lynch, and the net proceeds therefrom must be immediately reinvested in Eligible Class A or Class D shares. Second, the closed-end fund shares must either have been acquired in the initial public offering or be shares representing dividends from shares of common stock acquired in such offering. Third, the closed-end fund shares must have been continuously maintained in a Merrill Lynch securities account. Fourth, there must be a minimum purchase of $250 to be eligible for the investment option. Class A shares of the Fund are offered at net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior Floating Rate Fund") who wish to reinvest the net proceeds from a sale of certain of their shares of common stock of Senior Floating Rate Fund in shares of the Fund. In order to exercise this investment option, Senior Floating Rate Fund shareholders must sell their Senior Floating Rate Fund shares to the Senior Floating Rate Fund in connection with a tender offer conducted by the Senior Floating Rate Fund and reinvest the proceeds immediately in the Fund. This investment option is available only with respect to the proceeds of Senior Floating Rate Fund shares as to which no Early Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing to exercise this investment option will be accepted only on the day that the related Senior Floating Rate Fund tender offer terminates and will be effected at the net asset value of the Fund at such day. Purchase Privileges of Certain Persons. Directors of the Fund, members of the Boards of other MLAM-advised investment companies, ML & Co., Inc. and its subsidiaries, (the term "subsidiaries", when used herein with respect to Merrill Lynch & Co., Inc., includes MLAM, FAM and certain other entities directly or indirectly wholly-owned and controlled by Merrill Lynch & Co., Inc.), and their directors and employees and any trust, pension, profit-sharing or other benefit plan for such persons, may purchase Class A shares of the Fund at net asset value. Class D shares of the Fund will be offered at net asset value, without sales charge, to an investor who has a business relationship with a financial consultant who joined Merrill Lynch from another investment firm within six months prior to the date of purchase by such investor, if the following conditions are satisfied. First, the investor must advise Merrill Lynch that it will purchase Class D shares of the Fund with proceeds from a redemption of a mutual fund that was sponsored by the financial consultant's previous firm and was subject to a sales charge either at the time of purchase or on a deferred basis. Second, the investor also must 17 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 will not be subject to an initial sales charge. Such purchases will be subject to a contingent deferred sales charge if the shares are redeemed within one year after purchase at the following rates: 1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on purchases of $2,500,000 to $3,500,000; 0.40% on purchases of $3,500,000 to $5,000,000; and 0.25% on purchases of more than $5,000,000 in lieu of paying an initial sales charge. Acquisition of Certain Investment Companies. The public offering price of Class D shares of the Portfolios may be reduced to the net asset value per share in connection with the acquisition of the assets of or merger or consolidation with a personal holding company or a public or private investment company. The value of the assets or company acquired in a tax-free transaction may in appropriate cases be adjusted to reduce possible adverse tax consequences to the Fund which might result from an acquisition of assets having net unrealized appreciation which is disproportionately higher at the time of acquisition than the realized or unrealized appreciation of the Fund. The issuance of Class D shares for consideration other than cash is limited to bona fide reorganizations, statutory mergers or other acquisitions of portfolio securities which (i) meet the investment objectives and policies of the Fund; (ii) are acquired for investment and not for resale (subject to the understanding that the disposition of the Fund's portfolio securities shall at all times remain within its control); and (iii) are liquid securities, the value of which is readily ascertainable, which are not restricted as to transfer either by law or illiquidity of market (except that the Fund may acquire through such transactions restricted or illiquid securities to the extent the Fund does not exceed the applicable limits on acquisition of such securities set forth under "Investment Objective and Policies" herein). 18 Purchases by Banks. Class A shares of the Fund's Insured Portfolio may be purchased at net asset value, without a sales charge, by banks which have invested a minimum of $25 million in such shares. 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 of 1940. Among other things, each Distribution Plan provides that the Distributor shall provide and the directors shall review quarterly reports of the disbursement of the account maintenance and/or distribution fees paid to the Distributor. In their consideration of each Distribution Plan, the directors must consider all factors they deem relevant, including information as to the benefits of the Distribution Plan to the Fund and the related class of shareholders of the relevant Portfolio. Each Distribution Plan further provides that, so long as the Distribution Plan remains in effect, the selection and nomination of directors who are not "interested persons" of the Fund, as defined in the Investment Company Act of 1940 (the "Independent Directors"), shall be committed to the discretion of the Independent Directors then in office. In approving each Distribution Plan in accordance with Rule 12b-1, the Independent Directors concluded that there is reasonable likelihood that such Distribution Plan will benefit the Fund and the related class of shareholders of the Portfolio. Each Distribution Plan can be terminated at any time, without penalty, by the vote of a majority of the Independent Directors or by the vote of the holders of a majority of the outstanding related voting securities of the relevant Portfolio. A Distribution Plan cannot be amended to increase materially the amount to be spent by any Portfolio without the approval of the related class of shareholders of such Portfolio and all material amendments are required to be approved by the vote of directors, including a majority of the Independent Directors who have no direct or indirect financial interest in such Distribution Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further requires that the Fund preserve copies of each class of Distribution Plan and any report made pursuant to such plan for a period of not less than six years from the date of such Distribution Plan or such report, the first two years in an easily accessible place. LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES The maximum sales charge rule in the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain asset-based sales charges such as the distribution fee and the CDSC borne by the Class B and Class C shares but not the account maintenance fee. The maximum sales charge rule is applied separately to each class of each Portfolio. As applicable to the Fund, the maximum sales charge rule limits the aggregate of distribution fee payments and CDSCs payable by the Fund with respect to Class B or Class C shares of a Portfolio to (1) 6.25% of eligible gross sales of such shares, computed separately for each class of a Portfolio (defined to exclude shares issued pursuant to dividend reinvestments and exchanges), plus (2) interest on the unpaid balance for the respective class, computed separately, at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts received from the payment of the distribution fee and the CDSC). In connection with the Class B shares, the Distributor has voluntarily agreed to waive interest charges on the unpaid balance in excess of 0.50% of eligible gross 19 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, 1995 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, 1995 for the Class B shares of the National and Insured Portfolios, for the period November 2, 1992 (commencement of operations) to June 30, 1995 for Class B shares of the Limited Maturity Portfolio, and for the period October 21, 1994 (commencement of Class C operations) to June 30, 1995 for the National, Insured and Limited Maturity Portfolios. 20 DATA CALCULATED AS OF JUNE 30, 1995 NATIONAL PORTFOLIO
ANNUAL DISTRIBUTION ALLOWABLE ALLOWABLE AMOUNTS FEE AT ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET CLASS B SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4) - ------- ---------- --------- ---------- -------- -------------- --------- ------------ (IN THOUSANDS) Under NASD Rule as Adopted................ $ 597,762 $ 37,360 $10,308 $ 47,668 $13,506 $ 34,162 $ 2,100 Under Distributor's Voluntary Waiver....... $ 597,762 $ 37,360 $ 2,989 $ 40,349 $13,506 $ 26,843 $ 2,100 CLASS C - ------- (NOT IN THOUSANDS) Under NASD Rule as Adopted................ $6,195,766 $387,235 $12,056 $399,291 $11,933 $387,358 $28,570 Under Distributor's Voluntary Waiver....... N/A N/A N/A N/A N/A N/A N/A INSURED PORTFOLIO ANNUAL DISTRIBUTION ALLOWABLE ALLOWABLE AMOUNTS FEE AT ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET CLASS B SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4) - ------- ---------- --------- ---------- -------- -------------- --------- ------------ (IN THOUSANDS) Under NASD Rule as Adopted................ $1,191,497 $ 74,469 $22,623 $ 97,092 $29,306 $ 67,786 $ 3,914 Under Distributor's Voluntary Waiver....... $1,191,497 $ 74,469 $ 5,957 $ 80,426 $29,306 $ 51,120 $ 3,914 CLASS C - ------- (NOT IN THOUSANDS) Under NASD Rule as Adopted................ $8,134,794 $508,425 $14,306 $522,731 $18,801 $503,930 $42,658 Under Distributor's Voluntary Waiver....... N/A N/A N/A N/A N/A N/A N/A
21 LIMITED MATURITY PORTFOLIO
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) CLASS B - ------- Under NASD Rule as Adopted................ $ 164,076 $ 10,255 $1,548 $ 11,803 $1,344 $ 10,459 $ 259 Under Distributor's Voluntary Waiver....... $ 164,076 $ 10,255 $ 820 $ 11,075 $1,344 $ 9,731 $ 259 CLASS C - ------- (NOT IN THOUSANDS) Under NASD Rule as Adopted................ $3,826,338 $189,146 $7,116 $196,262 $3,441 $192,821 $7,930 Under Distributor's Voluntary Waiver....... N/A N/A N/A N/A N/A N/A N/A
- -------- (1) Purchase price of all eligible Class B shares sold since October 21, 1988 (commencement of Class B operations) other than shares acquired through dividend reinvestment and the exchange privilege. (2) Interest is computed on a monthly average Prime Rate basis based upon the prime rate, as reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD Rule. (3) Consists of CDSC payments, distribution fee payments and accruals. Of these distribution fee payments made prior to July 6, 1993 under the Prior Plan at the 0.75% rate, 0.50% of average daily net assets has been treated as a distribution fee and 0.25% of average daily net assets has been deemed to have been a service fee and not subject to the NASD maximum sales charge rule. (4) Provided to illustrate the extent to which the current level of distribution fee payments (not including any CDSC payments) is amortizing the unpaid balance. No assurance can be given that payments of the distribution fee will reach either the voluntary maximum or the NASD maximum. (5) Purchase price of all eligible Class B shares sold since November 2, 1992 (commencement of Class B operations) other than shares acquired through dividend reinvestment and exchange privilege. (6) Consists of CDSC payments, distribution fee payments and accruals. Of these distribution fee payments made prior to July 6, 1993 under the Prior Plan at the 0.35% rate, 0.25% of average daily net assets has been treated as a distribution fee and 0.10% of average daily net assets has been deemed to have been a service fee and not subject to the NASD maximum sales charge rule. REDEMPTION OF SHARES The right to redeem shares or to receive payment with respect to any such redemption may be suspended for any period during which trading on the New York Stock Exchange is restricted as determined by the Securities and Exchange Commission or such Exchange is closed (other than customary weekend and holiday closings), for any period during which an emergency exists as defined by the Commission as a result of which disposal of portfolio securities or determination of the net asset value of any Portfolio is not reasonably practicable, and for such other periods as the Securities and Exchange Commission may by order permit for the protection of shareholders of each Portfolio. Reference is made to "Redemption of Shares" in the Prospectus, for certain information as to the redemption and repurchase of Fund shares. The value of shares at the time of redemption may be more or less than the shareholder's cost, depending on the market value of the securities held by each Portfolio at such time. 22 REINSTATEMENT PRIVILEGE Holders of Class A or Class D shares of any Portfolio who have redeemed their shares have a one-time privilege to reinstate their accounts by purchasing Class A or Class D shares, as the case may be, of the Portfolio in which they had invested at net asset value without a sales charge up to the dollar amount redeemed. The reinstatement privilege may be exercised as follows. A notice to exercise this privilege along with a check for the amount to be reinstated must be received by the Transfer Agent within 30 days after the date the request for redemption was executed by the Transfer Agent or the Distributor. The reinstatement will be made at the net asset value per share next determined after the notice of reinstatement is received and cannot exceed the amount of the redemption proceeds. DEFERRED SALES CHARGE--CLASS B AND CLASS C SHARES As discussed in the Prospectus under "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares", while Class B shares of the Insured Portfolio and National Portfolio redeemed within four years of purchase and Class B shares of the Limited Maturity Portfolio redeemed within one year of purchase are subject to a contingent deferred sales charge under most circumstances, the charge is waived on redemptions of Class B shares following the death or disability of a Class B shareholder. Redemptions for which the waiver applies are any partial or complete redemptions following the death or disability (as defined in the Internal Revenue Code) of a Class B shareholder (including one who owns the Class B shares of any Portfolio as joint tenant with his or her spouse), provided the redemption is requested within one year of the death or initial determination of disability. For the year ended June 30, 1995, contingent deferred sales charges for Class B shares paid by shareholders of the Fund to the Distributor were $1,036,339 for the National Portfolio, $1,840,608 for the Insured Portfolio, and $387,044 for the Limited Maturity Portfolio. For the year ended June 30, 1994, contingent deferred sales charges for Class B shares paid by shareholders of the Fund to the Distributor were $718,890 for the National Portfolio, $1,469,123 for the Insured Portfolio, and $190,903 for the Limited maturity Portfolio. For the year ended June 30, 1993, contingent deferred sales charges for Class B shares paid by shareholders of the Fund to the Distributor were $638,430 for the National Portfolio, $1,749,022 for the Insured Portfolio, and $37,348 for the Limited Maturity Portfolio. For the period October 21, 1994 (commencement of Class C operations) to June 30, 1995, contingent deferred sales charges for Class C shares paid by shareholders of the Fund to the Distributor were $3,219 for the National Portfolio, $5,361 for the Insured Portfolio, and $2,661 for the Limited Maturity Portfolio. 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. Employee Access Accounts SM. Class A or Class D shares are offered at net asset value to Employee Access 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. 23 Merrill Lynch Blueprint SM Program. Class B shares of all three Portfolios are offered to certain participants in the Merrill Lynch BlueprintSM 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 BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441. DIVIDENDS, DISTRIBUTIONS AND TAXES Reference is made to "Dividends, Distributions and Taxes--Federal Income Taxes" in the Prospectus. Each Portfolio intends to qualify to pay "exempt-interest" dividends as defined in Section 852(b)(5) of the Internal Revenue Code of 1986, as amended (the "Code"). Under that section if, at the close of each quarter of its taxable year, at least 50% of the value of its total assets consists of obligations exempt from federal income tax ("tax-exempt obligations"), pursuant to Section 103(a) of the Code (relating to obligations of a state, territory, or a possession of the United States, or any political sub-division of any of the foregoing, or of the District of Columbia), the Portfolio will be qualified to pay exempt-interest dividends to its shareholders. Exempt- interest dividends are dividends or any part thereof (other than any capital gain distributions) paid by the Portfolio which are attributable to interest on tax-exempt obligations and designated by the Portfolio as exempt-interest dividends in a written notice mailed to the Portfolio's shareholders within sixty days after the close of its taxable year. The percentage of the total dividends paid by the Portfolio during any taxable year which qualifies as exempt-interest dividends will be the same for all shareholders of each Portfolio receiving dividends during such year. Exempt-interest dividends may be treated by shareholders for all purposes as items of interest excludible from their gross income under Section 103(a) of the Code. However, a shareholder is advised to consult his tax adviser with respect to whether exempt-interest dividends retain the exclusion under Section 103(a) if such shareholder would be treated as a "substantial user" under Section 147(a)(1) with respect to some or all of the tax-exempt obligations held by the Portfolio. Dividends paid by each Portfolio from its taxable income (i.e., interest on money market securities) and distributions of net realized short-term capital gains (whether from tax-exempt or taxable obligations) are taxable to shareholders as ordinary income. If a Portfolio acquires tax-exempt obligations having market discount (generally, obligations acquired for a price less than their principal amount) after April 30, 1993, gain on the disposition or retirement of such obligations will be treated as ordinary income to the extent of accrued market discount. To the extent the Portfolio has both taxable and tax-exempt income, expenses of the Fund will be allocated between the taxable and the tax-exempt income on a proportional basis. Since the 24 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. 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. 25 A loss realized on a sale or exchange of shares of the Fund will be disallowed if other Fund shares are acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. An exchange between funds pursuant to the Exchange Privilege is treated as a sale for federal income tax purposes and, depending upon the circumstances, a short- or long-term capital gain or loss may be realized. In addition, any shareholder of the Fund who exercises the Exchange Privilege and becomes a shareholder of another fund must certify to such other fund his Social Security Number or Taxpayer Identification Number and that he is not subject to the backup withholding tax if he wishes to avoid a 31% backup withholding tax on the gross proceeds paid by such other fund on redemption of shares and on dividend distributions made to him by such other fund. Any dividend declared by a Portfolio in October, November or December of any year and made payable to shareholders of record in such a month will be deemed to be received on December 31 of such year if actually paid during the following January. Accordingly, those dividends, to the extent taxable, will be taxable to shareholders in the year declared, and not in the year in which shareholders actually receive the dividend. Not later than sixty days after the end of each fiscal year of the Fund, the Fund will send to its shareholders the written notice required by the Code designating the amount of its dividends that constitute exempt-interest dividends, the amount of the dividends and distributions which are ordinary taxable income and the amount of distributions which are taxable to shareholders as long-term capital gains. Every person required to file a tax return must disclose on that return the amount of exempt-interest dividends received from a Portfolio during the taxable year. The disclosure of this amount is for information purposes only. In addition, with respect to a shareholder who receives exempt-interest dividends on shares held for less than six months, any loss on the sale or exchange of such shares will, to the extent of the amount of such exempt- interest dividends, be disallowed. Interest income with respect to certain tax-exempt bonds, known as "private activity" bonds, is a preference item for purposes of the corporate and individual alternative minimum tax. To the extent that a Portfolio invests in private activity bonds, shareholders of the Portfolio will have preference items attributable to their proportionate shares of the interest income received by the Portfolio from such bonds, thereby increasing a Shareholders' alternative minimum taxable income. In addition, a corporation must increase its alternative minimum taxable income by 75 percent of the amount by which adjusted current earnings exceed alternative minimum taxable income (without regard to this provision or the alternative net operating loss deduction). Adjusted current earnings are computed by making certain adjustments, which generally follow the rules applicable to corporations in computing earnings and profits. All tax-exempt dividends received by the corporate shareholders of a Portfolio are included in their current earnings, thus, increasing a corporate shareholders' alternative minimum taxable income. The Code imposes a four percent nondeductible excise tax on a regulated investment company, such as a Portfolio of the Fund, if the company does not distribute to its shareholders during the calendar year an amount equal to 98 percent of the investment company's taxable income, with certain adjustments, for such calendar year, plus 98 percent of the company's capital gain net income for the one-year period ending on October 31 of such calendar year. In addition, an amount equal to any undistributed investment company taxable income or capital gain net income from the previous calendar year must also be distributed to avoid 26 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, 1995, the Fund's Portfolios had a capital loss carryforward as follows: Approximately $38,085,000 in the Insured Portfolio, all of which expires in 2003; approximately $37,909,000 in the National Portfolio, all of which expires in 2003; and approximately $6,271,000 in the Limited Maturity Portfolio, of which $1,416,000 expires in 1997, $2,787,000 expires in 1998, $22,000 expires in 1999, $25,000 expires in 2002 and $2,021,000 expires in 2003. These will be available to offset like amounts of any future taxable gains. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury Regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury Regulations promulgated thereunder. The Code and these Regulations are subject to change by legislative or administrative action. SYSTEMATIC WITHDRAWAL PLANS A holder of Class A or Class D shares of any of the three Portfolios may elect to make systematic withdrawals of either a monthly or calendar quarterly basis as provided below. Quarterly withdrawals of such shares are available for shareholders who have acquired Class A or Class D shares having a value, based upon cost or the current offering price, of $5,000 or more, and monthly withdrawals are available for shareholders with Class A or Class D shares with such a value of $10,000 or more. At the time of each withdrawal payment, sufficient Class A or Class D shares are redeemed from those on deposit in the shareholder's account to provide the withdrawal payment specified by the shareholder. The shareholder may specify either a dollar amount or a percentage of the value of his Class A or Class D shares. Redemptions will be made at net asset value as determined once daily by FAM immediately after the declaration of dividends as of 15 minutes after the close of business on the New York Stock Exchange (generally 4:00 P.M. New York City time) on the 24th day of each month or the 24th day of the last month of each quarter, whichever is applicable. If the Exchange is not open for business on that day, Class A or Class D shares will be redeemed at the close of business on the following business day. The check for the withdrawal payment will be mailed or the direct deposit for the withdrawal payment will be made on the next business day following redemption. When a shareholder is making systematic withdrawals, dividends and distributions on all Class A or Class D shares in the Investment Account are automatically reinvested in Class A or Class D shares, respectively. A shareholder's Systematic Withdrawal Plan Account is automatically reinvested in shares of the same class. A shareholder's Systematic Withdrawal Plan may be terminated at any time, without charge or penalty, by the shareholder, the Fund, the Fund's Transfer Agent or the Distributor. Withdrawal payments should not be considered as dividends, yield or income. Each withdrawal is a taxable event. If periodic withdrawals continuously exceed reinvested dividends, the shareholder's original investment may be correspondingly reduced. Purchases of additional Class A or Class D shares concurrent with withdrawals are ordinarily disadvantageous to the shareholder because of sales charges and tax liabilities. The Fund will not knowingly accept additions to an Investment Account in which an election has been made to receive systematic withdrawals unless such addition is equal to at least one year's scheduled withdrawals or $1,200, whichever is greater. Periodic investments may not be made into an Investment Account in which the shareholder has elected to make systematic withdrawals. 27 A Class A or Class D shareholder whose shares are held within a CMA (R) or CBA (R) Account may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through the Systematic Redemption Program. The minimum fixed dollar amount redeemable is $25. The proceeds of systematic redemptions will be posted to the shareholder's account five business days after the date the shares are redeemed. Monthly systematic redemptions will be made at net asset value on the first Monday of each month, bimonthly systematic redemptions will be made at net asset value on the first Monday of every other month, and quarterly, semiannual or annual redemptions are made at net asset value on the first Monday of months selected at the shareholder's option. If the first Monday of the month is a holiday, the redemption will be processed at net asset value on the next business day. The Systematic Redemption Program is not available if Fund shares are being purchased within the account pursuant to the Automatic Investment Program. For more information on the Systematic Redemption Program, eligible shareholders should contact their Financial Consultant. EXCHANGE PRIVILEGE Shareholders of each class of shares of a Portfolio of the Fund have an exchange privilege with other Portfolios of the Fund and with certain other MLAM-advised mutual funds listed below. Under the Merrill Lynch Select Pricing SM System, Class A shareholders may exchange Class A shares of a Portfolio for Class A shares of another Portfolio or a second MLAM-advised mutual fund if the shareholder holds any Class A shares of the other Portfolio or second fund in his account in which the exchange is made at the time of the exchange or is otherwise eligible to purchase Class A shares of the second fund. If the Class A shareholder wants to exchange Class A shares for shares of another Portfolio or a second MLAM-advised mutual fund, and the shareholder does not hold Class A shares of the other Portfolio or second fund in his account at the time of the exchange and is not otherwise eligible to acquire Class A shares of the other Portfolio or second fund, the shareholder will receive Class D shares of the other Portfolio or second fund as a result of the exchange. Class D shares also may be exchanged for Class A shares of another Portfolio or a second MLAM-advised mutual fund at any time as long as, at the time of the exchange, the shareholder holds Class A shares of the other Portfolio or second fund in the account in which the exchange is made or is otherwise eligible to purchase Class A shares of the other Portfolio or second fund. Class B, Class C and Class D of a Portfolio shares will be exchangeable with shares of the same class of another Portfolio or other MLAM-advised mutual funds. For purposes of computing the CDSC that may be payable upon a disposition of the shares acquired in the exchange, the holding period for the previously owned shares of the Portfolio is "tacked" to the holding period of the newly acquired shares of the other Portfolio or other Fund as more fully described below. Class A, Class B, Class C and Class D shares also will be exchangeable for shares of certain MLAM-advised money market funds specifically designated below as available for exchange by holders of Class A, Class B, Class C or Class D shares. Shares with a net asset value of at least $100 are required to qualify for the exchange privilege, except that there is no minimum value of shares which must be exchanged by shareholders of the Insured Portfolio who exchange their shares for shares of either the National Portfolio or the Limited Maturity Portfolio and any shares utilized in an exchange must have been held by the shareholder for at least 15 days. The exchange privilege available to participants in the Merrill Lynch Blueprint SM Program may be different from that available to other investors. 28 Exchanges of Class A and Class D shares of a Portfolio outstanding ("outstanding Class A and Class D shares") for Class A or Class D shares of another Portfolio or another MLAM-advised mutual fund ("new Class A or Class D shares) are transacted on the basis of relative net asset value per Class A or Class D share respectively, plus an amount equal to the difference, if any, between the sales charge previously paid on the outstanding Class A or Class D shares and the sales charge payable at the time of the exchange on the new Class A or Class D shares. With respect to outstanding Class A or Class D shares as to which previous exchanges have taken place, the 'sales charge previously paid' will include the aggregate of the sales charges paid with respect to such Class A or Class D shares in the initial purchase and any subsequent exchange. Class A or Class D shares issued pursuant to dividend reinvestment are sold on a no-load basis in each of the funds offering Class A or Class D shares. For purposes of the exchange privilege, dividend reinvestment Class A or Class D shares will be exchanged into the Class A or Class D shares of the other funds or into shares of the Class A or Class D money market funds without a sales charge. In addition, the Fund offers to exchange Class B and Class C shares of a Portfolio outstanding ("outstanding Class B or Class C shares") for Class B or Class C shares respectively of another Portfolio or any of the other MLAM- advised mutual funds ("new Class B or Class C shares") on the basis of relative net asset value per Class B or Class C share, without the payment of any CDSC that might otherwise be due on redemption of the outstanding shares. Class B shareholders of a Portfolio exercising the exchange privilege will continue to be subject to that Portfolio's contingent deferred sales charge schedule if such schedule is higher than the CDSC schedule relating to the new Class B shares acquired through the use of the exchange privilege. In addition, Class B shares of the Portfolio acquired through the use of the exchange privilege will be subject to that Portfolio's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares of the fund or Portfolio from which the exchange has been made. For purposes of computing the sales charge that may be payable on a disposition of the new Class B or Class C shares, the holding period for the outstanding Class B shares is "tacked" to the holding period of the new Class B or Class C shares. For example, an investor may exchange Class B or Class C shares of the National Portfolio for those of the Merrill Lynch Basic Value Fund, Inc. after having held the National Portfolio Class B shares for two and a half years. The 2% contingent deferred sales charge that generally would apply to a redemption would not apply to the exchange. Two years later the investor may decide to redeem the Class B shares of Merrill Lynch Basic Value Fund, Inc. and receive cash. There will be no contingent deferred sales charge due on this redemption, since by "tacking" the two and a half year holding period of National Portfolio Class B shares to the two year holding period for the Merrill Lynch Basic Value Fund, Inc. Class B shares, the investor will be deemed to have held the new Class B shares for more than four years. Shareholders also may exchange shares of the Fund into shares of a money market fund advised by the Investment Adviser or its affiliates, but the period of time that Class B or Class C shares are held in a Class B or Class C money market fund will not count towards satisfaction of the holding period requirement for purposes of reducing the CDSC or, with respect to the Class B shares, towards satisfaction of the conversion period. However, shares of a Class B money market fund which were acquired as a result of an exchange for Class B or Class C shares of a fund may, in turn, be exchanged back into Class B or Class C shares of any fund offering such shares, in which event the holding period for Class B or Class C shares of the fund will be aggregated with previous holding periods for purposes of reducing the CDSC. Thus, for example, an investor may exchange Class B shares of the National Portfolio for shares of Merrill Lynch Institutional Fund ("Institutional Fund") after having held the Class B shares for two and a half years, and two years later 29 decide to redeem the shares of Institutional Fund for cash. At the time of this redemption, the 2% CDSC that would have been due had the Class B shares of the National Portfolio been redeemed for cash rather than exchanged for shares of Institutional Fund will be payable. If, instead of such redemption the shareholder exchanged such shares for Class B shares of a fund which the shareholder continued to hold for an additional one and a half years, any subsequent redemption will not incur a CDSC. A list of the funds into which exchanges may be made and their respective investment objectives is as follows: Funds Issuing Class A, Class B, Class C and Class D Shares Merrill Lynch Adjustable Rate Securities Fund, Inc. ............ High current income consistent with a policy of limiting the degree of fluctu- ation in net asset value by investing primarily in a portfolio of adjustable rate securities, consisting principally of mortgage-backed and asset-backed se- curities. Merrill Lynch Americas Income Fund, Inc. ....................... A high level of current income, consis- tent with prudent investment risk, by investing primarily in debt securities denominated in a currency of a country located in the Western Hemisphere (i.e., North and South America and the sur- rounding waters). Merrill Lynch Arizona Limited Maturity Municipal Bond Fund...... A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Arizona income taxes as is consistent with prudent investment management through investment in a port- folio primarily of intermediate-term in- vestment grade Arizona Municipal Bonds. Merrill Lynch Arizona Municipal Bond Fund......................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Arizona income taxes as is consistent with prudent investment management. Merrill Lynch Arkansas Municipal Bond Fund......................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Arkansas income taxes as is consistent with prudent investment management. 30 Merrill Lynch Asset Growth Fund, Inc. ....................... High total investment return, consistent with prudent risk, from investment in United States and foreign equity, debt and money market securities, the combi- nation of which will be varied both with respect to types of securities and mar- kets in response to changing market and economic trends. Merrill Lynch Asset Income Fund, A high level of current income through Inc. ............................. investment primarily in United States fixed income securities. Merrill Lynch Balanced Fund for Investment and Retirement, Inc. .. As high a level of total investment re- turn as is consistent with a relatively low level of risk through investment in common stocks and other types of securi- ties, including fixed income securities and convertible securities. Capital appreciation and, secondarily, Merrill Lynch Basic Value Fund, income by investing in securities, pri- Inc. ........................ marily equities, that are under- valued and therefore represent basic investment value. Merrill Lynch California Municipal Bond Fund......................... Currently the only portfolio of Merrill Lynch California Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and California income taxes as is consistent with prudent investment management. Merrill Lynch California Insured Municipal Bond Fund............... A portfolio of Merrill Lynch California Municipal Series Trust, a series fund, whose objective is to provide sharehold- ers with as high a level of income ex- empt from Federal and California income taxes as is consistent with prudent in- vestment management through investment in a portfolio primarily of insured Cal- ifornia Municipal Bonds. Merrill Lynch California Limited Maturity Municipal Bond Fund...... A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a series fund, whose objective is to provide shareholders with as high a level of income exempt from Federal and California income taxes as is consistent with prudent investment management through investment in a portfolio primarly of intermediate-term investment grade California Municipal Bonds. 31 Merrill Lynch Capital Fund, Inc. .. The highest total investment return con- sistent with prudent risk through a fully managed investment policy utiliz- ing equity, debt and convertible securi- ties. Merrill Lynch Colorado Municipal Bond Fund......................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Colorado income taxes as is consistent with prudent investment management. Merrill Lynch Connecticut Municipal Bond Fund............... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Connecticut income taxes as is consis- tent with prudent investment management. Merrill Lynch Corporate Bond Fund, Inc. ....................... Current income from three diversified portfolios of fixed income securities. Merrill Lynch Developing Capital Markets Fund, Inc. ............... Long-term appreciation through investment in securities, principally equities, of issuers in countries having smaller cap- ital markets. Merrill Lynch Dragon Fund, Inc. ... Capital appreciation primarily through investment in equity and debt securities of issuers domiciled in developing coun- tries located in Asia and the Pacific Basin. Merrill Lynch EuroFund............. Capital appreciation primarily through investment in equity securities of cor- porations domiciled in Western Europe. Merrill Lynch Federal Securities Trust............................. High current return through investments in U.S. government and governmental agency securities, including GNMA mort- gage-backed certificates and other mortgage-backed government securities. Merrill Lynch Florida Limited Maturity Municipal Bond Fund...... A portfolio of Merrill Lynch Multi-State Limited Maturity Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Fed- eral 32 income taxes as is consistent with pru- dent investment management while seeking to offer shareholders the opportunity to own securities exempt from Florida in- tangible personal property taxes through investment in a portfolio primarily of intermediate-term investment grade Flor- ida Municipal Bonds. Merrill Lynch Florida Municipal Bond Fund......................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal in- come taxes as is consistent with prudent investment management while seeking to offer shareholders the opportunity to own securities exempt from Florida in- tangible personal property taxes. Merrill Lynch Fund for Tomorrow, Inc..................... Long-term growth through investment in a portfolio of high quality securities, primarily common stock, potentially po- sitioned to benefit from demographic and cultural changes as they affect consumer markets. Merrill Lynch Fundamental Growth Fund, Inc......................... Long-term growth through investment in a diversified portfolio of equity securi- ties placing particular emphasis on com- panies that have exhibited above-average growth rates in earnings. Merrill Lynch Global Allocation Fund, Inc......................... High total investment return, consistent with prudent risk, through a fully-man- aged investment policy utilizing United States and foreign equity, debt and money market securities, the combination of which will be varied from time to time both with respect to the types of securities and markets in response to changing market and economic trends. Merrill Lynch Global Bond Fund for Investment and Retirement......... High total investment return by investing in a global portfolio of debt invest- ments denominated in various currencies and multinational currency units. Merrill Lynch Global Convertible Fund, Inc......................... High total return from investment primar- ily in an internationally diversified portfolio of convertible debt securi- ties, convertible preferred stock and "synthetic" convertible securities con- sisting of a combination of debt securi- ties or preferred stock and warrants or options. 33 Merrill Lynch Global Holdings, Inc. (residents of Arizona must meet investor suitability standards)........................ The highest total investment return con- sistent with prudent risk through world- wide investment in an internationally diversified portfolio of securities. Merrill Lynch Global Resources Trust............................. Long-term growth and protection of capi- tal from investment in securities of foreign and domestic companies that pos- sess substantial natural resource as- sets. Merrill Lynch Global SmallCapFund, Inc............................... Long-term growth of capital by investing primarily in equity securities of compa- nies with relatively small market capi- talizations located in various foreign countries and in the United States. Merrill Lynch Global Utility Fund, Inc......................... Capital appreciation and current income through investment of at least 65% of its total assets in equity and debt se- curities issued by domestic and foreign companies primarily engaged in the own- ership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. Merrill Lynch Growth Fund for Investment and Retirement......... Growth of capital and, secondarily, in- come from investment in a diversified portfolio of equity securities placing principal emphasis on those securities which management of the fund believes to be undervalued. Merrill Lynch Healthcare Fund, Inc. (residents of Wisconsin must meet investor suitability standards)........................ Capital appreciation through worldwide investment in equity securities of com- panies that derive or are expected to derive a substantial portion of their sales from products and services in healthcare. Merrill Lynch International Equity Fund.............................. Capital appreciation and, secondarily, income by investing in a diversified portfolio of equity securities of is- suers located in countries other than the United States. Merrill Lynch Latin America Fund... Capital appreciation by investing primar- ily in Latin American equity and debt securities. 34 Merrill Lynch Maryland Municipal Bond Fund......................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Maryland income taxes as is consistent with prudent investment management. Merrill Lynch Massachusetts Limited Maturity Municipal Bond A portfolio of Merrill Lynch Multi-State Fund.............................. Limited Maturity Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Massachusetts income taxes as is consistent with prudent in- vestment management through investment in a portfolio primarily of intermedi- ate-term investment grade Massachusetts Municipal Bonds. Merrill Lynch Massachusetts Municipal Bond Fund............... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Massachusetts income taxes as is consis- tent with prudent investment management. Merrill Lynch Michigan Limited Mautirty Municipal Bond Fund...... A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Michigan income taxes as is consistent with prudent investment in a portfolio primarily of intermedi- ate-term investment grade Michigan Mu- nicipal Bonds. Merrill Lynch Michigan Municipal Bond Fund......................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Michigan personal income taxes as is consistent with prudent investment man- agement. Merrill Lynch Minnesota Municipal Bond Fund......................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Minnesota income taxes as is consistent with prudent investment management. 35 Merrill Lynch Municipal Intermediate Term Fund............ Currently the only portfolio of Merrill Lynch Municipal Series Trust, a series fund, whose objective is to provide as high a level as possible of income ex- empt from Federal income taxes by in- vesting in investment grade obligations with a dollar weighted average maturity of five to twelve years. Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund...... A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and New Jersey income taxes as is consistent with prudent investment management through a portfolio primarily of intermediate-term investment grade New Jersey Municipal Bonds. Merrill Lynch New Jersey Municipal Bond Fund......................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and New Jersey income taxes as is consistent with prudent investment management. Merrill Lynch New Mexico Municipal Bond Fund......................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and New Mexico income taxes as is consistent with prudent investment management. Merrill Lynch New York Limited Maturity Municipal Bond Fund...... A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal, New York State and New York City income taxes as is consistent with prudent investment management through investment in a portfolio pri- marily of intermediate-term investment grade New York Municipal Bonds. Merrill Lynch New York Municipal Bond Fund......................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal, New York State and New York City income taxes as is consistent with prudent in- vestment management. 36 Merrill Lynch North Carolina Municipal Bond Fund............... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and North Carolina income taxes as is con- sistent with prudent investment manage- ment. Merrill Lynch Ohio Municipal Bond Fund.............................. A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Ohio income taxes as is consistent with prudent investment management. Merrill Lynch Oregon Municipal Bond Fund......................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Oregon income taxes as is consistent with prudent investment management. Merrill Lynch Pacific Fund, Inc.... Capital appreciation primarily through investment in equities of corporations domiciled in Far Eastern or Western Pa- cific countries, including Japan, Aus- tralia, Hong Kong and Singapore. Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund...... A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Pennsylvania income taxes as is consistent with prudent in- vestment management through investment in a portfolio primarily of intermedi- ate-term investment grade Pennsylvania Municipal Bonds. Merrill Lynch Pennsylvania Municipal Bond Fund............... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Pennsylvania income taxes as is consis- tent with prudent investment management. Merrill Lynch Phoenix Fund, Inc.... Long-term growth of capital from invest- ing in equity and fixed income securi- ties, including tax-exempt securities, of issuers in weak financial condition or experiencing poor operating results that are undervalued relative to the as- sessment of the current or prospective condition of such issuer. 37 Merrill Lynch Short-Term Global Income Fund, Inc.................. As high a level of current income as is consistent with prudent investment man- agement from a global portfolio of high quality debt securities denominated in various currencies and multinational currency units and having remaining ma- turities not exceeding three years. Merrill Lynch Special Value Fund, Inc............................... Long-term growth of capital from invest- ments in securities, primarily common stocks, or relatively small companies believed to have special investment value and emerging growth companies re- gardless of size. Merrill Lynch Strategic Dividend Fund.............................. Long-term total return from investment in dividend- paying common stocks which yield more than Standard & Poor's 500 Composite Stock Price Index. Merrill Lynch Technology Fund, Long-term capital appreciation through Inc............................... worldwide investment in equity securi- ties of companies that derive or are ex- pected to derive a substantial portion of their sales from products and serv- ices in technology. Merrill Lynch Texas Municipal Bond Fund.............................. A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal in- come taxes as is consistent with prudent investment management from a portfolio of long-term, investment grade obliga- tions issued by the State of Texas, its political subdivisions, agencies and in- strumentalities. Merrill Lynch Utility Income Fund, Inc............................... High current income through investment in equity and debt securities issued by companies which are primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. Merrill Lynch World Income Fund, Inc............................... High current income by investing in a global portfolio of fixed income securi- ties denominated in various currencies, including multinational currency units. 38 Class A Share Money Market Funds: Merrill Lynch Ready Assets Trust... Preservation of capital, liquidity and the highest possible current income con- sistent with the foregoing objectives from the short-term money market securi- ties in which the Trust invests. Merrill Lynch Retirement Reserves Money Fund (available only for exchanges within certain retirement plans)................. Currently the only portfolio of Merrill Lynch Retirement Series Trust, a series fund, whose objectives are current in- come, preservation of capital and li- quidity available from investing in a diversified portfolio of short-term money market securities. Merrill Lynch U.S.A. Government Reserves.......................... Preservation of capital, current income and liquidity available from investing in direct obligations of the U.S. Gov- ernment and repurchase agreements relat- ing to such securities. Merrill Lynch U.S. Treasury Money Fund.............................. Preservation of capital, liquidity and current income through investment exclu- sively in a diversified portfolio of short-term marketable securities which are direct obligations of the U.S. Trea- sury. Class B, Class C and Class D Share Money Market Funds: Merrill Lynch Government Fund...... A portfolio of Merrill Lynch Funds for Institutions Series, a series fund, whose objective is to provide current income consistent with liquidity and se- curity of principal from investment in securities issued or guranteed by the U.S. Government, its agencies and in- strumentalities and in repurchase agree- ments secured by such obligations. Merrill Lynch Institutional Fund... A portfolio of Merrill Lynch Funds for Institutions Series, a series fund, whose objective is to provide maximum current income consistent with liquidity and the maintenance of a high-quality portfolio of money market securities. 39 Merrill Lynch Institutional Tax- Exempt Fund....................... A portfolio of Merrill Lynch Funds for Institutions Series, a series fund, whose objective is to provide current income exempt from Federal income taxes, preservation of capital and liquidity available from investing in a diversi- fied portfolio of short-term, high qual- ity municipal bonds. Merrill Lynch Treasury Fund........ A portfolio of Merrill Lynch Funds for Institutions Series, a series fund, whose objective is to provide current income consistent with liquidity and se- curity of principal from investment in direct obligations of the U.S. Treasury and up to 10% of its total assets in re- purchase agreements secured by such ob- ligations. Before effecting an exchange, shareholders of the Fund should obtain a currently effective prospectus of the fund into which the exchange is to be made. Exercise of the exchange privilege is treated as a sale for Federal income tax purposes and, depending on the circumstances, a short- or long-term capital gain or loss may be realized. In addition, a shareholder exchanging shares of any of the funds may be subject to a backup withholding tax unless such shareholder certifies under penalty of perjury that the taxpayer identification number on file with any such fund is correct and that such shareholder is not otherwise subject to backup withholding. See "Dividends, Distributions and Taxes" below. To exercise the Exchange Privilege, shareholders should contact their listed dealer, who will advise the Fund of the exchange, or the shareholder may write to the Transfer Agent requesting that the exchange be effected. Such letter must be signed exactly as the account is registered with signature(s) guaranteed by "eligible guarantor institution" (including, for example, Merrill Lynch branch offices and certain other financial institutions) as such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the existence and validity of which may be verified by the transfer agent through the use of industry publications. Shareholders of the Fund, and shareholders of the other funds described above with shares for which certificates have not been issued may exercise the Exchange Privilege by wire through their securities dealers. The Fund reserves the right to require a properly completed Exchange Application. These funds may suspend the continuous offering of their shares to the public at any time and may thereafter resume such offering from time to time. The Exchange Privilege may be modified or terminated at any time on 60 days' notice. The Fund reserves the right to limit the number of times an investor may exercise the Exchange Privilege. The exchange privilege is available only to U.S. shareholders in states where the exchange legally may be made. PERFORMANCE DATA From time to time the Fund may include its average annual total return and other total return data, as well as yield and tax equivalent yield, in advertisements or information furnished to present or prospective shareholders. Total return yield, and tax equivalent yield figures are based on the Fund's historical 40 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 Securities and Exchange Commission. Average annual total return quotations for the specified periods are computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return is computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in the case of Class A and Class D shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case of Class B and Class C shares. The Fund also may quote annual, average annual and annualized total return and aggregate total return performance data, both as a percentage and as a dollar amount based on a hypothetical $1,000 investment, for various periods other than those noted below. Such data will be computed as described above, except that, (1) as required by the periods of the quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside from the impact on the performance data calculation of including or excluding the maximum applicable sales charges, actual annual or annualized total return data generally will be lower than average annual total return data since the average rates of return reflect compounding of return. Aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time. Set forth below is total return information for each class of shares of each Portfolio for the periods indicated.
EXPRESSED AS A PERCENTAGE BASED ON REDEEMABLE VALUE OF A HYPOTHETICAL $1,000 A HYPOTHETICAL $1,000 INVESTMENT INVESTMENT AT THE END OF THE PERIOD ----------------------------------------- ----------------------------------------- LIMITED LIMITED NATIONAL INSURED MATURITY NATIONAL INSURED MATURITY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO ----------- ----------- ----------- ------------- ------------- ------------- Average Annual Total Return (including maximum applicable sales charges) One Year Ended June 30, 1995 Class A................ 3.58% 4.25% 3.48% $1,035.80 $1,042.50 $ 1,034.80 Class B................ 3.29 3.91 3.14 1,032.90 1,039.10 1,031.40 Five Years Ended June 30, 1995 Class A................ 7.14 7.18 4.87 1,411.90 1,414.60 1,268.60 Class B................ 7.23 7.25 -- 1,418.00 1,419.30 -- Ten Years Ended June 30, 1995................... 8.46 8.32 5.28 2,253.10 2,224.80 1,672.50 Class B shares 10/21/88- 6/30/95................ 7.09 7.20 -- 1,581.30 1,592.50 -- Class B shares 11/02/92- 6/30/95................ -- -- 3.53 -- -- 1,096.70 Inception (October 21, 1994) to June 30, 1995 Class C................ 10.26 11.54 3.67 1,069.70 1,078.30 1,025.20 Class D................ 5.90 7.13 3.92 1,040.40 1,048.70 1,026.90
41 ANNUAL TOTAL RETURN (EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
LIMITED LIMITED NATIONAL INSURED MATURITY NATIONAL INSURED MATURITY YEAR ENDED JUNE 30, PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO ------------------- --------- --------- --------- --------- --------- --------- 1995 (Class A)............. 7.89% 8.60% 4.53% $1,078.90 $1,086.00 $1,045.30 (Class B)............. 7.28 7.91 4.14 1,072.80 1,079.10 1,041.40 (Class C)**........... 7.97 8.83 3.52 1,079.70 1,088.30 1,035.20 (Class D)**........... 8.32 9.24 3.73 1,083.70 1,092.40 1,037.30 1994 (Class A)............. (0.47) (1.08) 2.30 995.30 989.20 1,023.00 (Class B)............. (1.39) (1.81) 1.98 986.10 981.90 1,019.80 1993 (Class A)............. 12.19 12.41 5.28 1,121.90 1,124.10 1,052.80 (Class B)*............ 11.45 11.44 3.26 1,114.50 1,114.40 1,032.60 1992 (Class A)............. 13.09 12.11 6.93 1,130.90 1,121.10 1,069.30 (Class B)............. 12.25 11.27 -- 1,122.50 1,112.70 -- 1991 (Class A)............. 7.94 8.84 6.45 1,079.40 1,088.40 1,064.50 (Class B)............. 7.14 8.02 -- 1,071.40 1,080.20 -- 1990 (Class A)............. 5.53 5.76 6.16 1,055.30 1,057.60 1,061.60 (Class B)............. 4.74 4.98 -- 1,047.40 1,049.80 -- 1989 (Class A)............. 11.89 11.62 5.96 1,118.90 1,116.20 1,059.60 (Class B) (10/21/88- 6/30/89)............. 6.48 6.88 -- 1,064.80 1,068.80 -- 1988.................... 6.89 7.75 4.83 1,068.90 1,077.50 1,048.30 1987.................... 7.99 6.94 4.99 1,079.90 1,069.40 1,049.90 1986.................... 17.09 15.62 6.50 1,170.90 1,156.20 1,065.00 1985.................... 22.36 22.21 8.72 1,223.60 1,222.10 1,087.20 1984.................... 4.44 3.00 5.58 1,044.40 1,030.00 1,055.80 1983.................... 32.66 31.60 8.59 1,326.60 1,316.00 1,085.90 1982.................... 2.73 (.33) 7.96 1,027.30 996.70 1,079.60 1981.................... (2.72) (10.27) 4.55 972.80 897.30 1,045.50 1980.................... 4.21 (5.88) 5.91 1,042.10 941.20 1,059.10 1979.................... -- 5.48 -- -- 1,054.80 --
- -------- * November 2, 1992 to June 30, 1993 for Limited Maturity Portfolio. ** October 21, 1994 (commencement of operations) to June 30, 1995 for Class C and Class D Shares. 42 AGGREGATE TOTAL RETURN (INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
LIMITED LIMITED NATIONAL INSURED MATURITY NATIONAL INSURED MATURITY YEAR ENDED JUNE 30, PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO ------------------- --------- --------- --------- --------- --------- --------- From Inception to June 30, 1995** Class A............... 297.76% 217.28% 149.20% $3,977.60 $3,172.80 $2,492.00 Class B............... 58.13 59.25 9.67 1,581.30 1,592.50 1,096.70 Class C............... 6.97 7.83 2.52 1,069.70 1,078.30 1,025.20 Class D............... 4.04 4.87 2.69 1,040.40 1,048.70 1,026.90
- -------- ** 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, 1995 for each class of each Portfolio.
