EX-99.17D 9 dex9917d.txt A/R TO STOCKHOLDERS OF MFAP Exhibit 17(d) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-2694 The Municipal Fund Accumulation Program, Inc. Address: P.O. Box 9011 Princeton, NJ 08543-9011 Name and address of agent for service: Terry K. Glenn, President, The Municipal Fund Accumulation Program, Inc., 800 Scudders Mill Road, Plainsboro, NJ, 08536. Mailing address: P.O. Box 9011, Princeton, NJ, 08543-9011 Registrant's telephone number, including area code: (609) 282-2800 Date of fiscal year end: 12/31/02 Date of reporting period: 01/01/02 - 12/31/02 Item 1 - Is shareholder report attached? - Y Item 2 - Did registrant adopt a code of ethics, as of the end of the period covered by this report, that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party? If not, why not? Briefly describe any amendments or waivers that occurred during the period. State here if code of ethics/amendments/waivers are on website and give website address-. State here if fund will send code of ethics to shareholders without charge upon request--N/A (not answered until July 15, 2003 and only annually for funds) Item 3 - Did the registrant's board of directors determine that the registrant either: (i) has at least one audit committee financial expert serving on its audit committee; or (ii) does not have an audit committee financial expert serving on its audit committee? If yes, disclose name of financial expert and whether he/she is "independent," (fund may, but is not required, to disclose name/independence of more than one financial expert) If no, explain why not. -N/A (not answered until July 15, 2003 and only annually for funds) Item 4 - Disclose annually only (not answered until December 15, 2003) (a) Audit Fees - Disclose aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. N/A. (b) Audit-Related Fees - Disclose aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item. Registrants shall describe the nature of the services comprising the fees disclosed under this category. N/A. (c) Tax Fees - Disclose aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. Registrants shall describe the nature of the services comprising the fees disclosed under this category. N/A. (d) All Other Fees - Disclose aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item. Registrants shall describe the nature of the services comprising the fees disclosed under this category. N/A. (e)(1) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. N/A. (e)(2) Disclose the percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. N/A. (f) If greater than 50%, disclose the percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees. N/A. (g) Disclose the aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant. N/A. (h) Disclose whether the registrant's audit committee has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any subadviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. N/A. Items 5-6 - Reserved Item 7 - For closed-end funds that contain voting securities in their portfolio, describe the policies and procedures that it uses to determine how to vote proxies relating to those portfolio securities. N/A. Item 8--Reserved Item 9(a) - Disclose the conclusions of the registrant's principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, about the effectiveness of the registrant's disclosure controls and procedures (as defined in Rule 30a-2(c) under the Act (17 CFR 270.30a-2(c))) based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph. N/A. Item 9(b)--There were no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 10 - Exhibits 10(a) - Attach code of ethics or amendments/waivers, unless code of ethics or amendments/waivers is on website or offered to shareholders upon request without charge. N/A. 10(b) - Attach certifications (4 in total pursuant to Sections 302 and 906 for CEO/CFO). Attached hereto. Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The Municipal Fund Accumulation Program, Inc. By: /s/ Terry K. Glenn --------------------------------------------- Terry K. Glenn, President of The Municipal Fund Accumulation Program, Inc. Date: February 24, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Terry K. Glenn --------------------------------------------- Terry K. Glenn, President of The Municipal Fund Accumulation Program, Inc. Date: February 24, 2003 By: /s/ Donald C. Burke --------------------------------------------- Donald C. Burke Chief Financial Officer of The Municipal Fund Accumulation Program, Inc. Date: February 24, 2003 (BULL LOGO) Merrill Lynch Investment Managers Annual Report December 31, 2002 The Municipal Fund Accumulation Program, Inc. www.mlim.ml.com This report is not authorized for use as an offer of sale or a solicitation of an offer to buy shares of the Program unless accompanied or preceded by the Program's current prospectus. The Municipal Fund Accumulation Program is only open to holders of units of Municipal Investment Trust Funds and Defined Assets Funds--Municipal Insured Series for reinvestment of distributions on those units. Past performance results shown in this report should not be considered a representation of future performance. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Statements and other information herein are as dated and are subject to change. The Municipal Fund Accumulation Program, Inc. Box 9011 Princeton, NJ 08543-9011 Printed on post-consumer recycled paper To Our Shareholders: The Municipal Market Environment During the six-month period ended December 31, 2002, long-term fixed income interest rates continued to move lower. As they had earlier in 2002, declining U.S. equity markets and worldwide political tensions easily overshadowed the incipient U.S. economic recovery allowing bond yields to fall to recent historic low levels. In late July, second quarter 2002 gross domestic product activity was reported at 1.1%, a significant decline from the first quarter rate of 5%. This rate suggested that continued declines in U.S. equity prices were negatively affecting not only consumer and business confidence but undermining much of the economic growth seen earlier this year. Some analysts extrapolated that recent weakness would continue, if not accelerate. This brought about forecasts that the Federal Reserve Board would soon be obliged to lower short-term interest rates both to offset equity market declines and boost consumer and business spending. The possibility of lower short-term interest rates helped push longer-term bond yields lower still during July and August. The dramatic decline in U.S. equity prices in late August and September triggered a significant fixed income rally as investors sought the safe-haven status of U.S. Treasury securities. By the end of September, U.S. Treasury bond yields had fallen to 4.66%. Bolstered by an unexpected decline in the national unemployment rate to 5.6% in early October, U.S. equity markets staged a strong rally throughout much of the month. The Standard & Poor's 500 (S&P 500) Index rose over 8% for the month, triggered by stronger-than- expected earnings reports from a large number of companies, such as General Electric Company, International Business Machines Corporation and Microsoft Corporation. As they have throughout most of the period, bond prices traded in an inverse relationship to equity prices. Consequently, as stocks rallied, bond yields rose in October, despite generally weak economic releases. During October, the U.S. housing sector remained quite robust, but retail sales and industrial production slowed. Fixed income bond yields remained under pressure in November as U.S. equity markets continued to strengthen. During November, the S&P 500 Index rose an additional 5.5%. Equity prices were supported by signs of further U.S. economic recovery, especially improving labor market activity. By the end of November, third quarter U.S. gross domestic product (GDP) growth was revised to 4%. Financial conditions were also strengthened by a larger-than-expected reduction in short-term interest rates by the Federal Reserve Board in early November. The Federal Funds target rate was lowered 50 basis points (.50%) to 1.25%, its lowest level since the 1960s. Recent action by the Federal Reserve Board was largely viewed as being taken to bolster the sputtering U.S. economic recovery. Rebounding U.S. equity markets and the prospects for a more substantial U.S. economic recovery pushed long-term U.S. Treasury yield levels to 5.10% by late November. In December, softer equity prices and renewed investor concerns about potential U.S. military action against Iraq again combined to push long-term interest rates lower. The S&P 500 Index declined more than 5% in December on disappointing earnings reports and anticipated weak holiday sales. During December 2002, as both national and international investors sought the safe-haven sanctuary of U.S. Treasury issues, long-term U.S. Treasury yields declined over 25 basis points to end the period at 4.75%. During the last six months, long-term U.S. Treasury bond yields declined 75 basis points. For the six-month period ended December 31, 2002, tax-exempt bond prices also generally rose. In recent months, municipal bond yields have declined in response to the positive fixed income environment engendered by falling equity valuations. Price advances in tax- exempt issues have not been able to keep pace with the U.S. Treasury bond price improvement as municipal bonds cannot offer foreign investors the safe-haven status U.S. Treasury obligations enjoy in periods of economic and political instability. Additionally, tax- exempt bond issuance increased dramatically in the last half of 2002 removing some of the positive technical support the municipal bond market enjoyed earlier this year. By the end of 2002, long-term municipal bond yields, as measured by the Bond Buyer Revenue Bond Index, stood at 5.16%, a decline of 25 basis points during the last six months. Investor demand for tax-exempt products remained positive throughout the period. In addition to the approximately $75 billion investors received from June to August 2002 from bond maturities, coupon income and proceeds from early redemptions, investors are expected to receive approximately $30 billion from these sources in January 2003. The Investment Company Institute reported that in 2002 municipal bond funds net cash flows continued to be very positive at nearly $16 billion, an increase of more than 25% compared to 2001. However, these positive demand factors have not been able to offset the increase in tax-exempt new-issue supply that has resulted in the underperformance seen in recent months. This price underper-formance served to make municipal bonds a particularly attractive purchase relative to their taxable counterparts. Throughout most of the yield curve, municipal bonds have been available for purchase at yields near or exceeding those of comparable U.S. Treasury issues. Compared to their recent historical averages of 82% - 88% of U.S. Treasury yields, municipal bond yields ratios at their current 95% - 105% range are likely to prove attractive to long-term investors. Continued uncertainty regarding the pace of the current U.S. economic recovery as well as the resolution of the U.N./Iraq confrontation are likely to keep interest rates near their present levels for the immediate future. Equity market declines over the past three years have helped push interest rates lower than