FOR THE PERIOD ENDING JUNE 30, 1995 --------------------------------------------------------------- YIELD --------------------------------------------------------------- INSURED PORTFOLIO NATIONAL PORTFOLIO LIMITED MATURITY PORTFOLIO ----------------- ------------------ -------------------------- Class A........ 5.07% 5.39% 3.66% Class B........ 4.50 4.84 3.33 Class C........ 4.54 4.79 3.49 Class D........ 4.83 5.14 3.56
43 The tax equivalent yield for the same period (based on a tax rate of 28%) was:
INSURED PORTFOLIO NATIONAL PORTFOLIO LIMITED MATURITY PORTFOLIO ----------------- ------------------ -------------------------- Class A........ 7.04% 7.49% 5.08% Class B........ 6.25 6.72 4.63 Class C........ 6.31 6.65 4.85 Class D........ 6.71 7.14 4.94
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 DESCRIPTION OF TEMPORARY INVESTMENTS The short-term money market securities in which the Portfolios may invest as temporary investments consist of United States Government securities, United States Government agency securities, domestic bank certificates of deposit and bankers' acceptances, short-term corporate debt securities such as commercial paper, and repurchase agreements. The money market securities must have a stated maturity not in excess of one year from the date of purchase. U.S. Government securities consist of various types of marketable securities issued by or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Government agency securities consist of debt securities issued by government sponsored enterprises, federal agencies and international institutions. Such securities are not direct obligations of the Treasury but involve government sponsorship or guarantees by government agencies or enterprises. The Fund has established the following standards with respect to money market securities in which the Portfolios invest. Commercial paper investments at the time of purchase must be rated "A" by Standard & Poor's Ratings Group or "Prime" by Moody's Investors Service, Inc. or, if not rated, issued by companies having an outstanding debt issue rated at least "A" by Standard & Poor's or Moody's. Investments in corporate bonds and debentures (which must have maturities at the date of purchase of one year or less) must be rated at the time of purchase at least "A" by Standard & Poor's or by Moody's. The Portfolios may not invest in any securities issued by a commercial bank or a savings and loan association unless the bank or association is organized and operating in the United States, has total assets of at least one billion dollars and is a member of the Federal Deposit Insurance Corporation. INSURANCE ON PORTFOLIO SECURITIES Set forth below is further information with respect to the Mutual Fund Insurance Policies (the "Policies") which the Fund has obtained from AMBAC Indemnity Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation ("MBIA") and Financial Security Assurance Inc. ("FSA"), with 44 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, 1994, the premium for the policies aggregated $74,901 or approximately 0.002% of the average net assets of the Insured Portfolio. During the fiscal year ended June 30, 1993, the premium for the Policies aggregated $162,176 or approximately 0.01% of the average net assets of the Insured Portfolio. In determining eligibility for insurance, AMBAC, MBIA and FSA have applied their own standards, which correspond generally to the standards they normally use in establishing the insurability of new issues of Municipal Bonds and which are not necessarily the criteria which would be used in regard to the purchase of Municipal Bonds by the Insured Portfolio. The Policies do not insure (i) municipal securities ineligible for insurance, or (ii) municipal securities which are no longer owned by the Insured Portfolio. In addition, the AMBAC policy does not insure municipal obligations which were insured as to the payment of principal and interest at the time of their issuance by AMBAC. The Policies do not guarantee the market value of the Insured Municipal Bonds or the value of the shares of the Insured Portfolio. In addition, if the provider of an original issuance insurance policy is unable to meet its obligations under such policy or if the rating assigned to the claims paying ability of any such insurer deteriorates, neither AMBAC nor MBIA nor FSA has any obligation to insure any issue held by the Insured Portfolio which is adversely affected by either of the above described events. The AMBAC policy provides for an annual policy period, which is renewable by the Fund for successive annual periods for so long as the Fund is in compliance with the terms of the AMBAC policy. In addition to the payment of premiums, the Policies require that the Insured Portfolio notify AMBAC and MBIA as to all Municipal Bonds in the Insured Portfolio and permit AMBAC and MBIA to audit records. The insurance premiums are payable monthly by the Insured Portfolio in accordance with a premium schedule which was furnished by AMBAC, MBIA and FSA at the time the Policies were issued. Premiums are based upon the amounts covered and the composition of the portfolio. AMBAC has reserved the right to change the premium schedule for any renewal policy period as to any municipal securities purchased by the Insured Portfolio during such renewal period. The FSA policy and the MBIA policy both provide that the premium rate for subsequent purchases by the Insured Portfolio of the same obligations will be determined by FSA or MBIA as of the date of such purchases. AMBAC has received a letter ruling from the Internal Revenue Service, which holds in effect that insurance proceeds representing maturing interest on defaulted municipal obligations paid by AMBAC to municipal bond funds substantially similar to the Insured Portfolio, under policy provisions substantially identical to the policy described herein, will be excludable from federal gross income under Section 103(a) of the Internal Revenue Code. AMBAC insures the portfolio of the Insured Portfolio and the prompt payment of the interest and principal of new issues of Municipal Bonds and Municipal Bond portfolios of individuals, banks, trust companies, corporations, insurance companies and units trusts. As of June 30, 1995, the admitted assets of AMBAC were approximately $2,230 million (unaudited) with a qualified capital of approximately $1,260 million (unaudited). Qualified capital consists of the statutory contingency reserve and policyholders' surplus of the insurance company. 45 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, 1995, the total admitted assets (unaudited) of FSA were approximately $776 million with a total capital and surplus (unaudited) of approximately $479 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, 1995, the total admitted assets of MBIA were approximately $3,549 million (unaudited) with total capital and surplus of approximately $1,845 million (unaudited). AMBAC has entered into reinsurance agreements with a number of unaffiliated reinsurers, relating to the municipal bond insurance programs of AMBAC including the insurance obtained by the Fund for the portfolio of the Insured Portfolio. The contracts of insurance relating to the Insured Portfolio and the negotiations in respect thereof represent the only significant relationship between AMBAC, MBIA and FSA and the Fund. Otherwise neither AMBAC or any associate thereof, nor MBIA or any associate thereof, nor FSA or any associate thereof has any material business relationship, direct or indirect, with the Fund. AMBAC, MBIA and FSA are subject to regulation by the department of insurance in each state in which they are qualified to do business. Such regulation, however, is not a guarantee that any of AMBAC, MBIA or FSA will be able to perform on its contractual insurance in the event a claim should be made thereunder at some time in the future. The information relating to AMBAC, MBIA and FSA set forth above, including the financial information, has been furnished by such corporations. Financial information with respect to AMBAC, MBIA and FSA appears in reports filed by AMBAC, MBIA and FSA with state insurance regulatory authorities and is subject to audit and review by such authorities. No representation is made herein as to the accuracy or adequacy of such information with respect to AMBAC, MBIA or FSA or as to the absence of material adverse changes in such information subsequent to the date thereof. DESCRIPTION OF FINANCIAL FUTURES CONTRACTS Futures Contracts. A financial futures contract obligates the seller of a contract to deliver and the purchaser of a contract to take delivery of the type of financial instrument called for in the contract or, in some instances, to make a cash settlement based upon the value of an instrument or an index of values, at a specified future time for a specified price. Although the terms of a contract call for actual delivery of the underlying financial instrument, or for a cash settlement, in most cases the contracts are closed out before the delivery date without the delivery taking place. The Fund intends to close out its futures contracts prior to the delivery date of such contracts. The National and Limited Maturity Portfolios (the "Portfolios") may sell futures contracts in anticipation of a decline in the value of their investments in municipal bonds. The loss associated with any such decline could be reduced without employing futures as a hedge by selling long-term securities and either 46 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. 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 Standard & Poor's or A or higher by Moody's Investors Service and must have a remaining maturity of 19 years or more. Twice a month new issues satisfying the eligibility requirements are added to, and an equal number of old issues will be deleted from, the index. The value of the index is 47 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 non-refundable fee, known as the "premium." Upon exercise of the option, the contract market clearing house assigns each party the appropriate position in the underlying futures contract. In the event of exercise, therefore, the parties are subject to all of the risks of futures trading, such as payment of initial and variation margin. In addition, the seller, or "writer", of the option is subject to margin requirements on the option position. Options on futures contracts are traded on the same contract markets as the underlying futures contracts. The Portfolios may purchase options on futures contracts for the same types of hedging purposes described above in connection with futures contracts. For example, in order to protect against an anticipated decline in the value of securities it holds, a Portfolio could purchase put options on futures contracts, instead of selling the underlying futures contracts. Conversely, in order to protect against the adverse effects of anticipated increases in the cost of securities to be acquired, a Portfolio could purchase call options on futures contracts, instead of purchasing the underlying futures contracts. The Portfolios generally will sell options on futures contracts only to close out an existing position. The Portfolios will not engage in transactions in such instruments unless and until the Investment Adviser determines that market conditions and the circumstances of the Portfolios warrant such trading. To the extent the Portfolios engage in the purchase and sale of futures contracts or options thereon, they will do so only at a level which is reflective of the Investment Adviser's view of the hedging needs of the Portfolios, 48 the liquidity of the market for futures contracts and the anticipated correlation between movements in the value of the futures or option contract and the value of securities held by the Portfolios. Restrictions on the Use of Futures Contracts and Options on Futures Contracts. Under regulations of the Commodity Futures Trading Commission ("CFTC"), the futures trading activities described herein will not result in the Portfolios' being deemed to be "commodity pools," as defined under such regulations, provided that certain trading restrictions are adhered to. In particular, CFTC regulations require that a notice of eligibility be filed and that all futures and option positions entered into by the Portfolios qualify as bona fide hedge transactions, as defined under CFTC regulations, or that any non-qualifying positions be limited so that the sum of the amount of initial margin deposits and premiums paid on such positions would not exceed 5% of the market value of the respective Portfolio's net assets. When either Portfolio purchases a futures contract, it will maintain an amount of cash, cash equivalents or commercial paper or other short-term high grade fixed income securities in a segregated account with the Fund's custodian, so that the amount so segregated plus the amount of initial margin held in the account of its broker equals the market value of the futures contract, thereby ensuring that the use of such futures is unleveraged. Risk Factors in Transactions in Futures Contracts and Options Thereon. The particular municipal bonds comprising the index underlying the municipal bond index futures contract may vary from the bonds held by the Portfolios. In addition, the securities underlying futures contracts on U.S. Treasury securities will not be the same as securities held by the Portfolios. As a result, the Portfolios' ability effectively to hedge all or a portion of the value of their municipal bonds through the use of futures contracts will depend in part on the degree to which price movements in the index underlying the municipal bond index futures contract, or the U.S. Treasury securities underlying other futures contracts traded, correlate with price movements of the Municipal Bonds held by the Portfolios. For example, where prices of securities in the Portfolios do not move in the same direction or to the same extent as the values of the securities or index underlying a futures contract, the trading of such futures contracts may not effectively hedge the Portfolios' investments and may result in trading losses. The correlation may be affected by disparities in the average maturity, ratings, geographical mix or structure of the Portfolios' investments as compared to those comprising the index, and general economic or political factors. In addition, the correlation between movements in the value of the index underlying a futures contract may be subject to change over time, as additions to and deletions from the index alter its structure. In the case of futures contracts on U.S. Treasury securities and options thereon, the anticipated correlation of price movements between the U.S. Treasury securities underlying the futures or options and Municipal Bonds may be adversely affected by economic, political, legislative or other developments that have a disparate impact on the respective markets for such securities. In the event that the Investment Adviser determines to enter into transactions in financial futures contracts other than the municipal bond index futures contract or futures on U.S. Treasury securities, the risk of imperfect correlation between movements in the prices of such futures contracts and the prices of Municipal Bonds held by the Portfolios may be greater. The trading of futures contracts on an index also entails the risk of imperfect correlation between movements in the price of the futures contract and the value of the underlying index. The anticipated spread between the prices may be affected due to differences in the nature of the markets, such as margin 49 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 asset and the number of shares outstanding as of June 30, 1995, is calculated as set forth below. 50 INSURED PORTFOLIO:
CLASS A CLASS B CLASS C CLASS D -------------- ------------ ---------- ----------- Net Assets.................. $1,706,064,230 $782,748,268 $7,755,939 $26,015,270 ============== ============ ========== =========== Number of Shares Outstand- ing........................ 215,373,913 98,884,919 979,281 3,283,048 ============== ============ ========== =========== Net Asset Value Per Share (net assets divided by num- ber of shares outstanding). $ 7.92 $ 7.92 $ 7.92 $ 7.92 Sales Charge (Class A and Class D shares: 4.00% of offering price (4.17% of net asset value per share))*................... .33 ** ** .33 -------------- ------------ ---------- ----------- Offering Price.............. $ 8.25 $ 7.92 $ 7.92 $ 8.25 ============== ============ ========== =========== NATIONAL PORTFOLIO: CLASS A CLASS B CLASS C CLASS D -------------- ------------ ---------- ----------- Net Assets.................. $1,059,440,068 $419,932,544 $5,194,514 $19,655,933 ============== ============ ========== =========== Number of Shares Outstand- ing........................ 105,686,998 41,903,872 518,140 1,960,467 ============== ============ ========== =========== Net Asset Value Per Share (net assets divided by num- ber of shares outstanding). $ 10.02 $ 10.02 $ 10.03 $ 10.03 Sales Charge (Class A and Class D shares: 4.00% of offering price (4.17% of net asset value per share))*................... .42 ** ** .42 -------------- ------------ ---------- ----------- Offering Price.............. $ 10.44 $ 10.02 $ 10.03 $ 10.45 ============== ============ ========== =========== LIMITED MATURITY PORTFOLIO: CLASS A CLASS B CLASS C CLASS D -------------- ------------ ---------- ----------- Net Assets.................. $ 536,474,423 $129,580,505 $3,964,961 $11,258,475 ============== ============ ========== =========== Number of Shares Outstand- ing........................ 54,068,710 13,057,358 399,691 1,134,219 ============== ============ ========== =========== Net Asset Value Per Share (net assets divided by number of shares outstanding)............... $ 9.92 $ 9.92 $ 9.92 $ 9.93 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.............. $ 10.02 $ 9.92 $ 9.92 $ 10.03 ============== ============ ========== ===========
- -------- *Rounded to the nearest one-hundredth percent; assumes maximum sales charge is applicable. ** Class B and Class C shares are not subject to an initial sales charge but may be subject to a CDSC on redemption of shares within one year of purchase. See "Purchase of Shares--Deferred Sales Charge Alternatives-- Class B and Class C Shares" in the Prospectus. 51 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, Merrill Lynch Municipal Bond Fund, Inc.: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of the Insured, National and Limited Maturity Portfolios of Merrill Lynch Municipal Bond Fund, Inc. as of June 30, 1995, the related statements of operations for the year then ended and changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at June 30, 1995 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of the Insured, National and Limited Maturity Portfolios of Merrill Lynch Municipal Bond Fund, Inc. as of June 30, 1995, the results of their operations, the changes in their net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Princeton, New Jersey August 15, 1995 52 [THIS PAGE INTENTIONALLY LEFT BLANK] 53
SCHEDULE OF INVESTMENTS (in Thousands) Municipal Bonds Insured Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Alabama--0.6% AAA Aaa $ 1,625 Alabama Water Pollution Control Authority, Revolving Fund Loan, Series A, 6.75% due 8/15/2017(b) $ 1,738 AAA Aaa 5,000 Auburn University, Alabama, Revenue Refunding Bonds (General Fee), 5.25% due 6/01/2013(e) 4,622 AAA Aaa 1,250 Mobile, Alabama, GO, Refunding and Capital Improvement Bonds, 10.875% due 11/01/2007(c) 1,745 AAA Aaa 6,000 Montgomery, Alabama, Baptist Medical Center, Special Care Facilities Financing Authority Revenue Bonds, Series A, 5.75% due 1/01/2022(h) 5,695 Alaska--0.7% Kenai Peninsula Borough, Alaska, GO(b): AAA Aaa 6,450 8.40% due 1/01/2000 7,391 AAA Aaa 8,460 8.40% due 1/01/2001 9,884 Arizona--2.4% AAA Aaa 6,750 Arizona State Municipal Financing Program, COP, Series 34, 7.25% due 8/01/2009(g) 7,883 AAA Aaa 3,800 Maricopa County, Arizona, IDA, Health Facilities Revenue Bonds (Saint Joseph's Care Center Project), Series A, 7.75% due 7/01/2020(e) 4,286 AAA Aaa 4,000 Maricopa County, Arizona, IDA, Hospital Facility Revenue Refunding Bonds (Samaritan Health Service Hospital), Series A, 7% due 12/01/2013(e) 4,377 AAA Aaa 2,555 Maricopa County, Arizona, School District No. 38 Revenue Bonds (Madison Elementary), UT, Series A, 5.50% due 7/01/2010(h) 2,496 AAA Aaa 7,000 Maricopa County, Arizona, Unified School District No. 97 Revenue Bonds (Deer Valley Project), UT, 1986 Series E, 10% due 7/01/2000(h) 8,626 Mesa, Arizona, IDA, Health Care Facilities Revenue Bonds (Western Health Network)(g): AAA Aaa 10,000 Refunding, Series A-2, 7.625% due 1/01/2013 11,074 AAA Aaa 7,340 Series A-1, 7.625% due 1/01/2019 8,128 Phoenix, Arizona, Street and Highway User, Revenue Refunding Bonds, Junior-Lien, Series A(h)(j)(k): AAA Aaa 5,000 5.63% due 7/01/2012 1,756 AAA Aaa 5,000 5.63% due 7/01/2013 1,643 AAA Aaa 5,000 Pima County, Arizona, Unified School District No. 10, Revenue Refunding Bonds (Amphitheatre), 5.75% due 7/01/2004(h) 5,174 AAA Aaa 5,250 University of Arizona Medical Center Corporation, Hospital Revenue Refunding Bonds, 5% due 7/01/2021(e) 4,607 California--4.4% AAA Aaa 38,700 California State, RAW, Series C, 5.75% due 4/25/1996(h) 39,385 AAA Aaa 12,000 Fresno, California, Sewer Revenue Bonds, Series A-1, 6.25% due 9/01/2014(b) 12,533 AAA Aaa 5,000 Los Angeles, California, Wastewater System Revenue Refunding Bonds, Series A, 5.70% due 6/01/2013(e) 4,868 AAA Aaa 17,600 Northern California Power Agency, Multiple Capital Facilities Revenue Bonds, 6.538% due 8/01/2025(e) 18,341 AAA Aaa 12,000 Oakland, California, Redevelopment Agency, Revenue Refunding Bonds, 5.95% due 9/01/2019(e) 11,728 University of California Revenue Bonds (Multiple Purpose Projects): AAA Aaa 4,650 Refunding, Series C, 5% due 9/01/2012(b) 4,197 AAA Aaa 13,075 Refunding, Series C, 5.25% due 9/01/2016(b) 11,936 AAA Aaa 5,000 Series D, 6.375% due 9/01/2024(e) 5,102 Delaware--0.5% AAA Aaa 6,000 Delaware EDA, PCR, Refunding (Delmarva Power and Light Company), Series B, 7.30% due 3/01/2014(e) 6,592 AAA Aaa 3,750 Delaware State Health Facilities Authority, Crossover Revenue Refunding Bonds (Delaware Medical Center), 7% due 10/01/2015(c)(e) 4,044 Florida--6.1% AAA Aaa 4,700 Duval County, Florida, School District Revenue Refunding Bonds, 6.125% due 8/01/2004(b) 5,032 Florida Municipal Power Agency, Revenue Bonds: AAA Aaa 7,750 (All Requirements Power Supply Project), 6.25% due 10/01/2002(a)(b) 8,571 AAA Aaa 4,500 Refunding (Saint Lucie Project), 5.25% due 10/01/2021(h) 4,073 AAA Aaa 5,000 Florida State Division, Board of Finance, Department of General Services Revenue Bonds (Department of Natural Resource Preservation), Series 2000-A, 6.75% due 7/01/2013(b) 5,412 Jacksonville, Florida, Health Facilities Authority, Hospital Revenue Refunding and Improvement Bonds (Baptist Medical Center Project): AAA Aaa 500 11.50% due 10/01/2012(c) 819
54 AAA Aaa 26,500 Series A, 7.30% due 6/01/2019(e) 28,932 AAA Aaa 8,750 Jacksonville, Florida, Port Authority Revenue Bonds, AMT, 7.875% due 11/01/2018(g) 9,295 AAA Aaa 20,000 Lee County, Florida, Hospital Board of Directors, Hospital Revenue Bonds, 6.60% due 4/01/2020(e) 20,832 AAA Aaa 16,700 Martin County, Florida, PCR, Refunding (Florida Power and Light Company Project), 7.30% due 7/01/2020(e) 18,370 AAA Aaa 11,570 Orange County, Florida, Health Facilities Authority, Revenue Refunding Bonds (Pooled Hospital Loan), Series B, 7.875% due 12/01/2025(g) 12,464 AAA Aaa 3,950 Orange County, Florida, HFA, Mortgage Revenue Refunding Bonds, Series A, 7.60% due 1/01/2024(h) 4,230 Palm Beach County, Florida, Criminal Justice Facilities, Revenue Refunding Bonds(h): AAA Aaa 11,985 5.375% due 6/01/2009 11,715 AAA Aaa 4,935 5.375% due 6/01/2010 4,809 AAA Aaa 3,500 Saint Lucie County, Florida, Sales Tax Revenue Refunding Bonds, 5% due 10/01/2023(h) 3,039 AAA Aaa 5,700 South Broward, Florida, Hospital District Revenue Bonds, 6.611% due 5/01/2021(b) 5,994 AAA Aaa 3,300 Tampa, Florida, Revenue Bonds (Allegany Health System-- Saint Joseph's), 5.125% due 12/01/2023(e) 2,884 AAA Aaa 2,000 Tampa, Florida, Water and Sewer System Revenue Bonds, Sub-Lien, Series A, 7.25% due 10/01/2016(b) 2,162 AAA Aaa 5,000 University Community Hospital Incorporated, Florida, Hospital Revenue Refunding Bonds, 7.375% due 9/01/2000(a)(i) 5,720 AAA Aaa 2,240 West Coast Regional Water Supply Authority, Florida, Capital Improvement Revenue Bonds (Hillsborough County Project), 10.40% due 10/01/2010(a)(b) 3,131 Georgia--5.4% AAA Aaa 5,500 Chatham County, Georgia, School District, UT, 6.75% due 8/01/2019(e) 5,899 AAA Aaa 5,000 Douglasville-Douglas County, Georgia, Water and Sewer Authority, Water and Sewer Revenue Refunding Bonds, 5.625% due 6/01/2015(b) 4,863 Georgia Municipal Electric Authority, Power Revenue Bonds: AAA Aaa 12,100 Refunding, Series Z, 5.50% due 1/01/2012(h) 11,643 AAA Aaa 7,400 Refunding, Series Z, 5.50% due 1/01/2012(i) 7,121 AAA Aaa 11,545 Refunding, Series Z, 5.50% due 1/01/2020(h) 10,809 AAA Aaa 20,000 Series EE, 7% due 1/01/2025(b) 22,781 Metropolitan Atlanta Rapid Transit Authority, Georgia, Sales Tax Revenue Refunding Bonds(b): AAA Aaa 3,990 Series A, 5.125% due 7/01/2019 3,544 AAA Aaa 10,500 Series A, 5.125% due 7/01/2020 9,305 AAA Aaa 18,605 Series P, 6% due 7/01/2013 19,017 AAA Aaa 28,165 Series P, 6.25% due 7/01/2020 29,257 AAA Aaa 9,000 Municipal Electric Authority, Georgia, Special Obligation Bonds (Fifth Crossover Series, Project One), 6.40% due 1/01/2013(b)(c) 9,538
Portfolio Abbreviations To simplify the listings of Merrill Lynch Municipal Bond Fund, Inc.'s portfolio holdings in the Schedule of Investments, we have abbreviated the names of many of the securities according to the list at right. AMT Alternative Minimum Tax (Subject to) BAN Bond Anticipation Notes COP Certificates of Participation CP Commercial Paper DATES Daily Adjustable Tax-Exempt Securities EDA Economic Development Authority GO General Obligation Bonds HDA Housing Development Authority HFA Housing Finance Agency IDA Industrial Development Authority IDB Industrial Development Board IDR Industrial Development Revenue Bonds INFLOS Inverse Floating Rate Municipal Bonds PCR Pollution Control Revenue Bonds RAN Revenue Anticipation Notes RAW Revenue Anticipation Warrants RIB Residual Interest Bonds SAVRS Select Auction Variable Rate Security S/F Single-Family TAN Tax Anticipation Notes TRAN Tax Revenue Anticipation Notes UT Unlimited Tax VRDN Variable Rate Demand Notes 55
SCHEDULE OF INVESTMENTS (continued) (in Thousands) Municipal Bonds Insured Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Hawaii--2.9% Hawaii County, Hawaii, Revenue Refunding and Improvement Bonds, GO, UT, Series A(h): AAA Aaa $ 1,000 5.60% due 5/01/2012 $ 980 AAA Aaa 1,000 5.60% due 5/01/2013 976 Hawaii Department of Budget and Finance, Special Purpose Mortgage Revenue Bonds (Hawaiian Electric Company, Inc. Project), AMT(e): AAA Aaa 4,340 7.625% due 12/01/2018 4,766 AAA Aaa 5,000 Series C, 7.375% due 12/01/2020 5,499 AAA Aaa 4,500 Hawaii Harbor Capital Improvement Revenue Bonds, AMT, 7% due 7/01/2017(e) 4,838 Hawaii State Airport System Revenue Bonds: AAA Aaa 21,795 AMT, 7.30% due 7/01/2020(b) 23,773 AAA Aaa 23,200 AMT, Second Series, 7.50% due 7/01/2020(h) 25,517 AAA Aaa 10,000 Refunding, Series 1993, 6.45% due 7/01/2013(e) 10,426 Illinois--3.7% AAA Aaa 25,000 Chicago, Illinois, Public Building Commission Revenue Bonds (Community College District No. 508), Series B, 8.75% due 1/01/2007(c)(g) 27,119 AAA Aaa 25,000 Chicago, Illinois, Public Building Commission Revenue Bonds, Series A, 7.125% due 1/01/2015(c)(e) 27,297 Illinois Health Facilities Authority Revenue Bonds: AAA Aaa 3,250 (Elmhurst Memorial Hospital), 6.625% due 1/01/2022(h) 3,379 AAA Aaa 4,000 (Methodist Health Project), 6.90% due 5/01/2021(b) 4,232 AAA Aaa 20,000 (Rush-Presbyterian Saint Luke's Medical Center), 6.80% due 10/01/2024(e) 21,079 AAA Aaa 6,600 Metropolitan Pier and Exposition Authority, Illinois, Dedicated State Tax Revenue Bonds (McCormick Place Expansion Project), Series A, 6.50% due 6/15/2027(b) 6,839 AAA Aaa 3,025 Northwest Suburban Municipal Joint Action Water Agency, Illinois, Water Supply System Revenue Refunding Bonds, Series A, 5.90% due 5/01/2015(e) 2,939 Indiana--1.7% AAA Aaa 2,470 Indiana Employment Development Commission, Environmental Revenue Bonds (Public Service Company of Indiana), AMT, 7.50% due 3/15/2015(e) 2,687 Indiana Municipal Power Agency, Power Supply System Revenue Refunding Bonds, Series B(e): AAA Aaa 12,600 5.75% due 1/01/2007 12,996 AAA Aaa 14,000 5.80% due 1/01/2008 14,376 AAA Aaa 4,040 Indianapolis, Indiana, Local Public Improvement Bond Bank, Series A, 7.90% due 2/01/2002(a)(g) 4,735 AAA Aaa 2,000 Jasper County, Indiana, PCR, Refunding (Collateral--Northern Indiana Public Service), 7.10% due 7/01/2017(e) 2,152 AAA Aaa 3,550 Rockport, Indiana, PCR, Refunding (Indiana-Michigan Power), Series B, 7.60% due 3/01/2016(h) 3,974 Iowa--0.2% AAA Aaa 5,000 Des Moines, Iowa, Parking Facilities Revenue Bonds, Series A, 7.25% due 7/01/2015(h) 5,455 Kansas--0.5% AAA Aaa 11,175 Kansas City, Kansas, Utility System Revenue Refunding and Improvement Bonds, 6.375% due 9/01/2023(h) 11,539 Kentucky--0.7% AAA Aaa 4,500 Boone County, Kentucky, PCR, Refunding (Collateral--Cincinnati Gas and Electric), Series A, 5.50% due 1/01/2024(e) 4,183 AAA Aaa 11,470 Kentucky Development Finance Authority, Hospital Revenue Refunding and Improvement Bonds (Saint Elizabeth Medical Center), Series A, 9% due 11/01/2000(h) 13,761 Louisiana--0.4% AAA Aaa 8,700 Louisiana Public Facilities Authority, Health and Education Capital Facilities Revenue Bonds (Our Lady of the Lake Regional Medical Center), Series C, 8.20% due 12/01/2015(g)(c) 9,768 Maryland--1.4% Baltimore, Maryland, Revenue Refunding Bonds (Kidder Maryland Water Projects), Series A(e): AAA Aaa 5,000 5.60% due 7/01/2013 4,906 AAA Aaa 23,000 5.65% due 7/01/2020 22,312 Maryland Health and Higher Educational Facilities Authority Revenue Bonds (University of Maryland Medical Systems)(h): AAA Aaa 2,250 Series A, 7% due 7/01/2001(a) 2,551 AAA Aaa 4,400 Series B, 7% due 7/01/2022(c) 5,017
56 Massachusetts-- AAA Aaa 13,000 Massachusetts Bay Transportation Authority Revenue Bonds, COP, 3.1% Series A, 7.65% due 8/01/2000(a)(i) 14,960 AAA Aaa 5,215 Massachusetts Educational Loan Authority Revenue Bonds, AMT, Issue D, Series D, 7.25% due 1/01/2009(e) 5,610 AAA Aaa 3,250 Massachusetts Port Authority Revenue Bonds, 13% due 7/01/2013(c) 5,585 AAA Aaa 10,055 Massachusetts State Consolidated Loan, Series B, 5.50% due 7/01/2012(b) 9,616 AAA Aaa 6,200 Massachusetts State Health and Educational Facilities Authority Revenue Bonds, 6.70% due 8/15/2021(i) 6,569 AAA Aaa 19,755 Massachusetts State, HFA, Housing Revenue Refunding Bonds (Insured Rental), AMT, Series A, 6.75% due 7/01/2028(b) 20,390 AAA Aaa 5,500 Massachusetts State Industrial Finance Agency Revenue Bonds (Brandeis University), Series C, 6.80% due 10/01/2019(e) 5,894 AAA Aaa 4,500 Massachusetts State Turnpike Authority, Turnpike Revenue Refunding Bonds, Series A, 5.125% due 1/01/2023(h) 3,935 AAA Aaa 3,975 Massachusetts State Water Resource Authority, General Revenue Bonds, Series A, 5.70% due 8/01/2009(e) 3,967 Michigan--3.8% Chippewa Valley, Michigan, Schools Revenue Bonds, UT, Series Q(h): AAA Aaa 5,500 6.375% due 5/01/2001(a) 6,025 AAA Aaa 10,500 Refunding, 5% due 5/01/2021 9,117 AAA Aaa 10,000 Grand Rapids, Michigan, Water Supply Systems, Revenue Refunding Bonds, 5.75% due 1/01/2018(h) 9,574 AAA Aaa 4,225 Lake Orion, Michigan, Community School District, Refunding, UT, 5.50% due 5/01/2020(b) 3,918 Michigan State Trunk Line, Series A(h): AAA Aaa 14,365 5.75% due 11/15/2020 13,701 AAA Aaa 26,120 5.80% due 11/15/2024 25,156 Monroe County, Michigan, PCR (Detroit Edison Company Project), AMT: AAA Aaa 16,500 Project 1, 7.65% due 9/01/2020(h) 18,396 AAA Aaa 9,745 Series I-B, 7.50% due 9/01/2019(b) 10,741 Mississippi--0.6% AAA Aaa 1,320 Harrison County, Mississippi, Wastewater Management District, Revenue Refunding Bonds, Wastewater Treatment Facilities, Series A, 8.50% due 2/01/2013(h) 1,703 AAA Aaa 13,000 Mississippi Hospital Equipment and Facilities Authority, Revenue Refunding and Improvement Bonds (North Mississippi Health Services), 5.75% due 5/15/2016(b) 12,421 Missouri--0.1% AAA Aaa 3,500 Sikeston, Missouri, Electric Revenue Refunding Bonds, 6.25% due 6/01/2012(e) 3,611 Montana--0.2% AAA Aaa 5,600 Montana Health Facilities Authority, Hospital Facilities Revenue Bonds (Deaconess Medical Center Project), SAVRS, Series A, 4.06% due 2/15/2016(b)(f) 5,600 Nebraska--0.5% AAA Aaa 12,755 Nebraska Public Power District Revenue Bonds, Series A, 5.50% due 1/01/2013(e) 12,283 Nevada--2.0% AAA Aaa 2,200 Nevada Housing Dividend, S/F Program, AMT, Issue C, 6.35% due 10/01/2012(b) 2,207 AAA Aaa 45,000 Washoe County, Nevada, Water Facility Revenue Bonds (Sierra Pacific Power), AMT, 6.65% due 6/01/2017(e) 47,253 New Jersey--3.8% AAA Aaa 3,350 Cape May County, New Jersey, Industrial Pollution Control Financing Authority, Revenue Refunding Bonds (Atlantic City Electric Company), Series A, 6.80% due 3/01/2021(e) 3,741 AAA Aaa 9,635 Essex County, New Jersey, Refunding Bonds, Series A-1, 5.375% due 9/01/2010 9,197 AAA Aaa 4,750 Jersey City, New Jersey, Sewer Authority Revenue Refunding Bonds, 6.25% due 1/01/2014(b) 4,990 AAA Aaa 20,000 New Jersey EDA, Natural Gas Facilities, Revenue Refunding Bonds (NUI Corp.), Series A, 6.35% due 10/01/2022(b) 20,417 New Jersey State Housing and Mortgage Finance Agency Revenue Bonds (Home Buyer), AMT(e): AAA Aaa 6,640 Series B, 7.90% due 10/01/2022 7,147 AAA Aaa 12,785 Series D, 7.70% due 10/01/2029 13,560 AAA Aaa 23,890 Series M, 7% due 1/01/2026 25,498 AAA Aaa 8,055 New Jersey State Turnpike Authority, Turnpike Revenue Bonds, Series A, 6% due 1/01/2005(e) 8,459 AAA VMIG1++ 6,000 New Jersey State Turnpike Authority, Turnpike Revenue Refunding Bonds, VRDN, Series D, 3.85% due 1/01/2018(f) 6,000
57
SCHEDULE OF INVESTMENTS (continued) (in Thousands) Municipal Bonds Insured Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) New York--6.0% AAA Aaa $ 9,650 Metropolitan Transportation Authority, New York, Service Contract Revenue Refunding Bonds (Transportation Facilities), Series L, 7.50% due 7/01/2017(b) $ 10,567 New York City, New York, GO, UT, Series I(b): AAA Aaa 4,505 7.25% due 8/15/2013 4,969 AAA Aaa 2,645 7.25% due 8/15/2013 2,885 AAA Aaa 10,130 7.25% due 8/15/2016 11,050 AAA Aaa 3,500 New York City, New York, IDA, Civic Facilities Revenue Bonds (USTA National Tennis Center Project), 6.25% due 11/15/2005(i) 3,771 New York City, New York, Municipal Water Finance Authority, Water and Sewer System Revenue Bonds: AAA Aaa 50,000 5.20% due 6/15/2008(e) 48,397 AAA Aaa 12,075 Refunding, Series A, 5.75% due 6/15/2018(h) 11,570 AAA Aaa 1,090 Series A, 6.75% due 6/15/2014(h) 1,145 AAA Aaa 9,600 Series B, 5.375% due 6/15/2007(b) 9,504 AAA Aaa 4,510 Series C, 6.20% due 6/15/2021(b) 4,553 AAA Aaa 16,000 Series F, 5.50% due 6/15/2023(e) 14,860 New York State Medical Care Facilities Finance Agency Revenue Bonds (Mental Health Services): AAA Aaa 3,085 Series C, 7.375% due 8/15/2019(e) 3,402 AAA Aaa 11,500 Series D, 5.90% due 8/15/2022(b) 11,196 Niagara Falls, New York, Public Improvement Bonds, UT(e): AAA Aaa 2,975 6.90% due 3/01/2023 3,214 AAA Aaa 3,190 6.90% due 3/01/2024 3,446 Suffolk County, New York, Water Authority, Waterworks Revenue Refunding Bonds(b): AAA Aaa 1,235 7.375% due 6/01/2012 1,353 AAA Aaa 7,345 Series C, 5.75% due 6/01/2013 7,224 North Carolina-- AAA VMIG1++ 200 Charlotte, North Carolina, Airport Revenue Refunding Bonds, VRDN, 0.0% Series A, 4.20% due 7/01/2016(e)(f) 200 Ohio--1.6% AAA Aaa 2,710 Clermont County, Ohio, Hospital Facilities Revenue Refunding Bonds (Mercy Health Systems), Series A, 7.50% due 9/01/2001(a)(b) 3,110 AAA Aaa 12,000 Cleveland, Ohio, Public Power System Revenue Bonds, First Mortgage, Series A, 7% due 11/15/2024(e) 13,744 AAA Aaa 6,700 Ohio Municipal Electric Generation Agency, Joint Ventures, COP, 5.375% due 2/15/2013(b) 6,289 AAA Aaa 3,500 Ohio State Air Quality Development Authority, Revenue Refunding Bonds (Cincinnati Gas and Electric), Series B, 5.45% due 1/01/2024(e) 3,275 Ohio State Water Development Authority Revenue Bonds (Fresh Water Series)(b): AAA Aaa 2,890 5.80% due 12/01/2011 2,900 AAA Aaa 2,475 5.875% due 6/01/2012 2,491 AAA Aaa 9,000 5.90% due 12/01/2015 8,894 Oklahoma--1.2% AAA Aaa 7,500 Oklahoma Industrial Authority, Hospital Revenue Bonds (Baptist Medical Center), Series A, 7% due 8/15/2014(b) 8,047 AAA Aaa 21,560 Tulsa, Oklahoma, Industrial Authority, Hospital Revenue Bonds (Saint John's Medical Center, Inc.), 7.25% due 12/01/2009(e) 23,423 Oregon--0.2% AAA Aaa 4,000 Port Portland, Oregon, Portland International Airport, Airport Revenue Bonds, AMT, Series 7-B, 7.10% due 7/01/2021(e) 4,331 Pennsylvania-- AAA Aaa 1,750 Allegheny County, Pennsylvania, Hospital Development Authority 7.1% Revenue Bonds (Mercy Hospital of Pittsburgh), 6.75% due 4/01/2021(b) 1,849 AAA Aaa 6,900 Beaver County, Pennsylvania, Hospital Authority Revenue Bonds (Medical Center of Beaver, Pennsylvania Incorporated), Series A, 6.25% due 7/01/2022(b) 6,959 AAA Aaa 3,365 Beaver County, Pennsylvania, IDA, PCR, Refunding (Ohio Edison Company/Mansfield), Series A, 7% due 6/01/2021(h) 3,659
58 AAA Aaa 2,110 Berks County, Pennsylvania, Municipal Authority, Hospital Revenue Bonds (Reading Hospital Medical Center Project), 5.70% due 10/01/2014(e) 2,047 AAA Aaa 4,425 Hazleton, Pennsylvania, Area School District, UT, Series B, 6.25% due 3/01/2017(h)(j)(k) 1,156 Pennsylvania Higher Educational Assistance Agency, Student Loan Revenue Bonds, AMT: AAA Aaa 16,000 7.437% due 3/01/2020(e) 17,047 AAA Aaa 3,200 6.031% due 3/01/2022(b) 3,154 AAA Aaa 34,000 6.172% due 3/01/2022(b) 33,515 AAA Aaa 30,000 6.854% due 9/03/2026(b) 31,182 Pennsylvania State Higher Educational Facilities Authority, College and University Revenue Bonds: AAA Aaa 1,500 (Bryn Mawr College), 6.50% due 12/01/2009(h) 1,584 AAA Aaa 4,250 (Temple University), First Series, 6.50% due 4/01/2021(e) 4,425 AAA Aaa 10,390 Pennsylvania Turnpike Commission, Turnpike Revenue Bonds, Series L, 6.25% due 6/01/2011(b) 10,623 Philadelphia, Pennsylvania, Airport Revenue Bonds, AMT(e): AAA Aaa 8,150 7.75% due 6/15/2015 8,926 AAA Aaa 24,000 7.375% due 6/15/2018 25,944 AAA Aaa 5,000 Philadelphia, Pennsylvania, Gas Works Revenue Bonds, 12th Series B, 7% due 5/15/2020(c)(e) 5,895 AAA Aaa 5,750 Philadelphia, Pennsylvania, Parking Authority, Airport Parking Revenue Bonds, 7.375% due 9/01/2018(b) 6,295 AAA Aaa 7,500 Philadelphia, Pennsylvania, School District Revenue Refunding Bonds, Series A, 5.375% due 7/01/2005(e) 7,503 Philadelphia, Pennsylvania, Water and Wastewater Revenue Refunding Bonds(b): AAA Aaa 4,250 5.50% due 6/15/2006 4,292 AAA Aaa 3,000 5.50% due 6/15/2007 3,002 Rhode Island--3.3% Rhode Island Depositors Economic Protection Corporation, Special Obligation Bonds, Series A(i): AAA Aaa 6,100 6.625% due 8/01/2002(a) 6,841 AAA Aaa 35,000 Refunding, 5.75% due 8/01/2019 33,461 AAA Aaa 16,520 Refunding, 5.50% due 8/01/2020 15,254 AAA Aaa 25,600 Rhode Island Health and Educational Building Corporation Revenue Bonds (Rhode Island Hospital), 6.85% due 8/15/2021(h) 27,352 South Carolina-- AAA Aaa 7,000 Charleston, South Carolina, Waterworks and Sewer Revenue 4.6% Refunding and Improvement Bonds, 6% due 1/01/2016(b) 6,919 AAA Aaa 5,000 Florence County, South Carolina, Hospital Revenue Bonds (McLeod Regional Medical Center Project), 6.75% due 11/01/2020(h) 5,305 AAA Aaa 1,750 Greenville, South Carolina, Hospital System, Hospital Facilities Revenue Bonds, Series A, 7.50% due 5/01/2016(h) 1,834 AAA Aaa 2,410 Myrtle Beach, South Carolina, Water and Sewer System Revenue Refunding Bonds, 5.25% due 3/01/2020(e) 2,176 AAA Aaa 3,500 Pickens and Richland Counties, South Carolina, Hospital Facilities Revenue Bonds (Baptist Hospital), Series A, 7% due 8/01/2001(a)(b) 3,972 Piedmont Municipal Power Agency, South Carolina, Electric Revenue Refunding Bonds: AAA Aaa 4,000 6.30% due 1/01/2022(e) 4,063 AAA Aaa 20,750 Series A, 7.40% due 1/01/2018(b) 22,347 AAA Aaa 29,100 South Carolina Jobs, EDA, Hospital Facilities Revenue Bonds, 5.55% due 8/01/2021(b) 26,951 South Carolina State Public Service Authority, Revenue Refunding Bonds: AAA Aaa 14,005 Series A, 5.50% due 7/01/2021(e) 12,899 AAA Aaa 17,090 Series A, 6.375% due 7/01/2021(b) 17,382 AAA Aaa 4,000 Series B, 6.10% due 7/01/2027(b) 3,956 AAA Aaa 2,750 Series C, 5% due 1/01/2014(b) 2,454 Tennessee--0.2% AAA Aaa 1,905 Jackson, Tennessee, Water and Sewer System Revenue Bonds, 10.375% due 7/01/2012(b) 2,315 AAA Aaa 2,200 Knox County, Tennessee, Health, Educational and Housing Facilities Board, Hospital Facilities Crossover Revenue Refunding Bonds (Mercy Health Care System), Series A, 7.60% due 9/01/1999(a)(b) 2,495
59
SCHEDULE OF INVESTMENTS (continued) (in Thousands) Municipal Bonds Insured Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Texas--16.2% Austin, Texas, Utility System Revenue Bonds(e): AAA Aaa $ 11,190 Prior Lien, 9.25% due 5/15/2004(a) $ 14,573 AAA Aaa 3,000 Refunding, 5.50% due 5/15/2007 3,002 AAA Aaa 3,500 Refunding, 5.50% due 5/15/2008 3,465 AAA Aaa 3,500 Refunding, 5.50% due 5/15/2009 3,427 AAA Aaa 2,000 Refunding, 5.50% due 5/15/2010 1,933 AAA Aaa 3,500 Refunding, 5.50% due 5/15/2011 3,367 AAA Aaa 4,000 Refunding, 5.50% due 5/15/2012 3,826 AAA Aaa 2,000 Refunding, 5.50% due 5/15/2013 1,904 AAA Aaa 14,825 Refunding, Series A, Prior Lien, 6.067% due 11/15/2011(j)(k) 5,437 Brazos River Authority, Texas, PCR (Collateral--Texas Utilities Electric Company Project), AMT: AAA Aaa 6,000 Refunding, 6.50% due 12/01/2027(b) 6,152 AAA Aaa 12,000 Series B, 6.625% due 6/01/2022(h) 12,419 Brazos River Authority, Texas, Revenue Refunding Bonds (Collateral--Houston Light and Power Co.): AAA Aaa 12,700 5.60% due 12/01/2017(e) 11,988 AAA Aaa 13,900 Series B, 7.20% due 12/01/2018(h) 15,299 AAA Aaa 20,000 Brownsville, Texas, Utility System Revenue Refunding Bonds, 6.25% due 9/01/2014(e) 20,913 A1+ VMIG1++ 1,100 Harris County, Texas, Health Facilities Development Corporation, Special Facilities Revenue Bonds (Texas Medical Center Project), VRDN, 4.20% due 2/15/2022(f)(e) 1,100 AAA Aaa 5,000 Harris County, Texas, Hospital District, Mortgage Revenue Refunding Bonds, 7.40% due 2/15/2010(b) 5,776 AAA Aaa 1,695 Harris County, Texas, Toll Road Revenue Bonds, Series A, 6.50% due 8/15/2011(h) 1,779 Harris County, Texas, Toll Road, Revenue Senior Lien Bonds: AAA Aaa 13,045 Refunding, 5.30% due 8/15/2013(b) 12,263 AAA Aaa 8,250 Refunding, 5% due 8/15/2016(h) 7,251 AAA Aaa 21,650 Refunding, 5.375% due 8/15/2020(h) 19,721 AAA Aaa 5,755 Refunding, 5.50% due 8/15/2021(h) 5,327 AAA Aaa 10,305 Refunding, Series A, 6.50% due 8/15/2002(a)(h) 11,485 AAA Aaa 15,250 Refunding, Series A, 6.50% due 8/15/2002(a)(b) 16,996 AAA Aaa 2,750 Series A, 6.50% due 8/15/2017(b) 2,857 AAA Aaa 11,100 Series A, 6.375% due 8/15/2024(e) 11,379 AAA Aaa 8,375 Houston, Texas, Water and Sewer System Revenue Bonds, Junior Lien, Series A, 6.375% due 12/01/2022(e) 8,562 Houston, Texas, Water and Sewer System, Revenue Refunding Bonds, Junior Lien, Series C(b): AAA Aaa 12,700 5.70% due 12/01/2010(j)(k) 4,961 AAA Aaa 45,960 5.70% due 12/01/2011(j)(k) 16,811 AAA Aaa 53,850 5.78% due 12/01/2012(j)(k) 18,433 AAA Aaa 18,400 5.75% due 12/01/2015 17,736 AAA Aaa 3,500 Houston, Texas, Water Conveyance System Contract, COP, Series J, 6.25% due 12/15/2013(b) 3,677 Lower Colorado River Authority, Texas, Revenue Refunding Bonds: AAA Aaa 4,415 5.60% due 1/01/2009(c)(e)(j)(k) 2,027 AAA Aaa 22,480 Junior Lien, 5.40% due 1/01/2007(i) 22,121 AAA Aaa 650 Series B, 7% due 1/01/2001(a)(b) 731 Matagorda County, Texas, Navigation District No. 1, PCR, AMT: AAA Aaa 5,000 (Collateralized--Central Power and Light Company Project), 7.50% due 3/01/2020(b) 5,482 AAA Aaa 8,250 (Collateralized--Houston Light and Power), Series D, 7.60% due 10/01/2019(h) 9,062 Matagorda County, Texas, Navigational District No. 1, Revenue Refunding Bonds (Collateralized--Houston Light and Power): AAA Aaa 11,800 Series A, 6.70% due 3/01/2027(b) 12,556 AAA Aaa 26,305 Series C, 7.125% due 7/01/2019(h) 28,733 AAA Aaa 6,470 Series E, 7.20% due 12/01/2018(h) 7,129 AAA Aaa 15,000 Southwest Higher Education Authority Incorporated, Texas, Revenue Refunding Bonds (Southern Methodist University), Series B, 6.25% due 10/01/2022(h) 15,166
60 Texas Municipal Power Agency, Revenue Refunding Bonds: AAA Aaa 10,000 5.50% due 9/01/2010(e) 9,768 AAA Aaa 2,900 Series A, 6.75% due 9/01/2012(b) 3,157 Texas State Public Finance Authority, Building Revenue Capital Appreciation Refunding Bonds(e)(j)(k): AAA Aaa 7,000 5.80% due 2/01/2009 3,102 AAA Aaa 2,890 6.10% due 2/01/2011 1,112 AAA Aaa 8,500 5.81% due 2/01/2012 3,063 AAA Aaa 15,875 Trinity River Authority, Texas, Regional Wastewater System Revenue Refunding Bonds, Series A, 5% due 8/01/2016(b) 14,023 Utah--1.6% AAA Aaa 28,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds (IHC Hospitals, Incorporated), 6.75% due 5/15/2020(b)(c) 29,603 AA- Aaa 1,000 Uintah County, Utah, PCR (Desert Generation and Transmission Cooperative--National Rural Utilities Company), Series 1984 F-2, 10.50% due 6/15/2001(a) 1,295 AAA Aaa 2,650 Utah Board of Regents, Student Loan Revenue Bonds, AMT, Series F, 7.45% due 11/01/2008(b) 2,870 Utah Municipal Power Agency, Electric System Revenue Refunding Bonds, Series A(h): AAA Aaa 3,120 5.50% due 7/01/2012 2,984 AAA Aaa 3,295 5.50% due 7/01/2013 3,136 Vermont--0.8% AAA Aaa 18,950 Vermont, HFA, Revenue Bonds (Home Mortgage Purchase), AMT, Series B, 7.60% due 12/01/2024(e) 20,212 Virginia--2.4% AAA Aaa 5,000 Danville, Virginia, IDA, Hospital Revenue Refunding Bonds (Danville Regional Medical Center), 6.50% due 10/01/2019(h) 5,247 AAA Aaa 16,800 Prince William County, Virginia, Service Authority, Water and Sewer System Revenue Refunding Bonds, 5% due 7/01/2021(h) 14,562 AAA Aaa 5,000 Upper Occoquan Sewer Authority, Virginia, Regional Sewer Revenue Refunding Bonds, 5% due 7/01/2021(h) 4,334 Virginia State, HDA, Commonwealth Mortgage, AMT, Series A, Sub Series A-4(e): AAA Aaa 5,000 6.30% due 7/01/2014 5,039 AAA Aaa 11,215 6.35% due 7/01/2018 11,244 AAA Aaa 21,000 6.45% due 7/01/2028 21,161 Washington--3.0% AAA Aaa 33,535 Seattle, Washington, Municipal Light and Power Revenue Bonds, 6.625% due 7/01/2020(h) 35,552 Seattle, Washington, Municipality, Metropolitan Seattle, Sewer Revenue Bonds: AAA Aaa 3,000 Refunding, Series X, 5.30% due 1/01/2008(h) 2,917 AAA Aaa 6,560 Refunding, Series Y, 5.70% due 1/01/2015(h) 6,245 AAA Aaa 3,315 Refunding, Series Y, 5.70% due 1/01/2016(h) 3,152 AAA Aaa 3,865 Refunding, Series Z, 5.45% due 1/01/2022(b) 3,504 AAA Aaa 2,465 Series W, 6.25% due 1/01/2022(e) 2,481 AAA Aaa 4,485 Series W, 6.25% due 1/01/2023(e) 4,514 AAA Aaa 10,000 Seattle, Washington, Solid Waste Utility, Revenue Refunding Bonds, Series A, 6.875% due 5/01/2009(g) 10,732 AAA Aaa 3,250 University of Washington Revenue Bonds (Housing and Dining), 7% due 12/01/2021(e) 3,582 AAA Aaa 7,000 Washington Health Care Facilities Authority Revenue Bonds (Southwest Washington Hospital--Vancouver), 7.125% due 10/01/2019(g) 7,556 D NR* 719 Washington Public Power Supply System, Generating Facilities Revenue Bonds (Nuclear Project, Numbers 4 & 5), Series D, 12.50% due 7/01/2010(b) 719 West Virginia--2.8% AAA Aaa 9,270 Kanawha County, West Virginia, Building Commission Revenue Refunding Bonds (Charleston Area Medical Center Inc.), Series A, 7.10% due 6/01/2013(e) 9,827 Pleasants County, West Virginia, PCR, Series 95-C(b): AAA Aaa 24,500 (Monogahela Power Co.), 6.15% due 5/01/2015 24,744 AAA Aaa 12,250 (Potomac Pleasants), 6.15% due 5/01/2015 12,372 AAA Aaa 5,250 (West Penn Power Co.), 6.15% due 5/01/2015 5,302 AAA Aaa 7,600 Putnam County, West Virginia, PCR, Refunding (Appalachian Power Company Project), Series D, 5.45% due 6/01/2019(b) 6,920 AAA Aaa 5,600 West Virginia School Building Authority Revenue Bonds (Capital Improvement), Series B, 6.75% due 7/01/2010(e) 5,953 AAA Aaa 4,000 West Virginia State Parkways, Economic Development and Tourism Authority, 5.80% due 5/15/2013(h) 3,896
61
SCHEDULE OF INVESTMENTS (concludued) (in Thousands) Municipal Bonds Insured Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Wisconsin--2.2% AAA Aaa $ 7,000 Superior, Wisconsin, Limited Obligation Revenue Refunding Bonds (Midwest Energy Resources), Series E, 6.90% due 8/01/2021(h) $ 7,815 Wisconsin Health and Educational Facilities Authority Revenue Bonds: AAA Aaa 1,500 (Saint Luke's Medical Center Project), 7.10% due 8/15/2019(e) 1,610 AAA Aaa 5,750 (Waukesha Memorial Hospital), Series B, 7.25% due 8/15/2019(b) 6,273 Wisconsin Public Power System Incorporated, Power Supply System Revenue Bonds, Series A(b): AAA Aaa 6,500 6.875% due 7/01/2001(a) 7,327 A1+ Aaa 8,360 Refunding, 5.25% due 7/01/2021 7,449 Wisconsin State (Veterans Housing Loans), AMT, Series B(e): AAA Aaa 7,920 6.50% due 5/01/2020 8,210 AAA Aaa 17,130 6.50% due 5/01/2025 17,809 Total Investments (Cost--$2,390,477)--98.9% 2,494,466 Other Assets Less Liabilities--1.1% 28,118 ---------- Net Assets--100.0% $2,522,584 ========== (a)Prerefunded. (b)AMBAC Insured. (c)Escrowed to maturity. (d)The interest rate is subject to change periodically and inversely based upon the prevailing market rate. The interest rate shown is the rate in effect at June 30, 1995. (e)MBIA Insured. (f)The interest rate is subject to change periodically based upon the prevailing market rate. The interest rate shown is the rate in effect at June 30, 1995. (g)BIG Insured. (h)FGIC Insured. (i)FSA Insured. (j)Principal only securities which are traded on a discount basis and are amortized to maturity. (k)The interest rate shown represents the yield to maturity. *Not Rated. ++Highest short-term rating issued by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements.