economic fundamentals alone would support. When U.S. business conditions improve and equity markets stabilize, however, any associated interest rate increases should not be extreme. Inflationary pressures are negligible and any move by the Federal Reserve Board to raise short-term interest rates is unlikely before late 2003. As equity valuations are likely to only gradually recover, U.S. economic recovery is also likely to be a moderate process. This suggests that the pace of any interest rate increases will be gradual. As the municipal bond market's strong technical position can be expected to remain supportive in the coming months, future tax-exempt rate increases should be more restrained than their taxable counterparts. Portfolio Matters Given no material change in our investment outlook, our strategy for the six-month period ended December 31, 2002 remained constant with only slight modifications in composition evident. Our investment stance was premised on the expectation that an aggressively accommodative monetary policy, coupled with improving consumer sentiment and business confidence, would spark an economic rebound. Recently, prospects for the passage of an aggressive fiscal stimulus and tax reduction package have improved, further raising the likelihood of stronger economic growth. Nevertheless, fixed income markets remain well bid as a number of geopolitical risks are likely to dominate investors' thoughts at least in the near term. With this in mind, the portfolio remains positioned for stable to modestly higher interest rates, while the adoption of a fully defensive stance appears unwarranted until such time as these risks subside. We continued to keep cash reserves at limited levels throughout the period, reflecting a strong emphasis on maintaining the Program's competitive income distribution. In addition, the portfolio's credit risk profile rose modestly with the addition of selected low investment-grade health care and industrial development bonds. We continue to believe that municipal credit spreads are attractive in comparison to historical averages and, within the context of a recovering economy, represent good value and offer solid total return prospects in the coming months. Nevertheless, roughly 78% of the portfolio's assets are rated in the top three rating categories with still close to 50% of the Program's assets rated AAA by at least one of the major rating agencies. In terms of sector concentrations, health care and housing constitute the portfolio's greatest exposure at roughly 16% and 15.8%, respectively, followed by smaller concentrations in industrial development bonds representing the paper, investor-owned utility and chemical sectors. As discussed in our previous letter to shareholders, the portfolio's housing bonds were subjected to prepayment calls that accelerated along with the decline in long-term interest rates experienced earlier in the year. Typically, we sought to limit the impact on the Program's income stream by reinvesting the proceeds from these calls in low-investment-grade municipal bonds. All the same, we continue to be mindful of the relatively conservative approach that characterized investment practice in past years. Fiscal Year In Review The Program's total investment return for the 12-month period ended December 31, 2002 was +7.09%, compared to the Fund's unmanaged benchmark, the Lehman Brothers Municipal Bond Index, which had a total return of +9.60% for the same period. (Complete performance information can be found on pages 4 and 5 of this report to shareholders.) While the Program's performance during the last quarter improved markedly, results for the fiscal year fell short of the return generated by the Lehman Brothers Municipal Bond Index. This is largely because of the defensive investment stance that we maintained for much of the period. Caution will continue to characterize the portfolio's investment position over the next six months as prospects for heavy new-issue municipal volume put pressure on a market expected to weaken against the backdrop of a strengthening economy. In Conclusion We appreciate your ongoing interest in The Municipal Fund Accumulation Program, Inc., and we look forward to assisting you with your financial needs in the months and years to come. Sincerely, (Terry K. Glenn) Terry K. Glenn President and Director (Kenneth A. Jacob) Kenneth A. Jacob Senior Vice President (John M. Loffredo) John M. Loffredo Senior Vice President (Theodore R. Jaeckel Jr.) Theodore R. Jaeckel Jr. Vice President and Portfolio Manager January 24, 2003 The Municipal Fund Accumulation Program, Inc. About Fund Performance None of the past results shown should be considered a representation of future performance. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Figures shown in each of the following tables assume reinvestment of all dividends and capital gains distributions at net asset value on the payable date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Recent Performance Results
6-Month 12-Month Standardized As of December 31, 2002 Total Return Total Return 30-Day Yield ---------------------------------------------- ------------ ------------ ------------ The Municipal Fund Accumulation Program, Inc.* +3.38% +7.09% 4.81% Lehman Brothers Municipal Bond Index** +4.75 +9.60 --
*Total investment returns are based on changes in net asset values for the periods shown, and assume reinvestment of all dividends and capital gains distributions at net asset value on the payable date. **This unmanaged Index consists of revenue bonds, general obligation bonds and insured bonds. The Municipal Fund Accumulation Program, Inc. Total Return Based on a $10,000 Investment A line graph illustrating the growth of a $10,000 investment in The Municipal Fund Accumulation Program, Inc.++ compared to a similar investment in Lehman Brothers Municipal Bond Index++++. Values illustrated are as follows: The Municipal Fund Accumulation Program, Inc.++ Date Value ------------- ---------- December 1992 $10,000.00 December 1993 $11,193.00 December 1994 $10,472.00 December 1995 $12,135.00 December 1996 $12,543.00 December 1997 $13,583.00 December 1998 $14,310.00 December 1999 $13,341.00 December 2000 $14,885.00 December 2001 $15,303.00 December 2002 $16,388.00 Lehman Brothers Municipal Bond Index++++ Date Value ------------- ---------- December 1992 $10,000.00 December 1993 $11,228.00 December 1994 $10,648.00 December 1995 $12,507.00 December 1996 $13,061.00 December 1997 $14,262.00 December 1998 $15,186.00 December 1999 $14,874.00 December 2000 $16,612.00 December 2001 $17,463.00 December 2002 $19,140.00 ++Assuming transaction costs and other operating expenses, including advisory fees and reimbursement of all expenses. The Municipal Fund Accumulation Program, Inc. invests in long-term and intermediate- term fixed interest bearing debt obligations issued primarily by corporations. ++++This unmanaged Index is comprised of revenue bonds, general obligation bonds and insured bonds. Past performance is not predictive of future results. The Municipal Fund Accumulation Program, Inc. Average Annual Total Return Period Covered % Return ------------------------- -------- One Year Ended 12/31/02 +7.09% Five Years Ended 12/31/02 +3.82 Ten Years Ended 12/31/02 +5.06 The Municipal Fund Accumulation Program, Inc. Schedule of Investments as of December 31, 2002 (in Thousands)
S&P Moody's Face State Rating+++ Rating+++ Amount Issue Value ------------- --------- --------- ------ --------------------------------------------------------------------- ------ Alabama-- NR* Aaa $3,010 Alabama HFA, S/F Mortgage Revenue Refunding Bonds (College 1.6% Home Mortgage Bond Program), Series B-1, 6.65% due 10/01/2025 $3,136 BBB Baa2 500 Mobile, Alabama, Industrial Development Board, Environmental Improvement Revenue Refunding Bonds (International Paper Company Project), AMT, Series A, 6.35% due 5/15/2016 519 BBB+ Baa2 2,500 Selma, Alabama, IDB, Environmental Improvement Revenue Refunding Bonds (International Paper Company Project), AMT, Series A, 6.70% due 2/01/2018 2,641 Arizona-- BBB Baa2 2,000 Arizona Health Facilities Authority Revenue Bonds (Catholic 0.5% Healthcare West), Series A, 6.625% due 7/01/2020 2,116 Arkansas-- A+ NR* 250 North Little Rock, Arkansas, Health Facilities Board, Health Care 1.2% Revenue Bonds (Baptist Health), 5.50% due 7/01/2016 261 BBB Baa2 500 Pine Bluff, Arkansas, Environmental Improvement Revenue Refunding Bonds (International Paper Company Project), AMT, Series A, 6.70% due 8/01/2020 532 NR* Aaa 4,000 University of Arkansas, University Revenue Bonds (Fayetteville Campus), 5% due 12/01/2032 (b) 4,056 California-- California Rural Home Mortgage Finance Authority, S/F Mortgage 4.9% Revenue Bonds (Mortgage-Backed Securities Program), AMT, Class 5: AAA NR* 3,880 Series C, 6.75% due 3/01/2029 4,162 AAA NR* 1,545 Series D, 6.70% due 5/01/2029 (j)(k) 1,656 AAA NR* 2,515 California Rural Home Mortgage Finance Authority, S/F Mortgage
Revenue Refunding Bonds (Mortgage-Backed Securities Program), AMT, Series A-2, 7% due 9/01/2029 (j)(k) 2,651 California State, Department of Water Resources, Power Supply Revenue Bonds, Series A: AAA Aaa 2,000 5.375% due 5/01/2018 (a) 2,189 BBB+ A3 1,360 5.375% due 5/01/2022 1,406 A A2 7,000 Chula Vista, California, IDR, Refunding (San Diego Gas & Electric Co.), AMT, Series A, 6.75% due 3/01/2023 7,115 Colorado--4.7% NR* Aa2 1,910 Colorado HFA, Revenue Bonds (S/F Program), Series B-3, 6.55% due 4.7% 10/01/2016 2,036 Colorado HFA, Revenue Refunding Bonds (S/F Program): NR* Aa2 1,500 AMT, Senior Series A-2, 7.50% due 4/01/2031 1,614 AA Aa2 635 AMT, Senior Series B-2, 7.10% due 4/01/2017 673 AA Aa2 3,895 AMT, Senior Series B-2, 7.25% due 10/01/2031 4,176 AA Aa2 2,545 AMT, Senior Series C-2, 7.25% due 10/01/2031 2,728 NR* Aa2 650 Senior Series A-3, 7.35% due 10/01/2030 700 NR* Aa2 2,805 Senior Series C-3, 6.75% due 10/01/2021 2,995 AA Aa2 1,115 Senior Series C-3, 7.15% due 10/01/2030 1,198 AA Aa2 2,500 Colorado Health Facilities Authority, Revenue Refunding Bonds (Catholic Health Initiatives), 5.50% due 9/01/2017 2,648
Portfolio Abbreviations To simplify the listings of The Municipal Fund Accumulation Program, Inc.'s portfolio holdings in the Schedule of Investments, we have abbreviated the names of many of the securities according to the list below. AMT Alternative Minimum Tax (subject to) CARS Complementary Auction Rate Securities COP Certificates of Participation DRIVERS Derivative Inverse Tax-Exempt Receipts EDA Economic Development Authority GO General Obligation Bonds HFA Housing Finance Agency IDA Industrial Development Authority IDB Industrial Development Board IDR Industrial Development Revenue Bonds M/F Multi-Family PCR Pollution Control Revenue Bonds RIB Residual Interest Bonds S/F Single-Family VRDN Variable Rate Demand Notes The Municipal Fund Accumulation Program, Inc. Schedule of Investments as of December 31, 2002 (continued) (in Thousands)