SCHEDULE OF INVESTMENTS (in Thousands) Municipal Bonds National Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Alabama--0.6% AAA Aaa $ 9,000 Alabama Agricultural and Mechanical University, 6.50% due 11/01/2025(f) $ 9,347 Alaska--2.4% Valdez, Alaska, Marine Terminal Revenue Refunding Bonds: AA- A1 6,000 (British Petroleum Pipeline), Series B, 7% due 12/01/2025 6,417 AA- A1 27,150 (Sohio Pipeline), 7.125% due 12/01/2025 29,344 Arizona--0.3% AA A1 4,640 Arizona State University, Revenue Refunding Bonds, Series A, 5.50% due 7/01/2019 4,375 California--5.9% NR* NR* 6,000 Antioch, California, Improvement Bond Act 1915 (Assessment District No. 27--Lone Tree), Series E, 7.125% due 9/02/2016 6,075 SP-1 MIG1++ 18,000 California State, GO, RAW, Series C, 5.75% due 4/25/1996 18,316 California State, Public Works Board, Lease Revenue Bonds: A- A 10,350 (Department of Corrections--Monterey County), Series A, 7% due 11/01/2019 10,964
62 AAA Aaa 2,800 (Various University of California Projects), Series A, 6.40% due 12/01/2016(c) 2,859 A- A1 1,000 (Various University of California Projects), Series B, 6.625% due 12/01/2019 1,021 NR* NR* 4,000 Long Beach, California, Special Tax Community Facilities, District No. 3--Pine Avenue, 6.375% due 9/01/2023 3,698 AA Aa 5,500 Los Angeles County, California, Department of Water and Power Waterworks Revenue Bonds, Second Issue, 6.40% due 11/01/2031 5,567 AA- Aaa 10,705 Los Angeles County, California, Transportation Commission, Sales Tax Revenue Bonds, Series A, 6.90% due 7/01/2001(k) 12,129 A NR* 11,725 Palmdale, California, Civic Authority, Revenue Refunding Bonds (Merged Redevelopment Project), Series A, 6.60% due 9/01/2034 12,008 A+ Aaa 5,385 Sacramento, California, City Financing Authority Revenue Bonds, 6.80% due 11/01/2001(k) 6,101 AAA Aaa 10,000 University of California Revenue Bonds, Multiple Purpose Projects, Series D, 6.25% due 9/01/2013(f) 10,230 Colorado--3.5% Denver, Colorado, City and County Airport Revenue Bonds, AMT: BB Baa 5,000 Series A, 8% due 11/15/2017 5,258 BB Baa 3,000 Series A, 7.50% due 11/15/2023 3,171 BB Baa 8,570 Series A, 8% due 11/15/2025 9,197 BB Baa 13,000 Series B, 7.25% due 11/15/2023 13,427 BB Baa 5,650 Series C, 6.75% due 11/15/2022 5,552 BB Baa 13,150 Series D, 7.75% due 11/15/2021 14,081 A1 NR* 2,800 Pitkin County, Colorado, IDR, Refunding (Aspen Skiing Co. Project), VRDN, Series A, 4.65% due 4/01/2016(a) 2,800 Connecticut--0.3% AA- Baa1 4,550 Connecticut State Resource Recovery Authority Revenue Bonds (American Refuse Fuel), AMT, Series A, 8% due 11/15/2015 5,015 Delaware--0.6% AAA NR* 7,500 Delaware State Health Facilities Authority, Revenue Refunding Bonds (Beebe Medical Center Project), 8.50% due 6/01/2000(k) 8,876 District of A+ A1 3,750 District of Columbia Revenue Bonds, RIB (Georgetown University), Columbia--0.3% 8.632% due 4/01/2022(m) 3,956 Florida--2.7% AAA Aaa 6,330 Florida, HFA (Antigua Club Apartments), AMT, Series A-1, 7% due 2/01/2035(c) 6,579 NR* Aaa 9,400 Florida HFA, Home Ownership Revenue Bonds, AMT, Series G-1, 7.90% due 3/01/2022(l) 10,104 AA Aa3 5,000 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa Electric Company Project), Series 1991, 7.875% due 8/01/2021 5,803 NR* NR* 2,700 Leesburg, Florida, Hospital Capital Improvement Revenue Bonds (Leesburg Regional Medical Center Project), Series 1991-A, 7.50% due 7/01/2002(k) 3,150 A1+ VMIG1++ 1,000 Martin County, Florida, PCR, Refunding (Florida Power and Light Company Project), VRDN, 4.20% due 9/01/2024(a) 1,000 AAA NR* 4,765 Orange County, Florida, HFA, Mortgage Revenue Bonds, AMT, Series A, 8.375% due 3/01/2021(l) 5,145 A1 VMIG1++ 1,500 Saint Lucie County, Florida, PCR, Refunding (Florida Power and Light Company Project), VRDN, 4.20% due 1/01/2026(a) 1,500 AAA Aaa 5,850 South Broward, Florida, Hospital District Revenue Bonds, RIB, Series C, 8.629% due 5/13/2021(c)(m) 6,450 AAA Aaa 2,000 Tampa, Florida, Revenue Bonds (Alleghany Health System-Saint Joseph's), 5.125% due 12/01/2023 1,748 Georgia--3.9% AA- Aa 25,705 Atlanta, Georgia, Water and Sewer Revenue Refunding Bonds, 4.75% due 1/01/2023 21,194 A+ A 8,375 Georgia Municipal Electric Authority Power, Revenue Refunding Bonds, Series Z, 5.50% due 1/01/2020 7,651 Metropolitan Atlanta, Georgia Rapid Transit Authority, Sales Tax Revenue Bonds: AAA Aaa 20,000 Second Indenture, Series A, 6.90% due 7/01/2020(f) 21,854 AA- A1 7,500 Series O, 6.55% due 7/01/2020 7,807 Idaho--0.2% AA NR* 2,380 Idaho Housing Agency, S/F Mortgage Revenue Bonds, AMT, Series E, 7.875% due 7/01/2024(b) 2,526 Illinois--5.0% AA- Aa3 8,000 Chicago, Illinois, Gas Supply Revenue Bonds (Peoples Gas, Light & Coke Company Project), AMT, Series A, 8.10% due 5/01/2020 8,995 Chicago, Illinois, O'Hare International Airport, Special Facilities Revenue Bonds (United Airlines, Inc.): BB Baa2 4,825 AMT, Series B, 8.95% due 5/01/2018 5,404 BB Baa2 14,075 Series 1984-B, 8.85% due 5/01/2018 15,838 AAA Aaa 5,015 Chicago, Illinois, Public Building Commission Revenue Bonds (Community College District No. 508), Series B, 8.75% due 1/01/2007(d)(i) 5,440 BBB NR* 3,000 Illinois Educational Facilities Authority, Revenue Refunding Bonds (Columbia College), 6.875% due 12/01/2017 3,019
63
SCHEDULE OF INVESTMENTS (continued) (in Thousands) Municipal Bonds National Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Illinois Illinois Health Facilities Authority Revenue Bonds: (concluded) AAA Aaa $ 1,500 (Methodist Health Project), RIB, 9.724% due 5/01/2021(c)(m) $ 1,673 BBB- NR* 2,625 Refunding (Saint Elizabeth's Hospital--Chicago), 7.75% due 7/01/2016 2,703 AAA Aaa 11,000 (Rush Presbyterian-Saint Luke's Medical Center), INFLOS, 9.057% due 10/01/2014(f)(m) 12,183 A+ Aa 5,250 Illinois Housing Development Authority, Residential Mortgage Revenue Bonds, RIB, AMT, 9.188% due 2/01/2018(m) 5,624 AAA Aaa 2,000 Illinois State, Dedicated Tax Revenue Civic Center, Series A, 7.35% due 12/15/2005(c) 2,246 AAA Aaa 5,950 Regional Transportation Authority Illinois, UT, Series D, 6.75% due 6/01/2025(e) 6,338 NR* A1 4,000 Southwestern Illinois, Development Authority, Sewer Facilities Revenue Bonds (Monsanto Company Project), AMT, 7.30% due 7/15/2015 4,233 Indiana--2.1% Indiana Health Facilities Financing Authority, Hospital Revenue Bonds: AAA Aaa 1,000 (Community Hospital Project), 6.85% due 7/01/2022(f) 1,053 NR* Baa1 3,500 (Riverview Hospital Project), 6.875% due 8/01/2017 3,403 NR* Aaa 9,500 Indiana State Educational Facilities Authority Revenue Bonds (University of Notre Dame Project), 6.70% due 3/01/2025 10,149 A+ NR* 9,100 Indianapolis, Indiana, Local Public Improvement Refunding Bond Bank, Series D, 6.75% due 2/01/2020 9,477 NR* Aa 1,500 Marion County, Indiana, Hospital Authority, Hospital Facility Revenue Bonds (Daughters of Charity--Saint Vincent's Hospital Project), 10.125% due 11/01/2015 1,559 AA- Aa2 5,700 Petersburg, Indiana, PCR, Refunding (Indianapolis Power & Light Co. Project), 6.625% due 12/01/2024 5,905 Iowa--0.6% NR* NR* 9,000 Iowa Finance Authority, Health Care Facilities Revenue Bonds (Mercy Health Initiatives Project), 9.95% due 7/01/2019 9,572 Kansas--0.8% AAA Aaa 12,000 Wichita, Kansas, Hospital Revenue Bonds, RIB, Series III-A, 8.475% due 10/01/2017(f)(m) 12,735 Kentucky--1.1% AAA Aaa 4,500 Louisville and Jefferson County, Kentucky, Metropolitan Sewer District, Sewer and Drain System, Revenue Refunding Bonds, Series A, 6.50% due 5/15/2024(c) 4,759 NR* NR* 4,500 Perry County, Kentucky, Solid Waste Disposal Revenue Bonds (TJ International Project), AMT, 7% due 6/01/2024 4,503 AA Aa2 6,345 Trimble County, Kentucky, PCR (Louisville Gas and Electric Company), AMT, Series A, 7.625% due 11/01/2020 7,006 Louisiana--3.1% NR* Baa3 37,850 Lake Charles, Louisiana, Harbor and Terminal District Port Facilities, Revenue Refunding Bonds (Trunkline LNG Company Project), 7.75% due 8/15/2022 41,665 BB- NR* 3,000 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain Company Project), 7.50% due 7/01/2013 3,055 BBB Baa2 1,100 Saint Charles Parish, Louisiana, PCR (Union Carbide Project), AMT, 7.35% due 11/01/2022 1,142 Maine--0.3% AA- A1 3,815 Maine State, Housing Authority, Mortgage Purchase, AMT, Series B-4, 6.90% due 11/15/2026 3,932 Maryland--0.5% AA- Aa 7,000 Maryland State Stadium Authority, Sports Facilities Lease Revenue Bonds, AMT, Series D, 7.60% due 12/15/2019 7,646 Massachusetts--6.1% AAA Aaa 6,000 Massachusetts Bay Transportation Authority Revenue Bonds, Series B, 7.875% due 3/01/2001(k) 7,027 A+ A1 10,000 Massachusetts State, Consolidated Loans, UT, Series B, 9.25% due 7/01/2000 11,998 Massachusetts State, Health and Educational Facilities Authority Revenue Bonds: SP-1+ VMIG1++ 8,000 (Capital Asset Program), VRDN, Series D, 4.15% due 1/01/2035(a) 8,000 NR* NR* 9,520 (North Adams Regional Hospital), Series A, 9.625% due 12/01/2018 9,966 NR* Ba 12,350 Massachusetts State, Health and Educational Facilities Authority, Revenue Refunding Bonds (New England Memorial Hospital), Series B, 6.25% due 7/01/2023 9,846 Massachusetts State, HFA, Residential Development(n): AAA Aaa 5,000 Series C, 6.875% due 11/15/2011 5,273 AAA Aaa 7,500 Series C, 6.90% due 11/15/2021 7,843 AAA Aaa 2,000 Series D, 6.80% due 11/15/2012 2,086 A A 31,015 Massachusetts State, Water Resource Authority, Refunding, Series B, 5.50% due 11/01/2015 28,758 Michigan--4.8% A1+ VMIG1++ 2,600 Grand Rapids, Michigan, Water Supply Systems Revenue Refunding Bonds, VRDN, 4.10% due 1/01/2020(a)(e) 2,600
64 A+ A 1,000 Marquette, Michigan, City Hospital Finance Authority, Revenue Refunding Bonds (Marquette General Hospital), Series C, 7.50% due 4/01/2019 1,082 AA A1 1,250 Michigan Municipal Bond Authority, Revenue Refunding Bonds (Local Government-Qualified School), Series A, 6.50% due 5/01/2016 1,303 AA- A 14,000 Michigan State Building Authority Revenue Bonds, Series II, 6.25% due 10/01/2020 13,875 Michigan State Hospital Finance Authority, Hospital Revenue Bonds (Detroit Medical Center), Series A: A A 3,500 7.50% due 8/15/2011 3,791 A A 6,500 Refunding, Obligation Group, 6.50% due 8/15/2018 6,509 AA- A1 30,000 Michigan State Trunk Line, GO, Series A, 5.50% due 10/01/2021 27,400 BBB Baa1 9,350 Monroe County, Michigan, PCR (Detroit Edison Company Project), AMT, Series A, 7.75% due 12/01/2019 10,064 AA Aa 5,000 Royal Oaks, Michigan, Hospital Financing Authority Revenue Bonds (William Beaumont Hospital), Series D, 6.75% due 1/01/2020 5,169 Minnesota--1.4% Minnesota State, HFA, S/F Mortgage Bonds: AA+ Aa 6,090 AMT, Series A, 7.45% due 7/01/2022(b) 6,489 AA+ Aa 5,250 Series F, 6.30% due 7/01/2025 5,306 AAA NR* 8,870 Saint Paul, Minnesota, Housing and Redevelopment Authority, S/F Mortgage Revenue Refunding Bonds, Series C, 6.95% due 12/01/2031(n) 9,142 Mississippi--0.7% BBB Baa 5,950 Lowndes County, Mississippi, Hospital Revenue Refunding Bonds (Golden Triangle Medical Center), 8.50% due 2/01/2010 6,430 NR* Aaa 4,195 Mississippi Home Corporation, S/F Mortgage Revenue Bonds (Access Program), AMT, Series A, 6.90% due 6/01/2024(l) 4,418 Missouri & BBB+ NR* 11,400 Bi-State Development Agency, Missouri and Illinois, Metropolitan Illinois--0.8% No. 5, Revenue Refunding Bonds (American Commonwealth), 7.75% due 6/01/2010 12,377 Nebraska--0.9% Nebraska Investment Finance Authority, S/F Mortgage Revenue Bonds, Series 2(1): AAA Aaa 100 AMT, 7.631% due 9/10/2030 107 AAA Aaa 4,400 RIB, 11.126% due 9/10/2030(m) 5,022 A+ A1 10,000 Nebraska Public Power District Revenue Bonds, Series C, 5% due 1/01/2017 8,746 Nevada--0.6% AAA Aaa 3,500 Clark County, Nevada, Passenger Facility Charge Revenue Bonds (Las Vegas/Macarran International Airport), AMT, Series A, 5.75% due 7/01/2023(f) 3,224 AA Aa 2,500 Nevada State, GO (Colorado River Community), 6.20% due 7/01/2007 2,640 AAA Aaa 3,500 Washoe County, Nevada, Gas and Water Facilities, Revenue Refunding Bonds (Sierra Pacific), 6.30% due 12/01/2014(c) 3,558 New Hampshire-- AAA Aa 3,185 New Hampshire State, HFA, S/F Residential Mortgage Bonds, AMT, 1.1% 7.90% due 7/01/2022(c) 3,351 New Hampshire State, IDA, PCR (Public Service Co. of New Hampshire Project), AMT: BB+ Baa3 4,850 Series A, 7.65% due 5/01/2021 5,109 BB+ Baa3 8,500 Series C, 7.65% due 5/01/2021 8,953 New Jersey--2.7% New Jersey Building Authority, State Building Revenue Refunding Bonds: AA- Aa 14,600 5% due 6/15/2015 12,976 AA- Aa 10,000 5% due 6/15/2018 8,819 NR* NR* 6,700 New Jersey Health Care Facilities Financing Authority Revenue Bonds (Riverwood Center Issue), Series A, 9.90% due 7/01/2021 7,452 AA A 9,500 University Medicine and Dentistry of New Jersey Revenue Bonds, Series C, 7.20% due 12/01/2019 10,377
65
SCHEDULE OF INVESTMENTS (continued) (in Thousands) Municipal Bonds National Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) New York--13.6% Metropolitan Transportation Authority, New York, Service Contract Revenue Refunding Bonds (Commuter Facilities), Series 5: BBB Baa1 $ 2,145 6.90% due 7/01/2006 $ 2,244 BBB Baa1 5,000 7% due 7/01/2012 5,246 Metropolitan Transportation Authority, New York, Transportation Facilities Revenue Bonds: AAA Aaa 23,150 Series 6, 7.125% due 7/01/2001(k) 26,498 AAA Aaa 5,000 Series J, 6.50% due 7/01/2018(e) 5,172 New York City, New York, GO, UT: A- Baa1 3,600 Series A, 7.75% due 8/15/2016 3,921 A- Baa1 4,065 Series A, 7.75% due 8/15/2017 4,428 A- Baa1 5,375 Series B, 8.25% due 6/01/2006 6,275 A- Baa1 2,700 Series B, 8.25% due 6/01/2007 3,169 A- Baa1 10,000 Series B, 7.75% due 2/01/2011 10,905 A- Baa1 4,500 Series B, 7.75% due 2/01/2012 4,907 A- Baa1 2,875 Series B, 7.75% due 2/01/2013 3,143 A- Baa1 1,650 Series B, 7.75% due 2/01/2014 1,804 A- Baa1 3,495 Series D, 8% due 8/01/2001(k) 4,128 A- Baa1 2,000 Series D, 7.70% due 2/01/2011 2,176 A- Aaa 5,495 Series F, 8.25% due 11/15/2001(k) 6,643 A- A 3,440 New York City, New York, Municipal Water Finance Authority, Water and Sewer System Revenue Bonds, Series A, 6.75% due 6/15/2017 3,599 A- A 2,000 New York State, GO (Environmental Quality), 6.50% due 12/01/2014 2,103 New York State Dormitory Authority Revenue Bonds (State University Educational Facilities): BBB+ Baa1 4,660 Refunding, Series B, 7.50% due 5/15/2011 5,281 BBB+ Baa1 6,735 Refunding, Series B, 7.375% due 5/15/2014 7,189 BBB+ Baa1 2,000 Refunding, Series B, 7% due 5/15/2016 2,081 BBB+ Baa1 5,000 Series A, 7.50% due 5/15/2013 5,672 A Aa 21,500 New York State Environmental Facilities Corporation, PCR (State Water Revolving Fund), Series E, 6.50% due 6/15/2014 22,630 New York State Local Government Assistance Corporation: A A 6,000 Series A, 7% due 4/01/2002(k) 6,545 A A 10,000 Series C, 6.25% due 4/01/2018 10,059 New York State Medical Care Facilities, Finance Agency Revenue Bonds: AAA Aaa 4,630 (Mental Health Services), Series C, 7.30% due 8/15/2001(k) 5,352 AAA Aaa 1,665 (Mental Health Services), Series E, 6.50% due 8/15/2024(j) 1,719 AAA Aaa 8,400 (New York Hospital Management), Series A, 6.75% due 8/15/2014(c) 8,943 AAA Aaa 9,100 (New York Hospital Mortgage), Series A, 6.80% due 8/15/2024(b)(c) 9,765 New York State Power Authority, General Purpose Revenue Refunding Bonds, Series Z: AA- Aa 5,000 6.625% due 1/01/2012 5,308 AA- Aa 5,000 6.50% due 1/01/2019 5,236 AAA Aaa 14,595 New York State Urban, Development Corporation, Revenue Refunding Bonds (Correctional Capital Facilities), Series A, 6.50% due 1/01/2010(h) 15,737 A+ Aa 1,000 Triborough Bridge and Tunnel Authority, New York, General Purpose Revenue Bonds, Series X, 6.50% due 1/01/2019 1,044 Ohio--2.2% AAA Aaa 12,000 Cleveland, Ohio, Public Power System Revenue Bonds, First Mortgage, Series A, 7% due 11/15/2024(f) 13,744 Ohio HFA, S/F Mortgage Revenue Bonds, AMT (1): AAA Aaa 10,750 RIB, Series B-4, 9.294% due 3/31/2031(m) 11,489 AAA NR* 2,605 Series B, 8.25% due 12/15/2019 2,791 AAA NR* 4,730 Series C, 7.85% due 9/01/2021 5,016 Oregon--0.1% A1 VMIG1++ 600 Medford, Oregon, Hospital Facilities Authority Revenue Bonds (Gross-Rogue Valley Health Services), VRDN, 4.30% due 10/01/2016(a) 600
66 A1+ VMIG1++ 1,600 Port Saint Helens, Oregon, PCR (Portland General Electric Company), VRDN, Series A, 4.25% due 4/01/2010(a) 1,600 Pennsylvania--4.6% BB Ba2 6,800 Beaver County, Pennsylvania, IDA, PCR, Refunding (Cleveland Electric Project), 7.625% due 5/01/2025 6,870 Emmaus, Pennsylvania, General Authority, Revenue Bonds, VRDN (a): A1 NR* 2,700 (Local Government), Series H, 4.15% due 3/01/2024 2,700 NR* NR* 3,600 Sub-Series D-10, 4.15% due 3/01/2024 3,600 BBB- Baa 10,000 Pennsylvania Convention Center Authority, Revenue Refunding Bonds, Series A, 6.75% due 9/01/2019 10,140 Pennsylvania, HFA, Revenue Refunding Bonds: AAA Aaa 8,850 6.50% due 7/01/2023(n) 9,025 AA Aa 8,800 RIB, AMT, Series 1991-31C, 9.377% due 10/01/2023(m) 9,548 AAA Aaa 6,570 Pennsylvania Intergovernmental Co-op Authority, Split Tax Revenue (Philadelphia Funding Project), 5.60% due 6/15/2015 6,252 2,000 Pennsylvania State, GO, UT, Third Series, 6.40% due 11/15/2006(e) 2,168 AAA Aaa 10,000 Pennsylvania State Higher Education Assistance Agency, Student Loan Revenue Bonds, RIB, AMT, 9.413% due 9/03/2026(c)(m) 10,788 AAA Aaa 4,800 Pittsburgh, Pennsylvania Water and Sewer Authority, Water and Sewer System Revenue Refunding Bonds, Series A, 6.75% due 9/01/2001(e)(k) 5,391 AAA Aaa 2,500 York County, Pennsylvania, Hospital Authority Revenue Bonds (York Hospital), 7% due 1/01/2001(c)(k) 2,813 Rhode Island--2.8% Rhode Island Depositors Economic Protection Corporation, Special Obligation Bonds, Series A: AAA Aaa 5,250 6.95% due 8/01/2002(k) 5,989 AAA Aaa 30,000 Refunding, 6.25% due 8/01/2016(f) 30,852 AAA Aaa 5,000 Rhode Island State, GO, Refunding, Series A, 6.25% due 6/15/2007(e) 5,266 South Carolina--0.6% BBB Baa1 8,355 South Carolina Jobs, EDA, Economic Development Revenue Bonds (Saint Francis Hospital--Franciscan Sisters), 7% due 7/01/2015 8,346 South Dakota--0.6% AA+ Aa1 9,085 South Dakota, HDA, Homeownership Mortgage, Series A, 7.15% due 5/01/2027 9,487 Tennessee--0.7% NR* NR* 10,000 Knox County, Tennessee, Health, Educational and Housing Facilities Board, Hospital Facilities Revenue Bonds (Baptist Health System of East Tennessee), 8.60% due 4/15/2016 10,781 Texas--10.3% Brazos River Authority, Texas, PCR (Texas Utilities Electric Company Project), AMT, Series A: BBB Baa2 2,095 8.25% due 1/01/2019 2,301 BBB Baa2 18,150 7.875% due 3/01/2021 20,032 A A2 12,350 Brazos River Authority, Texas, Revenue Refunding Bonds (Houston Light and Power), Series 1989-A, 7.625% due 5/01/2019 13,429 AAA Aaa 1,780 Brazos River Authority, Texas, Special Facilities Revenue Refunding Bonds, 5.50% due 8/15/2021(e) 1,639 AA- Aa3 9,105 Guadalupe Blanco River Authority, Texas, Industrial Development Corporation, PCR (E.I. du Pont), 6.35% due 7/01/2022 9,266 BBB Baa1 7,250 Gulf Coast Waste Disposal Authority, Texas, Revenue Bonds (Champion International Corporation), AMT, 7.45% due 5/01/2026 7,673 AA Aa 2,400 Harris County, Texas, Certificates of Obligation, Tax and Revenue Bonds, 10% due 10/01/2001 3,073 Harris County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds: AA Aa 12,470 (Saint Luke's Episcopal Hospital Project), Series A, 6.75% due 2/15/2021 12,919 AA Aa 18,000 (Sisters of Charity), 7.10% due 7/01/2021 19,238 AAA Aaa 11,100 Harris County, Texas, Senior Lien Toll Road, Series A, 6.375% due 8/15/2024(f) 11,379 BBB- Ba1 8,175 Jefferson County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds (Baptist Healthcare System Project), 8.875% due 6/01/2021 8,878 AA Aa 12,000 North Central Texas, Health Facilities Development Corporation Revenue Bonds (Baylor University Medical Center), INFLOS, Series A, 9.563% due 5/15/2016(m) 13,080 BB Ba 6,500 Odessa, Texas, Junior College District, Revenue Refunding Bonds, Series A, 8.125% due 12/01/2018 6,539 A+ Aa 8,475 Texas Housing Agency, Residential Development Mortgage Revenue Bonds, Series A, 7.50% due 7/01/2015(l) 8,957 AA Aa 14,000 Texas State Veterans Housing Assistance, AMT, UT, Fund II, Series A, 7% due 12/01/2025 14,569 Utah--1.0% AA NR* 13,250 Weber County, Utah, Municipal Building Authority, Lease Revenue Bonds, 7.50% due 12/15/2019 14,789
67
SCHEDULE OF INVESTMENTS (concluded) (in Thousands) Municipal Bonds National Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Virginia--1.2% A1 Aaa $ 4,200 Lynchburg, Virginia, IDA, Hospital Facilities, First Mortgage Revenue Bonds (Mid Atlantic/Capital), VRDN, Series G, 4.20% due 12/01/2025(a)(c) $ 4,200 AA A1 8,800 Richmond, Virginia, Public Improvement, Refunding, UT, Series B, 6.25% due 1/15/2018 8,863 AA+ Aa1 4,000 Virginia State HDA, Commonwealth Mortgage Revenue Bonds, Series A, 7.15% due 1/01/2033 4,189 Washington--2.5% AAA Aaa 1,825 Washington State Health Care Facilities Authority, Revenue Refunding Bonds, 6.625% due 7/01/2020(f) 1,897 AAA NR* 14,425 Washington State Housing Finance Community, S/F Mortgage Revenue Refunding Bonds, AMT, Series E, 7.10% due 7/01/2022(g) 15,019 Washington State Public Power Supply System, Revenue Refunding Bonds: AA Aa 2,450 (Nuclear Project No. 1), Series A, 7% due 7/01/2011 2,603 AA Aa 10,250 (Nuclear Project No. 1), Series A, 6.50% due 7/01/2015 10,375 AA Aa 5,000 (Nuclear Project No. 1), Series A, 6.875% due 7/01/2017 5,230 AA Aa 3,000 (Nuclear Project No. 2), Series B, 7% due 7/01/2012 3,173 West Virginia--1.4% AAA Aaa 11,465 Mason County, West Virginia, PCR, Refunding (Appalachian Power Co.), Series I, 6.85% due 6/01/2022(f) 12,317 AA+ Aa1 8,400 West Virginia State, Housing Development Fund, Housing Finance, Series D, 7.05% due 11/01/2024 8,786 Wisconsin--2.3% Wisconsin Housing and EDA, Housing Revenue Bonds: A A1 5,400 Series B, 7.05% due 11/01/2022 5,613 A A1 5,105 Series C, 7% due 5/01/2015 5,325 AA Aa 4,925 Wisconsin Housing, EDA, Home Ownership Revenue Bonds, Series A, 7.10% due 3/01/2023 5,159 Wisconsin State Health and Educational Facilities Authority Revenue Bonds: AAA Aaa 5,500 (Novus Health Group), Series B, 6.75% due 12/15/2020(f) 5,800 AAA Aaa 11,400 (Wausau Hospitals Inc.), Series B, 6.70% due 8/15/2020(c) 11,938 Puerto Rico--0.6% A Baa1 2,360 Puerto Rico Commonwealth, Highway Authority, Highway Revenue Refunding Bonds, Series R, 6.75% due 7/01/2005 2,524 A Baa1 5,750 Puerto Rico Commonwealth, UT, 6.45% due 7/01/2017 5,873 Total Investments (Cost--$1,409,585)--97.8% 1,471,461 Other Assets Less Liabilities--2.2% 32,762 ---------- Net Assets--100.0% $1,504,223 ========== (a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at June 30, 1995. (b)FHA Insured. (c)AMBAC Insured. (d)BIG Insured. (e)FGIC Insured. (f)MBIA Insured. (g)GNMA/FNMA Collateralized. (h)FSA Insured. (i)Escrowed to Maturity. (j)Capital Guaranty. (k)Prerefunded. (l)GNMA Collateralized. (m)The interest rate is subject to change periodically and inversely based upon prevailing market rates. The interest rate shown is the rate in effect at June 30, 1995. (n)FNMA Collateralized. ++Highest short-term rating issued by Moody's Investors Service, Inc. *Not Rated. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements.
68
SCHEDULE OF INVESTMENTS (in Thousands) Municipal Bonds Limited Maturity Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Alabama--2.6% NR* Aa $ 5,050 Alabama State Public School and College Authority, Refunding Bonds, 3.70% due 12/01/1996 $ 5,038 A1+ NR* 300 Birmingham, Alabama, Medical Clinic Board Revenue Bonds (U.A.H.S.F.), VRDN, 4.60% due 12/01/2026(b) 300 A2 A3 12,880 Mobile, Alabama, IDB, PCR (International Paper Co.), VRDN, 6.30% due 4/15/2004(b) 12,867 Alaska--1.1% A+ Aa 1,700 Alaska State Housing Finance Corporation, GO, Series A, 4.20% due 12/01/1995 1,701 AAA Aaa 5,000 Anchorage, Alaska, GO, Refunding Bonds, UT, 4.85% due 7/01/1995(d) 5,000 NR* P1 400 Valdez, Alaska, Marine Term Revenue Bonds (Exxon Pipeline Co., Project), DATES, CP, 4.20% due 10/01/2025(h) 400 Arizona--0.8% SP-1 MIG2 2,000 Maricopa County, Arizona, CP, TAN, UT, 5% due 7/28/1995 2,001 A+ A1 3,000 Maricopa County, Arizona, Transportation Board, Excise Tax Revenue Bonds, 7.10% due 7/01/1996 3,099 California--9.6% NR* VMIG1++ 5,850 California Higher Education Loan Authority, Student Loan Revenue Refunding Bonds, Senior Lien, Series A-1, 3.90% due 7/01/1995 5,850 SP-1 MIG1++ 9,900 California State, GO, RAW, Series C, 5.75% due 4/25/1996 10,074 A A1 10,000 California State Various Purpose Bonds, GO, 4% due 10/01/1995 10,008 AA Aa 5,005 California Statewide Communities Development Authority, Revenue Refunding Bonds, COP (Saint Joseph Health Systems), 4.10% due 7/01/1997 4,948 NR* MIG1++ 30,000 Fresno County, California, TRAN, 4.25% due 7/13/1995 29,998 SP-1+ MIG1++ 4,000 Santa Clara County, California, TRAN, UT, 4.25% due 7/07/1995 4,000 Colorado--2.1% NR* NR* 10,000 Denver, Colorado, City and County Airport Revenue Bonds, Sub-Series B, 4.25% due 12/01/2025 9,975 AA Baa1 3,810 Jefferson County, Colorado, School District No. R-001, Revenue Refunding Bonds, Series A, 3.65% due 12/15/1996 3,797 Connecticut--3.7% Connecticut State, GO: AA- Aa 11,680 Series A, 5.25% due 3/15/1999 12,015 AA- Aa 6,705 UT, Series B, 4.90% due 11/15/1995 6,739 NR* Aa3 3,930 Connecticut State Housing Mortgage Revenue Bonds (Chestnut Hill Apartments), 4.60% due 4/01/1997 3,913 AAA Aaa 2,000 Stratford, Connecticut, GO, UT, 3.50% due 11/01/1996(f) 1,990 Florida--4.2% A Aa 2,000 Dade County, Florida, Aviation Revenue Refunding Bonds, Series X, 4.10% due 10/01/1995 2,002 AAA Aaa 5,000 Florida State Division, Board of Finance Revenue Bonds (Department of Natural Resources Preservation 2000), Series A, 6.10% due 7/01/1995(c) 5,000 A+ A 1,495 Florida State, GO, COP (Construction Equipment Financing Program), 5.75% due 11/15/1995 1,505 AAA Aaa 2,375 Florida State Turnpike Authority, Turnpike Revenue Bonds, Series A, 5% due 7/01/1995(f) 2,375 AA Aa1 5,000 Jacksonville, Florida, Electric Authority Revenue Bonds (Electric Systems), Series 3-B, 4% due 10/01/1998 4,977 AA Aaa 4,000 Jacksonville, Florida, Electric Authority, Revenue Refunding Bonds (Saint John's River Park Power), Issue II, Series 4, 6.90% due 10/01/1995(a) 4,093 A-1 VMIG1++ 400 Martin County, Florida, PCR, Refunding (Florida Power and Light Co., Project), VRDN, 4.20% due 9/01/2024(b) 400 NR* NR* 7,500 Martin County, Florida, School District, TAN, 4.25% due 6/08/1996 7,506 A-1 VMIG1++ 1,300 Saint Lucie County, Florida, PCR, Refunding (Florida Power and Lighting Co. Project), VRDN, 4.20% due 1/01/2026(b) 1,300 Georgia--3.0% AA Aa1 2,000 Gwinnett County, Georgia, COP (Water and Sewer), 7.60% due 8/01/1995 2,007 AA Aa1 4,000 Gwinnett County, Georgia, School District, Refunding, UT, 4.40% due 2/01/1998 4,025 AAA Aaa 3,965 Metropolitan Atlanta, Georgia, Rapid Transit Authority, Sales Tax Revenue Refunding Bonds, Series P, 4.75% due 7/01/1995(c) 3,965 A-1 VMIG1++ 10,000 Municipal Electric Authority, Georgia, General Resolution, Series C, 4.90% due 3/01/1996 10,065
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SCHEDULE OF INVESTMENTS (continued) (in Thousands) Municipal Bonds Limited Maturity Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Illinois--8.8% Chicago, Illinois, Metropolitan Water Reclamation District, Greater Chicago Revenue Refunding Bonds: AA Aa $ 5,000 4% due 12/01/1996 $ 5,020 AA Aa 3,100 UT, 4.10% due 12/01/1995 3,105 AA Aa 3,000 UT, 4.50% due 12/01/1996 3,027 AAA Aaa 4,120 Chicago, Illinois, Public Commerce Building Revenue Bonds (Chicago Board of Education), Series A, 7.75% due 1/01/1999(a)(f) 4,623 AAA Aaa 4,500 Chicago, Illinois, Refunding, Series A, 4.40% due 1/01/1999(d) 4,473 AA- Baa1 5,000 Chicago, Illinois, School Financing Authority, 7.25% due 6/01/1998 5,166 A1+ VMIG1++ 7,500 Chicago, Illinois, Tender Notes, Series A-1, 3.10% due 10/31/1995 7,471 AAA Aaa 3,000 Cook County, Illinois, High School District No. 205, Revenue Refunding Bonds (Thornton Township), UT, 5.60% due 6/01/1998(f)(g) 3,117 NR* VMIG1++ 4,900 Illinois Health Facilities Authority Revenue Bonds (Resurrection Health Care System), VRDN, 4.65% due 5/01/2011(b) 4,900 AA- A1 4,600 Illinois State, GO, UT, Refunding, 3.90% due 12/01/1998 4,525 Illinois State Toll and Highway Authority, Revenue Refunding Bonds, Series A: A A1 3,625 3.70% due 1/01/1996 3,620 A A1 10,000 4.10% due 1/01/1998 9,927 Indiana--2.6% NR* VMIG1++ 13,280 Indiana State, HFA, S/F Mortgage Revenue Bonds, Series D, 4.30% due 7/03/1995(i) 13,280 AA- Aa 4,800 Purdue University, Indiana, University Revenue Bonds, Student Fees, Series J, 4.15% due 7/01/1996 4,820 Kentucky--2.4% A+ A 13,000 Kentucky State Property and Building Community, Revenue Refunding Bonds (Project No. 55), 3.60% due 9/01/1996 12,918 AAA Aaa 3,250 Kentucky State Turnpike Authority, Economic Development Road, Revenue Refunding Bonds (Revitalization Projects), 4% due 7/01/1996(c) 3,266 Louisiana--1.3% A A1 3,610 Louisiana Public Facilities Authority Revenue Bonds (Tulane University), Series B, 6.80% due 8/15/1996 3,724 A A3 5,410 Louisiana State Offshore Terminal Authority, Revenue Refunding Bonds (Deepwater Port), First Stage, Series B, 4.60% due 9/01/1995 5,405 Maine--0.8% AA+ Aa 5,255 Maine State General Purpose Bonds, GO, 4.10% due 9/01/1995 5,260 Maryland--0.7% A+ A1 4,535 Maryland State Transportation Authority Revenue Bonds (Transportation Facilities Project), 6% due 7/01/1995 4,535 Massachusetts-- BBB+ NR* 2,131 Massachusetts State, COP, GO, 5.10% due 6/30/1996 2,149 2.6% A+ A1 2,500 Massachusetts State, GO, Dedicated Income Tax, Series A, 7.25% due 6/01/1996 2,577 AAA Aaa 2,005 Massachusetts State Health and Educational Facilities Authority Revenue Bonds (New England Medical Center Hospitals), Series G, 3.80% due 7/01/1997(d) 1,993 A- A1 10,160 New England Education Loan Marketing Corporation, Massachusetts, Student Loan, Series D, 4.75% due 7/01/1998 10,126 NR* NR* 995 South Hadley, Massachusetts, IDR (South Hadley Health Care), AMT, Series A, 5% due 12/01/1996 992 Michigan--6.6% AAA Aaa1 12,785 Detroit, Michigan, Distributable State Aid, 7.20% due 5/01/1999(a)(c) 14,213 NR* VMIG1++ 1,000 Detroit, Michigan, Downtown Development Authority, Revenue Refunding Bonds (Millender Center Project), VRDN, 4.10% due 12/01/2010(b) 1,000 SP-1 MIG1++ 5,075 Detroit, Michigan, GO, Notes, 3.80% due 7/01/1995 5,075 A1+ VMIG1++ 6,100 Grand Rapids, Michigan, Water Supply Systems, Revenue Refunding Bonds, VRDN, 4.10% due 1/01/2020(b)(f) 6,100 AAA NR* 5,475 Michigan State, Hospital Finance Authority Revenue Bonds (Harper-Grace & Huron Valley Hospitals), Series A, 10% due 10/01/1995(a) 5,670 AA- A 2,700 Michigan State Building Authority Revenue Bonds (Equipment Program), Series A, 4.55% due 10/01/1998 2,714 AA- A 10,145 Michigan State Building Authority, Revenue Refunding Bonds, Series I, 3.90% due 10/01/1997 10,095 NR* VMIG1++ 800 Michigan State Strategic Fund, Solid Waste Disposal Revenue Bonds (Grayling Generating Project), VRDN, AMT, 4.25% due 1/01/2014(b) 800
70 Minnesota--2.9% AAA Aaa 3,225 Hennepin County, Minnesota, Capital Improvement Bonds, UT, Series B, 3.25% due 12/01/1995 3,221 Minnesota State, HFA, S/F Mortgage: A1+ VMIG1++ 4,755 AMT, Series U, 4.95% due 12/14/1995 4,759 A1+ VMIG1++ 7,265 AMT, Series V, 4.95% due 12/01/1995 7,271 A1+ VMIG1++ 4,105 Series T, 4.85% due 12/14/1995 4,109 Mississippi--1.0% NR* Aa 2500 Jackson County, Mississippi, Individual Sewer Facilities Revenue Bonds (Chevron USA, Inc. Project), VRDN, 4.35% due 12/15/2024(b) 500 A NR* 6,000 Mississippi Higher Education Assistance Corporation, Student Loan Revenue Refunding Bonds, AMT, Series C, 5.40% due 1/01/1996 6,032 Missouri--2.1% SP1+ NR* 14,500 Missouri State Environmental Improvement and Energy Resource Authority, Water, PCR (State Revolving Fund Program), Series A, 3.90% due 9/01/1996 14,455 Nebraska--1.5% Nebraska Public Power District Revenue Bonds: A+ A1 7,000 (Nuclear Facility), 4% due 7/01/1995 7,000 A+ A1 3,570 Refunding (Power Supply System), Series C, 3.50% due 1/01/1996 3,563 Nevada--1.8% AAA Aaa 5,635 Clark County, Nevada, School District, Series A, 4.25% due 6/15/1998(d) 5,633 AAA Aaa 7,000 Washoe County, Nevada, Airport Authority, Airport Systems Improvement Revenue Bonds, AMT, Series A, 3.90% due 7/01/1995(d) 7,000 New Jersey--3.3% Camden County, New Jersey, Improvement Authority (Solid Waste Disposal), Revenue Refunding Bonds (Landfill Project): A- A1 1,125 3.55% due 7/01/1995 1,125 A- A1 2,000 4% due 7/01/1997 1,997 AA+ Aaa 4,500 Middlesex County, New Jersey, Refunding Bonds, UT, 3.60% due 7/15/1996 4,497 AAA Aaa 5,000 New Jersey EDA, Market Transition Facility Revenue Bonds, Senior Lien--Series A, 4.80% due 7/01/1998(d) 5,067 A+ NR* 3,765 New Jersey State Housing and Mortgage Finance Agency, Revenue Refunding Bonds, Series 1, 4.50% due 11/01/1995 3,771 A A 2,160 New Jersey State Turnpike Authority, Revenue Refunding Bonds, Series A, 5.50% due 1/01/1996 2,178 AAA Aaa 3,265 Passaic Valley, New Jersey, Sewage Commissioners Revenue Refunding Bonds, Series D, 5.70% due 12/01/1995(c) 3,295 New Mexico--0.3% AAA Aaa 2,340 New Mexico Education Loan Assistance Foundation, Student Loan Revenue Bonds, AMT, Series A, 5.75% due 4/01/1996(c) 2,364 New York--2.3% AAA Aaa 4,000 Albany County, New York, Revenue Refunding Bonds, UT, 3.30% due 10/01/1995(f) 3,998 A- Baa1 5,000 New York City, New York, GO, UT, Refunding, Series A, 4.60% due 8/01/1995 5,002 A1+ VMIG1++ 7,000 New York State Dormitory Authority Revenue Bonds (New York Public Library), Series B, 3.875% due 7/01/1995 6,998 A1+ VMIG1++ 100 Syracuse, New York, IDA, Civic Facility Revenue Bonds (Multi-Modal Syracuse University Project), VRDN, 4.35% due 3/01/2023(b) 100 North Carolina-- North Carolina State, Clean Water, Series B: 2.1% AAA Aaa 10,000 4.25% due 6/01/1997 10,054 AAA Aaa 5,000 4.25% due 6/01/1998 5,037 North Dakota--0.7% NR* Aa 5,000 North Dakota Student Loan Revenue Refunding Bonds, Series A, 5.40% due 7/01/1996 5,060
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SCHEDULE OF INVESTMENTS (concluded) (in Thousands) Municipal Bonds Limited Maturity Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Ohio--8.7% A- NR* $ 2,500 Cincinnati, Ohio, City School District, RAN, 5.35% due 6/15/1996 $ 2,533 Cleveland, Ohio, City School District, RAN, UT(c): AAA Aaa 3,000 4.20% due 6/01/1996 3,016 AAA Aaa 10,000 4.35% due 6/01/1997 10,066 AAA Aaa 2,500 Columbus, Ohio, Limited Tax, 4.25% due 6/15/1998 2,513 NR* Aaa 2,700 Columbus, Ohio, Sewer Improvement Revenue Bonds (Waterworks Parks), 6.75% due 7/01/1995(g) 2,700 NR* VMIG1++ 2,100 Cuyahoga County, Ohio, Hospital Improvement Revenue Bonds (Cleveland University Hospital), VRDN, 4.20% due 1/01/2016(b) 2,100 NR* NR* 2,000 Lucas County, Ohio, BAN, 5.75% due 11/30/1995 2,015 NR* MIG1++ 3,500 Miami Valley Regional Transport Authority, Ohio (Capital Facilities), BAN, 4.75% due 4/15/1997 3,539 Ohio State Air Quality Development Authority, Revenue Refunding Bonds (Ohio Edison Project), Series A: A+ VMIG1++ 10,500 4.25% due 8/01/1996 10,477 A+ VMIG1++ 6,700 3.45% due 2/01/2015 6,646 A+ A1 3,300 Ohio State Public Facilities Commission, Higher Education Facilities, Capital Facilities, Series II-A, 5.30% due 12/01/1996 3,358 AAA Aaa 10,000 Ohio State Public Facilities Commission, Refunding (Mental Health Facilities), Series II-B, 4.25% due 6/01/1998(e) 10,032 Oklahoma--1.0% A+ Aa 6,370 Oklahoma County, Oklahoma, Independent School District No. 89, UT, 6.50% due 2/01/1998 6,712 Pennsylvania--1.3% Pennsylvania State Higher Educational Facilities Authority, Revenue Refunding Bonds, Series A: AA Aa 2,750 (College and Universities), 4.80% due 9/01/1998 2,798 A+ Aa 3,000 (Thomas Jefferson University), 5.75% due 8/15/1998 3,123 AAA Aaa 3,000 Pittsburgh, Pennsylvania, Water and Sewer Authority, Revenue Refunding Bonds, Series A, 3.50% due 9/01/1996(f) 2,984 Rhode Island--1.5% AAA Aaa 4,180 Rhode Island Depositors Economic Protection Corporation, Special Obligation Bonds, Series A, 5% due 8/01/1995(e) 4,184 NR* A 6,000 Rhode Island State, Student Loan Authority, Student Loan Revenue Refunding Bonds, Series A, 5.70% due 12/01/1996 6,104 South Carolina NR* NR* 5,775 Georgetown County, South Carolina, Water and Sewer District Revenue - --2.3% Bonds, BAN, 6.25% due 5/07/1996 5,808 South Carolina State Public Service Authority Revenue Refunding Bonds: AA- A1 4,000 (Electric Systems Expansion), Series A, 7.50% due 7/01/1996 4,145 A+ A1 5,170 Series C, 3.80% due 1/01/1997 5,138 Tennessee-- AA NR* 2,885 Clarksville, Tennessee, Public Building Authority, Revenue 1.0% Refunding Bonds (Pooled Loan Program), 4.40% due 12/01/1998 2,861 AA+ Aa 4,000 Shelby County, Tennessee, Refunding, Series A, 6.40% due 8/01/1998 4,124 Texas--3.8% Brazos, Texas, Higher Education Authority Incorporated, Student Loan Revenue Refunding Bonds, AMT: NR* Aaa 2,200 Senior Lien, Series A-2, 5.45% due 6/01/1998 2,244 NR* Aa 2,000 Series C-1, 5% due 11/01/1995 2,007 NR* Aa 5,455 Series C-1, 5.60% due 11/01/1997 5,581 NR* A1 950 Fort Bend County, Texas, IDR, Corporate Refunding (Frito Lay Incorporated Project), 4% due 10/01/2011 940 NR* A1 3,650 Fort Bend County, Texas, PCR, Corporate IDR, Refunding (Frito Lay Incorporated Project), 4% due 10/01/2011 3,613 A1+ NR* 3,300 Harris County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds (Methodist Hospital), VRDN, 4.50% due 12/01/2025(b) 3,300 Panhandle-Plains, Texas, Higher Education Authority Incorporated, Student Loan Revenue Refunding Bonds, Series C: NR* Aaa 2,000 3.95% due 9/01/1996 1,994 NR* Aaa 2,675 4.15% due 9/01/1997 2,653 AA Aa 3,000 Texas State Public Finance Authority Revenue Bonds, Series A, 6% due 10/01/1995 3,018 AAA Aa 1,500 Texas Water Development Board Revenue Bonds (State Revolving Fund--Senior Lien), 4.35% due 7/15/1995 1,500
72 Utah--3.6% NR* NR* 18,774 Carbon County, Utah, Solid Waste Disposal Revenue Refunding Bonds (East Carbon Landfill Project), AMT, 6.04% due 5/01/1997 19,110 Intermountain Power Agency, Utah, Power Supply Revenue Refunding Bonds: AA Aa 1,250 Series A, 3.90% due 7/01/1996 1,252 AA Aa 4,250 Series B, 4.60% due 7/01/1995 4,250 Virginia--1.0% AAA Aaa 2,500 Virginia Port Authority Facilities, Revenue Refunding Bonds, 5% due 7/01/1995(c) 2,500 AA+ Aa1 2,975 Virginia State Housing Development Authority, Commonwealth Mortgage Revenue Bonds, AMT, Series B, Sub-Series B-1, 5.50% due 1/01/1996 2,992 AA Aa 1,500 Virginia State Public Building Authority, Building Revenue Bonds, Series C, 3.95% due 8/01/1995 1,500 Washington--6.1% AA- A1 3,000 Port Seattle, Washington, Revenue Refunding Bonds, Series B, 4% due 11/01/1995 3,003 Washington State, GO: AA Aa 1,800 Refunding, Series R-93B, 4.40% due 10/01/1998 1,810 AA Aa 8,460 Series C, 4.80% due 7/01/1998 8,590 AA Aa 7,250 Series R-93-B-1, UT, 4.125% due 10/01/1997 7,275 Washington State Public Power Supply System, Revenue Refunding Bonds: AA Aa 8,000 (Nuclear Project No. 1), Series A, 4.20% due 7/01/1995 8,000 AA Aa 2,000 (Nuclear Project No. 2), Series A, 3.50% due 7/01/1996 1,982 AA Aa 4,890 (Nuclear Project No. 2), Series A, 3.75% due 7/01/1997 4,796 AA Aa 5,405 (Nuclear Project No. 3), Series C, 4% due 7/01/1997 5,341 Wisconsin--3.9% AA Aa 3,500 Milwaukee County, Wisconsin, Metropolitan Sewer District Revenue Bonds, UT, Series A, 5.25% due 9/01/1995 3,509 AA- A1 10,000 Milwaukee County, Wisconsin, UT, Refunding, Series A, 4.80% due 9/01/1997 10,143 NR* NR* 8,000 Waukensha, Wisconsin, School District, TRAN, 4.75% due 10/24/1995 8,023 Wisconsin Housing and EDA, Housing Revenue Refunding Bonds, Series C: A A1 2,200 3.60% due 11/01/1995 2,196 A A1 2,795 4.30% due 11/01/1997 2,766 Puerto Rico--1.5% A Baa1 3,415 Puerto Rico Public Buildings Authority, Revenue Refunding Bonds, Series J, 5.20% due 7/01/1995 3,415 BBB Baa 7,065 Puerto Rico, S/F Finance Housing Agency, Revenue Refunding Bonds, 3.75% due 12/01/1995 7,054 Total Investments (Cost--$723,214)--106.6% 726,038 Liabilities in Excess of Other Assets--(6.6%) (44,760) ---------- Net Assets--100.0% $ 681,278 ========== (a)Prerefunded. (b)The interest rate is subject to change periodically based upon the prevailing market rate. The interest rate shown is the rate in effect at June 30, 1995. (c)AMBAC Insured. (d)MBIA Insured. (e)FSA Insured. (f)FGIC Insured. (g)Escrowed to maturity. (h)The interest rate is subject to change periodically and inversely based upon prevailing market rates. The interest rate shown is the rate in effect at June 30, 1995. (i)GNMA/FNMA Collateralized. ++Highest short-term rating by Moody's Investors Service, Inc. *Not Rated. Rating of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements.