S&P Moody's Face State Rating+++ Rating+++ Amount Issue Value ------------- --------- --------- ------ --------------------------------------------------------------------- ------ Connecticut-- Connecticut State Health and Educational Facilities Authority, 3.2% Revenue Refunding Bonds: AA NR* $5,025 DRIVERS, Series 215, 11.16% due 6/01/2030 (g) $6,475 AA Baa3 5,710 (University of Hartford), Series E, 5.50% due 7/01/2022 (l) 6,180 District of AAA NR* 5,000 District of Columbia, GO, Refunding, DRIVERS, Series 214, 10.14% Columbia-- due 6/01/2026 (e)(g) 6,752 1.7% Florida-- AA NR* 1,900 Beacon Tradeport Community, Florida, Development District, Special 2.4% Assessment Revenue Refunding Bonds (Commercial Project), Series A, 5.25% due 5/01/2016 2,025 NR* NR* 5,000 Hillsborough County, Florida, IDA, Exempt Facilities Revenue Bonds (National Gypsum), AMT, Series A, 7.125% due 4/01/2030 4,949 NR* Aaa 2,375 Orange County, Florida, HFA, M/F Housing Revenue Bonds, Series A, 6.40% due 1/01/2031 (e) 2,592 Hawaii-- BBB Baa1 3,000 Kuakini, Hawaii, Health System, Special Purpose Revenue Bonds
0.8% (Kuakini Health System), Series A, 6.375% due 7/01/2032 2,978 Idaho-- BB+ Ba3 5,000 Power County, Idaho, Industrial Development Corporation, Solid 1.1% Waste Disposal Revenue Bonds (FMC Corporation Project), AMT, 6.45% due 8/01/2032 4,319 Illinois-- AAA NR* 4,205 Chicago, Illinois, S/F Mortgage Revenue Bonds, AMT, Series A, 7.15% 2.1% due 9/01/2031 (j)(k) 4,479 Illinois Development Finance Authority Revenue Bonds: BBB NR* 3,140 (Community Rehabilitation Providers Facility), Series A, 6.50% due 7/01/2022 3,186 AAA Aaa 660 Series B, 6.40% due 9/01/2031 (d) 731 Indiana-- AA Aa2 1,000 Indiana State Office Building Commission, Capital Complex Revenue 4.6% Refunding Bonds (State Office Building-II Facility), Series D, 6.90% due 7/01/2011 1,200 AAA Aaa 6,500 Indiana Transportation Finance Authority, Airport Facilities, Lease Revenue Refunding Bonds, Series A, 5% due 11/01/2016 6,770 AA NR* 1,865 Indianapolis, Indiana, Local Public Improvement Bond Bank, Revenue Refunding Bonds, Series D, 6.75% due 2/01/2020 1,911 NR* Ba1 2,500 Jasper County, Indiana, Economic Development Revenue Refunding Bonds (Georgia Pacific Corporation Project), AMT, 6.70% due 4/01/2029 1,986 AAA NR* 6,000 MSD Warren Township, Indiana, Vision 2005, School Building Corporation Revenue Bonds, First Mortgage, 5.50% due 7/15/2020 (b) 6,443 Kansas-- NR* Aaa 7,860 Sedgwick and Shawnee Counties, Kansas, S/F Revenue Bonds, AMT, 3.7% Series A-1, 6.95% due 6/01/2029 (i) 8,950 A+ NR* 2,500 Witchita, Kansas, Hospital Facilities Revenue Refunding and Improvement Bonds, Series III, 6.25% due 11/15/2019 2,760
BBB A3 3,000 Wyandotte County, Kansas, Kansas City Unified Government Revenue Refunding Bonds (General Motors Corporation Project), 6% due 6/01/2025 3,060 Louisiana-- Louisiana Local Government, Environmental Facilities, Community 4.8% Development Authority Revenue Bonds: NR* Baa3 1,615 (Air Cargo), AMT, 6.65% due 1/01/2025 1,595 AAA Aaa 10,000 (Capital Projects and Equipment Acquisition), Series A, 6.30% due 7/01/2030 (a) 12,113 AAA Aaa 2,900 New Orleans, Louisiana, GO, Refunding, 6.125% due 10/01/2016 (a) 3,238 BBB Baa2 2,000 Rapides Finance Authority, Louisiana, Environmental Improvement Revenue Bonds (International Paper Company Project), AMT, Series A, 6.55% due 11/15/2023 2,093
The Municipal Fund Accumulation Program, Inc. Schedule of Investments as of December 31, 2002 (continued) (in Thousands)
S&P Moody's Face State Rating+++ Rating+++ Amount Issue Value ------------- --------- --------- ------ ------------------------------------------------------------------- ------ Massachu- AAA Aaa $2,575 Massachusetts State Health and Educational Facilities Authority setts--1.1% Revenue Bonds (Medical Center of Central Massachusetts), CARS, Series B, 11.52% due 6/23/2022 (a)(g) $3,154 BBB NR* 1,000 Massachusetts State Industrial Finance Agency, Higher Education Revenue Refunding Bonds (Hampshire College Project), 5.625% due 10/01/2012 1,047 Michigan-- BBB Baa2 2,500 Delta County, Michigan, Economic Development Corporation, 1.3% Environmental Improvement Revenue Refunding Bonds (Mead
Westvaco-Escanaba), Series A, 6.25% due 4/15/2027 2,484 AAA Aaa 2,000 Michigan State Strategic Fund, Limited Obligation Revenue Refunding Bonds (Detroit Edison Company), Series BB, 7% due 5/01/2021 (a) 2,584 Minnesota-- NR* A3 1,750 Minneapolis, Minnesota, Health Care System Revenue Bonds (Allina 0.9% Health System), Series A, 5.75% due 11/15/2032 1,780 AA+ Aa1 1,680 Minnesota State, HFA, S/F Mortgage Revenue Bonds, AMT, Series M, 6.70% due 7/01/2026 1,736 Mississippi-- BBB Baa2 1,700 Warren County, Mississippi, Environmental Improvement Revenue 0.5% Refunding Bonds (International Paper Company Project), AMT, Series B, 6.75% due 8/01/2021 1,800 Missouri-- NR* NR* 1,000 Cape Girardeau County, Missouri, IDA, Health Care Facilities 0.9% Revenue Refunding Bonds (Southeast Missouri Hospital Association), 5.625% due 6/01/2027 999 AAA Aaa 2,200 Saint Louis, Missouri, Airport Revenue Bonds (Airport Development Program), Series A, 5.625% due 7/01/2019 (e) 2,426 Montana-- NR* A2 6,000 Montana State Higher Education, Student Assistance Corporation, 1.6% Student Loan Revenue Refunding Bonds, AMT, Sub-Series B, 6.40% due 12/01/2032 6,297 Nevada-- AAA Aaa 5,000 Clark County, Nevada, IDR (Power Company Project), AMT, Series A, 1.9% 6.70% due 6/01/2022 (b) 5,168 Elko, Nevada, GO (Airport Improvement), AMT, Series B (e): AAA Aaa 165 6.10% due 10/01/2014 184 AAA Aaa 245 6.30% due 10/01/2019 273 AAA Aaa 320 6.75% due 10/01/2024 370 AAA Aaa 225 7% due 10/01/2029 261 AAA Aaa 1,035 Nevada Housing Division, S/F Program, AMT, Senior Series E, 7.05%
due 4/01/2027 (c) 1,072 New Jersey-- AAA Aaa 5,000 New Jersey EDA, Revenue Refunding Bonds (RWJ Health Care 5.5% Corporation), 6.50% due 7/01/2024 (d) 5,448 AAA Aaa 3,680 New Jersey EDA, State Lease Revenue Bonds (State Office Buildings Projects), 6% due 6/15/2016 (a) 4,292 NR* Baa1 3,130 New Jersey Health Care Facilities Financing Authority Revenue Bonds (South Jersey Hospital), 6% due 7/01/2026 3,219 AAA Aaa 1,500 New Jersey State Housing and Mortgage Finance Agency, M/F Housing Revenue Refunding Bonds, Series B, 6.25% due 11/01/2026 (d) 1,621 A A1 7,500 Tobacco Settlement Financing Corporation, New Jersey, Asset-Backed Revenue Refunding Bonds, 6.125% due 6/01/2042 7,225 New York-- New York City, New York, City Transitional Finance Authority 11.4% Revenue Bonds, Future Tax Secured: AAA NR* 400 Series A, 5% due 8/15/2027 (b) 404 AA+ Aa2 8,500 Series B, 6% due 11/15/2010 10,008 New York City, New York, GO, Refunding, Series A: AAA A2 3,080 6.50% due 5/15/2017 3,584 AAA Aaa 10,075 6.25% due 5/15/2026 (m) 11,564 A+ A1 1,500 New York State Dormitory Authority, Lease Revenue Bonds (State University Dormitory Facilities), Series A, 6.25% due 7/01/2020 1,751
The Municipal Fund Accumulation Program, Inc. Schedule of Investments as of December 31, 2002 (continued) (in Thousands)
S&P Moody's Face State Rating+++ Rating+++ Amount Issue Value ----------- --------- --------- ------ ---------------------------------------------------------------------- ------
New York AAA Aaa $ 750 New York State Dormitory Authority Revenue Bonds (New York (concluded) University), Series A, 6% due 7/01/2019 (e) $ 900 New York State Dormitory Authority, Revenue Refunding Bonds: NR* Aa3 3,745 (Concord Nursing Home Inc.), 6.25% due 7/01/2016 4,142 NR* Aa3 2,500 (Concord Nursing Home Inc.), 6.50% due 7/01/2029 2,725 BBB- Baa3 3,000 (Mount Sinai Health), Series A, 6.50% due 7/01/2016 3,315 BBB- Baa3 3,950 (Mount Sinai Health), Series A, 6.50% due 7/01/2025 4,213 AA NR* 2,285 Oneida County, New York, IDA, Revenue Bonds (Civic Facility-Faxton Hospital), Series C, 6.625% due 1/01/2015 2,676 North North Carolina Eastern Municipal Power Agency, Power System Carolina-- Revenue Refunding Bonds: 4.3% AAA Aaa 1,330 Series A, 6.50% due 1/01/2018 (f) 1,675 A Baa3 4,440 Series D, 6.70% due 1/01/2019 4,946 North Carolina Municipal Power Agency Number 1, Catawba Electric Revenue Refunding Bonds, Series B: BBB+ Baa1 5,000 6.50% due 1/01/2020 5,400 A NR* 2,500 6.50% due 1/01/2020 2,745 NR* Aaa 2,250 Raleigh-Durham, North Carolina, Airport Authority, Airport Revenue Bonds, Series A, 5.25% due 11/01/2017 (b) 2,440 Ohio--1.3% Ohio State Higher Educational Facility Revenue Bonds (Kenyon College Project): A A2 2,500 4.95% due 7/01/2037 2,587 A A2 2,500 5.05% due 7/01/2037 2,601 Pennsyl- A NR* 250 Montgomery County, Pennsylvania, Higher Education and Health vania--0.1% Authority, Hospital Revenue Bonds (Abington Memorial Hospital), Series A, 5.125% due 6/01/2032 237 South A A2 5,000 Lexington County, South Carolina, Health Services District Inc., Carolina-- Hospital Revenue Refunding and Improvement Bonds, 5.50% due 11/01/2032 4,928
3.5% BBB+ Baa2 2,450 Medical University, South Carolina, Hospital Authority, Hospital Facility Revenue Refunding Bonds, 6.50% due 8/15/2032 2,540 Piedmont Municipal Power Agency, South Carolina, Electric Revenue Refunding Bonds: AAA Aaa 3,000 6.75% due 1/01/2019 (b) 3,748 AAA Aaa 1,890 Series A, 6.50% due 1/01/2014 2,292 AAA Aaa 320 Series A, 6.50% due 1/01/2014 (b)(f) 398 Tennessee-- BBB+ Baa1 3,500 Shelby County, Tennessee, Health, Educational and Housing Facility 0.9% Board, Hospital Revenue Refunding Bonds (Methodist Healthcare), 6.50% due 9/01/2026 3,676 Texas-- A+ Aa3 6,740 Austin, Texas, Convention Center Revenue Bonds (Convention 19.2% Enterprises Inc.), Trust Certificates, Second Tier, Series B, 6% due 1/01/2023 7,185 AAA Aaa 5,330 Austin, Texas, Revenue Bonds (Town Lake Community Events Center Venue), 6.20% due 11/15/2029 (b) 6,170 A1+ VMIG1++ 1,500 Bell County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds (Scott & White Memorial Hospital), VRDN, Series 2001-2, 1.80% due 8/15/2031 (e)(h) 1,500 Brazos River Authority, Texas, PCR, Refunding (TXU Electric Company Project), AMT: BBB Baa2 5,000 Series A, 4.95% due 10/01/2030 4,890 BBB Baa2 2,500 Series C, 5.75% due 5/01/2036 2,375 A A3 4,000 Brazos River, Texas, Harbor Navigation District, Brazoria County Environmental Revenue Refunding Bonds (Dow Chemical Company Project), AMT, Series A-7, 6.625% due 5/15/2033 4,147 AAA Aaa 2,135 Central Texas Housing Finance Corporation, S/F Mortgage Revenue Bonds (GNMA Mortgage Program), AMT, 8.20% due 6/28/2017 (i) 2,265
The Municipal Fund Accumulation Program, Inc. Schedule of Investments as of December 31, 2002 (concluded) (in Thousands)
S&P Moody's Face State Rating+++ Rating+++ Amount Issue Value ------------ --------- --------- ------- -------------------------------------------------------------------- ------ Texas AAA NR* $8,125 Dallas-Fort Worth, Texas, International Airport Revenue Bonds, (concluded) DRIVERS, AMT, Series 201, 10.12% due 11/01/2024 (b)(g) $9,856 AA Baa2 3,500 Gregg County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds (Good Shepherd Medical Center Project), 6.375% due 10/01/2025 3,889 BBB Baa2 6,665 Gulf Coast, Texas, Waste Disposal Authority Revenue Refunding Bonds (International Paper Company), AMT, Series A, 6.10% due 8/01/2024 6,654 Harris County, Texas, Health Facilities Development Corporation, Revenue Refunding Bonds: A1+ AA 2,150 (Methodist Hospital), VRDN, 1.65% due 12/01/2032 (h) 2,150 AA- NR* 2,500 (Saint Luke's Episcopal Hospital), Series A, 5.625% due 2/15/2017 2,660 A- Baa1 2,000 Lower Colorado River Authority, Texas, PCR (Samsung Austin Semiconductor), AMT, 6.95% due 4/01/2030 2,140 BBB Baa2 7,350 Matagorda County, Texas, Port of Bay City Authority Revenue Bonds (Hoechst Celanese Corp. Project), AMT, 6.50% due 5/01/2026 7,359 NR* Aaa 7,235 South Plains, Texas, Housing Finance Corporation, S/F Mortgage Revenue Bonds, AMT, Series A, 7.30% due 9/01/2031 8,258 AA Aa1 1,790 Texas State, GO, Veterans' Housing Assistance Fund II, AMT, Series A, 7% due 12/01/2025 1,867 AAA Aaa 2,305 Webster, Texas, GO, COP, Series A, 6% due 3/01/2021 (d) 2,590 Washington-- NR* NR* 2,500 Seattle, Washington, Housing Authority, Housing Revenue Bonds