73
STATEMENT OF ASSETS AND LIABILITIES Limited Insured National Maturity As of June 30, 1995 Portfolio Portfolio Portfolio Assets: Investments, at value* (Note 1a) $2,494,465,694 $1,471,461,312 $726,037,534 Cash 99,421 -- -- Receivables: Interest 45,726,555 28,831,308 11,938,731 Securities sold -- 23,282,169 28,293 Capital shares sold 1,574,288 967,199 356,466 Prepaid registration fees and other assets (Note 1e) 71,615 53,547 63,464 -------------- -------------- ------------ Total assets 2,541,937,573 1,524,595,535 738,424,488 -------------- -------------- ------------ Liabilities: Payables: Securities purchased 9,996,595 12,808,429 40,267,587 Capital shares redeemed 5,404,811 2,200,851 1,799,740 Dividends to shareholders (Note 1f) 2,256,454 1,420,326 401,295 Investment adviser (Note 2) 812,054 638,536 199,507 Distributor (Note 2) 536,063 288,096 41,178 Accrued expenses and other liabilities 347,889 3,016,238 14,436,817 -------------- -------------- ------------ Total liabilities 19,353,866 20,372,476 57,146,124 -------------- -------------- ------------ Net Assets: Net assets $2,522,583,707 $1,504,223,059 $681,278,364 ============== ============== ============ Net Assets Class A Common Stock, $0.10 par value++ $ 21,537,391 $ 10,568,700 $ 5,406,871 Consist of: Class B Common Stock, $0.10 par value++++ 9,888,492 4,190,387 1,305,736 Class C Common Stock, $0.10 par value+++ 97,928 51,814 39,969 Class D Common Stock, $0.10 par value+++++ 328,305 196,047 113,422 Paid-in capital in excess of par 2,424,829,060 1,508,398,383 678,543,843 Accumulated realized capital losses on investments--net (Note 5) (38,085,734) (77,312,474) (6,954,744) Accumulated distributions in excess of realized capital gains on investments-net -- (3,745,999) -- Unrealized appreciation on investments--net 103,988,265 61,876,201 2,823,267 -------------- -------------- ------------ Net assets $2,522,583,707 $1,504,223,059 $681,278,364 ============== ============== ============ Net Asset Class A: Value: Net assets $1,706,064,230 $1,059,440,068 $536,474,423 ============== ============== ============ Shares outstanding 215,373,913 105,686,998 54,068,710 ============== ============== ============ Net asset value and redemption price per share $ 7.92 $ 10.02 $ 9.92 ============== ============== ============ Class B: Net assets $ 782,748,268 $ 419,932,544 $129,580,505 ============== ============== ============ Shares outstanding 98,884,919 41,903,872 13,057,358 ============== ============== ============ Net asset value and redemption price per share $ 7.92 $ 10.02 $ 9.92 ============== ============== ============ Class C: Net assets $ 7,755,939 $ 5,194,514 $ 3,964,961 ============== ============== ============ Shares outstanding 979,281 518,140 399,691 ============== ============== ============ Net asset value and redemption price per share $ 7.92 $ 10.03 $ 9.92 ============== ============== ============ Class D: Net assets $ 26,015,270 $ 19,655,933 $ 11,258,475 ============== ============== ============ Shares outstanding 3,283,048 1,960,467 1,134,219 ============== ============== ============
74 Net asset value and redemption price per share $ 7.92 $ 10.03 $ 9.93 ============== ============== ============ *Identified cost $2,390,477,429 $1,409,585,111 $723,214,267 ============== ============== ============ ++Authorized shares--Class A 500,000,000 375,000,000 150,000,000 ============== ============== ============ ++++Authorized shares--Class B 375,000,000 375,000,000 150,000,000 ============== ============== ============ +++Authorized shares--Class C 375,000,000 375,000,000 150,000,000 ============== ============== ============ +++++Authorized shares--Class D 500,000,000 375,000,000 150,000,000 ============== ============== ============ See Notes to Financial Statements.
STATEMENT OF OPERATIONS Limited Insured National Maturity For the Year Ended June 30, 1995 Portfolio Portfolio Portfolio Investment Interest and amortization of premium and discount earned $ 162,836,631 $ 102,352,831 $ 35,037,639 Income (Note 1d): Expenses: Investment advisory fees (Note 2) 9,408,013 7,415,203 2,712,662 Account maintenance and distribution fees--Class B (Note 2) 6,068,445 3,222,144 509,545 Transfer agent fees--Class A (Note 2) 644,746 492,073 229,485 Transfer agent fees--Class B (Note 2) 361,606 230,543 71,068 Custodian fees 196,723 139,502 75,289 Accounting services (Note 2) 179,937 112,483 91,455 Printing and shareholder reports 185,551 130,785 66,926 Registration fees (Note 1e) 102,874 135,468 101,323 Professional fees 59,240 58,390 26,854 Pricing services 38,685 28,033 25,903 Account maintenance fees--Class D (Note 2) 29,774 24,626 4,973 Portfolio insurance 33,397 16,034 9,463 Directors' fees and expenses 27,936 16,026 6,655 Account maintenance and distribution fees--Class C (Note 2) 19,066 13,868 2,688 Transfer agent fees--Class D (Note 2) 4,430 4,446 2,063 Transfer agent fees--Class C (Note 2) 1,326 884 1,186 Other 10,402 12,490 -- -------------- -------------- ------------ Total expenses 17,372,151 12,052,998 3,937,538 -------------- -------------- ------------ Investment income--net 145,464,480 90,299,833 31,100,101 -------------- -------------- ------------ Realized & Realized loss on investments--net (38,085,273) (77,312,475) (1,760,975) Unrealized Change in unrealized appreciation/depreciation on investments--net 91,672,331 98,337,487 4,210,861 Gain (Loss)on -------------- -------------- ------------ Investments-- Net Increase in Net Assets Resulting from Operations $ 199,051,538 $ 111,324,845 $ 33,549,987 Net(Notes 1b, ============== ============== ============ 1d & 3): See Notes to Financial Statements.
75
STATEMENTS OF CHANGES IN NET ASSETS Insured Portfolio National Portfolio For the Year Ended June 30, For the Year Ended June 30, Increase (Decrease) in Net Assets: 1995 1994 1995 1994 Operations: Investment income--net $ 145,464,480 $ 163,942,349 $ 90,299,833 $ 98,848,832 Realized gain (loss) on investments --net (38,085,273) 80,935,129 (77,312,475) 62,008,845 Change in unrealized appreciation/ depreciation on investments--net 91,672,331 (275,252,365) 98,337,487 (172,722,080) -------------- -------------- -------------- -------------- Net increase (decrease) in net assets resulting from operations 199,051,538 (30,374,887) 111,324,845 (11,864,403) -------------- -------------- -------------- -------------- Dividends & Investment income--net: Distributions Class A (104,032,884) (119,441,701) (67,078,481) (75,680,507) to Share- Class B (40,656,294) (44,500,648) (22,561,653) (23,168,325) holders Class C (120,450) -- (90,229) -- (Note 1f): Class D (654,852) -- (569,470) -- Realized gain on investments--net: Class A (31,614,511) (57,171,047) (20,402,246) (36,128,677) Class B (14,155,831) (24,972,443) (7,752,072) (12,798,152) Class C (23,608) -- (26,597) -- Class D (104,611) -- (171,804) -- In excess of realized gain on investments --net: Class A -- -- (2,695,572) -- Class B -- -- (1,024,214) -- Class C -- -- (3,514) -- Class D -- -- (22,699) -- -------------- -------------- -------------- -------------- Net decrease in net assets resulting from dividends and distributions to shareholders (191,363,041) (246,085,839) (122,398,551) (147,775,661) -------------- -------------- -------------- -------------- Capital Share Net increase (decrease) in net assets Transactions derived from capital share (Note 4): transactions (293,039,051) (52,099,956) (147,053,135) 44,114,517 -------------- -------------- -------------- -------------- Net Assets: Total decrease in net assets (285,350,554) (328,560,682) (158,126,841) (115,525,547) Beginning of year 2,807,934,261 3,136,494,943 1,662,349,900 1,777,875,447 -------------- -------------- -------------- -------------- End of year $2,522,583,707 $2,807,934,261 $1,504,223,059 $1,662,349,900 ============== ============== ============== ============== See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS (continued) Limited Maturity Portfolio For the Year Ended June 30, Increase (Decrease) in Net Assets: 1995 1994 Operations: Investment income--net $ 31,100,101 $ 36,430,985 Realized gain (loss) on investments --net (1,760,975) (968,336) Change in unrealized appreciation/ depreciation on investments--net 4,210,861 (13,063,534) -------------- -------------- Net increase (decrease) in net assets resulting from operations 33,549,987 22,399,115 -------------- -------------- Dividends & Investment income--net: Distributions Class A (25,771,957) (31,987,779) to Share- Class B (5,094,228) (4,443,206) holders Class C (45,930) -- (Note 1f): Class D (187,986) -- Realized gain on investments--net: Class A -- -- Class B -- -- Class C -- -- Class D -- -- In excess of realized gain on investments--net: Class A -- -- Class B -- -- Class C -- -- Class D -- -- -------------- -------------- Net decrease in net assets resulting from dividends and distributions to shareholders (31,100,101) (36,430,985) -------------- -------------- Capital Share Net increase (decrease) in net assets Transactions derived from capital share (Note 4): transactions (256,848,291) 7,793,356 -------------- -------------- Net Assets: Total decrease in net assets (254,398,405) (6,238,514) Beginning of year 935,676,769 941,915,283 -------------- -------------- End of year $ 681,278,364 $ 935,676,769 ============== ============== See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS The following per share data and ratios have been derived from information provided Insured Portfolio in the financial statements. Class A For the Year Ended June 30, Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992 1991 Per Share Net asset value, beginning of year $ 7.88 $ 8.64 $ 8.26 $ 7.92 $ 7.86 Operating ----------- ----------- ----------- ----------- ----------- Performance: Investment income--net .46 .47 .50 .52 .54 Realized and unrealized gain (loss) on investments--net .18 (.53) .49 .41 .12 ----------- ----------- ----------- ----------- ----------- Total from investment operations .64 (.06) .99 .93 .66 ----------- ----------- ----------- ----------- -----------
76 Less dividends and distributions: Investment income--net (.46) (.47) (.50) (.52) (.54) Realized gain on investments--net (.14) (.23) (.11) (.07) (.06) ----------- ----------- ----------- ----------- ----------- Total dividends and distributions (.60) (.70) (.61) (.59) (.60) ----------- ----------- ----------- ----------- ----------- Net asset value, end of year $ 7.92 $ 7.88 $ 8.64 $ 8.26 $ 7.92 =========== =========== =========== =========== =========== Total Based on net asset value per share 8.60% (1.08%) 12.43% 12.11% 8.84% Investment =========== =========== =========== =========== =========== Return:** Ratios to Expenses .43% .42% .42% .44% .45% Average =========== =========== =========== =========== =========== Net Assets: Investment income--net 5.78% 5.53% 5.94% 6.44% 6.90% =========== =========== =========== =========== =========== Supplemental Net assets, end of year (in thousands) $ 1,706,064 $ 1,941,741 $ 2,225,188 $ 2,062,591 $ 1,984,307 Data: =========== =========== =========== =========== =========== Portfolio turnover 35.61% 28.34% 43.86% 22.50% 33.12% =========== =========== =========== =========== ===========
The following per share data and ratios have been derived from information Insured Portfolio provided in the financial statements. For the Period Class B October 21, 1994++ to Increase (Decrease) in Net Asset Value: For the Year Ended June 30, June 30, 1995 1995 1994 1993 1992 1991 Class C Class D Per Share Net asset value, beginning of period $ 7.87 $ 8.63 $ 8.26 $ 7.92 $ 7.86 $ 7.68 $ 7.68 Operating --------- --------- --------- --------- --------- -------- -------- Performance: Investment income--net .40 .40 .44 .46 .48 .27 .29 Realized and unrealized gain (loss) on investments--net .19 (.53) .48 .41 .12 .38 .38 --------- --------- --------- --------- --------- -------- -------- Total from investment operations .59 (.13) .92 .87 .60 .65 .67 --------- --------- --------- --------- --------- -------- -------- Less dividends and distributions: Investment income--net (.40) (.40) (.44) (.46) (.48) (.27) (.29) Realized gain on investments--net (.14) (.23) (.11) (.07) (.06) (.14) (.14) --------- --------- --------- --------- --------- -------- -------- Total dividends and distributions (.54) (.63) (.55) (.53) (.54) (.41) (.43) --------- --------- --------- --------- --------- -------- -------- Net asset value, end of period $ 7.92 $ 7.87 $ 8.63 $ 8.26 $ 7.92 $ 7.92 $ 7.92 ========= ========= ========= ========= ========= ======== ======== Total Based on net asset value per share 7.91% (1.81%) 11.45% 11.27% 8.02% 8.83%+++ 9.24%+++ Investment ========= ========= ========= ========= ========= ======== ======== Return:** Ratios to Expenses, excluding account Average maintenance and distribution fees .44% .42% .43% .44% .45% .43%* .43%* Net Assets: ========= ========= ========= ========= ========= ======== ======== Expenses 1.19% 1.17% 1.18% 1.19% 1.20% 1.23%* .68%* ========= ========= ========= ========= ========= ======== ======== Investment income--net 5.03% 4.78% 5.17% 5.69% 6.13% 4.93%* 5.50%* ========= ========= ========= ========= ========= ======== ======== Supplemental Net assets, end of period (in Data: thousands) $ 782,748 $ 866,193 $ 911,307 $ 706,016 $ 537,755 $ 7,756 $ 26,015 ========= ========= ========= ========= ========= ======== ======== Portfolio turnover 35.61% 28.34% 43.86% 22.50% 33.12% 35.61% 35.61% ========= ========= ========= ========= ========= ======== ======== *Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. +++Aggregate total investment return. See Notes to Financial Statements.
77
FINANCIAL HIGHLIGHTS (continued) The following per share data and ratios have been derived from information provided National Portfolio in the financial statements. Class A For the Year Ended June 30, Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992 1991 Per Share Net asset value, beginning of year $ 10.08 $ 11.02 $ 10.64 $ 10.17 $ 10.12 Operating ----------- ----------- ----------- ----------- ----------- Performance: Investment income--net .60 .62 .67 .71 .73 Realized and unrealized gain (loss) on investments--net .15 (.64) .57 .58 .05 ----------- ----------- ----------- ----------- ----------- Total from investment operations .75 (.02) 1.24 1.29 .78 ----------- ----------- ----------- ----------- ----------- Less dividends and distributions: Investment income--net (.60) (.62) (.67) (.71) (.73) Realized gain on investments--net (.19) (.30) (.19) (.11) -- In excess of realized gain on investments--net (.02) -- -- -- -- ----------- ----------- ----------- ----------- ----------- Total dividends and distributions (.81) (.92) (.86) (.82) (.73) ----------- ----------- ----------- ----------- ----------- Net asset value, end of year $ 10.02 $ 10.08 $ 11.02 $ 10.64 $ 10.17 =========== =========== =========== =========== =========== Total Based on net asset value per share 7.89% (.47%) 12.21% 13.09% 7.94% Investment =========== =========== =========== =========== =========== Return:* Ratios to Expenses .56% .55% .55% .55% .55% Average =========== =========== =========== =========== =========== Net Assets: Investment income--net 6.01% 5.72% 6.23% 6.80% 7.20% =========== =========== =========== =========== =========== Supplemental Net assets, end of year (in thousands) $ 1,059,440 $ 1,203,181 $ 1,353,805 $ 1,278,055 $ 1,255,820 Data: =========== =========== =========== =========== =========== Portfolio turnover 103.65% 73.33% 65.43% 50.94% 75.25% =========== =========== =========== =========== =========== The following per share data and ratios have been derived from information provided National Portfolio in the financial statements. Class B For the Year Ended June 30, Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992 1991 Per Share Net asset value, beginning of year $ 10.07 $ 11.02 $ 10.63 $ 10.16 $ 10.11 Operating ----------- ----------- ----------- ----------- ----------- Performance: Investment income--net .52 .54 .59 .63 .65 Realized and unrealized gain (loss) on investments--net .16 (.65) .58 .58 .05 ----------- ----------- ----------- ----------- ----------- Total from investment operations .68 (.11) 1.17 1.21 .70 ----------- ----------- ----------- ----------- ----------- Less dividends and distributions: Investment income--net (.52) (.54) (.59) (.63) (.65) Realized gain on investments--net (.19) (.30) (.19) (.11) -- In excess of realized gain on investments--net (.02) -- -- -- -- ----------- ----------- ----------- ----------- ----------- Total dividends and distributions (.73) (.84) (.78) (.74) (.65) ----------- ----------- ----------- ----------- ----------- Net asset value, end of year $ 10.02 $ 10.07 $ 11.02 $ 10.63 $ 10.16 =========== =========== =========== =========== =========== Total Based on net asset value per share 7.28% (1.39%) 11.47% 12.25% 7.14% Investment =========== =========== =========== =========== =========== Return:** Ratios to Expenses, excluding account maintenance and Average distribution fees .57% .55% .56% .56% .56% Net Assets: =========== =========== =========== =========== =========== Expenses 1.32% 1.30% 1.31% 1.31% 1.31% =========== =========== =========== =========== =========== Investment income--net 5.25% 4.97% 5.46% 6.03% 6.43% =========== =========== =========== =========== =========== Supplemental Net assets, end of year (in thousands) $ 419,933 $ 459,169 $ 424,071 $ 286,375 $ 213,581 Data: =========== =========== =========== =========== =========== Portfolio turnover 103.65% 73.33% 65.43% 50.94% 75.25% =========== =========== =========== =========== ===========
78
The following per share data and ratios have been derived National Portfolio from information provided in the financial statements. For the Period Oct. 21, 1994++ to June 30, 1995 Increase (Decrease) in Net Asset Value: Class C Class D Per Share Net asset value, beginning of period $ 9.85 $ 9.85 Operating ----------- ----------- Performance: Investment income--net .36 .40 Realized and unrealized gain on investments--net .39 .39 ----------- ----------- Total from investment operations .75 .79 ----------- ----------- Less dividends and distributions: Investment income--net (.36) (.40) Realized gain on investments--net (.19) (.19) In excess of realized gain on investments--net (.02) (.02) ----------- ----------- Total dividends and distributions (.57) (.61) ----------- ----------- Net asset value, end of period $ 10.03 $ 10.03 =========== =========== Total Based on net asset value per share 7.97%+++ 8.37%+++ Investment =========== =========== Return:** Ratios to Expenses, excluding account maintenance and Average distribution fees .57%* .56%* Net Assets: =========== =========== Expenses 1.37%* .81%* =========== =========== Investment income--net 5.21%* 5.78%* =========== =========== Supplemental Net assets, end of period (in thousands) $ 5,195 $ 19,656 Data: =========== =========== Portfolio turnover 103.65% 103.65% =========== =========== The following per share data and ratios have been derived from information provided Limited Maturity Portfolio in the financial statements. Class A For the Year Ended June 30, Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992 1991 Per Share Net asset value, beginning of year $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71 Operating ----------- ----------- ----------- ----------- ----------- Performance: Investment income--net .38 .37 .41 .50 .57 Realized and unrealized gain (loss) on investments--net .05 (.14) .10 .16 .04 ----------- ----------- ----------- ----------- ----------- Total from investment operations .43 .23 .51 .66 .61 ----------- ----------- ----------- ----------- ----------- Less dividends from investment income--net (.38) (.37) (.41) (.50) (.57) ----------- ----------- ----------- ----------- ----------- Net asset value, end of year $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.75 =========== =========== =========== =========== =========== Total Based on net asset value per share 4.53% 2.30% 5.28% 6.93% 6.45% Investment =========== =========== =========== =========== =========== Return:** Ratios to Expenses .41% .40% .41% .40% .40% Average =========== =========== =========== =========== =========== Net Assets: Investment income--net 3.86% 3.68% 4.13% 5.02% 5.88% =========== =========== =========== =========== =========== Supplemental Net assets, end of year (in thousands) $ 536,474 $ 790,142 $ 846,736 $ 613,407 $ 350,549 Data: =========== =========== =========== =========== =========== Portfolio turnover 37.33% 45.67% 65.43% 96.32% 93.06% =========== =========== =========== =========== =========== *Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. +++Aggregate total investment return. See Notes to Financial Statements.
79
FINANCIAL HIGHLIGHTS (concluded) Limited Maturity Portfolio The following per share data and ratios Class B have been derived from information provided For the Period For the Period in the financial statements. Nov. 2, 1992++ October 21, 1994++ For the Year Ended June 30, to June 30, to June 30, 1995 Increase (Decrease) in Net Asset Value: 1995 1994 1993 Class C Class D Per Share Net asset value, beginning of period $ 9.87 $ 10.01 $ 9.93 $ 9.83 $ 9.83 Operating ----------- ----------- ----------- ----------- ----------- Performance: Investment income--net .35 .33 .24 .25 .26 Realized and unrealized gain (loss) on investments--net .05 (.14) .08 .09 .10 ----------- ----------- ----------- ----------- ----------- Total from investment operations .40 .19 .32 .34 .36 ----------- ----------- ----------- ----------- ----------- Less dividends from investment income--net (.35) (.33) (.24) (.25) (.26) ----------- ----------- ----------- ----------- ----------- Net asset value, end of period $ 9.92 $ 9.87 $ 10.01 $ 9.92 $ 9.93 =========== =========== =========== =========== =========== Total Based on net asset value per share 4.14% 1.98% 3.26%+++ 3.52%+++ 3.73%+++ Investment =========== =========== =========== =========== =========== Return:** Ratios to Expenses, excluding account maintenance and Average distribution fees .43% .41% .41%* .49%* .43%* Net Assets: =========== =========== =========== =========== =========== Expenses .78% .76% .76%* .70%* .53%* =========== =========== =========== =========== =========== Investment income--net 3.50% 3.33% 3.60%* 3.61%* 3.78%* =========== =========== =========== =========== =========== Supplemental Net assets, end of period (in thousands) $ 129,581 $ 145,534 $ 95,179 $ 3,965 $ 11,258 Data: =========== =========== =========== =========== =========== Portfolio turnover 37.33% 45.67% 65.43% 37.33% 37.33% =========== =========== =========== =========== =========== *Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. +++Aggregate total investment return. See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Fund's Portfolios offer four classes of shares under the Merrill Lynch Select Pricing SM System. Shares of Class A and Class D are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. The following is a summary of significant accounting policies followed by the Fund. 80 (a) Valuation of investments--Insured Portfolio: Where bonds in the Portfolio have not been insured pursuant to policies obtained by the issuer, the Fund has obtained insurance with respect to the payment of interest and principal of each bond. Such insurance is valid as long as the bonds are held by the Fund. All Portfolios: Municipal bonds and money market securities are traded primarily in the over-the-counter markets and are valued at the most recent bid price or yield equivalent as obtained from dealers that make markets in such securities. Positions in futures contracts, and options thereon, are valued at closing prices as of the close of such exchanges. Assets for which market quotations are not readily available are valued at fair value on a consistent basis using methods determined in good faith by the Fund's Board of Directors, including valuations furnished by a pricing service retained by the Fund, which may utilize a matrix system for valuations. (b) Derivative financial instruments--The Fund may engage in various portfolio strategies to seek to increase its return by hedging its portfolio against adverse movements in the debt markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Financial futures contracts--The National and Limited Maturity Portfolios ("the Portfolios") may purchase or sell interest rate futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Portfolios deposit and maintain as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Portfolios agree to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Portfolios as unrealized gains or losses. When the contract is closed, the Portfolios record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. (c) Income taxes--It is the Fund's policy to comply with the re- quirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income--Security trans- actions are recorded on the dates the transactions are entered into (the trade dates). Interest income is recognized on the accrual basis. Discounts and market premiums are amortized into interest income. Realized gains and losses on security transactions are determined on the identified cost basis. (e) Prepaid registration fees--Prepaid registration fees are charged to expenses as the related shares are issued. (f) Dividends and distributions--Dividends from net investment income are declared daily and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. Distributions in excess of realized capital gains are due primarily to differing tax treatment, for futures transactions and post-October losses. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Fund Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered into a Distribution Agreement and Distribution Plans with Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned sub- sidary of Merrill Lynch Group, Inc. FAM is responsible for the management of the Fund's portfolios and provides the necessary personnel, facilities, equipment and certain other services necessary to the operation of the Fund. For such services, FAM receives at the end of each month a fee with respect to each Portfolio at the annual rates set forth below which are based upon the average daily value of the Fund's net assets. Rate of Advisory Fee Aggregate of Average Daily Limited Net Assets of the Three Insured National Maturity Combined Portfolios Portfolio Portfolio Portfolio Not exceeding $250 million .40 % .50 % .40 % In excess of $250 million but not exceeding $400 million .375 .475 .375 In excess of $400 million but not exceeding $550 million .375 .475 .35 In excess of $550 million but not exceeding $1.5 billion .375 .475 .325 In excess of $1.5 billion .35 .475 .325 The Investment Advisory Agreement obligates FAM to reimburse the Fund to the extent that the Fund's expenses (excluding interest, taxes, distribution fees, brokerage fees and commissions and extra- ordinary items) exceed 2.5% of the Fund's first $30 million of average daily net assets, 2.0% of the Fund's next $70 million of average daily net assets, and 1.5% of the average daily net assets in excess thereof. No fee payment will be made to FAM with respect to any Portfolio during any fiscal year which will cause the expenses of such Portfolio to exceed the pro rata expense limitation applicable to such Portfolio at the time of such payment. 81 NOTES TO FINANCIAL STATEMENTS (continued) Pursuant to the distribution plans ("the Distribution Plans") adopted by the Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor ongoing account maintenance and distribution fees. The Distributor voluntarily did not collect any Class C distribution fees in the Limited Maturity Portfolio until January 10, 1995. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the shares as follows: Account Maintenance Feees Distribution Fees Limited Limited Insured National Maturity Insured National Maturity Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Class B .25% .25% .15% .50% .50% .20% Class C .25% .25% .15% .55% .55% .20% Class D .25% .25% .10% -- -- -- Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance and distribution services to the Fund. The ongoing account maintenance fee compensates the Dis- tributor and MLPF&S for providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribu- tion fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the year ended June 30, 1995, MLFD earned underwriting discounts and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D Shares as follows: Insured National Limited Maturity Portfolio Portfolio Portfolio Class A Shares: MLFD $ 32,899 $ 21,667 $ 8,782 MLPF&S 316,110 214,728 70,749 Class D Shares: MLFD 10,320 6,515 635 MLPF&S 102,688 114,904 11,439 MLPF&S received contingent deferred sales charges of $3,263,991 relating to transactions in Class B Shares, amounting to $1,840,608, $1,036,339 and $387,044 in the Insured, National and Limited Maturity Portfolios, respectively, and $11,241 relating to transactions in Class C Shares, amounting to $5,361, $3,219 and $2,661 in the Insured, National and Limited Maturity Portfolios, respectively. Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly- owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services are provided to the Fund by FAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of FAM, PSI, MLFD, MLFDS, MLPF&S, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for year ended June 30, 1995 were as follows: Purchases Sales Insured Portfolio $ 855,727,565 $1,063,660,912 National Portfolio 1,479,315,535 1,555,712,973 Limited Maturity Portfolio 257,607,605 487,390,324 Net realized and unrealized gains (losses) as of June 30, 1995 were as follows: Realized Unrealized Insured Portfolio Losses Gains Long-term investments $ (37,976,407) $ 103,596,361 Short-term investments (108,866) 391,904 -------------- -------------- Total $ (38,085,273) $ 103,988,265 ============== ============== Realized Unrealized National Portfolio Losses Gains Long-term investments $ (65,507,359) $ 61,575,207 Short-term investments (502,522) 300,994 Financial future contracts on options (11,302,594) -- -------------- -------------- Total $ (77,312,475) $ 61,876,201 ============== ============== Realized Unrealized Limited Maturity Portfolio Losses Gains Long-term investments $ (1,605,058) $ 2,574,173 Short-term investments (155,917) 249,094 -------------- -------------- Total $ (1,760,975) $ 2,823,267 ============== ============== As of June 30, 1995 net unrealized appreciation/depreciation for Federal income tax purposes were as follows: Gross Gross Unrealized Unrealized Net Unrealized Appreciation Depreciation Appreciation Insured Portfolio $127,141,738 $ 23,153,473 $103,988,265 National Portfolio 67,325,412 5,449,211 61,876,201 Limited Maturity Portfolio 3,787,995 964,728 2,823,267 82 The aggregate cost of investments at June 30, 1995 for Federal income tax purposes was $2,390,477,429 for the Insured Portfolio, $1,409,585,111 for the National Portfolio, and $723,214,267 for the Limited Maturity Portfolio. 4. Capital Share Transactions: Net increase (decrease) on net assets derived from capital share transactions for the years ended June 30, 1995 and June 30, 1994 was $(293,039,051) and $(52,099,956), respectively, for the Insured Portfolio; $(147,053,135) and $44,114,517, respectively, for the National Portfolio and $(256,848,291) and $7,793,356, respectively, for the Limited Maturity Portfolio. Transactions in capital shares for each class were as follows: Insured Portfolio Class A Shares for the Year Dollar Ended June 30, 1995 Shares Amount Shares sold 17,244,995 $ 133,588,440 Shares issued to shareholders in reinvestment of dividends and distributions 5,993,847 46,501,518 ------------- ------------- Total issued 23,238,842 180,089,958 Shares redeemed (54,299,693) (419,430,676) ------------- ------------- Net decrease (31,060,851) $(239,340,718) ============= ============= Insured Portfolio Class A Shares for the Year Dollar Ended June 30, 1994 Shares Amount Shares sold 33,131,876 $ 280,935,110 Shares issued to shareholders in reinvestment of dividends and distributions 9,445,296 80,198,475 ------------- ------------- Total issued 42,577,172 361,133,585 Shares redeemed (53,818,184) (453,958,624) ------------- ------------- Net decrease (11,241,012) $ (92,825,039) ============= ============= Insured Portfolio Class B Shares for the Year Dollar Ended June 30, 1995 Shares Amount Shares sold 16,066,095 $ 123,787,819 Shares issued to shareholders in reinvestment of dividends and distributions 2,730,539 21,164,361 ------------- ------------- Total issued 18,796,634 144,952,180 Automatic conversion of shares (8,999) (69,008) Shares redeemed (29,913,866) (230,944,682) ------------- ------------- Net decrease (11,126,231) $ (86,061,510) ============= ============= Insured Portfolio Class B Shares for the Year Dollar Ended June 30, 1994 Shares Amount Shares sold 21,671,550 $ 184,351,353 Shares issued to shareholders in reinvestment of dividends and distributions 4,290,552 36,402,265 ------------- ------------- Total issued 25,962,102 220,753,618 Shares redeemed (21,552,384) (180,028,535) ------------- ------------- Net increase 4,409,718 $ 40,725,083 ============= ============= Insured Portfolio Class C Shares for the Period Dollar October 21, 1994++ to June 30, 1995 Shares Amount Shares sold 1,136,288 $ 8,839,400 Shares issued to shareholders in reinvestment of dividends and distributions 10,357 81,730 ------------- ------------- Total issued 1,146,645 8,921,130 Shares redeemed (167,364) (1,318,478) ------------- ------------- Net increase 979,281 $ 7,602,652 ============= ============= [FN] ++Commencement of Operations. Insured Portfolio Class D Shares for the Period Dollar October 21, 1994++ to June 30, 1995 Shares Amount Shares sold 5,713,054 $ 43,851,761 Automatic conversion of shares 8,988 69,008 Shares issued to shareholders in reinvestment of dividends and distributions 41,138 324,130 ------------- ------------- Total issued 5,763,180 44,244,899 Shares redeemed (2,480,132) (19,484,374) ------------- ------------- Net increase 3,283,048 $ 24,760,525 ============= ============= [FN] ++Commencement of Operations. National Portfolio Class A Shares for the Year Dollar Ended June 30, 1995 Shares Amount Shares sold 3,950,018 $ 38,999,667 Shares issued to shareholders in reinvestment of dividends and distributions 4,615,676 44,866,990 ------------- ------------- Total issued 8,565,694 83,866,657 Shares redeemed (22,289,533) (218,456,423) ------------- ------------- Net decrease (13,723,839) $(134,589,766) ============= ============= 83 NOTES TO FIINANCIAL STATEMENTS (concluded) National Portfolio Class A Shares for the Year Dollar Ended June 30, 1994 Shares Amount Shares sold 8,490,083 $ 92,184,282 Shares issued to shareholders in reinvestment of dividends and distributions 5,189,718 56,058,472 ------------- ------------- Total issued 13,679,801 148,242,754 Shares redeemed (17,141,264) (182,785,636) ------------- ------------- Net decrease (3,461,463) $ (34,542,882) ============= ============= National Portfolio Class B Shares for the Year Dollar Ended June 30, 1995 Shares Amount Shares sold 8,878,807 $ 87,072,076 Shares issued to shareholders in reinvestment of dividends and distributions 1,612,526 15,637,171 ------------- ------------- Total issued 10,491,333 102,709,247 Automatic conversion of shares (2,817) (44,533) Shares redeemed (14,168,055) (139,040,527) ------------- ------------- Net decrease (3,679,539) $ (36,375,813) ============= ============= National Portfolio Class B Shares for the Year Dollar Ended June 30, 1994 Shares Amount Shares sold 14,847,862 $ 161,270,898 Shares issued to shareholders in reinvestment of dividends and distributions 1,710,325 18,453,990 ------------- ------------- Total issued 16,558,187 179,724,888 Shares redeemed (9,473,731) (101,067,489) ------------- ------------- Net increase 7,084,456 $ 78,657,399 ============= ============= National Portfolio Class C Shares for the Period Dollar October 21, 1994++ to June 30, 1995 Shares Amount Shares sold 658,356 $ 6,451,126 Shares issued to shareholders in reinvestment of dividends and distributions 5,456 53,279 ------------- ------------- Total issued 663,812 6,504,405 Shares redeemed (145,672) (1,433,070) ------------- ------------- Net increase 518,140 $ 5,071,335 ============= ============= [FN] ++Commencement of Operations. National Portfolio Class D Shares for the Period Dollar October 21, 1994++ to June 30, 1995 Shares Amount Shares sold 5,900,638 $ 57,599,450 Automatic conversion of shares 2,818 44,533 Shares issued to shareholders in reinvestment of dividends and distributions 32,362 314,401 ------------- ------------- Total issued 5,935,818 57,958,384 Shares redeemed (3,975,351) (39,117,275) ------------- ------------- Net increase 1,960,467 $ 18,841,109 ============= ============= [FN] ++Commencement of Operations. Limited Maturity Portfolio Class A Shares for the Year Dollar Ended June 30, 1995 Shares Amount Shares sold 5,989,549 $ 58,950,508 Shares issued to shareholders in reinvestment of dividends 1,619,597 15,934,105 ------------- ------------- Total issued 7,609,146 74,884,613 Shares redeemed (33,605,286) (330,320,109) ------------- ------------- Net decrease (25,996,140) $(255,435,496) ============= ============= 84 Limited Maturity Portfolio Class A Shares for the Year Dollar Ended June 30, 1994 Shares Amount Shares sold 37,619,639 $ 375,440,124 Shares issued to shareholders in reinvestment of dividends and distributions 1,983,800 19,748,994 ------------- ------------- Total issued 39,603,439 395,189,118 Shares redeemed (44,144,662) (439,707,786) ------------- ------------- Net decrease (4,541,223) $ (44,518,668) ============= ============= Limited Maturity Portfolio Class B Shares for the Year Dollar Ended June 30, 1995 Shares Amount Shares sold 8,960,577 $ 88,112,911 Shares issued to shareholders in reinvestment of dividends 364,664 3,587,539 ------------- ------------- Total issued 9,325,241 91,700,450 Automatic conversion of shares (447) (4,387) Shares redeemed (11,012,352) (108,188,416) ------------- ------------- Net decrease (1,687,558) $ (16,492,353) ============= ============= Limited Maturity Portfolio Class B Shares for the Year Dollar Ended June 30, 1994 Shares Amount Shares sold 10,622,252 $ 105,858,053 Shares issued to shareholders in reinvestment of dividends and distributions 284,833 2,836,330 ------------- ------------- Total issued 10,907,085 108,694,383 Shares redeemed (5,671,375) (56,382,359) ------------- ------------- Net increase 5,235,710 $ 52,312,024 ============= ============= Limited Maturity Portfolio Class C Shares for the Period October 21, 1994++ to Dollar June 30, 1995 Shares Amount Shares sold 1,018,221 $ 10,034,099 Shares issued to shareholders in reinvestment of dividends 3,599 35,474 ------------- ------------- Total issued 1,021,820 10,069,573 Shares redeemed (622,129) (6,135,873) ------------- ------------- Net increase 399,691 $ 3,933,700 ============= ============= [FN] ++Commencement of Operations. Limited Maturity Portfolio Class D Shares for the Period October 21, 1994++ to Dollar June 30, 1995 Shares Amount Shares sold 2,889,627 $ 28,392,515 Automatic conversion of shares 447 4,387 Shares issued to shareholders in reinvestment of dividends 12,056 118,733 ------------- ------------- Total issued 2,902,130 28,515,635 Shares redeemed (1,767,911) (17,369,777) ------------- ------------- Net increase 1,134,219 $ 11,145,858 ============= ============= [FN] ++Commencement of Operations. 5. Capital Loss Carryforward: At June 30, 1995, the Fund's Portfolios had a capital loss carry- forward as follows: Approximately $38,085,000 in the Insured Portfolio, all of which expires in 2003; approximately $37,909,000 in the National Portfolio, all of which expires in 2003; and approxi- mately $6,271,000 in the Limited Maturity Portfolio, of which $1,416,000 expires in 1997, $2,787,000 expires in 1998, $22,000 expires in 1999, $25,000 expires in 2002 and $2,021,000 expires in 2003. These will be available to offset like amounts of any future taxable gains. 85 [THIS PAGE INTENTIONALLY LEFT BLANK] 86 [THIS PAGE INTENTIONALLY LEFT BLANK] 87 TABLE OF CONTENTS
PAGE ---- Investment Objective and Policies.......................................... 2 Insurance on Portfolio Securities......................................... 2 Risk Factors In Transactions In Junk Bonds................................ 2 Transactions In Futures Contracts......................................... 4 Investment Restrictions.................................................... 5 Management of the Fund..................................................... 7 Directors and Officers.................................................... 7 Investment Advisory Arrangements.......................................... 9 Determination of Net Asset Value........................................... 12 Portfolio Transactions..................................................... 13 Purchase of Shares......................................................... 13 Alternative Sales Arrangements............................................ 14 Initial Sales Charge Alternatives--Class A and Class D Shares............. 14 Reduced Initial Sales Charges--Class A and Class D Shares................. 14 Distribution Plans........................................................ 19 Limitations on the Payment of Deferred Sales Charges...................... 20 Redemption of Shares....................................................... 22 Reinstatement Privilege................................................... 23 Deferred Sales Charge--Class B and Class C Shares......................... 23 Dividends, Distributions and Taxes......................................... 24 Systematic Withdrawal Plans................................................ 27 Exchange Privilege......................................................... 28 Performance Data........................................................... 40 Additional Information..................................................... 44 Description of Temporary Investments...................................... 44 Insurance on Portfolio Securities......................................... 44 Description of Financial Futures Contracts................................ 46 Computation of Offering Price Per Share................................... 50 Independent Auditors' Report............................................... 52 Financial Statements....................................................... 54
Code #10130-1095 LOGO MERRILL LYNCH Merrill Lynch Municipal Bond Fund [ART] STATEMENT OF ADDITIONAL INFORMATION October 31, 1995 Distributor: Merrill Lynch Funds Distributor, Inc. 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, 1995. Contained in Part B: Schedules of Investments, as of June 30, 1995. Statements of Assets and Liabilities, as of June 30, 1995. Statements of Operations for the year ended June 30, 1995. Statements of Changes in Net Assets for the years ended June 30, 1995 and 1994. Financial Highlights for each of the years in the five year period ended June 30, 1995. (B) EXHIBITS: 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). 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-1 (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. (including form of Selected Dealers Agreement). (b) Form of Class C Distribution Agreement between Registrant and Merrill Lynch Funds Distribution 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. (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). 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 Merrill Lynch Financial Data Services, Inc. (incorporated by reference to Post-Effective Amendment No. 13). 10. Inapplicable. (Filed with Rule 24f-2 Notice). 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-1, 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). C-2 (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). (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). (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 to Registrant's Registration Statement on Form N-1A). (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. (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. 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. C-3 ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT. Inapplicable. ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
NUMBER OF HOLDERS AT TITLE OF CLASS SEPTEMBER 30, 1995 -------------- ------------------ Insured Portfolio Series-- Class A Common Stock........... 31,818 Class B Common Stock........... 23,589 Class C Common Stock........... 537 Class D Common Stock........... 406 National Portfolio Se- ries-- Class A Common Stock........... 24,701 Class B Common Stock........... 13,317 Class C Common Stock........... 209 Class D Common Stock........... 319 Limited Maturity Portfo- lio-- Class A Common Stock........... 7,643 Class B Common Stock........... 4,760 Class C Common Stock........... 290 Class D Common Stock........... 192
Note: The number of holders shown above includes holders of record plus beneficial owners whose shares are held of record by Merrill Lynch, Pierce, Fenner & Smith Incorporated. ITEM 27. INDEMNIFICATION. Reference is made to Article VI of Registrant's Articles of Incorporation, Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General Corporation Law and Section 9 of the Distribution Agreement. ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER. Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM"), acts as investment adviser for the following open-end investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Balanced Fund for Investment and Retirement, Inc., Merrill Lynch Capital 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 Convertible 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 Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Institutional Intermediate 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 Ready Assets Trust, Merrill Lynch Retirement Asset Builder Program, Inc., Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill C-4 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., and Merrill Lynch Variable Series Funds, Inc.; and the following closed-end investment companies: Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the investment adviser for the following open-end 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 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 Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation Program, Inc.; and the following closed-end investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., MuniAsset Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured 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 Insured Fund II, 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 New York Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc. and Worldwide DollarVest Fund, Inc. The address of each of these investment companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for Institutions Series and Merrill Lynch Institutional Intermediate Fund is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of the Manager and FAM is also P.O. Box 9011, Princeton, New Jersey 08543-9011. 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. The address of Merrill Lynch Financial Data Services, Inc. ("FDS") is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. 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 April 1, 1993 for his or 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 paragraph and Messrs. Giordano, Harvey, Hewitt, Kirstein and Monagle are directors or officers of one or more of such companies. Messrs. Zeikel, Glenn and Richard also hold the same positions with all or substantially all of the investment companies advised by MLAM as they do with the Investment Adviser. Messrs. Giordano, Harvey, Hewitt, Kirstein and Monagle are directors or officers of one or more of such companies. C-5
OTHER SUBSTANTIAL BUSINESS, POSITION WITH PROFESSION, VOCATION NAME INVESTMENT ADVISER OR EMPLOYMENT ---- ------------------ --------------------------- ML&Co. ..................... Limited Partner Financial Services Holding Company; Limited Partner of MLAM. Princeton Services, Inc. ("Princeton Services")..... General Partner General Partner of MLAM. Arthur Zeikel............... President President of MLAM; President and Director of Princeton Services; Executive Vice President of ML & Co. and Merrill Lynch; Director of MLFD. Terry K. Glenn.............. Executive Vice President and Executive Vice President of MLAM; Director Executive Vice President and Director of Princeton Services; President and Director of MLFD; Director of Financial Data Services, Inc. Robert W. Crook............. Senior Vice President Senior Vice President of MLFD since 1990; Vice President of MLFD from 1978 to 1990 and Vice President of Investment Adviser from 1981 to 1990. Vincent R. Giordano......... Senior Vice President Senior Vice President of MLAM. 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. N. John Hewitt.............. Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton Services. Philip L. Kirstein.......... Senior Vice President, Senior Vice President, General General Counsel, Director Counsel and Secretary of MLAM; and Secretary Senior Vice President, General Counsel, Director and Secretary of Princeton Services; Director of MLFD. Ronald M. Kloss............. Senior Vice President Senior Vice President and Controller of MLAM; Senior Vice President and Controller of Princeton Services. Stephen M.M. Miller......... Senior Vice President Executive Vice President of Princeton Administrators, L.P. Joseph T. Monagle........... Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton Services.
C-6
OTHER SUBSTANTIAL BUSINESS, POSITION WITH PROFESSION, VOCATION NAME INVESTMENT ADVISER OR EMPLOYMENT ---- ------------------ --------------------------- Gerald M. Richard........... Senior Vice President Senior Vice President and Treasurer of MLAM; Senior Vice President and Treasurer of Princeton Services; Vice President and Treasurer of MLFD. Ronald L. Welburn........... Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton Services. Anthony Wiseman............. Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton Services.
ITEM 29. PRINCIPAL UNDERWRITERS. (a) Merrill Lynch Funds Distributor, Inc. ("MLFD") acts as the principal underwriter for the Registrant. MLFD acts as the principal underwriter for each of the open-end 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., and also acts as principal underwriter for the following closed-end funds: Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. (b) Set forth below is information concerning each director and officer of MLFD. The principal business address of each such person is P.O. Box 9011, Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook, Aldrich, Breen, Brady, Fatseas, Graczyk, Maguire and Wasel and Ms. Schena is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2665.
POSITIONS AND OFFICES POSITIONS AND OFFICES NAME WITH UNDERWRITER WITH REGISTRANT ---- -------------------------------------- --------------------- Terry K. Glenn.......... President Trustee Arthur Zeikel........... Director None Philip Kirstein......... Director None William E. Aldrich...... Senior Vice President None Robert W. Crook......... Senior Vice President None Gerald M. Richard....... Vice President and Treasurer Treasurer Sharon Creveling........ Vice President and Assistant Treasurer None Kevin P. Boman.......... Vice President None Mark A. DeSario......... Vice President None Michelle T. Lau......... Vice President None Salvatore Venezia....... Vice President None Michael J. Brady........ Vice President None William M. Breen........ Vice President None James T. Fatseas........ Vice President None
(c) Not applicable. C-7 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 of 1940, as amended, and the rules thereunder will be maintained at the offices of the Registrant, 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and MLFDS, 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--Investment Adviser" in the Prospectus constituting Part A of the Registration Statement and under the caption "Management of the Funds--Investment 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-8 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 27TH DAY OF OCTOBER, 1995. Merrill Lynch Municipal Bond Fund, Inc. (REGISTRANT) /s/ Terry K. Glenn By: ____________________________ (TERRY K. GLENN, EXECUTIVE VICE PRESIDENT) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED. SIGNATURE TITLE DATE Arthur Zeikel* President and - ------------------------------------- Director (Principal ARTHUR ZEIKEL Executive Officer) Gerald M. Richard* Treasurer (Principal - ------------------------------------- Financial and GERALD M. RICHARD Accounting Officer) 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) /s/ Terry K. Glenn October 27, 1995 *By: ___________________________ (TERRY K. GLENN, ATTORNEY-IN-FACT) EXHIBIT INDEX
EXHIBIT PAGE NUMBER DESCRIPTION NO. ------- ----------- ---- 11 Consent of Deloitte & Touche LLP Independent Auditors........... 16(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............................... (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............................... 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.............................................