2.4% (Replacement Housing Project), 6.125% due 12/01/2032 2,507 AAA NR* 3,875 Tacoma, Washington, Electric System Revenue Refunding Bonds, RIB, Series 512X, 9.65% due 1/01/2017 (d)(g) 4,777 A A1 2,400 Tobacco Settlement Authority, Washington, Tobacco Settlement Revenue Bonds, 6.625% due 6/01/2032 2,406 West AAA Aaa 6,050 West Virginia State Housing Development Fund, Housing Finance Virginia-- Revenue Bonds, Series A, 6.20% due 5/01/2018 6,528 1.7% Wyoming-- BB+ Ba3 5,000 Sweetwater County, Wyoming, Solid Waste Disposal Revenue Bonds 1.2% (FMC Corporation Project), AMT, Series A, 7% due 6/01/2024 4,635 Puerto NR* Aaa 7,770 Puerto Rico Public Finance Corporation Revenue Bonds, RIB, Rico-- Series 519X, 9.254% due 8/01/2018 (e)(g) 9,441 2.4% Total Investments (Cost--$370,791)--99.4% 393,177 Variation Margin on Financial Futures Contracts**--0.0% 45 Other Assets Less Liabilities--0.6% 2,446 -------- Net Assets--100.0% $395,668 ========
(a) AMBAC Insured. (b) FGIC Insured. (c) FHA Insured. (d) FSA Insured. (e) MBIA Insured. (f) Escrowed to maturity. (g) 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 December 31, 2002. (h) The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at December 31, 2002. (i) GNMA Collateralized. (j) FNMA/GNMA Collateralized. (k) FHLMC Collateralized. (l) All or a portion of security held as collateral in connection with open financial futures contracts. (m) XL Capital Insured. * Not Rated. ** Financial futures contracts sold as of December 31, 2002 were as follows: (in Thousands) Number of Expiration Contracts Issue Date Value --------- ------------------- ---------- ------- 205 U.S. Treasury Bonds March 2003 $23,585 ------- Total Financial Futures Contracts Sold (Total Contract Price--$22,973) $23,585 ======= ++ Highest short-term rating by Moody's Investors Service, Inc. +++ The ratings of issues shown are unaudited. See Notes to Financial Statements. The Municipal Fund Accumulation Program, Inc. Statement of Assets and Liabilities as of December 31, 2002 Assets: Investments, at value (identified cost--$370,790,963) $393,176,929 Cash 179,330 Receivables: Interest $ 7,189,077 Securities sold 554,452 Capital shares sold 46,358 Variation margin 44,844 7,834,731 ------------ Prepaid registration fees and other assets 12,812 ------------ Total assets 401,203,802 ------------ Liabilities:
Payables: Securities purchased 4,836,050 Capital shares redeemed 190,325 Investment adviser 165,872 Dividends to shareholders 23 5,192,270 ------------ Accrued expenses 343,708 ------------ Total liabilities 5,535,978 ------------ Net Assets $395,667,824 ============ Net Assets Consist of: Common Stock, $.01 par value, 100,000,000 shares authorized $ 229,418 Paid-in capital in excess of par 406,947,575 Undistributed investment income--net $ 967,214 Accumulated realized capital losses on investments--net (34,250,552) Unrealized appreciation on investments--net 21,774,169 ------------ Total accumulated losses--net (11,509,169) ------------ Net Assets: Equivalent to $17.25 per share based on 22,941,799 shares outstanding $395,667,824 ============
See Notes to Financial Statements. The Municipal Fund Accumulation Program, Inc. Statement of Operations for the Year Ended December 31, 2002 Investment Income: Interest $23,578,622 Expenses: Investment advisory fees $1,985,992 Transfer agent fees 726,678 Accounting services 135,492 Printing and shareholder reports 52,185 Professional fees 48,526 Registration fees 30,169 Custodian fees 24,631 Pricing services 18,384 Directors' fees and expenses 12,535 Other 33,637 ---------- Total expenses before reimbursement 3,068,229 Reimbursement of expenses (62) ---------- Total expenses after reimbursement 3,068,167 ----------- Investment income--net 20,510,455 ----------- Realized & Unrealized Gain (Loss) on Investments--Net: Realized loss on investments--net (2,092,195) Change in unrealized appreciation on investments--net 8,688,043 ----------- Total realized and unrealized gain on investments--net 6,595,848 ----------- Net Increase in Net Assets Resulting from Operations $27,106,303
===========
See Notes to Financial Statements. The Municipal Fund Accumulation Program, Inc. Statements of Changes in Net Assets
For the Year Ended December 31, --------------------------- Increase (Decrease) in Net Assets: 2002 2001 ------------ ------------ Operations: Investment income--net $ 20,510,455 $ 20,586,623 Realized gain (loss)on investments--net (2,092,195) 435,165 Change in unrealized appreciation on investments--net 8,688,043 (8,930,648) ------------ ------------ Net increase in net assets resulting from operations 27,106,303 12,091,140 ------------ ------------ Dividends & Distributions to Shareholders: Investment income--net (20,456,922) (20,597,212) Realized gain on investments--net -- (90,422) ------------ ------------ Net decrease in net assets resulting from dividends and distributions to shareholders (20,456,922) (20,687,634) ------------ ------------ Capital Share Transactions: Net decrease in net assets resulting from capital share transactions (16,366,714) (16,509,073) ------------ ------------ Net Assets:
Total decrease in net assets (9,717,333) (25,105,567) Beginning of year 405,385,157 430,490,724 ------------ ------------ End of year* $395,667,824 $405,385,157 ============ ============ *Undistributed investment income--net $ 967,214 $ 1,007,709 ============ ============
See Notes to Financial Statements. The Municipal Fund Accumulation Program, Inc. Financial Highlights The following per share data and ratios have been derived from information provided in the financial statements.