APPENDIX FOR GRAPHICS AND IMAGE MATERIAL Pursuant to Rule 304 of Regulation S-T, the following table presents fair and accurate narrative descriptions of graphic and image material omitted from this EDGAR Submission file due to ASCII-incompatibility and cross- references this material to the location of each occurrence in the text. DESCRIPTION OF OMITTED LOCATION OF GRAPHIC GRAPHIC OR IMAGE OR IMAGE IN TEXT - ---------------------- ------------------- Compass plate, circular Back cover of Prospectus and graph paper and Merrill Lynch back cover of Statement of logo including stylized market Additional Information bull EX-99.1(A) 2 ARTICLES OF INCORPORATION EXHIBIT 99.1(a) ARTICLES OF INCORPORATION OF MERRILL LYNCH MUNICIPAL BOND FUND, INC. ARTICLE I 1. THE UNDERSIGNED, ZURAB S. KOBIASHVILI, whose post-office address is One Liberty Plaza, New York, New York 10006, being at least eighteen years of age, do hereby act as an incorporator, under and by virtue or the General Laws of the State of Maryland authorizing the formation of cor-porations and with the intention or forming a corporation. ARTICLE II NAME The name of the Corporation is MERRILL LYNCH MUNICIPAL BOND FUND, INC. ARTICLE III PURPOSES AND POWERS The purpose or purposes for which the Corporation is formed and the business or objects to be transacted, carried on and promoted by it are as follows: (1) To conduct and carry on the business of an investment company or the management type. 2. (2) To hold, invest and reinvests its assets in securities, and in connection therewith to hold part or all of its assets in cash. (3) To issue and sell shares of its own capital stock in such amounts and on such term and conditions, for such purposes and for such amount or kind of consideration now or hereafter permitted by the General Laws of the State of Maryland and by these Articles or Incorporation, as its board or Directors may determine; provided, however, that the value of the consideration per share to be received by the Corporation upon the sale or other disposition of any shares or its capital stock shall not be less than the net asset value per share or such capital stock outstanding at the time of such event. (4) To redeem, purchase or otherwise acquire, hold, dlspose of, resell, transfer, reissue or cancel (all with-out the vote or consent of the stockholders of the Corporation) shares of its capital stock, in any manner and to the extent now or hereafter permitted by the general Laws of the State of Maryland and by these Articles of Incorporation. (5) To do any and all such further acts or things and to exercise any and all such furthur powers or rights as may be necessary, incidental, relative, conducive, appropriate or desirable for the accoplishment, carrying out or attainment of all or any of the foregoing purposes or objects. 3. The Corporation shall be authorized to exercise and enjoy all of the powers, fiths and privileges granted to, or conferred ypon, corporations by the General Laws of the State of Maryland now or hereafter in force, and the enumera-tion of the foregoing shall not be deemed to exclude any powers, rights or privileges so granted or conferred. ARTICLE IV PRINCIPAL OFFICE AND RESIDENT ANGENT The post-office address of the principal office or the Corporation in the State or Maryland le c/o The Corporation Trust Incorporated, First Maryland Building, 25 South Charles Street, Baltimore, Maryland 21201. The name of the resident agent of the Corporation in this State is The Corporation Trust Incorporated, a corporation of this State, and the post-office address of the resident agent is First Maryland Building, 25 South Charles Street, Baltimore, Maryland 21201. ARTICLE V CAPITAL STOCK (1) The total number of shares of capital stock which the Corporation shall have authority to issue is One-Hundred Million (100,000,000) shares, all of one class, of the par value of ton cents ($.10) per share and of the aggregate par value of Ten Million Dollars ($10,000,000). 4. (2) Any fractional share shall carry proportionately all the rights of a whole shares, excepting any right to receive certificate evidencing such fractional share, but indluding, without limitation, the right to vote and the right to receive dividends. (3) All Persons who sha acquires stock in the Corporation shall acquire the same subject to the provisions of these Articles of Incorporation and the by-laws of the corporation. ARTICLE VI PROVISIONS FOR DEFINING, LIMITING AND REGULATING CERTAIN POWERS OF THE CORPORATION AND OF THE DIRECTORS AND STOCKHOLDERS (1) The number of directors of the Corporation shall be three (3) which number may be Increased pursuant to the by-laws of the Corporation and shall never be less than three (3). The names or the directors who shall act until the first annual meeting or until their successor are duly chosen and quality are: Charles H. Ross, Jr. William W. Hewitt, Jr. Stephen M. M. Miller (2) The Board of Directors of the Corporation is hereby empowered to authorize the issuance from time to time of shares of capital stook, whether now or hereafter author- ided, for such consideration as the Board of Directors may 5. deem advisable, subject to such limitations as may be set forth in these Articles of Incorporation or in the by-laws or the Corporation or in the General Laws of the State of Maryland. (3) No holder of stock of the Corporation shall, as such holder, have any right to purchase or subscribe for any shares of the capital Stock of the Corporation or any other security of the Corporation which it may issue or sell (whether out of the number of shares authorized by these Articles of Incorporation, or out or any shares of the capital stock of the Corporation acquired by it after the issue thereof, or otherwise) other than such right, if any, as the Board of Directors, in its Discretion, may determine. (4) Each director and each officer of the Corporation shall be indemnified by the Corporation to the full extent permitted by the General Laws of the State of Maryland. (5) The Board of Directors of the Corporation my make, alter or repeal from time to time any of the by-laws of the Corporation except any particular by-law which is specified as not subject to alteration or repeal by the Board and which is subject to alteration or repeal only by the affirmative vote at a meeting of the holders of the majority of the shares of capital stock of the Corporation 6. outstanding or by the written consent of the holders of a majority of such shares. When alternation or repeal of a by- law is only possible by stockholder vote, 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% or the outstanding shares shall be required to constitute the requisite majority vote for such alteration or repeal. ARTICLE VII REDEMPTION Each holder of shares of capital stock of the Cor- poration shall be entitled to require the Corporation to redeem all or any part, of the shares capital stock of the Corporation standing in the name of such holder on the books of the Corporation, and all shares of capital stock issued by the Corporation shall be subject to redemption by the Corporation, at the redemption price of such shares as in effect from time to time as may be dertermined by the Board of Directors of the Corporation in accordance with the provisions hereof, subject to the right of the Board of Directors of the Corporation to suspend the right of re- demption of shares of capital stock of the Corporation or postpone the date of payment of such redemption price in accordance with provisions of applicable law. The redemption 7. price of shares of capital stock of the Corporations shall be the net assest value thereof as determined by the Board of Directors of the Corporation from time to time in accordance with the provisions of applicable law, less such redemption fee or other charge, if any, as may be fixed by resolution of the board of Directors of the Corporation. Payment of the redemption price shall be made in cash by the Corporation at such time and in such manner as may be determined from time to time by the Board of Directors of the Corporation. ARTICLE VIII DETERNINATION BINDING Any determination made in good faith, so far as ac- counting matters are involved, in accordance with accepted accounting practice by or pursuant to the direction of the Board of Directors, as to the amount of assets, obligations or liabilities of the Corporation, as to the amount of not income of the Corporation from dividend and interest for any period or amounts at any tire legally available for the payment of dividends, as to the amount of any reserves or charges set up and the propriety thereof, as to the time or or purpose for creating reserves or as to the use, alteration or cancellation of any reserves or charges (whether or not any obligation or liability for which such reserves or 8. charges shall have been creatd shall have been paid or discharged or shall be than or thereafter required to be or discharged), as to the price or any security owned by the Corporation or as to any other matters relating to the issuance, sale, redemption or other acquisition or disposition of securities or shares of capital stock or the Corporation, and any reasonable determination made in good faith by the Board of Directors as to whether any transaction constitutes a purchase of securities on "margin", a sale of securities "short", or an underwriting of the sale of, or a participation in any underwriting, or selling in con- nection with the publlc distribution of, any securities, shall be final and conclusive, and shall be binding upon the Corporation and all holders of its capital stock, past, present and future, and shares of the capital stock of the Corporation are issued and sold on the condition and under- standing, evidenced by the purchase of shares of capital stock or acceptance of share certificates, that any and all such determinations shall be binding as aforesaid. No pro- vision of these Articles of Incorporation shall be effectlve to (a) require a waiver of compliance with any provision of the Securities Act or 1933, as amended, or the Investment Act of 1940, as amended, or of any valid rule, regulation or order of the Securities and Exchange Commission thereunder 9. or b) protect or purport to protect any director of officer or the Corporation against any liability to the Corporation or its security holders to which he would otherwise be subject by deason of willful misfeasence, and faith, gross negligence or reckless disregard of the duties involved in the conduct or his office. ARTICLE IX PERPETUAL EXISTENCE The duration of the Corporation shall be perpetual. ARTICLE X AMENDMENT The Corporation reserves the right from time to time to make any amendment of its charter, now or hereafter authorized by law, including any amendment which alters the contract rights, as expressly set forth in its charter, of any outstanding stock. IN WITNESS WHEREOF, the undersigned Incorporate of MERRILL LYNCH MUNICIPAL BOND FUND, INC. who executed the foregoing Artices of Incorporation hereby acknowledges the same to be his act and further acknowledges that to the 10. best of his knowledge, the matters and facts set forth therein are true in all material repects under the penalties of perjury. Date the 30th day of September, 1976. /s/ Zurab S. Kobiashvill ------------------------ Zurab S. Kobiashvill EX-99.1(B) 3 ARTICLES OF AMENDMENT EXHIBIT 99.1(b) MERRILL LYNCH MUNICIPAL BOND FUND, INC. ARTICLES OF AMENDMENT MERRILL LYNCH MUNICIPAL BOND FUND, INC., A Maryland corporation having its principal office in the City of Baltimore, Maryland (hereinafter called the Corporation), hereby certifies to the State Department of Assessments and Texation of Maryland that: FIRST: The charter Of the Corporation, as hereafters amended, is hereby amended by striging out tat first paragragh of ARTICLE V and inserting to lieu thereof the following: ARTICLES V CAPITAL STOCK The total number of shares of all classes of stock, including those previously authorized, which the Corporation shall have authority to issue is One Billion eight Hundred Million ($1,800,000,000) shares of a per value of Ten Cents ($.10) per Share and an aggregate par value of One Hundred and Eighty Million Dollars ($180,000,000). The shares shall be divided into three classes of Common Stock which are designateed as Insured Portfolio Common Stock. High Yield Portfolio Common Stock, and Limited Maturity Portfolio Common stock, as follows; Class Number of Authorized shares Insured Portfolio Common Stock........... 750,000,000 High Yield Portfolio Coupon Stock........ 750,000,000 Limited Hatucity Portfolio Common Stock.. 300,000,000 SECOND: The amendmen of the charter of the Corporation as hereinabove set forth has been duly advised by the Board of Directors and approved by the stockholders of the Corporation. THIRD: (a) The total number of Shares of all classes of stock of the Corporation heretofore authorized, and the number and par value of the shares of each class, are as follows: Nine Hundred Million (900,000,000) shares of capital stock divided into three Classes Of Common Stock each of which Consists Of Three Hundred Million (300,000.000) shares of the par value of Ten Cents ($.10) per share. (b) The total number of share of all classes of Stock Of the Corporation as increased and the number and per value of the shares of each Class, are an follows: One Billion Eight Hundred Million ($1,800,000,000) shares of Capital stock divided into throw classes of common stock each of which, with the exception of the class designated an Limited Maturity Common Stock, consists of Seven Hundred and Fifty Million (750,000,000) shares of the per value of Ton Cents ($.l0) per shares. The class of common stock designated as Limited Maturity Portfolio Common Stock consists of Three Hundred Million (300,000,000) shares of the per value of Ten Cents ($.1O) pot Share. (C) The information required pursuant to $ 2-607(b)(2)(1) of the General Corporation Low of Maryland was not changed by the foregoing amendment. In Witness whereof: MERRILL LYNCH MUNICIPAL &MD FUND, INC. has caused these presents to be executed in its nano and on its behalf by its Vice President and attested by its Stcretary as of March 2, 1987. MERRILL LYNCH MUNICIPAL BOND FUND, INC. By: /s/ Kenneth A. Jacob ------------------------- Vice President Attest: /s/ Mark B. Goldfus - ------------------------------ Secretary The undersigned, President of MERRILL LYNCH MUNICIPAL BOND FUND, INC., who executed on behalf of said Corporation the foregoing Articles of Amendment, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said Corporation, the foregoing Articles of Amendment to be the corporate act of said Corporation and further cortifitt that, to 2 the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/ Kenneth A. Jacob ------------------------ Vice President 3 EX-99.1(C) 4 ARTICLES SUPPLEMENTARY TO THE ART. OF INCORP. EXHIBIT 99.1(c) ARTICLES SUPPLEMENTARY TO THE ARTICLES OF INCORPORATION OF MERRILL LYNCH MUNICIPAL BOND FUND, INC. MERRILL LYNCH MUNICIPAL BOND FUND, INC. (hereinafter called the Corporation), a Maryland corporation, registered as an open-end investment company under the Investment Company Act of 1940 and having its principal office in the City of Baltimore, Maryland, hereby certifies to the state Department of Assessments and Taxation of Maryland that: FIRST: The Board of Directors of the Corporation at a meeting duly convened and held on March 27, 1990 adopted a resolution in accordance with Section 2-105(c) of the General Corporation Law of Maryland, to increase the total number of shares of capital stock of the Insured Portfolio, designated as Class A, which the Corporation shall have authority to issue to FIVE HUNDRED MILLION (500,000,000) shares of the par value of Ten Cents ($0.10) per share and of the aggregate par value of Fifty Million Dollars ( $ 50,000,000). SECOND: The total number of shares of all classes of stock of the Corporation heretofore authorized, and the number and par value of the shares of each class, are as follows: One Billion Eight Hundred Million (1,800,000,000) shares of capital stock of the par value of ton cents ($0.10) per share and of the aggregate par value of one Hundred Eighty million Dollars ($180,000,000), divided into three series, two of which are divided into two classes each. The classes of Common Stock designated as the Insured Portfolio and the High Yield Portfolio consist of 750,000,000 shares each, which are each divided into 375,000,000 shares of Class A and 375,000,000 shares of Class B Common Stock. The class of Common Stock designated as the Limited Maturity portfolio consists of 300,000,000 shares of a single class. THIRD: The total number of shares of all classes of stock of the Corporation as increased, and the number and Par value of the shares of each class, are as follows: The class of Common Stock designated as the Insured Portfolio shall consist of 875,000,000 shares of the par value of Ten Cents ($.10) per share divided into 500,000,000 shares of Class A and 375,000,000 shares of Class B Common Stock. The class of Common Stock designated as the High Yield Portfolio shall consist of 750,000,000 shares of the par value of Ten Cents ($.10) per share divided into 375,000,000 Class A and 375,000,000 Class B shares of Common Stock. The class of Common Stock designated as the Limited Maturity Portfolio shall consist of 300,000,000 shares of the par value of Ten Cents ($.10) per share of a single class. FOURTH: The aforesaid action by the Board of Directors was taken pursuant to authority and power contained in the Charter of the Corporation. IN WITNESS WHEREOF, MERRILL LYNCH MUNICIPAL BOND FUND, INC. has caused these presents to be signed in its name and on its behalf by its President and attested by its Secretary on May 21, 1990. MERRILL LYNCH MUNICIPAL BOND FUND, INC. By: /s/ Arthur Zeikel -------------------- Arthur Zeikel President Attest: /s/ Mark B. Goldfus ----------------------- Mark B. Goldfus Secretary 2 The undersigned, President of MERRILL LYNCH MUNICIPAL BOND FUND, INC., who executed on behalf of said corporation the foregoing Articles Supplementary, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles Supplementary to be the corporate act of said corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/ Arthur Zeikel ---------------------- Arthur Zeikel President 3 EX-99.1(D) 5 ARTICLES SUPPLEMENTARY EXHIBIT 99.1(d) Merrill Lynch Municipal Bond Fund, Inc. Article Supplementary Merrill Lynch municipal Bond Fund, Inc., a Maryland corporation (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation as follows: First: The corporation is an open-end company registered as such under the Investment Company Act of 1940 with authority to issue capital stock as follows: Number of Series Authorized Shares Insured Portfolio Series Common Stock Class A 375,000,000 Class B 375,000,000 High Yield Portfolio Series Common Stock Class A 375,000,000 Class B 375,000,000 Limited Maturity Portfolio Series Common Stock 300,000,000 Second: The Board of Directors of the Corporation, acting pursuant to authority contained in the Corporation's Charter, hereby classifies 150,000,000 shares of the unissued shares of Limited Maturity Portfolio Series Common Stock as "Class B Limited Maturity Portfolio Series Common Stock" which shall have the powers, preferences, and voting or other special rights, and the qualifications, restrictions and limitations set forth in the Corporation's Charter, as amended, and as required by the Investment Company Act of 1940. Third: To avoid confusion, all other shares of the Limited Maturity Portfolio Series Common Stock other than those described in Article Second hereof, shall be referred to as "Class A Limited Maturity Portfolio Series Common Stock." This is intended for purposes of identification and effects no substantive change, and shall apply both to issued and unissued shares of said Class A Limited Maturity Portfolio Series common Stock. Fourth: No other change is intended or effected. In Witness Whereof, the Corporation has caused these Articles Supplementary to be executed in its name and on its - 2 - behalf by its Vice President and attested by its Secretary as of the 21 day of June, 1991. MERRILL LYNCH MUNICIPAL BOND Attest FUND, INC. /s/ Mark B. Goldfus By: /s/ Vincent Giordano - ----------------------- ------------------------ Secretary Vice President The undersigned, Vice President of Merrill Lynch Municipal Bond Fund, Inc., who executed on behalf of said Corporation the foregoing Articles Supplementary, of which this certificate is made apart, hereby acknowledges, in the name and on behalf of said Corporation, the foregoing Articles Supplementary to be the corporate act of said Corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/ Vincent Giordano -------------------- Vice President EX-99.2 6 BY-LAWS OF THE M/L MUNI BOND FUND EXHIBIT 99.2 BY-LAWS OF MERRILL LYNCH MUNICIPAL BOND FUND, INC. ARTICLE I Offices ------- Section 1. Principal Office. The principal office of the ---------------- Corporation shall be in the City of Baltimore, State of Maryland. Section 2. Principal Executive Office. The principal executive -------------------------- office of the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. Section 3. Other Offices. The Corporation may have such other ------------- offices in such places as the Board of Directors may from time to time determine. ARTICLE II Meetings of Stockholders ------------------------ Section 1. Annual Meeting. The Corporation shall not be required to -------------- hold an annual meeting of its stockholders in any year in which the election of directors is not required to be acted upon under the Investment Company Act of 1940. In the event that the Corporation shall be required to hold an annual meeting of stockholders to elect directors by the Investment Company Act of 1940, as amended, such meeting shall be held no later than 120 days after the occurrence of the event requiring the meeting. Any stockholders' meeting held in accordance with this Section shall for all purposes constitute the annual meeting of stockholders for the year in which the meeting is held. Section 2. Special Meetings. Special meetings of the stockholders, ---------------- unless otherwise provided by law, may be called for any purpose or purposes by a majority of the Board of Directors, the President, or on the written request of the holders of at least 10% of the outstanding shares of capital stock of the Corporation entitled to vote at such meeting if they comply with Section 2- 502(b) or (c) of the Maryland General Corporation Law. Section 3. Place of Meetings. Meetings of the stockholders shall be ----------------- held at such place within the United States as the Board of Directors may from time to time determine. Section 4. Notice of Meetings; Waiver of Notice. Notice of the ------------------------------------ place, date and time of the holding of each stockholders' meeting and, if the meeting is a special meeting, the purpose or purposes of the special meeting, shall be given personally or by mail, not less than ten nor more than ninety days before the date of such meeting, to each stockholder entitled to vote at such meeting and to each other stockholder entitled to notice of the meeting. Notice by mail shall be deemed to be duly given when deposited in the United States mail addressed to the stockholder at his address as it appears on the records of the Corporation, with postage thereon prepaid. Notice of any meeting of stockholders shall be deemed waived by any stockholder who shall attend such meeting in person or by proxy, or who shall, either before or after the meeting, submit a signed waiver of notice which is filed with the records 2 of the meeting. When a meeting is adjourned to another time and place, unless the Board of Directors, after the adjournment, shall fix a new record date for an adjourned meeting, or the adjournment is for more than one hundred and twenty days after the original record date, notice of such adjourned meeting need not be given if the time and place to which the meeting shall be adjourned were announced at the meeting at which the adjournment is taken. Section 5. Quorum. At all meetings of the stockholders, the holders ------ of shares of stock of the Corporation entitled to cast a majority of the votes entitled to be cast, present in person or by proxy, shall constitute a quorum for the transaction of any business, except with respect to any matter which requires approval by a separate vote of one or more classes of stock, in which case the presence in person or by proxy of the holders of shares entitled to cast a majority of the votes entitled to be cast by each class entitled to vote as a separate class shall constitute a quorum. In the absence of a quorum no business may be transacted, except that the holders of a majority of the shares of stock present in person or by proxy and entitled to vote may adjourn the meeting from time to time, without notice other than announcement thereat except as otherwise required by these By-Laws, until the holders of the requisite amount of shares of stock shall be so present. At any such adjourned meeting at which a quorum may be present any business may be transacted which might have been transacted at the meeting as originally called. The absence from any meeting, in person or by 3 proxy, of holders of the number of shares of stock of the Corporation in excess of a majority thereof which may be required by the laws of the State of Maryland, the Investment Company Act of 1940, as amended, or other applicable statute, the Articles of Incorporation, or these By-Laws, for action upon any given matter shall not prevent action at such meeting upon any other matter or matters which may properly come before the meeting, if there shall be present thereat, in person or by proxy, holders of the number of shares of stock of the Corporation required for action in respect of such other matter or matters. Section 6. Organization. At each meeting of the stockholders, the ------------ Chairman of the Board (if one has been designated by the Board), or in his absence or inability to act, the President, or in the absence or inability to act of the Chairman of the Board and the President, a Vice President, shall act as chairman of the meeting. The Secretary, or in his absence or inability to act, any person appointed by the chairman of the meeting, shall act as secretary of the meeting and keep the minutes thereof. Section 7. Order of Business. The order of business at all meetings ----------------- of the stockholders shall be as determined by the chairman of the meeting. Section 8. Voting. Except as otherwise provided by statute or the ------ Articles of Incorporation, each holder of record of shares of stock of the Corporation having voting power shall be entitled at each meeting of the stockholders to one vote for every share of such stock standing in his name on the record of 4 stockholders of the Corporation as of the record date determined pursuant to Section 9 of this Article or if such record date shall not have been so fixed, then at the later of (i) the close of business on the day on which notice of the meeting is mailed or (ii) the thirtieth day before the meeting. Each stockholder entitled to vote at any meeting of stockholders may authorize another person or persons to act for him by a proxy signed by such stockholder or his attorney-in-fact. No proxy shall be valid after the expiration of eleven months from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases where such proxy states that it is irrevocable and where an irrevocable proxy is permitted by law. Except as otherwise provided by statute, the Articles of Incorporation or these By-Laws, any corporate action to be taken by vote of the stockholders (other than the election of directors, which shall be by plurality vote) shall be authorized by a majority of the total votes cast at a meeting of stockholders by the holders of shares present in person or represented by proxy and entitled to vote on such action. If a vote shall be taken on any question other than the election of directors, which shall be by written ballot, then unless required by statute or these By-Laws, or determined by the chairman of the meeting to be advisable, any such vote need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. 5 Section 9. Fixing of Record Date. The Board of Directors may set a --------------------- record date for the purpose of determining stockholders entitled to vote at any meeting of the stockholders. The record date, which may not be prior to the close of business on the day the record date is fixed, shall be not more than ninety nor less than ten days before the date of the meeting of the stockholders. All persons who were holders of record of shares at such time, and not others, shall be entitled to vote at such meeting and any adjournment thereof. Section 10. Inspectors. The Board may, in advance of any meeting of ---------- stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If the inspectors shall not be so appointed or if any of them shall fail to appear or act, the chairman of the meeting may, and on the request of any stockholder entitled to vote thereat shall, appoint inspectors. Each inspector, before entering upon the discharge of his duties, may be required to take and sign an oath to execute faithfully the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors may be empowered to determine the number of shares outstanding and the voting powers of each, the number of shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote 6 with fairness to all stockholders. On request of the chairman of the meeting or any stockholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as inspector of an election of directors. Inspectors need not be stockholders. Section 11. Consent of Stockholders in Lieu of Meeting. Except as ------------------------------------------ otherwise provided by statute or the Articles of Incorporation, any action required to be taken at any meeting of stockholders, or any action which may be taken at any meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if the following are filed with the records of stockholders meetings: (i) a unanimous written consent which sets forth the action and is signed by each stockholder entitled to vote on the matter and (ii) a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote thereat. ARTICLE III Board of Directors ------------------ Section 1. General Powers. Except as otherwise provided in the -------------- Articles of Incorporation, the business and affairs of the Corporation shall be managed under the direction of the Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors except 7 as conferred on or reserved to the stockholders by law or by the Articles of Incorporation or these By-Laws. Section 2. Number of Directors. The number of directors shall be ------------------- fixed from time to time by resolution of the Board of Directors adopted by a majority of the entire Board of Directors; provided, however, that the number of directors shall in no event be less than three nor more than fifteen. Any vacancy created by an increase in Directors may be filled in accordance with Section 6 of this Article III. No reduction in the number of directors shall have the effect of removing any director from office prior to the expiration of his term unless such director is specifically removed pursuant to Section 5 of this Article III at the time of such decrease. Directors need not be stockholders. Section 3. Election and Term of Directors. Directors shall be ------------------------------ elected annually by written ballot at a meeting of stockholders held for that purpose; provided, however, that if no meeting of the stockholders of the Corporation is required to be held in a particular year pursuant to Section 1 of Article II of these By-Laws, directors shall be elected at the next meeting held. The term of office of each director shall be from the time of his election and qualification until the election of directors next succeeding his election and until his successor shall have been elected and shall have qualified, or until his death, or until he shall have resigned, or until December 31 of the year in which he shall have reached seventy-two years of age, or until he shall have been removed as hereinafter provided in these By-Laws, 8 or as otherwise provided by statute or the Articles of Incorporation. Section 4. Resignation. A director of the Corporation may resign at ----------- any time by giving written notice of his resignation to the Board or the Chairman of the Board or the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5. Removal of Directors. Any director of the Corporation -------------------- may be removed by the stockholders by a vote of a majority of the votes entitled to be cast for the election of directors. Section 6. Vacancies. Any vacancies in the Board, whether arising --------- from death, resignation, removal, an increase in the number of directors or any other cause, may be filled by a vote of the majority of the Board of Directors then in office even though such majority is less than a quorum, provided that no vacancies shall be filled by action of the remaining directors, if after the filling of said vacancy or vacancies, less than two-thirds of the directors then holding office shall have been elected by the stockholders of the Corporation. In the event that at any time there is a vacancy in any office of a director which vacancy may not be filled by the remaining directors, a special meeting of ----------------- the stockholders shall be held as promptly as 9 possible and in any event within sixty days, for the purpose of filling said vacancy or vacancies. Section 7. Place of Meetings. Meetings of the Board may be held at ----------------- such place as the Board may from time to time determine or as shall be specified in the notice of such meeting. Section 8. Regular Meetings. Regular meetings of the Board may be ---------------- held without notice at such time and place as may be determined by the Board of Directors. Section 9. Special Meetings. Special meetings of the Board may be ---------------- called by two or more directors of the Corporation or by the Chairman of the Board or the President. Section 10. Telephone Meetings. Members of the Board of Directors or ------------------ of any committee thereof may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Subject to the provisions of the Investment Company Act of 1940, as amended, participation in a meeting by these means constitutes presence in person at the meeting. Section 11. Notice of Special Meetings. Notice of each special -------------------------- meeting of the Board shall be given by the Secretary as hereinafter provided, in which notice shall be stated the time and place of the meeting. Notice of each such meeting shall be delivered to each director, either personally or by telephone or any standard form of telecommunication, at least twenty-four hours before the time at which such meeting is to be held, or by first-class mail, postage prepaid, addressed to him at his 10 residence or usual place of business, at least three days before the day on which such meeting is to be held. Section 12. Waiver of Notice of Meetings. Notice of any special ---------------------------- meeting need not be given to any director who shall, either before or after the meeting, sign a written waiver of notice which is filed with the records of the meeting or who shall attend such meeting. Except as otherwise specifically required by these By-Laws, a notice or waiver or notice of any meeting need not state the purposes of such meeting. Section 13. Quorum and Voting. One-third, but not less than two, of ----------------- the members of the entire Board shall be present in person at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting, and except as otherwise expressly required by statute, the Articles of Incorporation, these By-Laws, the Investment Company Act of 1940, as amended, or other applicable statute, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. In the absence of a quorum at any meeting of the Board, a majority of the directors present thereat may adjourn such meeting to another time and place until a quorum shall be present thereat. Notice of the time and place of any such adjourned meeting shall be given to the directors who were not present at the time of the adjournment and, unless such time and place were announced at the meeting at which the adjournment was taken, to the other directors. At any adjourned meeting at which a quorum is 11 present, any business may be transacted which might have been transacted at the meeting as originally called. Section 14. Organization. The Board may, by resolution adopted by a ------------ majority of the entire Board, designate a Chairman of the Board, who shall preside at each meeting of the Board. In the absence or inability of the Chairman of the Board to preside at a meeting, the President or, in his absence or inability to act, another director chosen by a majority of the directors present, shall act as chairman of the meeting and preside thereat. The Secretary (or, in his absence or inability to act, any person appointed by the Chairman) shall act as secretary of the meeting and keep the minutes thereof. Section 15. Written Consent of Directors in Lieu of a Meeting. ------------------------------------------------- Subject to the provisions of the Investment Company Act of 1940, as amended, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writings or writing are filed with the minutes of the proceedings of the Board or committee. Section 16. Compensation. Directors may receive compensation for ------------ services to the Corporation in their capacities as directors or otherwise in such manner and in such amounts as may be fixed from time to time by the Board. Section 17. Investment Policies. It shall be the duty of the Board ------------------- of Directors to direct that the purchase, sale, retention and disposal of portfolio securities and the other 12 investment practices of the Corporation are at all times consistent with the investment policies and restrictions with respect to securities investments and otherwise of the Corporation, as recited in the current Prospectus and Statement of Additional Information of the Corporation, as filed from time to time with the Securities and Exchange Commission and as required by the Investment Company Act of 1940, as amended. The Board however, may delegate the duty of management of the assets and the administration of its day to day operations to an individual or corporate management company and/or investment adviser pursuant to a written contract or contracts which have obtained the requisite approvals, including the requisite approvals of renewals thereof, of the Board of Directors and/or the stockholders of the Corporation in accordance with the provisions of the Investment Company Act of 1940, as amended. ARTICLE IV Committees ---------- Section 1. Executive Committee. The Board may, by resolution ------------------- adopted by a majority of the entire board, designate an Executive Committee consisting of two or more of the directors of the Corporation, which committee shall have and may exercise all the powers and authority of the Board with respect to all matters other than: (a) the submission to stockholders of any action requiring authorization of stockholders pursuant to statute or the Articles of Incorporation; 13 (b) the filling of vacancies on the Board of Directors; (c) the fixing of compensation of the directors for serving on the Board or on any committee of the Board, including the Executive Committee; (d) the approval or termination of any contract with an investment adviser or principal underwriter, as such terms are defined in the Investment Company Act of 1940, as amended, or the taking of any other action required to be taken by the Board of Directors by the Investment Company Act of 1940, as amended; (e) the amendment or repeal of these By-Laws or the adoption of new By-Laws; (f) the amendment or repeal of any resolution of the Board which by its terms may be amended or repealed only by the Board; (g) the declaration of dividends and the issuance of capital stock of the Corporation; and (h) the approval of any merger or share exchange which does not require stockholder approval. The Executive Committee shall keep written minutes of its proceedings and shall report such minutes to the Board. All such proceedings shall be subject to revision or alteration by the Board; provided, however, that third parties shall not be prejudiced by such revision or alteration. Section 2. Other Committees of the Board. The Board of Directors ----------------------------- may from time to time, by resolution adopted by a majority of the whole Board, designate one or more other 14 committees of the Board, each such committee to consist of two or more directors and to have such powers and duties as the Board of Directors may, by resolution, prescribe. Section 3. General. One-third, but not less than two, of the ------- members of any committee shall be present in person at any meeting of such committee in order to constitute a quorum for the transaction of business at such meeting, and the act of a majority present shall be the act of such committee. The Board may designate a chairman of any committee and such chairman or any two members of any committee may fix the time and place of its meetings unless the Board shall otherwise provide. In the absence or disqualification of any member of any committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The Board shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member, or to dissolve any such committee. Nothing herein shall be deemed to prevent the Board from appointing one or more committees consisting in whole or in part of persons who are not directors of the Corporation; provided, however, that no such committee shall have or may exercise any authority or power of the Board in the management of the business or affairs of the Corporation. 15 ARTICLE V Officers, Agents and Employees ------------------------------ Section 1. Number and Qualifications. The officers of the ------------------------- Corporation shall be a President, a Secretary and a Treasurer, each of whom shall be elected by the Board of Directors. The Board of Directors may elect or appoint one or more Vice Presidents and may also appoint such other officers, agents and employees as it may deem necessary or proper. Any two or more offices may be held by the same person, except the offices of President and Vice President, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. Such officers shall be elected by the Board of Directors each year at a meeting of the Board of Directors, each to hold office for the ensuing year and until his successor shall have been duly elected and shall have qualified, or until his death, or until he shall have resigned, or have been removed, as hereinafter provided in these By-Laws. The Board may from time to time elect, or delegate to the President the power to appoint, such officers (including one or more Assistant Vice Presidents, one or more Assistant Treasurers and one or more Assistant Secretaries) and such agents, as may be necessary or desirable for the business of the Corporation. Such officers and agents shall have such duties and shall hold their offices for such terms as may be prescribed by the Board or by the appointing authority. Section 2. Resignations. Any officer of the Corporation may resign ------------ at any time by giving written notice of 16 resignation to the Board, the Chairman of the Board, President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3. Removal of Officer, Agent or Employee. Any officer, ------------------------------------- agent or employee of the Corporation may be removed by the Board of Directors with or without cause at any time, and the Board may delegate such power of removal as to agents and employees not elected or appointed by the Board of Directors. Such removal shall be without prejudice to such person's contract rights, if any, but the appointment of any person as an officer, agent or employee of the Corporation shall not of itself create contract rights. Section 4. Vacancies. A vacancy in any office, whether arising from --------- death, resignation, removal or any other cause, may be filled for the unexpired portion of the term of the office which shall be vacant, in the manner prescribed in these By-Laws for the regular election or appointment to such office. Section 5. Compensation. The compensation of the officers of the ------------ Corporation shall be fixed by the Board of Directors, but this power may be delegated to any officer in respect of other officers under his control. Section 6. Bonds or Other Security. If required by the Board, any ----------------------- officer, agent or employee of the Corporation shall give a bond or other security for the faithful performance 17 of his duties, in such amount and with such surety or sureties as the Board may require. Section 7. President. The President shall be the chief executive --------- officer of the Corporation. In the absence of the Chairman of the Board (or if there be none), he shall preside at all meetings of the stockholders and of the Board Directors. He shall have, subject to the control of the Board of Directors, general charge of the business and affairs of the Corporation. He may employ and discharge employees and agents of the Corporation, except such as shall be appointed by the Board, and he may delegate these powers. Section 8. Vice President. Each Vice President shall have such -------------- powers and perform such duties as the Board of Directors or the President may from time to time prescribe. Section 9. Treasurer. The Treasurer shall: --------- (a) have charge and custody of, and be responsible for, all the funds and securities of the Corporation, except those which the Corporation has placed in the custody of a bank or trust company or member of a national securities exchange (as that term is defined in the Securities Exchange Act of 1934, as amended) pursuant to a written agreement designating such bank or trust company or member of a national securities exchange as custodian of the property of the Corporation; (b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation; (c) cause all moneys and other valuables to be deposited to the credit of the Corporation; 18 (d) receive, and give receipts for, moneys due and payable, to the Corporation from any source whatsoever; (e) disburse the funds of the Corporation and supervise the investment of its funds as ordered or authorized by the Board, taking proper vouchers therefor; and (f) in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board or the President. Section 10. Secretary. The Secretary shall: --------- (a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board, the committees of the Board and the stockholders; (b) see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law; (c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and (e) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board or the President. 19 Section 11. Delegation of Duties. In case of the absence of any -------------------- officer of the Corporation, or for any other reason that the Board may deem sufficient, the Board may confer for the time being the powers or duties, or any of them, of such officer upon any other officer or upon any director. ARTICLE VI Indemnification --------------- Each officer and director of the Corporation shall be indemnified by the Corporation to the full extent permitted under the Maryland General Corporation Law, except that such indemnity shall not protect any such person against any liability to the Corporation or any stockholder thereof to which such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Absent a court determination that an officer or director seeking indemnification was not liable on the merits or guilty of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office, the decision by the Corporation to indemnify such person must be based upon the reasonable determination of independent legal counsel in a written opinion or the vote of a majority of a quorum of the directors who are neither "interested persons," as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, nor parties to the proceeding ("non-party independent directors"), after review of the facts, that such officer or director is not guilty of 20 willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Each officer and director of the Corporation claiming indemnification within the scope of this Article VI shall be entitled to advances from the Corporation for payment of the reasonable expenses incurred by him in connection with proceedings to which he is a party in the manner and to the full extent permitted under the Maryland General Corporation Law without a preliminary determination as to his or her ultimate entitlement to indemnification (except as set forth below); provided, however, that the person seeking indemnification shall provide to the Corporation a written affirmation of his good faith belief that the standard of conduct necessary for indemnification by the Corporation has been met and a written undertaking to repay any such advance, if it should ultimately be determined that the standard of conduct has not been met, and provided further that at least one of the following additional conditions is met: (a) the person seeking indemnification shall provide a security in form and amount acceptable to the Corporation for his undertaking; (b) the Corporation is insured against losses arising by reason of the advance; (c) a majority of a quorum of non-party independent directors, or independent legal counsel in a written opinion, shall determine, based on a review of facts readily available to the Corporation at the time the advance is proposed to be made, that there is reason to believe that the person seeking indemnification will ultimately be found to be entitled to indemnification. 21 The Corporation may purchase insurance on behalf of an officer or director protecting such person to the full extent permitted under the General Laws of the State of Maryland, from liability arising from his activities as officer or director of the Corporation. The Corporation, however, may not purchase insurance on behalf of any officer or director of the Corporation that protects or purports to protect such person from liability to the Corporation or to its stockholders to which such officer or director would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office. The Corporation may indemnify, make advances or purchase insurance to the extent provided in this Article VI on behalf of an employee or agent who is not an officer or director of the Corporation. ARTICLE VII Capital Stock ------------- Section 1. Stock Certificates. Each holder of stock of the ------------------ Corporation shall be entitled upon request to have a certificate or certificates, in such form as shall be approved by the Board, representing the number of shares of stock of the Corporation owned by him, provided, however, that certificates for fractional shares will not be delivered in any case. The certificates representing shares of stock shall be signed by or in the name of the Corporation by the Chairman, President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed with the seal 22 of the Corporation. Any or all of the signatures or the seal on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate shall be issued, it may be issued by the Corporation with the same effect as if such officer, transfer agent or registrar were still in office at the date of issue. Section 2. Books of Account and Record of Stockholders. There shall ------------------------------------------- be kept at the principal executive office of the Corporation correct and complete books and records of account of all the business and transactions of the Corporation. There shall be made available upon request of any stockholder, in accordance with Maryland law, a record containing the number of shares of stock issued during a specified period not to exceed twelve months and the consideration received by the Corporation for each such share. Section 3. Transfers of Shares. Transfers of shares of stock of the ------------------- Corporation shall be made on the stock records of the Corporation only by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or certificates, if issued, for such shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person in 23 whose name any share or shares stand on the record of stockholders as the owner of such share or shares for all purposes, including, without limitation, the rights to receive dividends or other distributions, and to vote as such owner, and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in any such share or shares on the part of any other person. Section 4. Regulations. The Board may make such additional rules ----------- and regulations, not inconsistent with these By-Laws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer agents or one or more transfer clerks and one or more registrars and may require all certificates for shares of stock to bear the signature or signatures of any of them. Section 5. Lost, Destroyed or Mutilated Certificates. The holder of ----------------------------------------- any certificates representing shares of stock of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of such certificate, and the Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it which the owner thereof shall allege to have been lost or destroyed or which shall have been mutilated, and the Board may, in its discretion, require such owner or his legal representatives to give to the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety or sureties, as the Board in its 24 absolute discretion shall determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or issuance of a new certificate. Anything herein to the contrary notwithstanding, the Board, in its absolute discretion, may refuse to issue any such new certificate, except pursuant to legal proceedings under the laws of the State of Maryland. Section 6. Fixing of a Record Date for Dividends and Distributions. ------------------------------------------------------- The Board may fix, in advance, a date not more than ninety days preceding the date fixed for the payment of any dividend or the making of any distribution or the allotment of rights to subscribe for securities of the Corporation, or for the delivery of evidences of rights or evidences of interests arising out of any change, conversion or exchange of common stock or other securities, as the record date for the determination of the stockholders entitled to receive any such dividend, distribution, allotment, rights or interests, and in such case only the stockholders of record at the time so fixed shall be entitled to receive such dividend, distribution, allotment, rights or interests. Section 7. Information to Stockholders and Others. Any stockholder -------------------------------------- of the Corporation or his agent may inspect and copy during usual business hours the Corporation's By-Laws, minutes of the proceedings of its stockholders, annual statements of its affairs, and voting trust agreements on file at its principal office. 25 ARTICLE VIII Seal ---- The seal of the Corporation shall be circular in form and shall bear, in addition to any other emblem or device approved by a the Board of Directors, the name of the Corporation, the year of its incorporation and the words "Corporate Seal" and "Maryland." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE IX Fiscal Year ----------- Unless otherwise determined by the Board, the fiscal year of the Corporation shall end on the 30th day of June. ARTICLE X Depositories and Custodians --------------------------- Section 1. Depositories. The funds of the Corporation shall be ------------ deposited with such banks or other depositories as the Board of Directors of the Corporation may from time to time determine. Section 2. Custodians. All securities and other investments shall ---------- be deposited in the safekeeping of such banks or other companies as the Board of Directors of the Corporation may from time to time determine. Every arrangement entered into with any bank or other company for the safekeeping of the securities and investments of the Corporation shall contain 26 provisions complying with the Investment Company Act of 1940, as amended, and the general rules and regulations thereunder. ARTICLE XI Execution of Instruments ------------------------ Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts, --------------------------- acceptances, bills of exchange and other orders or obligations for the payment of money shall be signed by such officer or officers or person or persons as the Board of Directors by resolution shall from time to time designate. Section 2. Sale or Transfer of Securities. Stock certificates, ------------------------------ bonds or other securities at any time owned by the Corporation may be held on behalf of the Corporation or sold, transferred or otherwise disposed of subject to any limits imposed by these By-Laws and pursuant to authorization by the Board and, when so authorized to be held on behalf of the Corporation or sold, transferred or otherwise disposed of, may be transferred from the name of the Corporation by the signature of the President or a Vice President or the Treasurer or pursuant to any procedure approved by the Board of Directors, subject to applicable law. ARTICLE XII Independent Public Accountants ------------------------------ The firm of independent public accountants which shall sign or certify the financial statements of the Corporation which are filed with the Securities and Exchange Commission shall be selected annually by the Board of Directors and, if required by 27 the provisions of the Investment Company Act of 1940, as amended, ratified by the stockholders. ARTICLE XIII Annual Statement ---------------- The books of account of the Corporation shall be examined by an independent firm of public accountants at the close of each annual period of the Corporation and at such other times as may be directed by the Board. A report to the stockholders based upon each such examination shall be mailed to each stockholder of the Corporation of record on such date with respect to each report as may be determined by the Board, at his address as the same appears on the books of the Corporation. Such annual statement shall also be available at the annual meeting of stockholders, if any, and be placed on file at the Corporation's principal office. Each such report shall show the assets and liabilities of the Corporation as of the close of the annual or quarterly period covered by the report and the securities in which the funds of the Corporation were then invested. Such report shall also show the Corporation's income and expenses for the period from the end of the Corporation's preceding fiscal year to the close of the annual or quarterly period covered by the report and any other information required by the Investment Company Act of 1940, as amended, and shall set forth such other matters as the Board or such firm of independent public accountants shall determine. 28 ARTICLE XIV Fundamental Policies -------------------- For purposes of the following policies, "Permissible Investments" consist of Municipal Bonds and money market securities referred to in the Corporation's Prospectus as "Temporary Investments." It is the fundamental policy of the Corporation not to: --- (1) Purchase any securities other than Municipal Bonds and Temporary Investments; (2) Invest more than 5% of the total assets of any Portfolio (taken at market value at the time of each investment) in the securities of any one issuer (including repurchase agreements with any one bank or dealer) except that such restrictions shall not apply to United States Government or Government agency securities (for the purposes of this restriction, the Fund will regard each state and each political subdivision, agency or instrumentality of such state and each multi-state agency of which such state is a member and each public authority which issues industrial development bonds on behalf of a private entity as a separate issuer); (3) Purchase, in connection with Temporary Investments, securities (other than securities of the United States Government, its agencies and instrumentalities) if, as a result of such purchase, more than 20% of the total 29 assets of any Portfolio (taken at market value) would be invested in any one industry; (4) Enter into a repurchase agreement if, as a result thereof, more than 10% of the total assets of any Portfolio (taken at market value at the time of each investment) would be subject to repurchase agreements maturing in more than seven days; (5) Make investments for the purpose of exercising control or management; (6) Purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization; (7) Purchase or sell real estate (provided that such restriction shall not apply to Permissible Investments secured by real estate or issued by companies which invest in real estate or interests therein), commodities or commodity contracts (provided that such restriction shall not apply to financial futures contracts), interests in oil, gas or other mineral exploration or development programs; (8) Purchase any securities on margin, except (a) to use short-term credit necessary for clearance or purchases and sales of portfolio securities and (b) to make margin payments in connection with transactions in financial futures contracts; (9) Make short sales of securities or maintain a short position in securities or write, purchase or sell puts, calls, straddles, spreads or combinations thereof (this 30 restriction does not apply to transactions in options on financial futures contracts); (10) Make loans to other persons, provided that the Fund may make Permissible Investments (the acquisition of Municipal Bonds or bonds, debentures or other corporate debt securities which are not publicly distributed is considered to be the making of a loan under the Investment Company Act of 1940); (11) Borrow amounts in any Portfolio in excess of 10% of the total assets of such Portfolio, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes (usually only "leveraged" investment companies may borrow in excess of 5% of their assets; however, the Portfolios will not borrow to increase income but only to meet redemption requests which might otherwise require untimely dispositions of portfolio securities); (12) Mortgage, pledge, hypothecate or in any manner transfer as security for indebtedness any securities owned or held by any Portfolio except as may be necessary in connection with borrowings mentioned in (11) above, in which case such mortgaging, pledging or hypothecating may not exceed 10% of such Portfolio'S total assets, taken at market value, or as may be necessary in connection with transactions in financial futures contracts as set forth in (8) above; 31 (13) Invest in securities with legal or contractual restrictions on resale (except for repurchase agreements) or for which no readily available market exists if, regarding all such securities, more than 5% of the total assets of any Portfolio (taken at market value) would be invested in such securities; (14) Act as an underwriter of securities, except to the extent that the Fund may technically be deemed an underwriter when engaged in the activities described in (10) above or insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities; and (15) Invest in securities of any one issuer with a record of less than three years of continuous operation, including predecessors, except obligations issued or guaranteed by the United States Government or its agencies or Municipal Bonds (except that, in case of industrial revenue bonds, this restriction shall apply to the entity supplying the revenues from which the issue is to be paid), if such investments by any Portfolio would exceed 5% of the value of its total assets (taken at market value). ARTICLE XV Amendments ---------- These By-Laws or any of them may be amended, altered or repealed at any regular meeting of the stockholders or at any special meeting of the stockholders at which a quorum is present or represented, provided that notice of the proposed amendment, 32 alteration or repeal be contained in the notice of such special meeting. These By-Laws, except Article XIV hereof, may also be amended, altered or repealed by the affirmative vote of a majority of the Board of Directors at any regular or special meeting of the Board of Directors. The By-Laws, or any of them, set forth in Article XIV of these By-Laws, may be amended, altered or repealed only by the affirmative vote of a majority (as defined below) of the outstanding shares of capital stock of the Corporation at a regular meeting or special meeting of the stockholders, the notice of which contains the proposed amendment, alteration or repeal. For the purpose of amending Article XIV of these By-Laws, a majority shall be 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. A certified copy of these By-Laws, as they may be amended from time to time, shall be kept at the principal office of the Corporation in the State of Maryland. 33 EX-99.5 7 FORM OF INVESTMENT ADVISORY AGREEMENT EXHIBIT 99.5 FORM OF INVESTMENT ADVISORY AGREEMENT AGREEMENT made this 1st day of January, 1981, by and between MERRILL LYNCH MUNICIPAL BOND FUND, INC., a Maryland corporation (the "Fund"), and FUND ASSET MANAGEMENT INC., a Delaware corporation (the "Adviser"): W I T N E S S E T H : WHEREAS, the Fund is engaged in business as a diversified open-end management investment company and is registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); WHEREAS, the Fund is comprised of three separate Portfolios, each of which pursues its investment objective through separate investment policies; WHEREAS, the Adviser is engaged principally in rendering advisory services and is registered as an investment adviser under the Investment Advisers Act of 1940; and WHEREAS, the Fund desires to retain the Adviser to render investment supervisory and corporate administrative services to the Fund in the manner and on the terms hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained, the Fund and the Adviser hereby agree as follows: ARTICLE 1. Duties of the Adviser The Fund hereby employs the Adviser to act as the investment adviser to and manager of the Fund and to manage the investment and reinvestment of the assets of each of its Portfolios and to administer its affairs, subject to the supervision of the Board of Directors of the Fund, for the period and on the terms and conditions set forth in this Agreement. The Adviser hereby accepts such employment and agrees during such period, at its own expense, to render the services and to assume the obligations herein set forth for the compensation provided for herein. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, unless otherwise expressly provided or authorized, have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund. (a) investment Advisory Services. In acting as investment adviser to the Fund, the Adviser shall regularly provide the Fund with such investment research, advise and supervision as the latter may from time to time consider necessary for the proper supervision of its Portfolios and shall furnish continuously an investment program and shall determine from time to time what securities shall be purchased, Bold or exchanged and what portion of the assets of each Portfolio shall be held in the various securities in which it may invest, subject always to the restrictions of the Fund's Articles of Incorporation and By-Laws, as amended from time to time, the provisions of the Investment Company Act, and the statements relating to the Fund's investment objectives, investment policies and investment restrictions as the same are set forth in the currently effective prospectus of the Fund under the Securities Act of 1933 (the "Prospectus"). The Adviser shall also be responsible for all duties arising in connection with any portfolio insurance policies, which the Insured Portfolio maintains. Should the Board of Directors of the Fund at any time, however, make any definite determination as to investment policy and notify the Adviser thereof, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Fund, all actions which it deems necessary to implement the investment policies determined as provided above, and in particular to place all orders for the purchase or sale of portfolio securities of each Portfolio with brokers or dealers selected by it. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser is directed at all times to seek to obtain for the Fund the most favorable execution and price within the meaning of such terms as determined by the Board of Directors and set forth in the Prospectus. Subject to this requirement and the provisions of the Investment Company Act, the Securities Exchange Act of 1934, and other applicable provisions of law, nothing shall prohibit the Adviser from selecting brokers or dealers with which it or the Fund is affiliated. (b) Administrative Services. In addition to the performance of investment advisory services, the Adviser shall perform or supervise the performance of, administrative services in 'connection with the management of the Fund and the Portfolios. In this connection, the Adviser agrees to (i) assist in supervising all aspects of the Fund's operations, including the coordination of all matters relating to the functions of the custodian, transfer agent, other shareholder service agents, accountants, attorneys and other parties performing services or operational functions for the Fund, (ii) provide the Fund, at the Adviser's expenses, with services of persons competent to perform such administrative and clerical functions as are necessary in order to provide effective administration of the Fund, including duties in connection with shareholder relations, reports, redemption requests and account adjustments and the maintenance of certain books and records of the Fund, (iii) provide the Fund, at the Adviser's expense, with adequate office space and related services necessary for its operations as contemplated in this Agreement, and (iv) supervise and administer the operation of the Exchange Privilege referred to in the Prospectus. The Fund acknowledges that the Adviser intends 2 to arrange for the provision of services and the performance of functions referred to in this subsection (b) by Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Administrator") pursuant to an Administration Agreement between the Adviser and the Administrator. ARTICLE 2. Allocation of Charges and Expenses (a) The Adviser. The Adviser assumes and shall pay for maintaining the staff and personnel and shall at its own expense ,provide the equipment, office space and facilities, necessary to perform its obligations under this Agreement, and shall pay all compensation of officers of the Fund and the fees of all directors of the Fund who are affiliated persons of Merrill Lynch & Co., Inc. or its subsidiaries. (b) The Fund. The Fund assumes and shall pay all expenses of the Fund, including, without limitation, organization costs, insurance (including portfolio insurance maintained by the Insured Portfolio), taxes, expenses for legal and auditing services, costs of printing proxies, stock certificates, shareholder reports and prospectuses (except to the extent paid by the Distributor) , charges of the Custodian and Transfer Agent, expenses of redemption of shares, Securities and Exchange Commission fees, expenses of registering the shares under Federal and state securities laws, fees and expenses of directors who are not affiliated persons of Merrill Lynch & Co., Inc. or its subsidiaries, accounting and pricing costs (including the daily calculation of net asset value), interest, brokerage costs, litigation and other extraordinary or non-recurring expenses, and other expenses properly payable by the Fund. ARTICLE 3. Compensation of the Adviser (a) Investment Advisory Fee. For the services rendered, the facilities furnished and expenses assumed by the Adviser, the Fund shall pay to the Adviser at the end of each calendar month a fee based upon the average daily value of the net assets of the Portfolios, as determined and computed in accordance with the description of the method of determination of net asset value contained in the Prospectus. During any period when the determination of net asset value is suspended by the Board of Directors of the Fund, the net asset value of a share as of the last business day prior to such suspension shall for this purpose be deemed to be the net asset value at the close of each succeeding business day until it is again determined. The fee with respect to each Portfolio shall be at the rates set forth below. These rates are subject to reduction to the 3 extent that the aggregate of the average daily net assets of the three combined Portfolios exceeds $250 million. [In addition, the fee payable by the Limited Maturity Portfolio is subject to further reductions to the extent the combined assets of the Portfolios exceed $400 million and $550 million.] The reductions shall be applicable to each Portfolio regardless of size on a "uniform percentage" basis. Determination of the portion of the net assets of each Portfolio to which the reduced rates are applicable is made by multiplying the net assets of that Portfolio by "uniform percentages", derived by dividing the amount by which the combined assets of all Portfolios exceed the various applicable breakpoints by such combined assets. Aggregate of Rate of Advisory Fee average daily net High Limited assets of the three Insured Yield Maturity combined Portfolio Portfolio Portfolio Portfolio Not exceeding $250 million 0.40 0.50 0.40 In excess of $250 million but not exceeding $400 million 0.375 0.475 0.375 In excess of $400 million but not exceeding $550 million 0.375 0.475 0.350 In excess of $550 million 0.375 0.475 0.325 (b) Expense Limitations. In the event the operating expenses of any Portfolio, including the investment advisory fee applicable to such Portfolio payable to the Adviser pursuant to subsection (a) hereof, for any fiscal year ending on a date on which this Agreement is in effect exceed the expense limitations applicable to that Portfolio imposed by state securities laws or regulations thereunder, as such limitations may be raised or lowered from time to time, the Adviser shall reduce its investment advisory fee by the extent of such excess and, if required pursuant to any such laws or regulations, will reimburse such Portfolio in the amount of such excess; provided, however, to the extent permitted by law, there shall be excluded from such expenses the amount of any interest, taxes, brokerage commissions and extraordinary expenses (including but not limited to legal claims and liabilities and litigation costs and any indemnification related thereto) paid or payable by the Fund and allocated to such Portfolio. Whenever the expenses of any Portfolio exceed a pro rata portion of the applicable annual expense limitations, the estimated amounts of reimbursement under such limitations shall be applicable as an offset against the monthly payment of the advisory fee due to the Adviser. 4 ARTICLE 4. Limitation of Liability of the Adviser The Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with any investment policy or the purchase, sale or redemption of any securities on the recommendation of the Adviser. Nothing herein contained shall be construed to protect the Adviser against any liability to the Fund or its security holders to which the Adviser shall otherwise be subject by reason of willful misfeasance, bad faith, gross negligence in the performance of its duties on behalf of the Fund, reckless disregard of the Adviser's obligations and duties under this Agreement or the violation of any applicable law. ARTICLE 5. Activities of the Adviser The services of the Adviser under this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar services to others so long as its services hereunder are not impaired thereby. It is understood that directors, officers, employees and shareholders of the Fund are or may become interested in the Adviser, as directors, officers, employees or shareholders or otherwise and that directors, officers, employees or shareholders of the Adviser are or may become similarly interested in the Fund, and that the Adviser is or may become interested in the Fund as shareholder or otherwise. ARTICLE 6. Duration and Termination of this Agreement This Agreement shall become effective as of the date first above written and shall remain in force until December 31, 1981 and thereafter, but only so long as such continuance is specifically approved at least annually by (i) the Board of Directors of the Fund, or by the vote of a majority of the outstanding shares of the Fund including a majority of the outstanding shares of each Portfolio, and (ii) a majority of those directors who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. This Agreement may be terminated at any time, without the payment of any penalty, by the Board of Directors of the Fund or by vote of a majority of the outstanding shares of the Fund, or by the Adviser on sixty days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment. 5 ARTICLE 7. Definitions. The terms "assignment", "affiliated person" and "interested person", when used in this Agreement, shall have the respective meanings specified in the Investment Company Act. As used with respect to the Fund or any of its Portfolios, the term "majority of the outstanding shares" 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 SOW of the outstanding shares. ARTICLE 8. Amendments of this Agreement This Agreement may be amended by the parties only if such amendment is specifically approved by (i) the Board of Directors of the Fund, or by the vote of a majority of outstanding shares of the Fund, including a majority of the outstanding shares of each Portfolio, and (ii) a majority of those directors of the Fund who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. ARTICLE 9. Governing Law The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of New York as at the time in effect and the applicable provisions of the Investment Company Act. To the extent that the applicable law of the State of New York, or any of the provisions herein, conflict 6 with the applicable provisions of the Investment Company Act, the latter shall control. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. MERRILL LYNCH MUNICIPAL BOND FUND, INC. By ------------------------- President Attest: - ------------------------- Secretary FUND ASSET MANAGEMENT, INC. By ------------------------- Vice President Attest: - ------------------------- Secretary 7 EX-99.6(B) 8 CLASS B AMENDED DISTRIBUTION AGREEMENT EXHIBIT 99.6(b) CLASS B SHARES AMENDED DISTRIBUTION AGREEMENT AGREEMENT made as of the day of 1992, between MERRILL LYNCH MUNICIPAL BOND FUND, INC., a Maryland corporation (the "Fund"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the "Distributor"). W I T N E S S E T H: WHEREAS, the Fund is registered under the Investment Company Act of 1940, as amended to date (the "Investment Company Act") , as an open-end investment company and it is affirmatively in the interest of the Fund to offer its shares for sale continuously; and WHEREAS, the Fund is comprised of three separate portfolios, namely, the Insured Portfolio, the High Yield Portfolio and the Limited Maturity Portfolio (the "Portfolios"), each of which pursues its own investment objective through separate investment policies; and WHEREAS, the Distributor is a securities firm engaged in the business of selling shares of investment companies either directly to purchasers or through other securities dealers; and WHEREAS, the Fund and the Distributor wish to enter into an agreement with each other with respect to the continuous offering of shares of the Class B Insured Portfolio Series Common Stock, the Class B High Yield Portfolio Series Common Stock and the Class B Limited Maturity Portfolio Series Common Stock of the Fund (collectively, the "Class B shares") in order to promote the growth of the Fund and facilitate the distribution of its Class B shares. NOW, THEREFORE, the parties agree as follows: Section 1. Appointment of the Distributor. The Fund hereby appoints the Distributor as the principal underwriter and distributor of the Fund to sell Class B shares to the public and hereby agrees during the term of this Agreement to sell Class B shares of the Fund to the Distributor upon the terms and conditions herein set forth. Section 2. Exclusive Nature of Duties. The Distributor shall be the exclusive representative of the Fund to act as principal underwriter and distributor of its Class B shares, except that: (a) The Fund may, upon written notice to the Distributor, from time to time designate other principal underwriters and distributors of its Class B shares with respect to areas other than the United States as to which the Distributor may have expressly waived in writing its right to act as such. If such designation is deemed exclusive, the right of the Distributor under this Agreement to sell Class B shares in the areas so designated shall terminate, but this Agreement shall remain otherwise in full effect until terminated in accordance with the other provisions hereof. (b) The exclusive rights granted to the Distributor to purchase Class B shares from the Fund shall not 2 apply to shares of the Fund issued in connection with the merger or consolidation of any other investment company or personal holding company with the Fund or the acquisition by purchase or otherwise of all (or substantially all) the assets or the outstanding shares of any such company by the Fund. (c) Such exclusive rights also shall not apply to Class B shares issued by the Fund pursuant to reinvestment of dividends or capital gains distributions. (d) Such exclusive rights also shall not apply to Class B shares issued by the Fund pursuant to any reinstatement privilege afforded redeeming shareholders. Section 3. Purchase of Shares from the Fund. (a) The Fund will commence an offering of its Class B shares and thereafter the Distributor shall have the right to buy from the Fund the Class B shares needed, but not more than the Class B shares needed (except for clerical errors in transmission) to fill unconditional orders for Class B shares of the Fund placed with the Distributor by investors or securities dealers. The price which the Distributor shall pay for the Class B shares so purchased from the Fund shall be the net asset value, determined as set forth in Section 3(c) hereof. (b) The Class B shares are to be resold by the Distributor to investors at net asset value, as set forth in Section 3(c) hereof, or to securities dealers having agreements with the Distributor upon the terms and conditions set forth in Section 7 hereof. 3 (c) The net asset value of Class B shares of the Fund shall be determined by the Fund or any agent of the Fund in accordance with the method set forth in the prospectus and statement of additional information of the Fund and guidelines established by the Board of Directors. (d) The Fund shall have the right to suspend the sale of its Class B shares at times when redemption is suspended pursuant to the conditions set forth in Section 4(b) hereof. The Fund shall also have the right to suspend the sale of its Class B shares if trading on the New York Stock Exchange shall have been suspended, if a banking moratorium shall have been declared by federal or New York authorities, or if there shall have been some other event, which, in the judgment of the Fund, makes it impracticable or inadvisable to sell the Class B shares. (e) The Fund, or any agent of the Fund designated in writing by the Fund, shall be promptly advised of all purchase orders for Class B shares received by the Distributor. Any order may be rejected by the Fund; provided, however, that the Fund will not arbitrarily or without reasonable cause refuse to accept or confirm orders for the purchase of Class B shares. The Fund (or its agent) will confirm orders upon their receipt, will make appropriate book entries and, upon receipt by the Fund (or its agent) of payment therefor, will deliver deposit receipts or certificates for such Class B shares pursuant to the instructions of the Distributor. Payment shall be made to the Fund in New York Clearing House funds. The Distributor agrees to cause such payment 4 and such instructions to be delivered promptly to the Fund (or its agent). Section 4. Repurchase or Redemption of Shares by the Fund. (a) Any of the outstanding Class B shares may be tendered for redemption at any time, and the Fund agrees to repurchase or redeem the Class B shares so tendered in accordance with its obligations as set forth in Article VII of its Articles of Incorporation, as amended from time to time, and in accordance with the applicable provisions set forth in the prospectus and statement of additional information of the Fund. The price to be paid to redeem or repurchase the Class B shares shall be equal to the net asset value calculated in accordance with the provisions of Section 3(c) hereof, less the redemption fee or other charge, if any, set forth in the prospectus and statement of additional information of the Fund. All payments by the Fund hereunder shall be made in the manner set forth below. The Fund shall pay the total amount of the redemption price as defined in the above paragraph pursuant to the instructions of the Distributor on or before the seventh business day subsequent to its having received the notice of redemption in proper form. The proceeds of any redemption of Class B shares shall be paid by the Fund as follows: (i) any applicable contingent deferred sales charge shall be paid to the Distributor and (ii) the balance shall be paid to or for the account of the shareholder, in each case in accordance with the applicable provisions of the prospectus and statement of additional information. 5 (b) Redemption of Class B shares or payment may be suspended at times when the New York Stock Exchange is closed, when trading on that Exchange is closed, when trading on that Exchange is restricted, when an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Fund fairly to determine the value of its net assets, or during any other period when the Securities and Exchange Commission, by order, so permits. Section 5. Duties of the Fund. (a) The Fund shall furnish to the Distributor copies of all information, financial statements and other papers which the Distributor may reasonably request for use in connection with the distribution of Class B shares of the Fund, and this shall include, upon request by the Distributor, one certified copy of all financial statements prepared for the Fund by independent public accountants. The Fund shall make available to the Distributor such number of copies of its prospectus and statement of additional information as the Distributor shall reasonably request. (b) The Fund shall take, from time to time, but subject to the necessary approval of the shareholders, all necessary action to fix the number of authorized Class B shares and such steps as may be necessary to register the same under the Securities Act of 1933, as amended (the "Securities Act"), to the end that there will be available for sale such number of Class B shares as the Distributor reasonably may be expected to sell. 6 (c) The Fund shall use its best efforts to qualify and maintain the qualification of an appropriate number of its Class B shares for sale under the securities laws of such states as the Distributor and the Fund may approve. Any such qualification may be withheld, terminated or withdrawn by the Fund at any time in its discretion. As provided in Section 8 (c) hereof, the expense of qualification and maintenance of qualification shall be borne by the Fund. The Distributor shall furnish such information and other material relating to its affairs and activities as may be required by the Fund in connection with such qualification. (d) The Fund will furnish, in reasonable quantities upon request by the Distributor, copies of annual and interim reports of the Fund. Section 6. Duties of the Distributor. (a) The Distributor shall devote reasonable time and effort to effect sales of Class B shares of the Fund, but shall not be obligated to sell any specific number of Class B shares. The services of the Distributor to the Fund hereunder are not to be deemed exclusive and nothing herein contained shall prevent the Distributor from entering into like arrangements with other investment companies so long as the performance of its obligations hereunder is not impaired thereby. (b) In selling the Class B shares of the Fund, the Distributor shall use its best efforts in all respects duly to conform with the requirements of all federal and state laws 7 relating to the sale of such securities. Neither the Distributor nor any selected dealer nor any other person is authorized by the Fund to give any information or to make any representations, other than those contained in the registration statement or related prospectus and statement of additional information and any sales literature specifically approved by the Fund. (c) The Distributor shall adopt and follow procedures, as approved by the officers of the Fund, for the confirmation of sales to investors and selected dealers, the collection of amounts payable by investors and selected dealers on such sales, and the cancellation of unsettled transactions, as may be necessary to comply with the requirements of the National Association of Securities Dealers, Inc. (the "NASD") , as such requirements may from time to time exist. Section 7. Selected Dealer Agreements. (a) The Distributor shall have the right to enter into selected dealer agreements with securities dealers of its choice ("selected dealers") for the sale of Class B shares; provided that the Fund shall approve the forms of agreements with dealers. Class B shares sold to selected dealers shall be for resale by such dealers only at net asset value determined as set forth in Section 3(c) hereof. The initial form of agreement with selected dealers to be used in the offering of the Class B shares is attached hereto as Exhibit A. 8 (b) Within the United States, the Distributor shall offer and sell Class B shares only to such selected dealers as are members in good standing of the NASD. Section 8. Payment of Expenses. (a) The Fund shall bear all costs and expenses of the Fund, including fees and disbursements of its counsel and auditors, in connection with the preparation and filing of any required registration statements and/or prospectuses and statements of additional information under the Investment Company Act, the Securities Act, and all amendments and supplements thereto, and preparing and mailing annual and interim reports and proxy materials to shareholders (including but not limited to the expense of setting in type any such registration statements, prospectuses, statements of additional information, annual or interim reports or proxy materials). (b) The Distributor shall be responsible for any payments made to selected dealers as reimbursement for their expenses associated with payments of sales commissions to financial consultants. In addition, after the prospectuses, statements of additional information and annual and interim reports have been prepared and set in type, the Distributor shall bear the costs and expenses of printing and distributing any copies thereof which are to be used in connection with the offering of Class B shares to selected dealers or investors pursuant to this Agreement. The Distributor shall bear the costs and expenses of preparing, printing and distributing any other literature used by the 9 Distributor or furnished by it for use by selected dealers in connection with the offering of the Class B shares for sale to the public and any expenses of advertising incurred by the Distributor in connection with such offering. It is understood and agreed that, so long as the Fund's Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act remains in effect, any expenses incurred by the Distributor hereunder may be paid from amounts recovered by it from the Fund under such Plan. (c) Each Portfolio shall bear the cost and expenses of qualifying its Class B shares for sale pursuant to this Agreement, and, if necessary or advisable in connection therewith, of qualifying the Fund as a broker or dealer, in such states of the United States or other jurisdictions as shall be selected by the Fund and the Distributor pursuant to Section 5(c) hereof and the cost and expenses payable to each such state for continuing qualification therein until the Fund decides to discontinue such qualification pursuant to Section 5(c) hereof. Section 9. Indemnification. (a) The Fund shall indemnify and hold harmless the Distributor and each person, if any, who controls the Distributor against any loss, liability, claim, damage or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damage or expense and reasonable counsel fees incurred in connection therewith) arising by reason of any person acquiring any Class B shares, which may be based upon the Securities Act, or on any other statute or at common law, on 10 the ground that the registration statement or related prospectus and statement of additional information, as from time to time amended and supplemented, or an annual or interim report to shareholders of the Fund, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, unless such statement or omission was made in reliance upon, and in conformity with, information furnished to the Fund in connection therewith by or on behalf of the Distributor; provided, however, that in no case (i) is the indemnity of the Fund in favor of the Distributor and any such controlling persons to be deemed to protect such Distributor or any such controlling persons thereof against any liability to the Fund or its security holders to which the Distributor or any such controlling persons would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of the reckless disregard of their obligations and duties under this Agreement; or (ii) is the Fund to be liable under its indemnity agreement contained in this paragraph with respect to any claim made against the Distributor or any such controlling persons, unless the Distributor or such controlling persons, as the case may be, shall have notified the Fund in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon the Distributor or such controlling persons (or after the Distributor or such controlling persons shall have received notice of such service on any designated agent) , but failure to notify the 11 Fund of any such claim shall not relieve it from any liability which it may have to the person against whom such action is brought otherwise than on account of its indemnity agreement contained in this paragraph. The Fund will be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but if the Fund elects to assume the defense, such defense shall be conducted by counsel chosen by it and satisfactory to the Distributor or such controlling person or persons, defendant or defendants in the suit. In the event the Fund elects to assume the defense of any such suit and retain such counsel, the Distributor or such controlling person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them, but, in case the Fund does not elect to assume the defense of any such suit, it will reimburse the Distributor or such controlling person or persons, defendant or defendants in the suit, for the reasonable fees and expenses of any counsel retained by them. The Fund shall promptly notify the Distributor of the commencement of any litigation or proceedings against it or any of its officers or Directors in connection with the issuance or sale of any of the Class B shares. (b) The Distributor shall indemnify and hold harmless the Fund and each of its Directors and officers and each person, if any, who controls the Fund against any loss, liability, claim, damage or expense described in the foregoing indemnity contained in subsection (a) of this Section, but only with respect to statements or omissions made in reliance upon, and in conformity 12 with, information furnished to the Fund in writing by or on behalf of the Distributor for use in connection with the registration statement or related prospectus and statement of additional information, as from time to time amended, or the annual or interim reports to shareholders. In case any action shall be brought against the Fund or any person so indemnified, in respect of which indemnity may be sought against the Distributor, the Distributor shall have the rights and duties given to the Fund, and the Fund and each person so indemnified shall have the rights and duties given to the Distributor by the provisions of subsection (a) of this Section 9. Section 10. Duration and Termination of this Agreement. This Agreement shall become effective as of the date first above written and shall remain in force until , 1993 and thereafter, but only so long as such continuance is specifically approved at least annually by (i) the Directors, or by the vote of a majority of the outstanding Class B voting securities of the Fund, and (ii) by the vote of a majority of those Directors who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. This Agreement may be terminated at any time, without the payment of any penalty, by the Directors or by vote of a majority of the outstanding Class B voting securities of the Fund, or by the Distributor, on sixty days, written notice to the other 13 party. This Agreement shall automatically terminate in the event of its assignment. The terms "vote of a majority of the outstanding voting securities," "assignment," "affiliated person" and "interested person," when used in this Agreement, shall have the respective meanings specified in the Investment Company Act. Section 11. Amendments of this Agreement. This Agreement may be amended by the parties only if such amendment is specifically approved by (i) the Directors, or by the vote of a majority of outstanding Class B voting securities of the Fund, and (ii) by the vote of a majority of those Directors of the Fund who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. 14 Section 12. Governing Law. The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of New York as at the time in effect and the applicable provisions of the Investment Company Act. To the extent that the applicable law of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Investment Company Act, the latter shall control. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. MERRILL LYNCH MUNICIPAL BOND FUND, INC. By ------------------------------------ MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By ------------------------------------ 15 EXHIBIT A MERRILL LYNCH MUNICIPAL BOND FUND, INC. CLASS B SHARES OF COMMON STOCK SELECTED DEALER AGREEMENT Gentlemen: Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement with Merrill Lynch Municipal Bond Fund, Inc., a Maryland corporation (the "Fund") , pursuant to which it acts as the distributor for the sale of shares of Class B Insured Portfolio Series Common Stock, Class B Limited Maturity Portfolio Series Common Stock and Class B High Yield Portfolio Series Common Stock, par value $0.10 per share, of the Fund (collectively, the "Class B shares") , and as such has the right to distribute Class B shares of the Fund for resale. The Fund is an open-end investment company registered under the Investment Company Act of 1940, as amended, and its Class B shares being offered to the public are registered under the Securities Act of 1933, as amended. You have received a copy of the Distribution Agreement between ourself and the Fund and reference is made herein to certain provisions of such Distribution Agreement. The terms "Prospectus" and "Statement of Additional Information" as used herein refer to the prospectus and statement of additional information, respectively, on file with the Securities and Exchange Commission which is part of the most recent effective registration statement pursuant to the Securities Act of 1933, as amended. As principal, we offer to sell to you, as a member of the Selected Dealers Group, Class B shares of the Fund upon the following terms and conditions: 1. In all sales of these Class B shares to the public you shall act as dealer for your own account, and in no transaction shall you have any authority to act as agent for the Fund, for us or for any other member of the Selected Dealers Group. 2. Orders received from you will be accepted through us only at the public offering price applicable to each order, as set forth in the current Prospectus and Statement of Additional Information of the Fund. The procedure relating to the handling of orders shall be subject to Section 4 hereof and instructions which we or the Fund shall forward from time to time to you. All orders are subject to acceptance or rejection by the Distributor or the Fund in the sole discretion of either. The minimum initial and subsequent purchase requirements are as set forth in the current Prospectus and Statement of Additional Information of the Fund. 3. You shall not place orders for any of the Class B shares unless you have already received purchase orders for such Class B shares at the applicable public offering prices and subject to the terms hereof and of the Distribution Agreement. You agree 16 that you will not offer or sell any of the Class B shares except under circumstances that will result in compliance with the applicable federal and state securities laws and that in connection with sales and offers to sell Class B shares you will furnish to each person to whom any such sale or offer is made a copy of the Prospectus and, if requested, the Statement of Additional Information (as then amended or supplemented) and will not furnish to any person any information relating to the Class B shares of the Fund which is inconsistent in any respect with the information contained in the Prospectus and Statement of Additional Information (as then amended or supplemented) or cause any advertisement to be published in any newspaper or posted in any public place without our consent and the consent of the Fund. 4. As a selected dealer, you are hereby authorized (i) to place orders directly with the Fund for Class B shares of the Fund to be resold by us to you subject to the applicable terms and conditions governing the placement of orders by us set forth in Section 3 of the Distribution Agreement, and (ii) to tender Class B shares directly to the Fund or its agent for redemption subject to the applicable terms and conditions set forth in Section 4 of the Distribution Agreement. 5. You shall not withhold placing orders received from your customers so as to profit yourself as a result of such withholding: e.g., by a change in the "net asset value" from that used in determining the offering price to your customers. 6. No person is authorized to make any representations concerning Class B shares of the Fund except those contained in the current Prospectus and Statement of Additional Information of the Fund and in such printed information subsequently issued by us or the Fund as information supplemental to such Prospectus and Statement of Additional Information. In purchasing Class B shares through us you shall rely solely on the representations contained in the Prospectus and Statement of Additional Information and supplemental information above mentioned. Any printed information which we furnish you other than the Fund's Prospectus, Statement of Additional Information, periodic reports and proxy solicitation material is our sole responsibility and not the responsibility of the Fund, and you agree that the Fund shall have no liability or responsibility to you in these respects unless expressly assumed in connection therewith. 7. You agree to deliver to each of the purchasers making purchases from you a copy of the then current Prospectus and, if requested, the Statement of Additional Information at or prior to the time of offering or sale and you agree thereafter to deliver to such purchasers copies of the annual and interim reports and proxy solicitation materials of the Fund. You further agree to endeavor to obtain proxies from such purchasers. Additional copies of the Prospectus and Statement of Additional Information, annual 17 or interim reports and proxy solicitation materials of the Fund will be supplied to you in reasonable quantities upon request. 8. We reserve the right in our discretion, without notice, to suspend sales or withdraw the offering of Class B shares entirely. Each party hereto has the right to cancel this Agreement upon notice to the other party. 9. We shall have full authority to take such action as we may deem advisable in respect of all matters pertaining to the continuous offering. We shall be under no liability to you except for lack of good faith and for obligations expressly assumed by us herein. Nothing contained in this paragraph is intended to operate as, and the provisions of this paragraph shall not in any way whatsoever constitute, a waiver by you of compliance with any provision of the Securities Act of 1933, as amended, or of the rules and regulations of the Securities and Exchange Commission issued thereunder. 10. You represent that you are a member of the National Association of Securities Dealers, Inc. and, with respect to any sales in the United States, we both hereby agree to abide by the Association's Rules of Fair Practice. 11. Upon application to us, we will inform you as to the states in which we believe the Class B shares have been qualified for sale under, or are exempt from the requirements of, the respective securities laws of such states, but we assume no responsibility or obligation as to your right to sell Class B shares in any jurisdiction. We will file with the Department of State in New York a Further State Notice with respect to the Class B shares, if necessary. 18 12. All communications to us should be sent to the address below. Any notice to you shall be duly given if mailed or telegraphed to you at the address specified by you below. 13. Your first order placed pursuant to this Agreement for the purchase of Class B shares of the Fund will represent your acceptance of this Agreement. MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By ---------------------------------- (Authorized Signature) Please return one signed copy of this Agreement to: MERRILL LYNCH FUNDS DISTRIBUTOR, INC. Box 9011 Princeton, New Jersey 08543-9011 Accepted: Firm Name: ---------------------------- By: ----------------------------------- Address: ------------------------------ Date: --------------------------------- 19 EX-99.8 9 CUSTODY AGREEMENT EXHIBIT 99.8 CUSTODY AGREEMENT CUSTODY AGREEMENT. dated as of September 1, 1987, between FINANCIAL GUARANTY INSURANCE COMPANY, a New York stock insurance Corporation ("Financial"), and SECURITY PACIFIC NATIONAL TRUST COMPANY (NEW YORK), a national banking association organized and existing under the laws of the United States of America ("Custodian'). WHEREAS, Financial desires to provide for the deposit from time to time of certain intercst bearing municipal bonds (the "Bonds") with the Custodian, on which Bonds payment of principal and interest is insured by Financial, and of the policies of municipal bond insurance which insure such Bonds (individually, the "Policy" and, collectively, the "Policies"), and for the creation, execution and delivery of Custodial Receipts ("Receipts") evidencing direct interests in such Bonds, including future principal, premium and interest payments on such Bonds; and WHEREAS, the Receipts are to be substantially in the form of Exhibit A hereto, with appropriate insertions, modifications and omissions, as hereinafter provided in this Agreement; and WHEREAS, Financial wishes the Custodian to act as the custodian of the Bonds and the Policies on behalf of the Holders of the Receipts and to carry out the duties set forth in this Agreement pertaining to the Receipts and the Policies, and the Custodian is agreeable to so acting; and WHEREAS, the corporate trust and agency office of the Custodian in the Borough of Manhattan, The City of New York shall be the designated office of the Custodian for the performance of the duties of the custodian contained herein. NOW, THEREFORE, in consideration of the mutual promises contained in this document, the parties hereto agree as follows: ARTICLE I ESTABLISHMENT OF CUSTODY ACCOUNT AND CREATION OF DIRECT INTERESTS IN BONDS 1. FINANCIAL and the Custodian hereby supplement the Custody Agreement and Book-Entrv Custody Agreement, both dated September 1, 1986, and amend those agreements by restating such agreements as of the date hereof in whole as follows. which restatement shall be effective as of the date hereof and shall not affect the Holder of any Receipt heretofore executed and delivered pursuant to the Custody Agreement or the Book-Entry Agreement or of the owner of any Bond to which a Statement of Insurance previously has been affixed pursuant to the Custody Agreement, which rights shall continue to be determined pursuant to such Agreements as in effect immediately prior to the execution hereof. 2. The Custodian shall establish a Custody Account in which the Custodian shall hold the Policies and such Bonds as shall on the date hereof, or from time to time hereafter, be deposited with the Custodian for the Custody Account, together with all moneys received as principal, premium or interest with respect to the Bonds or as proceeds of the Policies pending disbursement as hereinafter provided. 3. The Custodian shall retain custody of the Bonds for the benefit of the Holders of Receipts, and shall retain custody of each Policy for the benefit of the Holders of Receipts relating to Bonds insured under such Policy and for the benefit of the owners of Bonds insured under such Policy which have been withdrawn from the Custody account pursuant to paragraph 7 of Article II. The Holders of Receipts shall be the beneficial owners of the Bonds. The Holders of Receipts and the owners of Bonds withdrawn from the Custodv Account pursuant to paragraph 7 of Article II shall be the beneficiaries of the Policy under which the Bonds relating to such receipts or such Bonds withdrawn from the Custody Account are insured. The Custodian shall assume full responsibility and risk for the safekeeping of the Policies, all Bonds on deposit with it and all moneys received by it as principal, premium or interest on the Bonds, or as proceeds of the Policies, and shall bear all costs and expenses incurred by it as custodian of such Bonds and the Policies (subject to such reimbursement by Financial as may be agreed upon by the Custodian and Financial in separate agreements). The Holders of Receipts and the owners of Bonds shall not be liable for any such costs or expenses, except costs and expenses incurred in connection with (i) the withdrawal of the Bond or Bonds to which a Receipt relates and (ii) the transfer or exchange of Bonds withdrawn from the Custody Account pursuant to paragraph 7 of Article II. 4. The Bonds (unless withdrawn from the Custody Account pursuant to paragraph 7 of of Article II), the Policies and all moneys received as principal, premium Or interest on the Bonds, or as proceeds of the Policies, shall remain in the custodv of the Custodian and shall be kept in a special account separate from the general assets of the Custodian; provided, that the Custodian may hold Bonds in its account with the Depository Trust Company or any other securities depository registered under Section 17(a) of the Securities Exchange Act of 1934, as amended (an "Authorized Depository"). The Bonds, the Policies and moneys received and held in the Custody Account will not be subject to any right, charge, security interest, lien or claim or any kind in favor of the Custodian or any person claiming through it. The Custodian shall not have the power or 2. authority to transfer, assign, hypothecate, pledge, or otherwise dispose of any of the assets of the Custodv Account to any person, except as expressly permitted by the provisions of this Agreement. 5. Upon each delivery to the Custodian for deposit of Bonds in registered form, or of Bonds in bearer form which by their terms are exchangeable for Bonds in registered form, the Custodian shall, as soon as practicable, present such Bonds to the registrar or fiscal agent of the issuer of such bonds for registration or registration of transfer, as the case may be, in the name of the Custodian or its nominee. Such Bonds will be held in the name of the Custodian or its nominee in certificated form. Upon each delivery to the Custodian for deposit of Bonds in bearer form which are not exchangeable for Bonds in registered form, the Custodian shall hold such Bonds in the Custody Account in the form in which such Bonds were received. Except in the case of a Bond or Bonds originally issued in book- entry form only ("Book-Entry Bond"or "Book-Entry Bonds"), upon each delivery to the Custodian of Bonds for deposit, the Custodian shall record the Bond number in a register opposite the serial number of the Receipt or Receipts relating to such Bond. Upon delivery to the Custodian of appropriate notifications and instruments of transfer of Book-Entry Bonds to be held for its account pursuant to this Agreement, the Custodian shall cause the Authorized Depository holding such bonds to register such Bonds in the name of the Custodian or its nominee. 6. The Custodian is authorized and directed to deliver any instrument or document necessary to obtain registration or registration of transfer of the Bonds and to obtain payment of principal, premium and interest thereon. The Custodian is further authorized to sign and file any declaration, affidavits, certificates of ownership or other documents required to service the Custody Account and to present for payment all Bonds or coupons thereon required to be presented as a condition to payment at the maturity or upon call for redemption thereof. ARTICLE II TERMS OF RECEIPTS 1. Each Receipt evidences ownership of all or a portion of the Bond or Bonds to which such Receipt relates, including a direct interest in the principal of and premium and interest on such Bond or Bonds in accordance with the provisions thereof. 2. The Receipts shall be substantially in the form set forth in Exhibit A hereto, with such appropriate omissions, insertions, substitutions and variations as are permitted by this Agreement, including such as may result by a permitted amendment of this Agreement. The definitive Receipts shall be printed, lithographed or engraved, or a combination thereof, on steel engraved borders. Temporary Receipts may be provided for in accordance with Section 4 of this Article II. 3. The Receipts will be delivered by the Custodian in registered form. Receipts Issued with respect to Book-Entrv Bonds shall not be delivered other than to an Authorized Depository. The Receipts delivered by the Custodian will be available in the same denominations as the Bonds to which such Receipts relate (the "Authorized Denominations"); provided that without the consent of the Custodian no Receipt will be in a denomination less than $5,000. Receipts are issuable in an aggregate principal amount not exceeding the aggregate principal amount of all Bonds held by the Custodian to which such Receipts relate, except for Receipts executed and delivered in exchange for or in lieu of other Receipts pursuant to paragraphs 4 and 5 of this Article II, paragraphs I and of Article V and paragraph 2 of Article VI. 3. The Receipts shall be executed on behalf of the Custodian by the manual signature of an authorized officer. No Receipt shall be entitled to any benefits under this Agreement, or be valid or obligatory for any purpose, unless such Receipt shall have been executed by the Custodian in the aforesaid manner. In case any person who shall have signed any of the Receipts shall no longer be a person authorized to sign Receipts before the Receipts so signed by him shall have been actually delivered, such Receipts shall be valid nevertheless, and may be delivered with the same effect as though the person who had signed such Receipts had not ceased to be such authorized person. The date of each Receipt shall be the original delivery date thereof. 4. Pending the preparation of definitive Receipts, Financial may, at its option, instruct the Custodian to execute and deliver temporary Receipts which are printed, lithographed, typewritten, mimeographed or otherwise produced, in Authorized Denominations and substantially of the tenor of the definitive Receipts in lieu of which they are issued, with such appropriate omissions, insertions, substitutions and variations as are permitted by this Agreement. After the preparation of definitive Receipts, the temporary Receipts shall be exchangeable for definitive Receipts upon surrender of temporary Receipts at the corporate trust and agency office of the Custodian without charge to the Holder. Upon surrender to and cancellation by the Custodian of any one or more temporary Receipts, the Custodian shall execute and deliver in exchange therefor a like principal amount of definitive Receipts of Authorized Denominations relating to the same issue of Bonds. 5. If any mutilated Receipts is surrendered to the Custodian, or the Custodian receives evidence of its satisfaction of the destruction, loss or theft of any Receipt, and there is delivered to the Custodian such security or indemnity as may be required by the Custodian to save it harmless, then, in the absence of notice to the Custodian that such Receipt has been acquired by a bona fide purchaser, the Custodian shall execute, by manual signature of an authorized officer, and deliver, in exchange for any such mutilated Receipt or in lieu of any such destroyed, lost or stolen Receipt, a new Receipt of like tenor and principal amount relating to the same issue of Bonds, bearing a number not contemporaneously outstanding. Upon the issuance of any new Receipt under this paragraph, the Custodian may require from the Holder thereof the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and the Custodian shall forthwith cancel any mutilated Receipt so surrendered. 4. 6. The Custodian has no responsibility for the payments due on the Receipts, except to receive payments on the Bonds from the Issuer thereof or payments from Financial pursuant to the Policies, as the case may be, and to apply such moneys in accordance with the provisions of the receipts and this Agreement. 7. Each Holder of a Receipt, as the beneficial owner of a direct interest in a Bond or Bonds, shall have all the rights and privileges of an owner of that interest in such Bond or Bonds by the issuer thereof, the Custodian shall have the right to hold such Bond or Bonds on behalf of such Receipt Holder, except as provided in this paragraph. With respect to a Book- Entry Bond or Bonds, in the absence of a default on such Bond or Bonds by the issuer thereof, such Bond shall be held by an Authorized Depository for the account of the Custodian, and neither the Custodian nor the Receipt Holder shall have the right to hold such Bond. The Holder of a Receipt, other than a Receipt issued with respect to a Book-Entry Bond or Bonds, shall be entitled to delivery of the principal amount of Bonds at the time represented by such Receipt in any form and denomination in which such Bonds are authorized to be issued and which such Holder shall request, (i) upon surrender of such Receipt, on behalf of such Holder, by a commercial bank or trust company or other financial institution or by a member of the New York Stock Exchange, Inc. (an "Authorized Intermediary") at the corporate trust and agency office of the Custodian and (ii) upon payment by the Holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith and of the fee of the Custodian for the withdrawal of Bonds (such fee not to exceed the sum of (a) $195 per transaction plus (b) $35 for each Bond certificate delivered in excess of one). Delivery of such Bonds may be made (i) in the case of registered Bonds, by the delivery of Certificates in the name of such Holder, or as ordered by him, and (ii) in the case of bearer Bonds, by the delivery of certificates with all unmatured coupons appertaining thereto, and (iii) together, in each such case, with a statement of insurance (the "Statement of Insurance"), substantially in the form of Exhibit B hereto, affixed to each such Bond. On each Statement of Insurance affixed to a Bond by the Custodian pursuant to this paragraph, the Custodian shall enter the number of the Bond to which such Statement of Insurance relates and the name of the owner of such Bond. Such delivery shall be made without unreasonable delay. A Receipt surrendered or such purposes may be required by the Custodian to be properly endorsed in blank or accompanied by proper instruments of transfer in blank, and the Holder thereof shall execute and cause to be delivered to the Custodian a written order directing the Custodian to cause the Bond or Bonds being withdrawn to be delivered to any Authorized Intermediary on behalf of the person or persons designated in such order. Thereupon the Custodian shall deliver to the Authorized Intermediary designated in the order delivered to the Custodian as above provided, the principal amount of Bonds represented by such Receipt with a Statement of Insurance affixed to each such Bond. The withdrawal of each Bond from the Custody Account pursuant to this paragraph shall be recorded on the book maintained by the Custodian for such purpose. 5. Upon any withdrawal of Bonds pursuant to this paragraph, the Custodian shall no longer receive payments of principal, premium or interest on such Bonds, or notices or solicitations relating to such Bonds. In addition, as a condition to the maintenance of insurance on such Bonds: (i) The owner of any bearer Bond withdrawn pursuant to this paragraph shall be required, upon any subsequent change of ownership of such Bond, to surrender such Bond, with the related Statement of Insurance affixed, through an Authorized Intermediary to the Custodian for recordation of transfer on the books maintained by the Custodian for Bonds withdrawn pursuant to this paragraph. The Custodian shall thereupon affix to the Bond so surrendered a new Statement of Insurance, bearing the number of such Bond and the name of the transferee or transferees, and shall redeliver such Bond, with the new Statement of Insurance affixed, to the Authorized Intermediary. (ii) The owner of any registered Bond withdrawn pursuant to this paragraph shall be required, in order to register the transfer of or exchange such Bond, to surrender such Bond, with the related Statement of Insurance affixed, through an Authorized Intermediary to the Custodian, accompanied by an appropriate instrument or instruments of transfer or endorsement in form satisfactory to the Custodian. The Custodian shall, as soon as practicable, (a) present such Bond on behalf of the owner to the registrar or fiscal agent of the issuer of such Bond for registration of transfer or exchange thereof in the name of the transferee or transferees designated by such owner and (b) record such transfer or exchange on the books maintained by the Custodian for Bonds withdrawn pursuant to this paragraph. The Custodian shall thereupon affix to each new Bond issued upon such transfer or exchange a new Statement of Insurance, bearing the number of the new Bond and the name of the transferee or transferees, and shall deliver the new Bond, with the new Statement of Insurance affixed, to the Authorized Intermediary. The Custodian may require from the transferee or transferees payment of any costs and expenses incurred by the Custodian in effecting such registration of transfer or exchange and of the fee of the Custodian for effecting such registration of transfer and exchange (such fee not to exceed S35 for each Bond certificate redelivered by the Custodian). The owner of any Bond with a Statement of Insurance affixed may redeposit such Bond for the Custody Account by surrendering such Bond, with the related Statement of Insurance affixed, through an Authorized Intermediary to the Custodian. Each Bond surrendered for redeposit pursuant to this paragraph shall be accompanied by an appropriate instrument or instruments of transfer or endorsement in form satisfactory to the Custodian, together with a written order of such owner directing the Custodian to deliver a Receipt or Receipts relating to such Bonds to any Authorized Intermediary on behalf of such owner. The Custodian, subject to the terms and conditions of this Agreement, shall thereupon deliver to the Authorized Intermediary designated in such order a Receipt or Receipts in the Authorized Denominations requested by such owner. The Custodian may require from the owner of any Bond surrendered for redeposit payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer of such Bond or the issuance of such Receipt therefor and any other expenses connected therewith. Any bearer Bond surrendered for redeposit pursuant to this paragraph shall have attached thereto all unmatured coupons. 6. The Custodian shall not be obligated to permit withdrawal or redeposit of any Bond pursuant to this paragraph (i) between the recorded date for such Bond and the related interest payment date or (ii) during any period in which the registrar or fiscal agent of the issuer of such Bond is not obligated to register the transfer of or exchange such Bond. ARTICLE III PAYMENTS ON THE RECEIPTS, NOTICES AND REPORTS 1. The Custodian shall receive payment of principal of and premium and interest on the Bonds from the issuer thereof on behalf of Receipt Holders and shall apply such moneys to the payment of the related Receipts in accordance with the provisions of the Receipts and this Agreement. Pending such payments, all moneys shall be received and held in trust by the Custodian. The Custodian shall not be entitled to make any deductions to compensate itself for its services or to reimburse itself for its expenses hereunder. 2. Whenever the Custodian shall receive payment of principal, premium or interest on the Bonds from the issuer thereof, the Custodian shall, not later than the business day following receipt of payment, distribute the amount thus received to the Holders of Receipts entitled thereto, in proportion to the principal amount of Bonds represented by the Receipt or receipts held by them respectively. Such distributions by the Custodian shall be made by check in New York Clearing House funds. Payments in respect of interest shall be distributed, not later than the business day following receipt of payment, to the Holder of each Receipt on the record date for the Bonds to which such Receipt relates, or, if the Bonds to which a Receipt relates do not provide for a record date, on the fifteenth day prior to such payment date (the 'Record Date"). The Holders of Receipts relating to such Bonds on such Record Date shall be entitled to receive the amount distributable by the Custodian with respect to such payment in proportion to the principal amount of Bonds represented by the Receipt or receipts held by them respectively. Receipts must be presented and surrendered to the Custodian for payment upon redemption or at maturity. 3. Payments on the Receipts shall be made at the corporate trust and agency office of the Custodian in the Borough of Manhattan, The City of New York, in accordance with the terms of the Receipts. 4. Upon receipt of any notice of default or of any meeting of Bondholders, or if the issuer of any Bond shall solicit from the holders thereof any request, demand, authorization, direction, notice, consent, waiver or other act, the Custodian shall, as soon as practicable after receipt of such notice or solicitation, mail to the Holders of the Receipts relating to such Bonds a notice which shall contain (a) such information as is contained in such notice or solicitation and (b) if applicable, a statement that the Holders of Receipts at the close of business on a specified record date will be entitled, subject to any applicable provisions of law, to instruct the Custodian as to the exercise of the voting rights pertaining to the number of Bonds represented by their respective Receipts or as to the giving of such request, demand, authorization, direction, notice, consent, waiver or other act, and a brief statement as to the manner in which such instruction may be given. 7. Upon the written request of a Holder of a Receipt on such record date, received on or before the date established by the Custodian for such purpose, the Custodian shall endeavor insofar as practicable to act in accordance with the instructions set forth in such request. ARTICLE IV BOND INSURANCE 1. On or prior to the date of each deposit of Bonds with the Custodian hereunder, Financial shall furnish to the Custodian a Policy of municipal bond insurance with Schedule A Attached thereto describing the Bonds to be deposited on such date. 2. (a) In the event that the issuer of any Bond or Bonds deposited with the Custodian shall fail to make all or a portion of a required payment of principal of or interest on such Bonds on the stated maturity date thereof or on the date on which such Bonds shall have been called for mandatory sinking fund redemption or for mandatory redemption as a result of a determination of taxability (but not any such payment which is due for any other reason prior to the stated maturity date thereof, including by reason of acceleration), or if the Custodian shall receive written notice from the owner of a Bond withdrawn from the Custody Account pursuant to paragraph 7 of Article II that the issuer of such Bond shall have failed to make all or a portion of any such payment, then the Custodian shall immediately file a claim with Financial. Such action by the Custodian shall in all respects be made in compliance with the terms of the applicable Policy. Nothing in this Agreement shall be construed as a limitation on the provisions of any Policy, and in the event the Custodian shall fail to comply with the provisions of this Agreement, Financial shall still be obligated to make payment in accordance with the provisions of the applicable Policy. (b) By his acceptance of the Receipts or of Bonds with Statements of Insurance affixed, each Holder of Receipts and each owner of such Bonds hereby designates, appoints, authorizes and directs the Custodian to act as his attorney-in-fact as follows: (i) if and to the extent a deficiency exists in amounts required to pay interest on the Bonds to which such Receipts relate or on such Bonds with Statements of Insurance affixed, to execute and deliver an appropriate instrument of assignment to Financial for each of the claims for interest to which such deficiency relates; and (ii) if and to the extent a deficiency exists in amounts required to pay principal of the Bonds to which such Receipts relate or of such Bonds with Statements of Insurance affixed, to execute and deliver an appropriate instrument of assignment to Financial of any of the Bonds the principal amount of which has not previously been paid or for which moneys are not held by the Custodian and available for payment. 8. In each case in which the Custodian shall receive, as attorncy- in-fact for each Holder of Receipts or each owner of Bonds with Statements of Insurance affixed, in accordance with the tenor of the applicable Policy, payment from Financial with respect to the claims for interest so assigned or the assignment of Bonds, whichever is applicable, the Custodian shall disburse such sums to the Holders of Receipts or the owner of Bonds with Statements of Insurance affixed which are entitled thereto in accordance with this Agreement. Payments disbursed by the Custodian from proceeds of the applicable Policy shall not be considered to satisfy payments required to be made by the issuer of such Bonds, and Financial shall become the owner of such unpaid Bonds and claims for principal or interest thereon in accordance with the tenor of the assignment made to it. Irrespective of whether any assignment is executed and delivered, the Custodian, each Holder of the Receipts and each owner of Bonds with Statements of Insurance affixed hereby agree for the benefits of Financial that (a) they recognize that to the extent Financial makes payments on account of principal of or interest on the Bonds to the Holders of such Receipts or owners of such Bonds, Financial will be subrogated to the rights of such Holders and owners to receive such principal and interest from the issuer thereof as provided in this Article and the Bonds, and (b) the Custodian will accordingly pay to Financial such principal and interest as shall be received by it as provided in this Article and the Bonds, but only from sources and in the manner provided herein for the payment of principal of and interest on the Bonds, and will otherwise treat Financial as the owner of such rights to principal and interest. (c) Anything in this Agreement notwithstanding the Custodian shall not be obligated to take any action of any kind with respect to any Policy, other than holding such Policy in safekeeping, until it has actual knowledge of a default in the payment of the principal of or interest on any Bonds insured under such Policy. The Custodian has no responsibility for the payment of premiums due on any Policy. 3. Upon default by Financial in the payment of any amounts due under a Policy, each Holder of Receipts relating to Bonds insured under such Policy or owner of Bonds insured under such Policy which have Statements of Insurance affixed, as the real party in interest, shall have the right to proceed directly and individually against Financial or the issuer of such Bonds, in whatever manner such Holder or owner deems to be appropriate. In such event, the Holder of Receipts or the owner of Bonds with Statements of Insurance affixed is not required to act in concert with other Holders of Receipts or other such owners or with the Custodian. The Custodian is not authorized to assert the rights and privileges of the Holders of Receipts or the owners of Bonds with Statements of Insurance affixed and has not duty to do so. No provision of this Agreement or any document or instrument delivered in furtherance of the provisions hereof shall provide otherwise. 9. ARTICLE V TRANSFERS AND EXCHANGES 1. The Custodian shall maintain books on which each Receipt executed and delivered under this Agreement and the transfer or exchange of such Receipt shall be registered and, except with respect to a Book-Entry Bond or Bonds, on which transfers and exchanges of Bonds withdrawn pursuant to paragraph 7 or Article 11 shall be recorded. Subject to the terms and conditions of this Agreement, the Custodian shall register transfers and exchanges on its transfer books from time to time of Receipts upon anv surrender of a Receipt by the Holder in person or by duty authorized attorney, properly endorsed or accompanied by proper instruments of transfer at the corporate trust and agency office of the Custodian in the Borough of Manhattan, The City of New York, and the Custodian shall record transfers and exchanges of Bonds withdrawn pursuant to paragraph 7 of Article 11 in accordance with the terms of such paragraph; provided, however, that with respect to a Book-Entry Bond or Bonds, no transfer of a Receipt shall be registered unless the transferee is an Authorized Depository. Upon surrender for registration of transfer of any Receipt at the above office of the Custodian, the Custodian shall execute and deliver, in the name of the transferee or transferees, one or more new Receipts, as the case may be, of any Authorized Denomination or Denominations of a like aggregate principal amount and relating to the same issue of Bonds. 2. At the option of the Holder thereof, Receipts may be exchanged for other Receipts relating to the same issue of Bonds, of any Authorized Denomination or Denominations and of a like aggregate principal amount, upon surrender of the Receipts to be exchanged at any designated office of the Custodian. Whenever any Receipts are so surrendered for exchange, the Custodian shall execute and deliver the Receipts which the Holder making the exchange is entitled to receive. 3. All Receipts so presented or surrendered for registration of transfer or exchange shall forthwith be cancelled by the Custodian. 4. No service charge to the Holder shall be made for any registration of transfer of Receipt, but the Custodian may require from the transferee or transferees payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Receipts. 5. All Receipts delivered upon any registration of transfer or exchange of Receipts shall evidence the same obligation, and be entitled to the same rights and privileges, as the Receipts surrendered upon such registration of transfer or exchange. 6. Every Receipt presented or surrendered for registration of transfer or (if required by he Custodian) for exchange shall be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Custodian duly executed by the Holder thereof or his attorney duly authorized in writing. 10. ARTICLE VI REDEMPTION OF RECEIPTS I. Upon receipt by the Custodian of notice of redemption of any Bond or Bonds deposited for the Custody Account, the Custodian shall, as soon as practicable thereafter, mail to the Holders of Receipts relating to such Bond or Bonds a notice containing such information as is contained in such notice of redemption and specifying the numbers of the Receipts to be redeemed (and, in the case of any Receipt which is to be redeemed in part, the portion thereof to be redeemed, which shall be a principal amount equal to the minimum Authorized Denomination or a multiple thereof). If less than all the Bonds of a particular issue are to be redeemed, the Custodian shall select by lot, in such manner as it shall deem fair and appropriate, the Receipts to be so redeemed. The Custodian shall also, as soon as practicable after receipt of notice of redemption of any Bonds, give notice of such redemption to Financial. In the event of a redemption in part, the Custodian shall not be required (i) to register the transfer of or exchange Receipts for a period of fifteen days preceding the selection of Receipts for redemption or (ii) to register the transfer of or exchange any Receipt, or portion thereof, selected for redemption. 2. Any Receipt which is to be redeemed in part only shall be surrendered at the corporate trust and agency office of the Custodian, and the Custodian shall execute and deliver to the Holder of such Receipt a new Receipt or Receipts, of any Authorized Denomination as requested by such Holder, in any aggregate principal amount equal to and in exchange for the unrcdeemed portion of the Receipt so surrendered. ARTICLE VII THE CUSTODIAN 1. The Custodian undertakes to perform such duties and only such duties as specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement against the Custodian. The Custodian shall not have by reason of this Agreement any fiduciary relationship in respect of the Holders of the Receipts or in respect of the owners of Bonds with Statements of Insurance affixed, except to file claims under the applicable Policy under the conditions and in accordance with the provisions of Article IV. The Custodian assumes no obligation nor shall it be subject to any liability under this Agreement to Holders of Receipts or to owners of Bonds with Statements of Insurance affixed (including, without limitation, liability with respect to the validity or worth of any Bonds or any Policy), other than it agrees to use its best judgment and good faith in the performance of such duties as are specifically set forth in this Agreement. The Custodian shall not be liable to anv Receipt Holder or to the owner of any Bond with a Statements of Insurance affixed for any act or thing to be done or performed under the terms of this Agreement, or for anv delay in acting or performing of for any nonaction or 11. nonperformance, if the Custodian shall be prevented or forbidden from acting or performing by reason of any present or future law or regulation of the United States of America or any other governmental agency or authority, or by reason of any other circumstance be, and its control. The Custodian may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, Receipt, Bond, Policy, Statements of Insurance, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. The Custodian may consult with counsel of its own choice and shall have full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance on the opinion of such counsel. The Custodian may perform such duties hereunder either directly or by or through agents or attorneys. The Custodian may treat the registered owner of any Receipt as the owner thereof for the purposes of receiving payment in respect of the Bonds to which such Receipt relates and for all other purposes, whether or not any such Receipt shall be overdue, and the Custodian shall not be affected by any notice to the contrary. The Custodian shall be under no obligation to appear in, prosecute or defend any action suit or other proceeding in respect of any Bonds, any Policy or any Receipts which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense and liability be furnished as often as may be required. 3. Except for the authority and authenticity of any signatures of officers of the Custodian appearing on the Receipts, the Custodian makes no representations as to the validity or sufficiency of the Receipts, the validity or worth of the Bonds or the validity or sufficiency of any Policy or any Statements of Insurance. 4. The Custodian, in its individual or any other capacity, may become the owner of pledgee of Receipts with the same rights in would have if it were not the Custodian. 5. The Custodian shall be a bank or trust company organized and doing business under the laws of the United States of America or the State of New York, authorized to act as Custodian, having a combined capital and surplus of at least $25,000,000, subject to supervision or examination by Federal or State authority, and having an office for the acceptance and delivery of Bonds and Receipts or employing an agent for such purpose in the Borough of Manhattan, The City and State of New York. If at any time the Custodian shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in accordance with the provisions of paragraph 6 of this Article VII. 6. The Custodian may resign at any time and Financial shall thereupon appoint a successor Custodian. If an instrument of acceptance by a successor Custodian shall not have been delivered to the Custodian within 30 days after the giving of such notice of resignation, the resigning Custodian may petition any court of competent jurisdiction for the appointment of a successor Custodian. 12. Notice of each resignation shall be given to Financial and shall be given once by publication in the English language In a financial journal of general circulation published on each business day in The City of New York, New York, and such notice shall be mailed to the address of the registered Holder of each Receipt and the owner of each Bond with a Statement of Insurance affixed. Every successor Custodian appointed hereunder shall execute, acknowledge and deliver to Financial and the retiring Custodian an instrument accepting such appointment and thereupon the resignation of the retiring Custodian shall become effective and such successor Custodian shall become vested with all the rights and duties of the retiring Custodian. The retiring Custodian shall, upon payment of its charges, duly assign, transfer and deliver to such successor Custodian the Policies and all records, Bonds, Receipts, Statements of Insurance and moneys held by such retiring Custodian hereunder. No successor Custodian shall accept its appointment unless at the time of such acceptance such successor Custodian shall be eligible under this Article. 7. Any corporation or national banking association into which the Custodian may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Custodian shall be a party, or any corporation succeeding to all or substantially all of the custodian business of the shall be a party, or any corporation succeeding to all or substantially all of the custodian business of the Custodian, shall be the successor of the Custodian hereunder, provided such corporation shall be otherwise eligible under this Article, without the execution or filing of any paper or any further act on the part of the parties hereto. ARTICLE VIII MISCELLANEOUS 1. This Agreement will be governed by the laws of the State of New York. 2. Any notice or other instrument in writing which is authorized or required by this Agreement to be given to Financial shall be sufficiently given if addressed to Financial and received by Financial at its offices at 175 Water Street, 15th Floor, New York, New York 10038, Attention: President, or at such other place as Financial may from time to time designate in writing. 3. Any notice or other instrument in writing which is authorized or required by this Agreement to be given to the Custodian shall be sufficiently given if addressed to the Custodian, and received by the Custodian at its offices at 127 John Street, 20th Floor, New York, New York 10038, Attention: Corporate Trust Division, or at such other place as the Custodian may from time to time designate in writing. 4. This Agreement shall extend to and shall be binding upon the parties hereto and their respective successors and assigns. 13. 5. Financial and the Custodian may enter into one or more amendments, modifications or supplements hereto, without the consent of the Holders of the Receipts or the owners of Bonds with Statements of Insurance affixed, which shall not adversely affect the interests of any Receipt Holder or owner of a Bond with a Statement of Insurance affixed, to cure any ambiguity, to provide for the issuance, at a future date, of Receipt in bearer form if and when United States tax laws so permit, to correct or supplement anv provision contained herein or in any supplement hereto which may be defective or inconsistent with any other provision herein or in any supplement hereto, or to otherwise amend, modify or supplement this Agreement or any supplement hereto. In addition, this Agreement may be amended or modified by Financial and the Custodian to make provisions with respect to a particular issue of Bonds to be deposited hereunder; provided that no such amendment or modification shall affect the Holder of any Receipt theretofore executed and delivered pursuant to this Agreement or the owner of any Bond to which a Statement of Insurance previously has been affixed pursuant to this Agreement. 6. (a) If at any time it shall be determined that the Custodian shall be prevented or forbidden from acting or performing any of its duties under the terms of this Agreement by reason of any present or future law or governmental agency or authority, then this Agreement shall be amended to delete here from those duties that the Custodian is so prevented or forbidden from performing, and if the Custodian is so prevented from performing all or substantially all of its duties hereunder, then this Agreement may be terminated by either of the parties hereto upon 90 days' written notice. (b) Whenever all of the Bonds and Receipts shall have been paid at maturity and all fees required hereunder shall have been paid, then this Agreement shall terminate. IN WITNESS WHEREOF, FINANCIAL GUARANTY INSURANCE COMPANY and SECURITY PACIFIC NATIONAL TRUST COMPANY (NEW YORK) have caused this Custodian Agreement to be executed by their duly authorized officers as of the day and year first above written. FINANCIAL GUARANTY INSURANCE COMPANY By /s/ ------------------------------ SECURITY PACIFIC NATIONAL TRUST COMPANY (NEW YORK) By /s/ ------------------------------ September 1, 1987 14. APPENDIX I RECEIPTS WILL BE IN SUBSTANTIALLY THE FOLLOWING FORM REGISTERED REGISTERED NUMBER TCR $ Dollars TRANSFERABLE CUSTODIAL RECEIPT FOR INSURED BONDS INSURED BY FINANCIAL GUARANTY INSURANCE COMPANY SECURITY PACIFIC NATIONAL TRUST COMPANY (NEW YORK), AS CUSTODIAN (Not an Interest in or Debt Obligation of the Custodian) This Receipt evidences the ownership of the following Bonds (the "Bonds"): Date Interest Interest Interest of Payment Record Date Issue Date(s) Date(s) Uninsured Insured Trading CUSIP No. CUSIP No. Denominations Maturity Registered Owner Issue Description: Principal Amount The Bonds and the insurance policy hereinafter mentioned (the "Policy") are being held in a custody account by, or for the account of, Security Pacific National Trust Company (New York), as Custodian, pursuant to the terms of a custody agreement dated as of September 1, 1987, the ("Custody Agreement"), pursuant to which this and other Receipts are registered and delivered by the Custodian. The terms and conditions of the Custody Agreement are hereby incorporated in this Receipt as if fully set forth herein. The holder hereof hereby assents to all of the terms and provisions of the Custody Agreement, a copy of which is available for inspection at the corporate trust and agency office of the Custodian. The Bond or Bonds to which this Receipt and other Receipts relate, the Policy and interest and principal payments received by the Custodian pending their disbursement will be held by the Custodian in custody for the benefit of holders of Receipts at Security Pacific National Trust Company (New York), in New York, New York. The Custodian assumes full responsibility and risk for the safekeeping of the custody account. Reference is hereby made to the further provisions of this Receipt set forth on the reverse side hereof, and such further provisions shall for all purposes have the same effect as if set forth on the front side hereof. 15. IN WITNESS WHEREOF, the Custodian has caused this Receipt to be executed in Its name by the facsimile signature of an authorized officer and attested by the manual signature of an authorized signer thereof, all as of the date of attestation. Date Issued: ATTEST: Security Pacific National Trust Company (New York) By: [Facsimile Signature] SEAL - ---------------------------- Authorized Signatory 16. (Reverse of Receipt) The Bond or Bonds to which this Receipt relates are held either directly by the Custodian or for the account of the Custodian with the Depository Trust Company or other securities depository registered under Section 17(a) of the Securities Exchange Act of 1934, as amended (an Authorized Depository"). Such Bonds, if held directiy by the Custodian and if registrable as to principal and interest or as to principal alone, are registered on the books of the registrar for such Bonds in the name of the Custodian. If such bonds are originally issued in book-entry form and are held by an Authorized Depository ("Book-Entry Bonds"), such Bonds are registered on the books of such Authorized Depository in the name of the Custodian. If such Bond or Bonds are held directly by the Custodian and are issuable solely as bearer Bonds, the Custodian shall present the appurtenant coupons for payment on the payment date thereof. If such Bonds are held directly by the Custodian the Custodian shall present each Bond for payment on the maturity date thereof or on such prior date as such Bond shall have been called for earlier redemption. The Custodian shall remit all payments of principal of and interest on such Bonds by mail to the registered owner of this Receipt as received; provided, that with respect to such principal payments, the holder of this receipt shall first present and surrender this Receipt, at the corporate trust and agency office of the Custodian in New York, New York. If a portion of the Bond or Bonds to which this Receipt relates shall be called for redemption, a new Receipt stating a principal amount equal to the unredeemed portion of the Bond or Bonds to which this Receipt relates will be issued to the registered owner hereof upon the surrender of this Receipt to the Custodian. If less than all of the Bonds of a particular issue held by the Custodian are to be redeemed, the Custodian shall select by lot the Receipt or Receipts to which said redeemed Bonds relate. All payments of principal and interest on Bonds shall be made to the registered owner of this Receipt by the Custodian in New York Clearing House funds. The Custodian is not entitled to make any deductions from such payments to compensate itself for its services or expenses incurred in connection therewith. The Custodian has no responsibility for the payments of principal and interest on the Bonds other than to remit such payments not later than the business day following the date any such payment is received by the Custodian to the registered owner of this Receipt and to file claims under the Policy in the event of nonpayment of such amounts by the issuer of the Bonds, as hereinafter described. If the issuer of the Bond or Bonds covered by this Receipt (the "Issuer) defaults in the payment of the principal or interest on said Bond or Bonds when due, the registered owner hereof, as the real party in interest shall have the right to proceed directly against the Issuer unless such payment shall be made pursuant to the Policy. Upon receipt by the Custodian of any notice of default or of any meeting of Bondholders, or of any solicitation by the Issuer of the Bondholders, the Custodian shall mail to the registered owner of this Receipt a notice containing the information received by the Custodian. Upon receipt by the Custodian of instructions of the registered owner of this Receipt pertaining to any said notice, the Custodian shall endeavor to act in accordance with said instructions. The payments of principal and interest on the Bond or Bonds covered by this Receipt are insured under the Policy by FINANCIAL GUARANTY INSURANCE COMPANY ("Financial Guaranty"), as more fully described in the Statement of Insurance printed hereon. 17. The registered owner agrees, in consideration of the issuance of the Policy, that in the event that the Issuer does not make payments of principal and interest when due on the Bond or Bonds covered by this Receipt, the Custodian shall, as attorney-in-fact of said owner, make a claim for payment under the Policy with respect to the Bond or Bonds covered by this Receipt. In order to obtain payments under the Policy with respect to defaults by the Issuer in the payment of interest on the Bonds, the Custodian shall execute and deliver an appropriate instrument of assignment to Financial Guaranty of each installment of interest on the Bonds to be paid by Financial Guaranty. In order to obtain payments under the Policy with respect to defaults by the Issuer in the payment of principal of the Bonds, the Custodian shall execute and deliver an appropriate instrument of assignment to Financial Guaranty of each Bond, the principal amount of which is to be paid by Financial Guaranty. Upon any such payment by Financial Guaranty, Financial Guaranty shall become the owner of the Bond or Bonds, appurtenant coupon(s) or right to payment of principal or interest on such Bond or Bonds so paid and the registered owner hereof shall have no further rights with respect to any Bond or Bonds or portion thereof so paid. Upon any default by Financial Guaranty in the payment of any amounts due under the Policy, the registered owner of this Receipt shall have the right to proceed directly and individually against Financial Guaranty or the Issuer in whatever manner said registered owner deems appropriate and is not required to act in concert with other holders of Receipts or of Bonds with affixed Statements of Insurance or with the Custodian. The Custodian is not authorized to assert the rights and privileges of holders of Receipts or of Bonds with affixed Statements of Insurance. This receipt may be exchanged, at the option of the registered owner hereof, for one or more Receipts evidencing ownership of an equal aggregate principal amount of Bonds covered by this Receipt in any Authorized Denomination at the principal office of the Custodian in New York, New York, upon payment of any tax or other governmental charge levied for such exchange; provided, however, that without the consent of the Custodian no Receipt will be issued in a denomination less than $5,000. Ownership of this Receipt is transferable on the transfer books of the Custodian maintained for registration of transfer, by the registered owner hereof or his duly authorized attorney, upon surrender of this Receipt together with the Assignment contained hereon properly endorsed; provided, however, in the case of a Book-Entry Bond or Bonds that the transferee must be an Authorized Depository. Upon surrender for registration of transfer of this Receipt at the corporate trust and agency office of the Custodian in New York, New York, the Custodian shall execute and deliver, in the name of the transferee or transferees, one or more Receipts, as the case may be, evidencing ownership of a principal amount of Bonds of any Authorized Denomination or Denominations equal in aggregate principal amount to the principal amount of Bonds the ownership of which is evidenced hereby. No service charge to the registered owner hereof shall be made by the Custodian for any registration of transfer of this Receipt, but the Custodian may require payment of a sum sufficient to cover any tax or governmental Charge that may be imposed in connection with any such registration of transfer. 18. In the event that this Receipt is mutilated or lost, and there is delivered to the Custodian such security or indemnity as may be required by the Custodian to save it harmless, then upon surrender of such mutilated Receipt to the Custodian for Cancellation, or receipt by the Custodian of evidence satisfactory to it that such Receipt has been destroyed, lost or stolen (in the absence of notice to the Custodian that such Receipt has been acquired by a bona fide purchaser), the Custodian shall execute and deliver a new Receipt of like tenor and principal amount to the Receipt which has been mutilated, destroyed, lost or stolen. Upon the issuance of a new Receipt in accordance with this paragraph, the Custodian may require the payment of a sum sufficient to cover anv tax or governmental charge that may be imposed in connection with the issuance of a replacement Receipt. Except in the case of Receipts issued with respect to Book-Entry Bonds, the registered owner hereof, at his option, is entitled to obtain delivery of the Bond or Bonds covered by this Receipt. Such delivery is not required for receipt by the registered owner hereof of payments of principal and interest on the Bonds. However, upon request to the Custodian, the Custodian shall obtain said Bond or Bonds for the registered owner hereof, in any form issued and which said registered owner shall request, which shall be delivered to the registered owner hereof upon surrender at the corporate trust and agency office of the Custodian of this Receipt, on behalf of the registered owner by a commercial bank or trust company or other financial institution, or by a member of the New York Stock Exchange, Inc. (an "Authorized Intermediary"), together with the Acknowledgment of Delivery of Bonds contained hereon properly endorsed, accompanied by a written order of the registered owner hereof directing the Custodian to cause the Bond or Bonds to be delivered to an Authorized Intermediary on behalf of such registered owner, The registered owner shall be required to pay the Custodian a fee equal to the sum of (a) $195 plus (b) $35 for each Bond certificate delivered in excess of one, or such lesser amount as shall be specified by the Custodian, for such delivery, in addition to any tax or governmental charge levied in connection therewith. In addition, if the registered owner shall have obtained such delivery, the Custodian shall no longer obtain payments of principal or interest on the Bonds from the Issuer on behalf of the registered owner other than payments which were accrued and unpaid to the registered owner at the time of delivery of said Bonds and are subsequently received by the Custodian. The Custodian shall not be required to obtain the delivery of any Bond or Bonds covered by this Receipt between the record date for such Bond or Bonds and the related interest payment date or during any period in which a registrar of such Bond or Bonds is not obligated to register the transfer of or exchange of such Bond or Bonds. Each Bond delivered to the registered owner hereof in accordance with the preceding paragraph shall have affixed to it by the Custodian prior to such delivery a Statement of Insurance as evidence that such Bond is insured under the Policy and setting forth the bond number and designation of such Bond and naming such registered owner as the insurance beneficiary. Said owner is hereby notified that as a condition to the maintenance of the coverage provided by the Policy with respect to said Bond or Bonds, said owner shall be required to surrender such Bond or Bonds to an Authorized Intermediary for delivery to the Custodian in order to record any subsequent transfer of said Bond or Bonds on the books maintained by the Custodian for Bonds which are not held by the Custodian, notwithstanding that said Bond or Bonds may at the time be in bearer form. In addition, in the event that any such Bond or Bonds is at the time held in registered form (whether registered as to principal and interest or as to principal alone), 19. other than registered to bearer, in order to maintain the coverage provided by the Policy with respect to such Bond, it shall be necessary for any exchange or transfer of such Bond to deliver said Bond to an Authorized Intermediary for delivery to the Custodian with the Statement of Insurance affixed, and the Custodian shall remove and cancel the Statement of insurance affixed to said Bond and shall deliver such Bond to the registrar therefor and shall obtain the new Bond or Bonds requested by the owner registered in accordance with such owner's instructions. Prior to delivering said Bond or Bonds to an Authorized Intermediary on behalf of the owner or owners thereof, the Custodian shall affix to each Bond a new Statement of Insurance setting forth the bond number and designation of the Bond and the name of the insurance beneficiary, which, in the case of a transfer, shall be the new owner of said Bond. Any owner causing delivery of a Bond to the Custodian in connection with any exchange or transfer thereof shall be required to pay the Custodian a fee of $35 for each Bond certificate redelivered by the Custodian, or such lesser amount as the Custodian shall specify, in addition to anv tax or governmental charge levied in connection therewith and any charge levied by the Issuer or the registrar of said Bond. The owner of any Bond to which a Statement of Insurance is attached may provide for the redeposit of said Bond with the Custodian through an Authorized Intermediary in exchange for a Receipt issued in the name of said owner fir said Bond. Such Receipt will be issued by the Custodian upon surrender at the corporate trust and agency office of the Custodian of said Bond, together with an assignment of said Bond to the Custodian in form satisfactory to the Custodian executed by said owner with the signature thereof guaranteed by an Authorized Intermediary. Said Bond and assignment shall be accompanied by a written order of said owner directing the Custodian to cause the Receipt to be delivered to an Authorized Intermediary. The owner of said Bond shall be required to pay any tax or governmental charge levied in connection with the transfer of said Bond or issuance of said Receipt therefor and any other expenses connected therewith. The Custodian may treat the person in whose name this Receipt is registered as the owner hereof for the purpose of receiving payments of principal and interest on the Bond or Bonds covered hereby and shall treat the party in whose name this Receipt is registered as the party entitled to receive payments of claims under the Policy with respect to the Bond or Bonds covered hereby. The Custodian shall treat the party named as the insurance beneficiary in any Statement of Insurance affixed to a Bond not held by the Custodian as the party entitled to payments of claims under the Policy with respect to such Bond. The Custodian assumes no obligation nor shall it be subject to any liability to the registered owner of this Receipt other than it agrees to use its best judgment and good faith in the performance of the duties specifically set forth herein. The Custodian shall at all times be a bank or trust company organized and doing business under the laws of the United States of America or the State of New York, authorized to act as Custodian, having a combined capital and surplus of at least $25,000,000, subject to examination by Federal or State authority and having an office or an agent for acceptance and delivery of Bonds and Receipts in the Borough of Manhattan, City and State of New York. 20. The Custodian may resign at any time and shall resign if it shall cease to meet the requirements of the preceding paragraph and Financial Guaranty shall thereupon appoint a successor Custodian. Notice of anv such resignation and the appointment of a successor Custodian shall be mailed to the address of the registered owner of this Receipt set forth on the books of the Custodian. This Receipt shall not be valid or become obligatory for any purpose unless and until duly executed by the Custodian. The terms and provisions of this Receipt will be governed by the laws of the State of New York. 21. STATEMENT OF INSURANCE Financial Guaranty Insurance Company ("Financial Guaranty") has issued a policy containing the following provisions with respect to the Bonds designated in this Receipt, such policy being on file at the corporate trust and agency office of Custodian: Financial Guaranty hereby unconditionally and irrevocably agrees to pay for disbursement to the Custodian that portion of the principal of and interest on the Bonds which is then due for payment and which the issuer of the Bonds (the "Issuer") shall have failed to provide to the paying agent therefor. Due for payment means, with respect to the principal, the stated maturity date thereof, or such earlier date on which the same shall have been called for mandatory sinking fund redemption or mandatory redemption as a result of a determination of taxability of the interest on the Bonds in accordance with the bond documents, but not any earlier date on which the payment of principal on the Bonds is due by reason of acceleration or otherwise, and with respect to interest, the stated date for payment of such interest. Upon receipt of telephonic or telegraphic notice subsequently confirmed in writing, or written notice by registered or certified mail, from the Custodian to Financial Guaranty that the required payment of principal or interest has not been made by the Issuer to the Custodian, Financial Guarantv on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with Citibank, N.A. or its successor, as its agent (the "Fiscal Agent") sufficient to make the portion of such payment not paid by the Issuer. Upon presentation to the Fiscal Agent of evidence satisfactory to it of the Custodian's right to receive such payment and any appropriate instruments of assignment required to vest all of such Custodian's right and the rights of the registered owner of the Transferable custodial Receipt for Insured Bonds to such payment in Financial Guaranty, the Fiscal Agent will disburse such amount to the Custodian. The policy does not provide for any payment to the Custodian on behalf of a registered owner of the Transferable Custodial Receipt for Insured Bonds is such owner is the Issuer. The policy is noncancelable for any reason. Financial Guaranty Insurance Company 22. ASSIGNMENT FOR VALUE RECEIVED, the undersigned does hereby sell, assign and transfer unto ................................................................................ (Name, Address and Taxpayer Identification Number of Assignee) all its right, title and interest in and to the within Receipt and hereby irrevocably constitutes and appoints attorney to transfer the within Receipt on the books kept for the registration thereof, with full power of substitution in the premises. Dated: .................... Signature(s) Guaranteed: Notice: The signature on this assignment must correspond with the name as written upon the face of this Receipt, in every particular, without alteration or enlargement or any change whatsoever. ------------------------ THE FOLLOWING ACKNOWLEDGMENT IS REQUIRED FOR ALL BONDS OTHER THAN BONDS ORIGINALLY ISSUED IN BOOK-ENTRY FORM ONLY. ACKNOWLEDGMENT OF DELIVERY OF BONDS The undersigned registered owner of the within Receipt acknowledges deliverv of all Bonds covered by this Receipt. Dated: .................... Signature(s) Guaranteed: Notice: The signature on this assignment must correspond with the name as written upon the face of this Receipt, in every particular, without alteration or enlargement or any change whatsoever. 23. APPENDIX II THE STATEMENT OF INSURANCE DELIVERED WITH INSURED BONDS WITHDRAWN FROM CUSTODY IF PURSUANT TO SECTION 7 OF ARTICLE 11 OF THIS AGREEMENT WILL BE IN SUBSTANTIALLY THE FOLLOWING FORM: [To be Affixed to Bonds Not Held by the Custodian] STATEMENT OF INSURANCE FINANCIAL GUARANTY INSURANCE COMPANY ("Financial Guaranty") has issued a policy containing the following provisions with respect to the Bond to which this Statement is attached, such policy being on file at the corporate trust and agency office of Security Pacific National Trust Company (New York), as Custodian: Financial Guaranty hereby unconditionally and irrevocably agrees to pay for disbursement to the Custodian that portion of the principal of and interest on the Bond which is then due for payment and which the issuer of the Bond (the "Issuer") shall have failed to provide to the paying agent for the Bond. Due for payment means, with respect to the principal, the stated maturity date thereof, or such earlier date on which the same shall have been called for mandatory sinking fund redemption or mandatory redemption as a result of a determination of taxability of the interest on the Bonds in accordance with the bond documents, but not any earlier date on which the payment of principal on the Bonds is due by reason of acceleration or otherwise, and with respect to interest, the stated date for payment of such interest. Upon receipt of telephonic or telegraphic notice, subsequently confirmed in writing, or written notice by registered or certified mail, from the Custodian to Financial Guaranty that the required payment of principal or interest has not been made by the Issuer to the Custodian, Financial Guaranty on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in account with Citibank, N.A., or its successor, as its agent (the "Fiscal Agent"), sufficient to make the portion of such payment not paid by the Issuer. Upon presentation to the Fiscal Agent of evidence satisfactory to it of the Custodian's right to receive such payment and any appropriate instruments of assignment required to vest all of such Custodian's right to receive such payment and any appropriate instruments of assignment required to vest all of such Custodian's rights and the rights of the registered owner of the Custodial Receipt for Insured Bonds to such payment in Financial Guaranty, the Fiscal Agent will disburse such amount to the Custodian. The policy is noncancelable for any reason; provided, however, that in order to maintain the policy in effect with respect to the Bond attached hereto the following procedures must be observed: 7. If the Bond attached hereto is in bearer form or registered as to bearer, the owner must, prior to the transfer of the Bond to a new owner, tender the Bond with this Statement of Insurance attached through a commercial bank or trust company or other financial institution, or a member of the New York Stock Exchange, Inc. (an "Authorized Intermediary") to the Custodian who will remove this Statement of 24. Insurance and affix a new Statement of Insurance with the name of the new owner listed as the Insurance beneficiary. 8. If the Bond attached hereto is in registered form (Whether registers d as to principal and interest or as to principal alone), the owner must, prior to the transfer of the Bond to a new owner, or the exchange of the Bond for Bond or Bonds of other authorized denominations, deliver the Bond with this Statement of Insurance, deliver the Bond to the registrar therefore and obtain the new Bond or Bonds requested by the owner registered in accordance with such owner's instructions. The Custodian shall affix to each Bond so obtained a new Statement of Insurance setting forth the bond number and designation and name of the insurance beneficiary thereof and shall provide for the delivery of said Bond to the owner thereof and shall provide for the delivery of said Bond to the owner thereof through the Authorized Intermediary designated by the owner. The Custodian shall charge a fee for the services performed by it pursuant to the preceding two paragraphs which shall by $35 for each Bond certificate redelivered by the Custodian, or such lesser amount as the Custodian shall specify. In addition, the owner of the Bond attached hereto shall be required to pay any tax or governmental charge levied in connection therewith and any charge levied by the issuer or registrar of the Bond attached hereto. The owner of the Bond to which this Statement of Insurance is attached may provide for the redeposit through an Authorized Intermediary of this Bond in custody with the Custodian, who will issue a Receipt to the Authorized Intermediary designated by the owner of the Bond for delivery to said owner. Thereafter, the Custodian will collect all payments of principal, interest and premium, if any made on the Bond and remit the same to the registered owner of the Receipt within one business day following receipt of any such payment by the Custodian and shall file claims on behalf of the owner for payment under the policy with respect to the Bond upon any nonpayment by the Issuer. Ownership of the Receipt so issued is transferable on the books of the Custodian maintained for registration of transfer and no service charge shall be made by the Custodian for any such registration of transfer, the owner being obligated solely to pay a sum sufficient to cover any tax or governmental charge imposed in connection therewith. REMOVAL OF THIS STATEMENT OF INSURANCE OR EVIDENCE OF TAMPERING WITH THE NAME OF THE INSURANCE BENEFICIARY, THE BOND DESIGNATION OR THE BOND NUMBER MAY RESULT IN THE LOSS OF THE COVERAGE PROVIDED WITH RESPECT TO THE BOND ATTACHED HERETO. FINANCIAL GUARANTY INSURANCE COMPANY Bond Designation ..................... ....................................... ................. (Name of Insurance Beneficiary) (Bond Number) 25. EX-99.9(A) 10 INSURED PORTFOLIO AGENCY AGREEMENT EXHIBIT 99.9(a) TRANSFER AGENCY, DIVIDEND DISBURSING AGENCY AND SHAREHOLDER SERVICING AGENCY THIS AGREEMENT made as of the 3rd day of August, 1987 by and between Merrill Lynch Municipal Bond Fund, Inc, Insured Portfolio (the "Fund") and Merrill Lynch Financial Data Service, Inc. ("MLFDS"), a New Jersey corporation. WITNESSETH: WHEREAS, the fund wishes to appoint MLFDS to be the Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent upon and subject to, the terms and provisions of this Agreement, and MLFDS is desirous of accepting such appointment upon, and subject to, ouch terms and provisions: Now THEREFORE, in consideration of mutual covenants contained in this Agreement, the Fund and MLFDS agree as follows: 1. Appointment of MLFDS as Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent. (a) The Fund hereby appoints MLFDS to act an Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent for the Fund upon, and subject to, the terms and provisions of this Agreement. (b) MLFDS hereby accepts the appointment as Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent for the Fund, and agrees to act as such upon, and subject to, the terms and provisions of this Agreement. 2. Definitions. (a) In this Agreements (b) The term "Act" means the Investment Company Act of 1940 an amended from time to time and any rule or regulation thereunder; (11) The term "Account" means any account of a Shareholder, or, it the shares are hold in an account in the name of MLPF&S for benefit of an identified customer, such account, including a Plan Account, any account under a plan (by whatever name referred to in the Prospectus) pursuant to the self-Employed Individuals Retirement Act of 1962 ("Keogh Act plan") and any plan (by whatever name referred to in the Prospectus) in conjunction with Section 401 of the Internal Revenue Code ("Corporation Master Plan"); (III) The term "application" means an application =ads by a Shareholder or prospective Shareholder respecting the opening of the Account; (IV) The term "MLFD" means Merrill Lynch Funds Distributor, Inc., a Delaware corporation; (V) The term "MLPF&S" means Merrill Lynch, Pierce, Penner & Smith Incorporated, a Delaware corporation; (VI) The term "Officer's Instruction" means an instruction in writing given on behalf of the Fund to MLFDS, and signed on behalf of the Fund by the President, and Vice President, the Secretary or the Treasurer of the Fund; (VII) The term "Prospectus" means the Prospectus and the Statement of Additional information of the Fund as from time to time in effect; (Vill) The term "Shares" means shares of stock or beneficial interest, an the case may be, of the Fund, irrespective of class or series; (IX) The term "Shareholder" means the holder of record of Shares:, (X) The term "Plan Account" means an account opened by a Shareholder or prospective Shareholdor in respect to an open account, monthly payment or withdrawal plan (in each case by whatever name referred to in the Prospectus), and may also include an account relating to any other Plan it and when provision in made for such plan in the Prospectus. 3. Duties of MLFDS as Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent. (a) Subject to the succeeding provisions of the Agreement, MLFDS hereby agrees to perform the following functions as Transfer Agent, Dividend Disbursing Agent, and Shareholder Servicing Agent for the Fund; (I) Issuing, transferring and redeeming Shares; (II) Opening, maintaining, servicing and closing Accounts; 2 (III) Acting as agent for the Fund Shareholders and/or customers of MLPF&S in connection with Plan Accounts, upon the terms and subject to the conditions contained in the Prospectus and application relating to the specific Plan Account; (IV) Acting as agent of the Fund an/or MLPF&S, maintaining such records as may permit the imposition of such contingent deferred sales charges as may be described in the Prospectus, including such reports as may be reasonably requested by the Fund with respect to such Shares as may be subject to a contingent deferred sale charge; (V) Upon the redemption of Shares subject to such a contingent deferred sales charge, calculating and deducting from, the redemption proceeds thereof the amount of such charge in the manner set forth in the Prospectus. MLFDS shall pay, on behalf of MLFD, to MLPF&S such deducted contingent deferred sales charges imposed upon all Shares maintained in the name of MLPF&S, or maintained in the name of an account identified as a customer account of MLPFAS. Sales charges imposed upon any other Shares shall be paid by MLFDS to MLFD. (VI) Exchanging the investment of an investor into, or from the shares of other open-end investment companies or other series portfolios of the Fund, if any, if and to the extent permitted by the Prospectus at the direction of such investor. (VII) Processing redemptions (VIII) Examining and approving legal transfers; (IX) Replacing lost, stolen or destroyed certificates representing shares, in accordance with, and subject to, procedures and conditions adopted by the Fund; (X) Furnishing such confirmations of transactions relating to their Shares as required by applicable law; (XI) Actinq as agent for the Fund and/or MLPF&S, furnishing such appropriate periodic statements relating to Accounts, together with additional enclosures, including appropriate income tax information and income tax forms duly completed, an required by applicable law. (XII) Acting as agent for the and/or MLPF&S, mailing annual, semi-annual and quarterly reports prepared by or on behalf of the Fund, and mailing now Prospectuses upon their issue to Shareholders as required by applicable law; (XIII) Furnishing such periodic statements of transactions affected by MLFDS, reconciliations, balances and summaries as the Fund may reasonably request: 3 (XIV) Maintaining such books and records relating to transactions effected by MLFDS as are required by the Act, or by any other applicable provision of law, rule or regulation, to be maintained by the Fund or its transfer agent with respect to such transactions, and preserving, or causing to be preserved any such books and records for such periods as may be required by any such law, rule or regulation and as may be agreed upon from time to time between MLFDS and the Fund. In addition, MLFDS agrees to maintain and preserve master files and historical computer tapes on a daily basis in multiple separate locations a sufficient distance apart to insure preservation of at least one copy of such information (XV) Withholding taxes an non-resident alien Accounts, preparing and filing U.S. Treasury Department Form 1099 and other appropriate forms as required by applicable law with respect to dividends and distributions; and (XVI) Reinvesting dividends for full and tractional shares,and disbursing cash dividends* as applicable. (b) MLFDS agrees to act as proxy agent in connection with the holding of annual, if any, and special meeting of Shareholders, mailing such notice&, proxies and proxy statements in connection with the holding of such meetings an may be required by applicable law, receiving and tabulating votes cast by proxy communicating to the Fund the results of such tabulation accompanied by appropriate certifications, and preparing and furnishing to the Fund certified lists of Shareholders as of such date, in such form and containing such information as may be required by the Fund. (C) MLFDS agrees to deal with, and answer in a timely manner, all correspondence and inquires relating to the functions of MLFDS under this Agreement with respect to Accounts; (d) MLFDS agrees to furnish to the Fund such information and at such intervals as in necessary for the Fund to comply with the registration and/or the reporting requirements (including applicable escheat laws) of the Securities and Exchange Commission, Blue Sky authorities or other governmental authorities. 4 (a) MLFDS agrees to provide to the Fund such information as may reasonably be required to enable the Fund to reconcile the number of outstanding Shares between MLFDS's records and the account books ot the Fund. (f)Notwithstanding an anythingin the foregoing provisions of this paragraph, MLFDs agrees to perform its functions thereunder subject to such modification (whether in respect of particular cases or in any particular class of cases) as may from time to time be contained in an Officer's Instruction. 4. Compensation. The charges for services described in this Agreement, including "out-of-pocket" expenses, will be set forth in the Schedule of Foes attached hereto. 5. Right of Inspection. MLFDS agrees that it will in a timely manner make available to, and permit, any officer, accountant, attorney or authorized agent of the Fund to examing and make transcripts and copies (including photocopies and computer or other electronical information storage media and print-cuts) of any and all of it's books and records which relate to any transaction or function performed by MLFDS or pursuant to this Agreement. 6. Confidential Relationship. MLFDS agrees that it will, on behalf of itself and its officers and employees, treat all transactions contemplated by this Agreement, and all information germane thereto, as confidential and not to be disclosed to any person (other than the Shareholder concerned, or the Fund, or as may be disclosed in the examination of any books or records by any person lawfully entitled to examine the same) except as may be authorized by the Fund by way of an officer's Instruction. 7. Indemnification. The Fund shall indemnify and hold MLFDS harmless from any loss, costs, damage and reasonable expenses, including reasonable attorney's fees (provided that such attorney is appointed with the Fund's consent, which consent shall not be unreasonably withhold), incurred by it resulting from any claim, demand, action, or suit in connection with the performance of its duties hereunder, 5 provided that this indemnification shall not apply to actions or omissions of MUDS in cases of willful misconduct, failure to act In good faith or negligence by MLFDS, it's officers, employees or agents, and further provided, that prior to confessing any claim against it which may be subject to this indemnification, MUDS shall give the Fund reasonable opportunity to defend against said claim in its own name or in the name of MLFDS. An action taken by MLFDS upon any officer's Instruction reasonably believed by it to have been properly executed shall not constitute willful misconduct, failure to act in good faith or negligence under this Agreement. 8. Regarding MLFDS. (a) MLFDS hereby agrees to hire, purchase, develop and maintain such dedicated personnel, facilities, equipment, software, resources and capabilities as may be reasonably determined by the Fund to be necessary for the satisfactory performance of the duties and responsibilities of MLFDS. MLFDS warrants and represents that its officers and supervisory personnel charged with carrying out its functions as Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent for the Fund possess the special skill and technical knowledge appropriate for that purpose. MLFDS shall at all time exercise due care and diligence in the performance of its functions as Transfer Agent, Dividend Disbursing Agent, and Shareholder Servicing Agent for the Fund. MLFDS agrees that, in determining whether it has exercised due care and diligence, its conduct shall be measured by the standard applicable to persons possessing such special skill and technical knowledge. (b) MLFDS warrants and represents that is duly authorized and permitted to act an Transfer Agent, Dividend Disbursing Agent, and Shareholder Servicing Agent under all applicable laws and that it will immediately notify the Fund of any revocation of such authority or permission or of the commencement of any proceeding or other action which may lead to such revocation. 9. Termination. (a) This Agreement shall become effective as of the date first above written and shall thereafter continue from year to year. This Agreement may be terminated by the Fund or MLFDS (without penalty to the Fund or MLFDS) provided that the terminating party gives the other party written notice of such termination at least sixty (60) days in advance, except that the Fund may terminate this Agreement immediately upon written notice to MLFDS if the authority or permission of MLFDS to act as Transfer Agent, Dividend Disbursing Agent, and Shareholder Servicing Agent has been revoked or if any proceeding or other action which the Fund reasonably believes will lead to such revocation has been commenced. 6 (b) upon termination of this Agreement, MLFDS shall deliver all unissued and cancelled stock certificates representing Shares remaining in its possession, and all Shareholder records, books, stock ledgers, instruments and other documents (including computerized or other electronically stored information) made or accumulated in the performance of its duties as Transfer Agent, Disbursing Agent, and Shareholder Servicing Agent for the Fund along with a certified locator document clearly indicating the complete contents therein, to such successor as may be specified in a notice of termination or Officer's Instruction; and the Fund assumes all responsibility for failure thereafter to produce any paper, record or documents so delivered and identified in the locator document, if and when required to be produced. 10. Amendment. Except to the extent that the performance by MLFDS or its functions under this Agreement may from time to time be modified by an officer's Instruction, this Agreement may be amended or modified only by further written Agreement between the parties. 11. Governing Law. This agreement shall be governed by the laws of the State of Now Jersey. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers and their respective corporate seals hereunto duly affixed and attested, as of the day and year above written. MERRILL LYNCH MUNICIPAL BOND FUND, INC. INSURED PROTFOLIO /s/ Gerald Richard Attest: /s/ Mark B. Goldfus Title: Treasurer Title: Secretary MERRILL LYNCH FINANCIAL DATA SERVICE, INC. BY:/s/ Robert C. Doan Title: President (Attest)/s/ Patrick M. Cassidy Title: Manager/MLFDS 7 ADDENDUM A In consideration of the performances of service by Merrill Lynch Financial Data Service, Inc., the Merrill Lynch Municipal Bond Fund, Inc. Insured Portfolio Severally agrees to pay Merrill Lynch Financial Data Service Compensation in the amount of $7.50 annually per shareholder account for which Merrill Lynch Financial Data service, Inc. is providing the services, and to reimburse Merrill Lynch Financial Data Service, Inc. for postage, out-of-pocket expenses, and the reasonable cost of supplies used by Merrill Lynch Financial Data Service in the performance of these services. Those services will be charged to the Merrill Lynch Muni insured Fund an a per annum basis and payment for foes and expenses will be remitted to Merrill Lynch Financial Data service on a monthly basis. By: /s/ Gerald Richard ------------------------------- Title: Treasurer ---------------------------- Merrill Lynch Municipal Bond Fund, Inc. Insured Portfolio Attest: /s/ Mark B. Goldfus ---------------------------- By: /s/ Robert C. Doan ------------------------------------------ Title: President ------------------------------------------ Merrill Lynch Financial Data service, Inc. Attest: /s/ Patrick M. Cassidy ------------------------------------------ Date: March 10, 1988 8 EX-99.9(B) 11 HIGH YIELD PORTFOLIO AGENCY AGREEMENT EXHIBIT 99.9(b) TRANSFER AGENCY, DIVIDEND DISBURSING AGENCY AND SHAREHOLDER SERVICING AGENCY AGREEMENT THIS AGREEMENT made as of the 3rd day of August, 1987 by and between Merrill Lynch Municipal Bond Fund, Inc. High Yield, Insured Portfolio (the "Fund") and Merrill Lynch Financial Data Service, Inc. ("MLFDS"), a New Jersey corporation. WHEREAS, the fund wishes to appoint MLFDS to be the Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent upon and subject to, the terms and provisions of this Agreement, and MLFDS is desirous of accepting such appointment upon, and subject to, ouch terms and provisions: Now THEREFORE, in consideration of mutual covenants contained in this Agreement, the Fund and MLFDS agree as follows: 1. Appointment of MLFDS as Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent. (a) The Fund hereby appoints MLFDS to act an Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent for the Fund upon, and subject to, the terms and provisions of this Agreement. (b) MLFDS hereby accepts the appointment as Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent for the Fund, and agrees to act as such upon, and subject to, the terms and provisions of this Agreement. 2. Definitions. (a) In this Agreements (b) The term "Act" means the Investment Company Act of 1940 an amended from time to time and any rule or regulation thereunder; (11) The term "Account" means any account of a Shareholder, or, it the shares are hold in an account in the name of MLPF&S for benefit of an identified customer, such account, including a Plan Account, any account under a plan (by whatever name referred to in the Prospectus) pursuant to the self-Employed Individuals Retirement Act of 1962 ("Keogh Act plan") and any plan (by whatever name referred to in the Prospectus) in conjunction with Section 401 of the Internal Revenue Code ("Corporation Master Plan"); The term "application" means an application =ads by a Shareholder or prospective Shareholder respecting the opening of the Account; (IV) The term "MLFD" means Merrill Lynch Funds Distributor, Inc., a Delaware corporation; (V) The term "MLPF&S" means Merrill Lynch, Pierce, Penner & Smith Incorporated, a Delaware corporation; (VI) The term "Officer's Instruction" means an instruction in writing given on behalf of the Fund to MLFDS, and signed on behalf of the Fund by the President, and Vice President, the Secretary or the Treasurer of the Fund; (VII) The term "Prospectus" means the Prospectus and the Statement of Additional information of the Fund as from time to time in effect; (Vill) The term "Shares" means shares of stock or beneficial interest, an the case may be, of the Fund, irrespective of class or series; (IX) The term "Shareholder" means the holder of record of Shares:, (X) The term "Plan Account" means an account opened by a Shareholder or prospective Shareholdor in respect to an open account, monthly payment or withdrawal plan (in each case by whatever name referred to in the Prospectus), and may also include an account relating to any other Plan it and when provision in made for such plan in the Prospectus. 3. Duties of MLFDS as Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent. (a) Subject to the succeeding provisions of the Agreement, MLFDS hereby agrees to perform the following functions as Transfer Agent, Dividend Disbursing Agent, and Shareholder Servicing Agent for the Fund; (I) Issuing, transferring and redeeming Shares; (II) Opening, maintaining, servicing and closing Accounts; 2 (III) Acting as agent for the Fund Shareholders and/or customers of MLPF&S in connection with Plan Accounts, upon the terms and subject to the conditions contained in the Prospectus and application relating to the specific Plan Account; (IV) Acting as agent of the Fund an/or MLPF&S, maintaining such records as may permit the imposition of such contingent deferred sales charges as may be described in the Prospectus, including such reports as may be reasonably requested by the Fund with respect to such Shares as may be subject to a contingent deferred sale charge; (V) Upon the redemption of Shares subject to such a contingent deferred sales charge, calculating and deducting from, the redemption proceeds thereof the amount of such charge in the manner set forth in the Prospectus. MLFDS shall pay, on behalf of MLFD, to MLPF&S such deducted contingent deferred sales charges imposed upon all Shares maintained in the name of MLPF&S, or maintained in the name of an account identified as a customer account of MLPFAS. Sales charges imposed upon any other Shares shall be paid by MLFDS to MLFD. (VI) Exchanging the investment of an investor into, or from the shares of other open-end investment companies or other series portfolios of the Fund, if any, if and to the extent permitted by the Prospectus at the direction of such investor. (VII) Processing redemptions (VIII) Examining and approving legal transfers; (IX) Replacing lost, stolen or destroyed certificates representing shares, in accordance with, and subject to, procedures and conditions adopted by the Fund; (X) Furnishing such confirmations of transactions relating to their Shares as required by applicable law; (XI) Actinq as agent for the Fund and/or MLPF&S, furnishing such appropriate periodic statements relating to Accounts, together with additional enclosures, including appropriate income tax information and income tax forms duly completed, an required by applicable law. (XII) Acting as agent for the and/or MLPF&S, mailing annual, semi-annual and quarterly reports prepared by or on behalf of the Fund, and mailing now Prospectuses upon their issue to Shareholders as required by applicable law; (XIII) Furnishing such periodic statements of transactions affected by MLFDS, reconciliations, balances and summaries as the Fund may reasonably request: 3 (XIV) Maintaining such books and records relating to transactions effected by MLFDS as are required by the Act, or by any other applicable provision of law, rule or regulation, to be maintained by the Fund or its transfer agent with respect to such transactions, and preserving, or causing to be preserved any such books and records for such periods as may be required by any such law, rule or regulation and as may be agreed upon from time to time between MLFDS and the Fund. In addition, MLFDS agrees to maintain and preserve master files and historical computer tapes on a daily basis in multiple separate locations a sufficient distance apart to insure preservation of at least one copy of such information (XV) Withholding taxes an non-resident alien Accounts, preparing and filing U.S. Treasury Department Form 1099 and other appropriate forms as required by applicable law with respect to dividends and distributions; and (XVI) Reinvesting dividends for full and tractional shares,and disbursing cash dividends* as applicable. (b) MLFDS agrees to act as proxy agent in connection with the holding of annual, if any, and special meeting of Shareholders, mailing such notice&, proxies and proxy statements in connection with the holding of such meetings an may be required by applicable law, receiving and tabulating votes cast by proxy communicating to the Fund the results of such tabulation accompanied by appropriate certifications, and preparing and furnishing to the Fund certified lists of Shareholders as of such date, in such form and containing such information as may be required by the Fund. (C) MLFDS agrees to deal with, and answer in a timely manner, all correspondence and inquires relating to the functions of MLFDS under this Agreement with respect to Accounts; (d) MLFDS agrees to furnish to the Fund such information and at such intervals as in necessary for the Fund to comply with the registration and/or the reporting requirements (including applicable escheat laws) of the Securities and Exchange Commission, Blue Sky authorities or other governmental authorities. 4 (a) MLFDS agrees to provide to the Fund such information as may reasonably be required to enable the Fund to reconcile the number of outstanding Shares between MLFDS's records and the account books ot the Fund. (f)Notwithstanding an anythingin the foregoing provisions of this paragraph, MLFDs agrees to perform its functions thereunder subject to such modification (whether in respect of particular cases or in any particular class of cases) as may from time to time be contained in an Officer's Instruction. 4. Compensation. The charges for services described in this Agreement, including "out-of-pocket" expenses, will be set forth in the Schedule of Foes attached hereto. 5. Right of Inspection. MLFDS agrees that it will in a timely manner make available to, and permit, any officer, accountant, attorney or authorized agent of the Fund to examing and make transcripts and copies (including photocopies and computer or other electronical information storage media and print-cuts) of any and all of it's books and records which relate to any transaction or function performed by MLFDS or pursuant to this Agreement. 6. Confidential Relationship. MLFDS agrees that it will, on behalf of itself and its officers and employees, treat all transactions contemplated by this Agreement, and all information germane thereto, as confidential and not to be disclosed to any person (other than the Shareholder concerned, or the Fund, or as may be disclosed in the examination of any books or records by any person lawfully entitled to examine the same) except as may be authorized by the Fund by way of an officer's Instruction. 7. Indemnification. The Fund shall indemnify and hold MLFDS harmless from any loss, costs, damage and reasonable expenses, including reasonable attorney's fees (provided that such attorney is appointed with the Fund's consent, which consent shall not be unreasonably withhold), incurred by it resulting from any claim, demand, action, or suit in connection with the performance of its duties hereunder, 5 provided that this indemnification shall not apply to actions or omissions of MUDS in cases of willful misconduct, failure to act In good faith or negligence by MLFDS, it's officers, employees or agents, and further provided, that prior to confessing any claim against it which may be subject to this indemnification, MUDS shall give the Fund reasonable opportunity to defend against said claim in its own name or in the name of MLFDS. An action taken by MLFDS upon any officer's Instruction reasonably believed by it to have been properly executed shall not constitute willful misconduct, failure to act in good faith or negligence under this Agreement. 8. Regarding MLFDS. (a) MLFDS hereby agrees to hire, purchase, develop and maintain such dedicated personnel, facilities, equipment, software, resources and capabilities as may be reasonably determined by the Fund to be necessary for the satisfactory performance of the duties and responsibilities of MLFDS. MLFDS warrants and represents that its officers and supervisory personnel charged with carrying out its functions as Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent for the Fund possess the special skill and technical knowledge appropriate for that purpose. MLFDS shall at all time exercise due care and diligence in the performance of its functions as Transfer Agent, Dividend Disbursing Agent, and Shareholder Servicing Agent for the Fund. MLFDS agrees that, in determining whether it has exercised due care and diligence, its conduct shall be measured by the standard applicable to persons possessing such special skill and technical knowledge. (b) MLFDS warrants and represents that is duly authorized and permitted to act an Transfer Agent, Dividend Disbursing Agent, and Shareholder Servicing Agent under all applicable laws and that it will immediately notify the Fund of any revocation of such authority or permission or of the commencement of any proceeding or other action which may lead to such revocation. 9. Termination. (a) This Agreement shall become effective as of the date first above written and shall thereafter continue from year to year. This Agreement may be terminated by the Fund or MLFDS (without penalty to the Fund or MLFDS) provided that the terminating party gives the other party written notice of such termination at least sixty (60) days in advance, except that the Fund may terminate this Agreement immediately upon written notice to MLFDS if the authority or permission of MLFDS to act as Transfer Agent, Dividend Disbursing Agent, and Shareholder Servicing Agent has been revoked or if any proceeding or other action which the Fund reasonably believes will lead to such revocation has been commenced. 6 (b) upon termination of this Agreement, MLFDS shall deliver all unissued and cancelled stock certificates representing Shares remaining in its possession, and all Shareholder records, books, stock ledgers, instruments and other documents (including computerized or other electronically stored information) made or accumulated in the performance of its duties as Transfer Agent, Disbursing Agent, and Shareholder Servicing Agent for the Fund along with a certified locator document clearly indicating the complete contents therein, to such successor as may be specified in a notice of termination or Officer's Instruction; and the Fund assumes all responsibility for failure thereafter to produce any paper, record or documents so delivered and identified in the locator document, if and when required to be produced. 10. Amendment. Except to the extent that the performance by MLFDS or its functions under this Agreement may from time to time be modified by an officer's Instruction, this Agreement may be amended or modified only by further written Agreement between the parties. 11. Governing Law. This agreement shall be governed by the laws of the State of Now Jersey. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers and their respective corporate seals hereunto duly affixed and attested, as of the day and year above written. MERRILL LYNCH MUNICIPAL BOND FUND, INC. HIGH YIELD, PROTFOLIO /s/ Gerald Richard Attest: /s/ Mark B. Goldfus Title: Treasurer Title: Secretary MERRILL LYNCH FINANCIAL DATA SERVICE, INC. BY:/S/ Robert C. Doan Title: President (Attest)/s/ Patrick M. Cassidy Title: Manager 7 ADDENDUM A In consideration of the performances of service by Merrill Lynch Financial Data Service, Inc., the Merrill Lynch Municipal Bond Fund, Inc. High Yield, Portfolio Severally agrees to pay Merrill Lynch Financial Data Service Compensation in the amount of $7.50 annually per shareholder account for which Merrill Lynch Financial Data service, Inc. is providing the services, and to reimburse Merrill Lynch Financial Data Service, Inc. for postage, out-of-pocket expenses, and the reasonable cost of supplies used by Merrill Lynch Financial Data Service in the performance of these services. Those services will be charged to the Merrill Lynch Muni High Yield, Fund an a per annum basis and payment for foes and expenses will be remitted to Merrill Lynch Financial Data service on a monthly basis. By: /s/ Gerald Richard ------------------------------- Title: Treasurer ---------------------------- Merrill Lynch Municipal Bond Fund, Inc. High Yield, Portfolio Attest: /s/ Mark B. Goldfus ---------------------------- By: /s/ Robert C. Doan ------------------------------------------ Title: President ------------------------------------------ Merrill Lynch Financial Data service, Inc. Attest: /s/ Patrick M. Cassidy ------------------------------------------ Date: March 10, 1988 8 EX-99.9(C) 12 LIMITED MATURITY PORTFOLIO AGENCY AGREEMENT EXHIBIT 99.9(c) TRANSFER AGEBCY, DIVIDEND DISBURSING AGENCY AND SHAREHOLDER SERVICING AGENCY AGREEMENT THIS AGREEMENT made as of the 3rd day of August, 1987 by and between Merrill Lynch Municipal Bond Fund, Inc, Limited Maturity Portfolio (the "Fund") and Merrill Lynch Financial Data Service, Inc. ("MLFDS"), a New Jersey corporation. WHEREAS, the fund wishes to appoint MLFDS to be the Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent upon and subject to, the terms and provisions of this Agreement, and MLFDS is desirous of accepting such appointment upon, and subject to, ouch terms and provisions: Now THEREFORE, in consideration of mutual covenants contained in this Agreement, the Fund and MLFDS agree as follows: 1. Appointment of MLFDS as Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent. (a) The Fund hereby appoints MLFDS to act an Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent for the Fund upon, and subject to, the terms and provisions of this Agreement. (b) MLFDS hereby accepts the appointment as Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent for the Fund, and agrees to act as such upon, and subject to, the terms and provisions of this Agreement. 2. Definitions. (a) In this Agreements (b) The term "Act" means the Investment Company Act of 1940 an amended from time to time and any rule or regulation thereunder; (11) The term "Account" means any account of a Shareholder, or, it the shares are hold in an account in the name of MLPF&S for benefit of an identified customer, such account, including a Plan Account, any account under a plan (by whatever name referred to in the Prospectus) pursuant to the self-Employed Individuals Retirement Act of 1962 ("Keogh Act plan") and any plan (by whatever name referred to in the Prospectus) in conjunction with Section 401 of the Internal Revenue Code ("Corporation Master Plan"); The term "application" means an application =ads by a Shareholder or prospective Shareholder respecting the opening of the Account; (IV) The term "MLFD" means Merrill Lynch Funds Distributor, Inc., a Delaware corporation; (V) The term "MLPF&S" means Merrill Lynch, Pierce, Penner & Smith Incorporated, a Delaware corporation; (VI) The term "Officer's Instruction" means an instruction in writing given on behalf of the Fund to MLFDS, and signed on behalf of the Fund by the President, and Vice President, the Secretary or the Treasurer of the Fund; (VII) The term "Prospectus" means the Prospectus and the Statement of Additional information of the Fund as from time to time in effect; (Vill) The term "Shares" means shares of stock or beneficial interest, an the case may be, of the Fund, irrespective of class or series; (IX) The term "Shareholder" means the holder of record of Shares:, (X) The term "Plan Account" means an account opened by a Shareholder or prospective Shareholdor in respect to an open account, monthly payment or withdrawal plan (in each case by whatever name referred to in the Prospectus), and may also include an account relating to any other Plan it and when provision in made for such plan in the Prospectus. 3. Duties of MLFDS as Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent. (a) Subject to the succeeding provisions of the Agreement, MLFDS hereby agrees to perform the following functions as Transfer Agent, Dividend Disbursing Agent, and Shareholder Servicing Agent for the Fund; (I) Issuing, transferring and redeeming Shares; (II) Opening, maintaining, servicing and closing Accounts; 2 (III) Acting as agent for the Fund Shareholders and/or customers of MLPF&S in connection with Plan Accounts, upon the terms and subject to the conditions contained in the Prospectus and application relating to the specific Plan Account; (IV) Acting as agent of the Fund an/or MLPF&S, maintaining such records as may permit the imposition of such contingent deferred sales charges as may be described in the Prospectus, including such reports as may be reasonably requested by the Fund with respect to such Shares as may be subject to a contingent deferred sale charge; (V) Upon the redemption of Shares subject to such a contingent deferred sales charge, calculating and deducting from, the redemption proceeds thereof the amount of such charge in the manner set forth in the Prospectus. MLFDS shall pay, on behalf of MLFD, to MLPF&S such deducted contingent deferred sales charges imposed upon all Shares maintained in the name of MLPF&S, or maintained in the name of an account identified as a customer account of MLPFAS. Sales charges imposed upon any other Shares shall be paid by MLFDS to MLFD. (VI) Exchanging the investment of an investor into, or from the shares of other open-end investment companies or other series portfolios of the Fund, if any, if and to the extent permitted by the Prospectus at the direction of such investor. (VII) Processing redemptions (VIII) Examining and approving legal transfers; (IX) Replacing lost, stolen or destroyed certificates representing shares, in accordance with, and subject to, procedures and conditions adopted by the Fund; (X) Furnishing such confirmations of transactions relating to their Shares as required by applicable law; (XI) Actinq as agent for the Fund and/or MLPF&S, furnishing such appropriate periodic statements relating to Accounts, together with additional enclosures, including appropriate income tax information and income tax forms duly completed, an required by applicable law. (XII) Acting as agent for the and/or MLPF&S, mailing annual, semi-annual and quarterly reports prepared by or on behalf of the Fund, and mailing now Prospectuses upon their issue to Shareholders as required by applicable law; (XIII) Furnishing such periodic statements of transactions affected by MLFDS, reconciliations, balances and summaries as the Fund may reasonably request: 3 (XIV) Maintaining such books and records relating to transactions effected by MLFDS as are required by the Act, or by any other applicable provision of law, rule or regulation, to be maintained by the Fund or its transfer agent with respect to such transactions, and preserving, or causing to be preserved any such books and records for such periods as may be required by any such law, rule or regulation and as may be agreed upon from time to time between MLFDS and the Fund. In addition, MLFDS agrees to maintain and preserve master files and historical computer tapes on a daily basis in multiple separate locations a sufficient distance apart to insure preservation of at least one copy of such information (XV) Withholding taxes an non-resident alien Accounts, preparing and filing U.S. Treasury Department Form 1099 and other appropriate forms as required by applicable law with respect to dividends and distributions; and (XVI) Reinvesting dividends for full and tractional shares,and disbursing cash dividends* as applicable. (b) MLFDS agrees to act as proxy agent in connection with the holding of annual, if any, and special meeting of Shareholders, mailing such notice&, proxies and proxy statements in connection with the holding of such meetings an may be required by applicable law, receiving and tabulating votes cast by proxy communicating to the Fund the results of such tabulation accompanied by appropriate certifications, and preparing and furnishing to the Fund certified lists of Shareholders as of such date, in such form and containing such information as may be required by the Fund. (C) MLFDS agrees to deal with, and answer in a timely manner, all correspondence and inquires relating to the functions of MLFDS under this Agreement with respect to Accounts; (d) MLFDS agrees to furnish to the Fund such information and at such intervals as in necessary for the Fund to comply with the registration and/or the reporting requirements (including applicable escheat laws) of the Securities and Exchange Commission, Blue Sky authorities or other governmental authorities. 4 (a) MLFDS agrees to provide to the Fund such information as may reasonably be required to enable the Fund to reconcile the number of outstanding Shares between MLFDS's records and the account books ot the Fund. (f)Notwithstanding an anythingin the foregoing provisions of this paragraph, MLFDs agrees to perform its functions thereunder subject to such modification (whether in respect of particular cases or in any particular class of cases) as may from time to time be contained in an Officer's Instruction. 4. Compensation. The charges for services described in this Agreement, including "out-of-pocket" expenses, will be set forth in the Schedule of Foes attached hereto. 5. Right of Inspection. MLFDS agrees that it will in a timely manner make available to, and permit, any officer, accountant, attorney or authorized agent of the Fund to examing and make transcripts and copies (including photocopies and computer or other electronical information storage media and print-cuts) of any and all of it's books and records which relate to any transaction or function performed by MLFDS or pursuant to this Agreement. 6. Confidential Relationship. MLFDS agrees that it will, on behalf of itself and its officers and employees, treat all transactions contemplated by this Agreement, and all information germane thereto, as confidential and not to be disclosed to any person (other than the Shareholder concerned, or the Fund, or as may be disclosed in the examination of any books or records by any person lawfully entitled to examine the same) except as may be authorized by the Fund by way of an officer's Instruction. 7. Indemnification. The Fund shall indemnify and hold MLFDS harmless from any loss, costs, damage and reasonable expenses, including reasonable attorney's fees (provided that such attorney is appointed with the Fund's consent, which consent shall not be unreasonably withhold), incurred by it resulting from any claim, demand, action, or suit in connection with the performance of its duties hereunder, 5 provided that this indemnification shall not apply to actions or omissions of MUDS in cases of willful misconduct, failure to act In good faith or negligence by MLFDS, it's officers, employees or agents, and further provided, that prior to confessing any claim against it which may be subject to this indemnification, MUDS shall give the Fund reasonable opportunity to defend against said claim in its own name or in the name of MLFDS. An action taken by MLFDS upon any officer's Instruction reasonably believed by it to have been properly executed shall not constitute willful misconduct, failure to act in good faith or negligence under this Agreement. 8. Regarding MLFDS. (a) MLFDS hereby agrees to hire, purchase, develop and maintain such dedicated personnel, facilities, equipment, software, resources and capabilities as may be reasonably determined by the Fund to be necessary for the satisfactory performance of the duties and responsibilities of MLFDS. MLFDS warrants and represents that its officers and supervisory personnel charged with carrying out its functions as Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent for the Fund possess the special skill and technical knowledge appropriate for that purpose. MLFDS shall at all time exercise due care and diligence in the performance of its functions as Transfer Agent, Dividend Disbursing Agent, and Shareholder Servicing Agent for the Fund. MLFDS agrees that, in determining whether it has exercised due care and diligence, its conduct shall be measured by the standard applicable to persons possessing such special skill and technical knowledge. (b) MLFDS warrants and represents that is duly authorized and permitted to act an Transfer Agent, Dividend Disbursing Agent, and Shareholder Servicing Agent under all applicable laws and that it will immediately notify the Fund of any revocation of such authority or permission or of the commencement of any proceeding or other action which may lead to such revocation. 9. Termination. (a) This Agreement shall become effective as of the date first above written and shall thereafter continue from year to year. This Agreement may be terminated by the Fund or MLFDS (without penalty to the Fund or MLFDS) provided that the terminating party gives the other party written notice of such termination at least sixty (60) days in advance, except that the Fund may terminate this Agreement immediately upon written notice to MLFDS if the authority or permission of MLFDS to act as Transfer Agent, Dividend Disbursing Agent, and Shareholder Servicing Agent has been revoked or if any proceeding or other action which the Fund reasonably believes will lead to such revocation has been commenced. 6 (b) upon termination of this Agreement, MLFDS shall deliver all unissued and cancelled stock certificates representing Shares remaining in its possession, and all Shareholder records, books, stock ledgers, instruments and other documents (including computerized or other electronically stored information) made or accumulated in the performance of its duties as Transfer Agent, Disbursing Agent, and Shareholder Servicing Agent for the Fund along with a certified locator document clearly indicating the complete contents therein, to such successor as may be specified in a notice of termination or Officer's Instruction; and the Fund assumes all responsibility for failure thereafter to produce any paper, record or documents so delivered and identified in the locator document, if and when required to be produced. 10. Amendment. Except to the extent that the performance by MLFDS or its functions under this Agreement may from time to time be modified by an officer's Instruction, this Agreement may be amended or modified only by further written Agreement between the parties. 11. Governing Law. This agreement shall be governed by the laws of the State of Now Jersey. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers and their respective corporate seals hereunto duly affixed and attested, as of the day and year above written. MERRILL LYNCH MUNICIPAL BOND FUND, INC. LIMITED MATURITY /s/ Gerald Richard Attest: /s/ Mark B. Goldfus Title: Treasurer Title: Secretary MERRILL LYNCH FINANCIAL DATA SERVICE, INC. BY:/S/ Robert C. Doan Title: President (Attest)/s/ Patrick M. Cassidy Title: Manager 7 ADDENDUM A In consideration of the performances of service by Merrill Lynch Financial Data Service, Inc., the Merrill Lynch Municipal Bond Fund, Inc. Limited Maturity Portfolio Severally agrees to pay Merrill Lynch Financial Data Service Compensation in the amount of $7.50 annually per shareholder account for which Merrill Lynch Financial Data service, Inc. is providing the services, and to reimburse Merrill Lynch Financial Data Service, Inc. for postage, out-of-pocket expenses, and the reasonable cost of supplies used by Merrill Lynch Financial Data Service in the performance of these services. Those services will be charged to the Merrill Lynch Muni Limited Maturity Fund an a per annum basis and payment for foes and expenses will be remitted to Merrill Lynch Financial Data service on a monthly basis. By: /s/ Gerald Richard ------------------------------- Title: Treasurer ---------------------------- Merrill Lynch Municipal Bond Fund, Inc. Limited Maturity Portfolio Attest: /s/ Mark B. Goldfus ---------------------------- By: /s/ Robert C. Doan ------------------------------------------ Title: Vice President ------------------------------------------ Merrill Lynch Financial Data service, Inc. Attest: /s/ Patrick M. Cassidy ------------------------------------------ Date: March 10, 1988 8 EX-99.13(A) 13 CERTIFICATE OF SOLE STOCKHOLDER EXHIBIT 99.13(a) CERTIFICATE OF SOLE STOCKHOLDER Fund Asset Management, Inc., the holder of 10,257 shares of Common Stock, par value $0.10 per share, of Merrill Lynch Municipal Bond Fund, Inc., a Maryland corporation (the "Fund"), does hereby confirm to the Fund its representation that it purchased such shares on September 12, 1977 for investment purposes, with no present intention of redeeming or reselling any portion thereof, and does further agree that if it redeems any portion of such shares prior to the amortization of the Fund's organizational expenses, the proceeds thereof will be reduced by the proportionate amount that the total unamortized balance bears to the number of shares being redeemed. FUND ASSET MANAGEMENT, INC. By /s/ Arthur Zeikel ---------------------------- Dated: September 13, 1977 EX-99.15(A) 14 DISTRIBUTION PLAN EXHIBIT 99.15(a) DISTRIBUTION PLAN OF MERRILL LYNCH MUNICIPAL BOND FUND, INC. PURSUANT TO RULE 12b-1 DISTRIBUTION PLAN made as of the day of 198_ and amended as of the day of , 1992, by and between Merrill Lynch Municipal Bond Fund, Inc., a Maryland corporation (the "Fund") , and Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD"). W I T N E S S E T H: WHEREAS, the Fund intends to engage in business as an open-end investment company registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"); and WHEREAS, the Fund is comprised of three separate portfolios, namely, the Insured Portfolio, the High Yield Portfolio and the Limited Maturity Portfolio (the "Portfolios"), each of which pursues its own investment objective through separate investment policies, and may in the future comprise one or more additional portfolios; and WHEREAS, MLFD is a securities firm engaged in the business of selling shares of investment companies either directly to purchasers or through other securities dealers; and WHEREAS, the Fund has entered into an amended Distribution Agreement with MLFD, pursuant to which MLFD acts as the exclusive distributor and representative of the Fund in the offer and sale of shares of the Class B insured Portfolio Series Common Stock, the Class B Limited Maturity Portfolio Series Common Stock and the Class B High Yield Portfolio Series Common Stock (collectively, the "Class B shares") of the Fund to the public; and WHEREAS, the Fund has adopted this Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Fund with respect to the Insured and High Yield Portfolios will pay a distribution fee to MLFD in connection with the distribution of Class B shares of each such Portfolio; WHEREAS, the Fund desires to adopt this Distribution Plan with respect to Class B Limited Maturity Portfolio Series Common Stock; and WHEREAS, the Directors of the Fund have determined that there is a reasonable likelihood that adoption of this Distribution Plan will benefit the Fund and its Class B shareholders. NOW, THEREFORE, the Fund hereby adopts, and the Distributor hereby agrees to the terms of, this Distribution Plan (the "Plan") in accordance with Rule 12b-1 under the Investment Company Act on the following terms and conditions: 1. The Fund shall pay MLFD a distribution fee under the Plan at the end of each month (i) at the annual rate of .75% of the average daily net asset value of the Class B shares of the Insured and High Yield Portfolios, and (ii) at the annual rate of .35% of the average daily net asset value of the Class B shares of the Limited Maturity Portfolio, to compensate MLFD and securities firms with which MLFD enters into related agreements ("Sub-Agreements") pursuant to Paragraph 2 hereof for providing sales and promotional activities and services. Such activities and services will relate to the sale, promotion and marketing of the Class B shares of such Portfolios and payments related to the furnishing of services to Class B shareholders by sales and marketing personnel. Such expenditures may consist of sales commissions to financial consultants for selling Class B shares of such Portfolios, compensation, sales incentives and payments to sales and marketing personnel, and the payment of expenses incurred in its sales and promotional activities including advertising expenditures related to the Class B shares of such Portfolios, the costs of preparing and distributing promotional materials and the costs of providing services to Class B shareholders of a Portfolio including assistance in connection with inquiries related to Class B shareholder accounts. only distribution expenditures properly attributable to the sale of Class B shares of a Portfolio will be used to justify any fee paid by the Fund with respect to that Portfolio pursuant to this Plan, and, to the extent that such expenditures relate to more than one Portfolio, the expenditures will be allocated between the affected Portfolios in a manner deemed appropriate by the Board of Directors of the Fund. 2. The Fund hereby authorizes MLFD to enter into Sub-Agreements with certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce, Fenner & Smith Incorporated, to provide compensation to such Securities Firms for activities and services of the type referred to in Paragraph 1. MLFD may reallocate all or a portion of its distribution fee to such Securities Firms as compensation for the above mentioned activities and services. Such Sub-Agreement shall provide that the Securities Firms shall provide MLFD with such information as is reasonably necessary to permit MLFD to comply with the reporting requirements set forth in Paragraph 3 hereof. 2 3. MLFD shall provide the Fund for review by the Board of Directors, and the Directors shall review, at least quarterly, a written report complying with the requirements of Rule 12b-1 regarding the disbursement of the distribution fee during such period. 4. This Plan shall not take effect with respect to a Portfolio until it has been approved by a vote of at least a majority, as defined in the Investment Company Act, of the outstanding Class B voting securities of that Portfolio. 5. This Plan shall not take effect with respect to a Portfolio until it has been approved, together with any related agreements with respect to that Portfolio, by votes of a majority of both (a) the Directors of the Fund and (b) those Directors of the Fund who are not "interested persons" of the Fund, as defined in the Investment Company Act, and have no direct or indirect financial interest in the operation of this Plan or any agreements related to it (the "Rule 12b-1 Directors") , cast in person at a meeting or meetings called for the purpose of voting on this Plan and such related agreements. 6. This Plan shall continue in effect for so long as such continuance is specifically approved at least annually in the manner provided for approval of this Plan in Paragraph 5. 7. This Plan may be terminated with respect to a Portfolio at any time by vote of a majority of the Rule 12b-1 Directors or by vote of a majority of the outstanding Class B voting securities of that Portfolio. 8. This Plan may not be amended to increase materially the rate of distribution payments provided for in Paragraph 1 hereof unless such amendment is approved in the manner provided for initial approval in Paragraphs 4 and 5 hereof, and no material amendment to the Plan shall be made unless approved in the manner provided for approval and annual renewal of Paragraph 5 hereof. 9. While this Plan is in effect, the selection and nomination of Directors who are not interested persons, as defined in the Investment Company Act, of the Fund shall be committed to the discretion of the Directors who are not interested persons. 10. The Fund shall preserve copies of this Plan and any related agreements and all reports made pursuant to Paragraph 3 3 hereof, for a period of not less than six years from the date of this Plan, or the agreements or such report, as the case may be, the first two years in an easily accessible place. IN WITNESS WHEREOF, the parties hereto have executed this Distribution Plan as of , 1992. MERRILL LYNCH MUNICIPAL BOND FUND, INC. By ----------------------------- MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By ----------------------------- 4 DISTRIBUTION PLAN SUB-AGREEMENT AGREEMENT made as of the day of 198_ and amended as of the day of 1992 by and between Merrill Lynch Funds Distributor, Inc., a Delaware corporation (the "Distributor") , and Merrill Lynch, Pierce, Fenner Smith Incorporated, a Delaware corporation ("Securities Firm") W I T N E S S E T H: WHEREAS, the Distributor has entered into an agreement with Merrill Lynch Municipal Bond Fund, Inc., a Maryland corporation (the "Fund") , pursuant to which it acts as the exclusive distributor for the sale of shares of the Class B Insured Portfolio Series Common Stock, the Class B Limited Maturity Portfolio Series Common Stock and the Class B High Yield Portfolio Series Common Stock (collectively, the "Class B shares") of the Fund; and WHEREAS, the Distributor and the Fund have entered into a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") pursuant to which the Distributor receives a distribution fee from the Fund at the annual rate of .75% of the average daily net asset value of the Class B shares of the Fund' s Insured Portfolio and High Yield Portfolio and at the annual rate of .35% of the average daily net asset value of the Class B Shares of the Fund's Limited Maturity Portfolio for providing sales and promotional activities and services related to the distribution of Class B shares of the Fund; and WHEREAS, the Distributor desires the Securities Firm to perform certain sales and promotional activities and services for the Fund's Class B shareholders, and the Securities Firm is willing to perform such services; NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereby agree as follows: 1. The Securities Firm shall provide sales and promotional activities and services with respect to the sale of the Class B shares of the Fund, and incur distribution expenditures, of the types referred to in Paragraph 1 of the Plan. 2. As compensation for its services performed under this Sub-Agreement, the Distributor shall pay the Securities Firm a fee at the end of each calendar month in an amount agreed upon by the parties hereto. 3. The Securities Firm shall provide the Distributor, at least quarterly, such information as reasonably requested by the Distributor to enable the Distributor to comply with the reporting 5 requirements of Rule 12b-1 regarding the disbursement of the fee during such period referred to in Paragraph 3 of the Plan. 4. This Sub-Agreement shall not take effect with respect to a Portfolio until it has been approved with respect to that Portfolio by votes of a majority of both (a) the Directors of the Fund and (b) those Directors of the Fund who are not "interested persons" of the Fund, as defined in the Act, and have no direct or indirect financial interest in the operation of this Plan or any agreements related to it, cast in person at a meeting or meetings called for the purpose of voting on this Agreement. 5. This Sub-Agreement shall continue in effect for as long as such continuance is specifically approved at least annually in the manner provided for approval of the Plan in Paragraph 5. 6. This Sub-Agreement shall automatically terminate in the event of its assignment or in the event of the termination of the Plan or any amendment to the Plan that requires such termination. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of , 1992. ---------------------- MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By ------------------------------ MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By, ------------------------------ 6 EX-99.16(A) 15 STANDARDIZED YIELD COMPUTATION JUNE 30, 1988 EXHIBIT 99.16(a) Municipal Bond Fund, Inc. Standardized Yield Computation June 30, 1988
High Limited Insured yield Maturity ------- ----- -------- Longterm Income generally based on yield to maturity tines market value of each security. $11,981,555 $8,566,048 $2,298,446 Plus short term income accrued for the past thirty days 389,931 482,769 387,160 Equals Total income 12,371,488 9,348,817 2,685,606 Less expenses for the past thirty days 642,202 675,444 179,559 .Equals not monthly income for yield calculation 11,729,296 8,673,373 2,506,047 Average shares outstanding for the month 258,476,202 148,614,019 58,867,841 Times maximum offering price 8.01 10.35 9.82 Equals total dollars 2,070,394,378 1,538,155,096 578,082,199 Not monthly income divided by total dollars equals .00566524 .00563882 .00433510 Add 1 1.00566324 1.00563882 1.00433510 Raise to the power of 6 1.03447652 1.03431347 1.02629613 Subtract 1 .03447652 .03431347 .02629613 Times 2 .06895 .06862 .05259 Expressed as a percentage equals the standardized yield for the month 6.90% 6.86% 5.26%
1 MUNICIPAL BOND - INSURED TOTAL RETURN
Annual total 1 Year 5 Years 10 Year Return* ------ ------- ------- ------- Initial Investment $1,000.00 $1,000.00 $1,000.00 $1,000.00 Divided by Maximum Offering Price 8.11 7.33 9.57 Divided by Net Asset Value 7.79 Equals Shares Purchased 123,304 136,426 104,493 128.370 Plus Shares Acquired Through Dividend Reinvestment 11,206 72.997 140,522 11,747 Equals Shares Hold at 6/30/88 134.510 209.323 245.085 140.117 Multiplied by Not Asset Value at 6/30/88 7.69 7.69 7.69 7.69 Equals Ending Redeemable Value of a $1,000 Investment (ERV) at 6/30/88 $1,034.38 $1,609.69 $1,684.70 $1.077.50 Divided by $1.000 (p) 1.0344 1.6097 1.8847 1.0775 Subtract 1 .0344 .6097 1.8847 .0775 Expressed as a percentage equals the Aggregate Total Return for the Period (T) 3.44% 60.97% 88.47% Expressed as a percentage equals the Anual Total Return 7.75% ERV divided by P 1.0344 1.6097 1.8847 Raise to the power of 1 5 10 Equals 1.0344 1.0999 1.0654 Subtract 1 .0344 .0999 .0654 Expressed as a percentage equals the Average Annualized Total Return 3.44% 9.99% 6.54% *Does not include sales charge for the period.
2 MUNICIPAL BOND - HIGH YIELD TOTAL RETURN
Since Annual Inception Total 1 Year 5 Years 05/05/78 Return* ------ ------- --------- ------- Initial Investment $1,000.00 $1,000.00 $1,000.00 $1,000.00 Divided by Maximum Offering Price 10.54 9.50 10.00 Divided by Not Asset Value 10.12 Equals Shares Purchased 94.877 105.263 100.00 98.814 Plus Shares Acquired Through Dividend Reinvestment 8,352 61,548 130,433 8,721 Equals Shares Held at 6/30/88 103,229 166,811 230,433 107,535 Multiplied by Not Asset Value at 6/30/88 9.94 9.94 9.94 9.94 Equals Ending Redeemable Value of a $1,000 Investment (ERV) at 6/30/88 $1,026.10 $1,658.10 $2,290.50 $1,068.90 Divided by $1,000 (p) (A) 1.0261 1.6581 2.2905 1.0689 Subtract 1 .0261 .6581 1.2905 .0689 Expressed an a percentage *qualm the Aggregate Total Return for the Period (T) 2.61% 65.81% 129.05% Expressed as a percentage equals the Annual Total Return 6.89% ERV divided by P (A) 1.0261 1.6581 2.2905 Raise to the power of 1 1/5 1/8.666 Equals 1.0261 1.1064 1.1004 Subtract 1 .0261 .1064 .1004 Expressed as a percentage equals the Average Annualized Total Return 2.61% 10.64% 10.04%
3 MUNICIPAL BOND - LIMITED TOTAL RETURN
Annual total 1 Year 5 Years 10 Year Return* ------ ------- ------- ------- Initial Investment $1,000.00 $1,000.00 $1,000.00 $1,000.00 Divided by Maximum Offering Price 9.90 9.89 9.97 Divided by Net Asset Value 9.83% Equals Shares Purchased 101.01 101.112 100.30 101.729 Plus Shares Acquired Through Dividend Reinvestment 5.70 35.48 77,484 5,781 Equals Shares Hold at 6/30/88 106.71 136.960 177.785 107.518 Multiplied by Not Asset Value at 6/30/88 9.75 9.75 9.75 9.75 Equals Ending Redeemable Value of a $1,000 Investment (ERV) $1,040.42 $1,335.36 $1,733.40 $1,048.30 Divided by $1,000 (p) 1.0404 1.3354 1.7334 1.0483 Subtract 1 00404 .3354 .7334 .0483 Expressed as a percentage equals the Aggregate Total Return for the Period (T) 4.04% 33.54% 73.34% Expressed as a percentage 4.73% equals the Annual Total Return ERV divided by P 1.0404 1.3354 1.7334 Raise to the power of 1 5 1/8.666 Equals 1,0404 1.0595 1.0655 Subtract .0404 .0595 0.0655 Expressed as a percentage equals the Average Annualized Total Return 4.04% 5.95% 6.55%
*Does not include sale& charge for the period 4 EX-99.16(B) 16 STANDARDIZED YIELD COMPUTATION EXHIBIT 16(b) Merrill Lynch Municipal Bond Fund Inc. High Yield-Class B Standardized Yield Computation Long term income generally based on yield to maturity times market value of each security..................... $ 521,244 Plus short term income accrued for the past thirty days.... 26 893 Equals Total Income........................................ 548,137 Less expenses for the past thirty days..................... (94,636) Equals net monthly income for yield calculation............ 453,501 Average shares outstanding for the month................... 8,647,493 Times net asset value...................................... 10.30 Equals total dollars....................................... $89,069,178 Net monthly income divided by total dollars equals......... 0.005091560 Add 1...................................................... 1.005091560 Raise to the power of 6.................................... 1.030940870 Subtract 1................................................. 0.030940870 Times 2.................................................... 0.061881741 Expressed as a percentage equals the standardized yield for the month..................................... 6.19% 1 Merrill Lynch Municipal Bond Fund, Inc. High Yield-Class B Total Return Period from 10/21/88 Annual (inception) Total to 06/30/89 Return* ----------- ------- Initial Investment.......................... $1,000.00 $ 1,000.00 Divided by Net Asset Value.................. 10.13 10.13 Equals Shares Purchased..................... 98.72 98.72 Plus Shares Acquired through Dividend Reinvestment............................. 4.76 4.76 Equals Shares Held at 06/30/89.............. 103.48 103.48 Multiplied by Net Asset Value at 06/30/89... 10.30 10.30 Equals Ending Value before deduction for contingent deferred sales charge......... 1,065.80 1,065.80 Less deferred sales charge.................. (40.00) 0.00 Equals Ending Redeemable Value of a $1,000 Investment (ERV)......................... $1,025.80 $1,065.80 Divided by $1,000 (P)....................... 1.0258 1.0658 Subtract 1.................................. 0.0258 0.0658 Expressed as a percentage equals the Aggregate Total Return for the Period (T) 2.58% Expressed as a percentage equals the Aggregate Total Return for the Period.... 6.58% ERV divided by P............................ 1.0258 Raise to the power of....................... 1.6944 Equals...................................... 1.0374 Subtract 1.................................. 0.0374 Expressed as a percentage equals the Average Annualized Total Return.................. 3.74% - ----------- *Does not include sales charge for the period. 2 Merrill Lynch Municipal Bond Fund, Inc. Insured-Class B Standardized Yield Computation Long term income generally based on yield to maturity times market value of each security........... $ 858,953 Plus short term income accrued for the past thirty days.. 74,625 Equals Total Income...................................... 933,578 Less expenses for the past thirty days................... (152,537) Equals net monthly income for yield calculation.......... 781,041 Average shares outstanding for the month................. 19,689,371 Times net asset value.................................... 7.97 Equals total dollars..................................... $156,924,286 Net monthly income divided by total dollars equals....... 0.004977185 Add 1.................................................... 1.004977185 Raise to the power of 6.................................. 1.030237172 Subtract 1............................................... 0.030237172 Times 2.................................................. 0.060474344 Expressed as a percentage equals the standardized for the month ........................................ 6.05% 3 Merrill Lynch Municipal Bond Fund, Inc. Insured- Class B Total Return Period from 10/21/88 Annual (inception) Total to 06/30/89 Return* ------------ ------- Initial Investment......................... $ 1,000.00 $1,000.00 Divided by Net Asset Value................. 7.80 7.80 Equals Shares Purchased.................... 128.21 128.21 Plus Shares Acquired through Dividend Reinvestment............................ 6.06 6.06 Equals Shares Held at 06/30/89............. 134.27 134.27 Multiplied by Net Asset Value at 06/30/89............................. 7.97 7.97 Equals Ending Value before deduction for contingent defeffed sales charge.... 1,070.10 1,070.10 Less defeffed sales charge................. (40.00) 0.00 Equals Ending Redeemable Value of a $1,000 Investment (ERV)............... $1,030.10 $1,070.10 Divided by $1,000 (P)...................... 1.0301 1.0701 Subtract 1................................. 0.0301 0.0701 Expressed as a percentage equals the Aggregate Total Return for the Period (T) 3.01% Expressed as a percentage equals the Aggregate Total Return for the Period... 7.01% ERV divided by P .......................... 1.0301 Raise to the power of...................... 1/.6932 Equals..................................... 1.0437 Subtract 1................................. 0.0437 Expressed as a percentage equals the Average Annualized Total Return......... 4.37% - ----------- *Does not include sales charge for the period. 4 EX-99.18 17 POWER OF ATTORNEY EXHIBIT 99.18 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that Charles C. Reilly whose signature appears below constitutes and appoints Terry K. Glenn and Arthur Zeikel and each of them, his true and lawful attorney-infact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all Amendments to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. October 20, 1990 /s/ Charles C. Reilly --------------------- Charles C. Reilly EX-27.1(A) 18 ART. 6 FDS FOR NATIONAL PORT. CLASS A SHARES
6 1 NATIONAL PORTFOLIO CLASS A 12-MOS JUN-30-1995 JUL-01-1994 JUN-30-1995 1409585111 1471461312 53080676 53547 0 1524595535 12808429 0 7564047 20372476 0 1523405331 105686998 119410837 0 0 (81058473) 0 61876201 1059440068 0 102352831 0 12052998 90299833 (77312475) 98337487 111324845 0 67078481 23097818 0 3950018 22289533 4615676 (158126841) 0 28352719 0 0 7415203 0 12052998 1109689136 10.08 .60 .15 .60 .21 0 10.02 .56 0 0
EX-27.1(B) 19 ART. 6 FDS FOR NATIONAL PORT. CLASS B SHARES
6 2 NATIONAL PORTFOLIO CLASS B 12-MOS JUN-30-1995 JUL-01-1994 JUN-30-1995 1409585111 1471461312 53080676 53547 0 1524595535 12808429 0 7564047 20372476 0 1523405331 41903872 45583411 0 0 (81058473) 0 61876201 419932544 0 102352831 0 12052998 90299833 (77312475) 98337487 111324845 0 22561653 8776286 0 8878807 14170872 1612526 (158126841) 0 28352719 0 0 7415203 0 12052998 427277965 10.07 .52 .16 .52 .21 0 10.02 1.32 0 0
EX-27.1(C) 20 ART. 6 FDS FOR NATIONAL PORT. CLASS C SHARES
6 3 NATIONAL PORTFOLIO CLASS C OTHER JUN-30-1995 OCT-21-1994 JUN-30-1995 1409585111 1471461312 53080676 53547 0 1524595535 12808429 0 7564047 20372476 0 1523405331 518140 0 0 0 (81058473) 0 61876201 5194514 0 102352831 0 12052998 90299833 (77312475) 98337487 111324845 0 90229 30111 0 658356 145672 5456 (158126841) 0 28352719 0 0 7415203 0 12052998 2510762 9.85 .36 .39 .36 .21 0 10.03 1.37 0 0
EX-27.1(D) 21 ART. 6 FDS FOR NATIONAL PORT. CLASS D SHARES
6 4 NATIONAL PORTFOLIO CLASS D OTHER JUN-30-1995 OCT-21-1994 JUN-30-1995 1409585111 1471461312 53080676 53547 0 1524595535 12808429 0 7564047 20372476 0 1523405331 1960467 0 0 0 (81058473) 0 61876201 19655933 0 102352831 0 12052998 90299833 (77312475) 98337487 111324845 0 569470 194503 0 5903456 3975351 32362 (158126841) 0 28352719 0 0 7415203 0 12052998 14267531 9.85 .40 .39 .40 .21 0 10.03 .81 0 0
EX-27.2(A) 22 ART. 6 FDS FOR INSURED PORT. CLASS A SHARES
6 5 INSURED PORTFOLIO CLASS A 12-MOS JUN-30-1995 JUL-01-1994 JUN-30-1995 2390477429 2494465694 47300843 171036 0 2541937573 9996595 0 9357271 19353866 0 2456681176 215373913 246434764 0 0 (38085734) 0 103988265 1706064230 0 162836631 0 17372151 145464480 (38085273) 91672331 199051538 0 104032884 31614511 0 17244995 54299693 5993847 (285350554) 0 45898099 0 0 9408013 0 17372151 1788840166 7.88 .46 .18 .46 .14 0 7.92 .43 0 0
EX-27.2(B) 23 ART. 6 FDS FOR INSURED PORT. CLASS B SHARES
6 6 INSURED PORTFOLIO CLASS B 12-MOS JUN-30-1995 JUL-01-1994 JUN-30-1995 2390477429 2494465694 47300843 171036 0 2541937573 9996595 0 9357271 19353866 0 2456681176 98884919 110011150 0 0 (38085734) 0 103988265 782748268 0 162836631 0 17372151 145464480 (38085273) 91672331 199051538 0 40656294 14155831 0 16066095 29922865 2730539 (285350554) 0 45898099 0 0 9408013 0 17372151 804598055 7.87 .40 .19 .40 .14 0 7.92 1.19 0 0
EX-27.2(C) 24 ART. 6 FDS FOR INSURED PORT. CLASS C SHARES
6 7 INSURED PORTFOLIO CLASS C OTHER JUN-30-1995 OCT-21-1994 JUN-30-1995 2390477429 2494465694 47300843 171036 0 2541937573 9996595 0 9357271 19353866 0 2456681176 979281 0 0 0 (38085734) 0 103988265 7755939 0 162836631 0 17372151 145464480 (38085273) 91672331 199051538 0 120450 23608 0 1136288 167364 10357 (285350554) 0 45898099 0 0 9408013 0 17372151 3539282 7.68 .27 .38 .27 .14 0 7.92 1.23 0 0
EX-27.2(D) 25 ART. 6 FDS FOR INSURED PORT. CLASS D SHARES
6 8 INSURED PORTFOLIO CLASS D OTHER JUN-30-1995 OCT-21-1994 JUN-30-1995 2390477429 2494465694 47300843 171036 0 2541937573 9996595 0 9357271 19353866 0 2456681176 3283048 0 0 0 (38085734) 0 103988265 26015270 0 162836631 0 17372151 145464480 (38085273) 91672331 199051538 0 654852 104611 0 5722042 2480132 41138 (285350554) 0 45898099 0 0 9408013 0 17372151 17249995 7.68 .29 .38 .29 .14 0 7.92 .68 0 0
EX-27.3(A) 26 ART. 6 FDS FOR LTD. MATURITY PORT. CLASS A SHARES
6 9 LIMITED MATURITY PORTFOLIO CLASS A 12-MOS JUN-30-1995 JUL-01-1994 JUN-30-1995 723214267 726037534 12323490 63464 0 738424488 40267587 0 16878537 57146124 0 685409841 54068710 80064850 0 0 (6954744) 0 2823267 536474423 0 35037639 0 3937538 31100101 (1760975) 4210861 33549987 0 25771957 0 0 5989549 33605286 1619597 (254398405) 0 (5193769) 0 0 2712662 0 3937538 664003180 9.87 .38 .05 .38 0 0 9.92 .41 0 0
EX-27.3(B) 27 ART. 6 FDS FOR LTD. MATURITY PORT. CLASS B SHARES
6 10 LIMITED MATURITY PORTFOLIO CLASS B 12-MOS JUN-30-1995 JUL-01-1994 JUN-30-1995 723214267 726037534 12323490 63464 0 738424488 40267587 0 16878537 57146124 0 685409841 13057358 14744916 0 0 (6954744) 0 2823267 129580505 0 35037639 0 3937538 31100101 (1760975) 4210861 33549987 0 5094228 0 0 8960577 11012799 364664 (254398405) 0 (5193769) 0 0 2712622 0 39337538 144790843 9.87 .35 .05 .35 0 0 9.92 .78 0 0
EX-27.3(C) 28 ART. 6 FDS FOR LTD. MATURITY PORT. CLASS C SHARES
6 11 LIMITED MATURITY PORTFOLIO CLASS C OTHER JUN-30-1995 OCT-21-1994 JUN-10-1995 723214267 726037534 12323490 63464 0 738424488 40267587 0 16878537 57146124 0 685409841 399691 0 0 0 (6954744) 0 2823267 3964961 0 35037639 0 3937538 31100101 (1760975) 4210861 33549987 0 45930 0 0 1018221 662129 3599 (254398405) 0 (5193769) 0 0 2712662 0 3937538 1843115 9.83 .25 .09 .25 0 0 9.92 .70 0 0
EX-27.3(D) 29 ART. 6 FDS FOR LTD. MATURITY PORT. CLASS D SHARES
6 12 LIMITED MATURITY PORTFOLIO CLASS D OTHER JUN-30-1995 OCT-21-1994 JUN-30-1995 723214267 726037534 12323490 63464 0 738424488 40267587 0 16878537 57146124 0 685409841 1134219 0 0 0 (6954744) 0 2823267 11258475 0 35037639 0 3937538 31100101 (1760975) 4210861 33549987 0 187986 0 0 2890074 1767911 12056 (254398405) 0 (5193769) 0 0 2712662 0 3937538 7203736 9.83 .26 .10 .26 0 0 9.93 .53 0 0
EX-99.11 30 CONSENT OF INDEPENDENT AUDITORS INDEPENDENT AUDITORS' CONSENT Merrill Lynch Municipal Bond Fund, Inc.: We consent to the use in Post-Effective Amendment No. 20 to Registration Statement No. 2-57354 of our report dated August 15, 1995 appearing in the Statement of Additional Information, which is a part of such Registration Statement, and to the reference to us under the caption "Financial Highlights" appearing in the Prospectus, which also is a part of such Registration Statement. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Princeton, New Jersey October 30, 1995 EX-99.16(D) 31 SCHEDULE OF COMPUTATION CLASS C EXHIBIT 99.16(d) Municipal Bond: Limited - Class C 10/21/94 - 6/30/95 Since Since Inception Inception Average Annual Total Total Return Return* -------------- --------- Initial Investment $1,000.00 $1,000.00 Divided by Net Asset Value 9.83 9.83 ----------- --------- Equals Shares Purchased 101.729 101.729 Plus Shares Acquired through Dividend Reinvestment 2.518 2.518 ----------- --------- Equals Shares Held at 6/30/95 104.248 104.248 Multiplied by Net Asset Value at 6/30/95 9.93 9.93 ----------- --------- Equals Ending Value before deduction for contingent deferred sales charge 1,035.18 1,035.18 Less deferred sales charge (10.00) 0.00 ----------- --------- Equals Ending Redeemable Value at $1000 Investment (ERV) at 6/30/95 1,025.18 1,035.18 ----------- --------- Divided by $1,000 (P) 1.0252 1.0352 Subtract 1 0.0252 0.0352 Expressed as a percentage equals the Aggregate Total Return for the Period (T) 2.52% =========== Expressed as a percentage equals the Aggregate Total Return for the Period 3.52% =========== ERV divided by P 1.0252 Raise to the power of 1.4494 Equals 1.0367 Subtract 1 0.0367 Expressed as a percentage equals the Average Annualized Total Return 3.67% =========== * Does not include sales charge for the period. Municipal Bond: Insured - Class C 10/21/94 - 6/30/95 Since Since Inception Inception Average Annual Total Total Return Return* -------------- --------- Initial Investment $1,000.00 $1,000.00 Divided by Net Asset Value 7.68 7.68 ----------- --------- Equals Shares Purchased 130.208 130.208 Plus Shares Acquired through Dividend Reinvestment 7.033 7.033 ----------- --------- Equals Shares Held at 6/30/95 137.242 137.242 Multiplied by Net Asset Value at 6/30/95 7.93 7.93 ----------- --------- Equals Ending Value before deduction for contingent deferred sales charge 1,088.33 1,088.33 Less deferred sales charge (10.00) 0.00 ----------- --------- Equals Ending Redeemable Value at $1000 Investment (ERV) at 6/30/95 1,078.33 1,098.33 ----------- --------- Divided by $1,000 (P) 1.0783 1.0883 Subtract 1 0.7832 0.0883 Expressed as a percentage equals the Aggregate Total Return for the Period (T) 7.83% =========== Expressed as a percentage equals the Aggregate Total Return for the Period 8.83% =========== ERV divided by P 1.0783 Raise to the power of 1.4484 Equals 1.1154 Subtract 1 0.1154 Expressed as a percentage equals the Average Annualized Total Return 11.54% =========== * Does not include sales charge for the period. Municipal Bond: National - Class C 10/21/94 - 6/30/95 Since Since Inception Inception Average Annual Total Total Return Return* -------------- --------- Initial Investment $1,000.00 $1,000.00 Divided by Net Asset Value 9.85 9.85 ----------- --------- Equals Shares Purchased 101.523 101.523 Plus Shares Acquired through Dividend Reinvestment 6.020 6.020 ----------- --------- Equals Shares Held at 6/30/95 107.543 107.543 Multiplied by Net Asset Value at 6/30/95 10.04 10.04 ----------- --------- Equals Ending Value before deduction for contingent deferred sales charge 1,079.73 1,079.73 Less deferred sales charge (10.00) 0.00 ----------- --------- Equals Ending Redeemable Value at $1000 Investment (ERV) at 6/30/95 1,069.73 1,079.73 ----------- --------- Divided by $1,000 (P) 1.0697 1.0797 Subtract 1 0.0697 0.0797 Expressed as a percentage equals the Aggregate Total Return for the Period (T) 6.97% =========== Expressed as a percentage equals the Aggregate Total Return for the Period 7.97% =========== ERV divided by P 1.0697 Raise to the power of 1.4484 Equals 1.1026 Subtract 1 0.1026 Expressed as a percentage equals the Average Annualized Total Return 10.26% =========== * Does not include sales charge for the period. EX-99.16(E) 32 SCHEDULE OF COMPUTATION CLASS D EXHIBIT 99.16(e) Municipal Bond: Limited - Class D 10/21/94 - 6/30/95 Since Since Inception Inception Average Annual Total Total Return Return* -------------- --------- Initial Investment $1,000.00 $1,000.00 Divided by Initial Maximum Offering Price 9.93 ----------- Divided by Net Asset Value 9.83 --------- Equals Shares Purchased 100.712 101.729 Plus Shares Acquired through Dividend Reinvestment 2.601 2.627 ----------- --------- Equals Shares Held at 6/30/95 103.313 104.357 Multiplied by Net Asset Value at 6/30/95 9.94 9.94 ----------- --------- Equals Ending Redeemable Value at $1000 Investment (ERV) at 6/30/95 1,026.93 1,037.31 Divided by $1,000 (P) 1.0269 1.0373 Subtract 1 0.0269 0.0373 Expressed as a percentage equals the Aggregate Total Return for the Period (T) 2.69% =========== Expressed as a percentage equals the Aggregate Total Return for the Period 3.73% =========== ERV divided by P 1.0269 Raise to the power of 1.4484 Equals 1.0392 Subtract 1 0.0392 Expressed as a percentage equals the Average Annualized Total Return 3.92% =========== * Does not include sales charge for the period. Municipal Bond: Insured - Class D 10/21/94 - 6/30/95 Since Since Inception Inception Average Annual Total Total Return Return* -------------- --------- Initial Investment $1,000.00 $1,000.00 Divided by Initial Maximum Offering Price 8.00 ----------- Divided by Net Asset Value 7.68 ---------- Equals Shares Purchased 125.000 130.208 Plus Shares Acquired through Dividend Reinvestment 7.245 7.547 ----------- --------- Equals Shares Held at 6/30/95 132.245 137.755 Multiplied by Net Asset Value at 6/30/95 7.93 7.93 ----------- --------- Equals Ending Redeemable Value at $1000 Investment (ERV) at 6/30/95 1,048.71 1,092.40 Divided by $1,000 (P) 1.0487 1.0924 Subtract 1 0.0487 0.0924 Expressed as a percentage equals the Aggregate Total Return for the Period (T) 4.87% =========== Expressed as a percentage equals the Aggregate Total Return for the Period 9.24% ========== ERV divided by P 1.0487 Raise to the power of 1.4484 Equals 1.0713 Subtract 1 0.0713 Expressed as a percentage equals the Average Annualized Total Return 7.13% =========== * Does not include sales charge for the period. Municipal Bond: National - Class D 10/21/94 - 6/30/95 Since Since Inception Inception Average Annual Total Total Return Return* -------------- --------- Initial Investment $1,000.00 $1,000.00 Divided by Initial Maximum Offering Price 10.26 ----------- Divided by Net Asset Value 9.85 --------- Equals Shares Purchased 97.462 101.523 Plus Shares Acquired through Dividend Reinvestment 6.160 6.416 ----------- --------- Equals Shares Held at 6/30/95 103.622 107.939 Multiplied by Net Asset Value at 6/30/95 10.04 10.04 ----------- --------- Equals Ending Redeemable Value at $1000 Investment (ERV) at 6/30/95 1,040.36 1,083.71 Divided by $1,000 (P) 1.0404 1.0837 Subtract 1 0.0404 0.0837 Expressed as a percentage equals the Aggregate Total Return for the Period (T) 4.04% =========== Expressed as a percentage equals the Aggregate Total Return for the Period 8.37% =========== ERV divided by P 1.0404 Raise to the power of 1.4484 Equals 1.0590 Subtract 1 0.0590 Expressed as a percentage equals the Average Annualized Total Return 5.90% =========== * Does not include sales charge for the period. -----END PRIVACY-ENHANCED MESSAGE-----