For the Year Ended December 31, ---------------------------------------------------- Increase (Decrease) in Net Asset Value: 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Per Share Operating Performance: Net asset value, beginning of year $ 16.96 $ 17.33 $ 16.35 $ 18.50 $ 19.22 -------- -------- -------- -------- -------- Investment income--net .88* .85 .85 .79 .88 Realized and unrealized gain (loss) on investments--net .29 (.37) .98 (2.00) .12 -------- -------- -------- -------- -------- Total from investment operations 1.17 .48 1.83 (1.21) 1.00 -------- -------- -------- -------- -------- Less dividends and distributions: Investment income--net (.88) (.85) (.85) (.79) (.88) Realized gain on investments--net -- --++ -- -- (.84) In excess of realized gain on investments--net -- -- -- (.15) --
-------- -------- -------- -------- -------- Total dividends and distributions (.88) (.85) (.85) (.94) (1.72) -------- -------- -------- -------- -------- Net asset value, end of year $ 17.25 $ 16.96 $ 17.33 $ 16.35 $ 18.50 ======== ======== ======== ======== ======== Total Investment Return: Based on net asset value per share 7.09% 2.81% 11.57% (6.77%) 5.35% ======== ======== ======== ======== ======== Ratios to Average Net Assets: Expenses, net of reimbursement .77% .82% .79% .79% .76% ======== ======== ======== ======== ======== Expenses .77% .82% .79% .79% .76% ======== ======== ======== ======== ======== Investment income--net 5.16% 4.89% 5.06% 4.47% 4.54% ======== ======== ======== ======== ======== Supplemental Data: Net assets, end of year (in thousands) $395,668 $405,385 $430,491 $432,433 $525,583 ======== ======== ======== ======== ======== Portfolio turnover 40% 76% 111% 222% 178% ======== ======== ======== ======== ========
* Based on average shares outstanding. ++ Amount is less than $.01 per share. See Notes to Financial Statements. The Municipal Fund Accumulation Program, Inc. Notes to Financial Statements 1. Significant Accounting Policies: The Municipal Fund Accumulation Program, Inc. (the "Program") is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Program's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require the use of management accruals and estimates. The following is a summary of significant accounting policies followed by the Program. (a) Valuation of investments--Portfolio securities are valued by the Program's pricing agent, Kenny S&P Evaluation Services ("Kenny"). Until December 19, 2002, the method used by Kenny to value the Program's securities was to obtain "quotes" on comparable securities of comparable quality and to value such Program securities similarly. These values were not necessarily bids or actual last sale prices, but were estimates of the price at which the pricing agent believes the Program could sell such portfolio securities. Municipal bonds and other portfolio securities in which the Program invests are traded primarily in the over-the-counter municipal bond and money markets and, as of December 20, 2002, pursuant to the approval of the Board of Directors, are valued at the last available bid price in the over-the-counter market or on the basis of yield equivalents as obtained from one or more dealers that make markets in the securities. Financial futures contracts and options thereon, which are traded on exchanges, are valued at their settlement prices as of the close of such exchanges. Short-term investments with remaining maturities of sixty days or less are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Program, including valuations furnished by a pricing service retained by the Program, which may utilize a matrix system for valuations. The procedures of the pricing service and its valuations are reviewed by the officers of the Program under the general supervision of the Directors. (b) Derivative financial instruments--The Program may engage in various portfolio investment strategies to increase or decrease the level of risk to which the Program is exposed more quickly and efficiently than transactions in other types of instruments. 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 Program may purchase or sell financial 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 Program deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Program agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Program as unrealized gains or losses. When the contract is closed, the Program records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. (c) Income taxes--It is the Program's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. Interest income is recognized on the accrual basis. The Program amortizes all premiums and discounts on debt securities. The Municipal Fund Accumulation Program, Inc. Notes to Financial Statements (continued) (e) Prepaid registration fees--Prepaid registration fees are charged to expense as the related shares are issued. (f) Dividends and distributions to shareholders--Dividends from net investment income are declared and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. (g) Reclassification--Accounting principles generally accepted in the United States of America require that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. Accordingly, the current year's permanent book/tax difference of $94,028 has been reclassified between undistributed net investment income and accumulated net realized capital losses. This reclassification has no effect on net assets or net asset value per share. 2. Investment Advisory Agreement and Transactions with Affiliates: The Program 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. FAM is responsible for the management of the Program's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Program. For such services, the Program pays a monthly fee of .50%, on an annual basis, of the value of the Program's average daily net assets. For the year ended December 31, 2002, FAM reimbursed the Program in the amount of $62. FAM has entered into an Administrative Agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated, a subsidiary of ML & Co., Prudential Securities, Inc., Morgan Stanley Dean Witter and Salomon Smith Barney, Inc. (the "Administrators"), whereby the Administrators perform certain administrative duties on behalf of FAM. The Administrators receive a monthly fee from FAM equal to .20%, on an annual basis, of the Program's average daily net assets. The Program does not pay this fee, FAM pays this fee directly to the Administrators. For the year ended December 31, 2002, the Program reimbursed FAM $12,486 for certain accounting services. Certain officers and/or directors of the Program are officers and/or directors of FAM, PSI, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended December 31, 2002 were $153,997,040 and $168,640,170, respectively. Net realized gains (losses) for the year ended December 31, 2002 and net unrealized gains (losses) as of December 31, 2002 were as follows: Realized Unrealized Gains Gains (Losses) (Losses) ----------- ----------- Long-term investments $ 2,338,657 $22,385,966 Financial futures contracts (4,430,852) (611,797) ----------- ----------- Total $(2,092,195) $21,774,169 =========== =========== As of December 31, 2002, net unrealized appreciation for Federal income tax purposes aggregated $22,377,941, of which $24,286,758 related to appreciated securities and $1,908,817 related to depreciated securities. The aggregate cost of investments at December 31, 2002 for Federal income tax purposes was $370,798,988. 4. Capital Share Transactions: Transactions in capital shares were as follows: For the Year Ended Dollar December 31, 2002 Shares Amount ----------------------------- ---------- ------------ Shares sold 1,254,838 $ 21,495,290 Shares issued to shareholders in reinvestment of dividends 1,093,117 18,710,633 ---------- ------------ Total issued 2,347,955 40,205,923 Shares redeemed (3,301,938) (56,572,637) ---------- ------------ Net decrease (953,983) $(16,366,714) ========== ============ For the Year Ended Dollar December 31, 2001 Shares Amount ----------------------------- ---------- ------------ Shares sold 1,590,897 $ 27,357,305 Shares issued to shareholders in reinvestment of dividends and distributions 1,105,658 19,043,056 ---------- ------------ Total issued 2,696,555 46,400,361 Shares redeemed (3,646,020) (62,909,434) ---------- ------------ Net decrease (949,465) $(16,509,073) ========== ============ The Municipal Fund Accumulation Program, Inc. Notes to Financial Statements (concluded) 5. Short-Term Borrowings: The Program, along with certain other funds managed by FAM and its affiliates, is a party to a credit agreement with Bank One, N.A. and certain other lenders. Effective November 29, 2002, in conjunction with the renewal for one year at the same terms, the total commitment was reduced from $1,000,000,000 to $500,000,000. The Program may borrow under the credit agreement to fund shareholder redemptions and for other lawful purposes other than for leverage. The Program may borrow up to the maximum amount allowable under the Program's current prospectus and statement of additional information, subject to various other legal, regulatory or contractual limits. The Program pays a commitment fee of .09% per annum based on the Program's pro rata share of the unused portion of the credit agreement. Amounts borrowed under the credit agreement bear interest at a rate equal to, at each fund's election, the Federal Funds rate plus .50% or a base rate as determined by Bank One, N.A. The Program did not borrow under the credit agreement during the year ended December 31, 2002. 6. Distributions to Shareholders: On January 15, 2003, a tax-exempt income dividend of $.074503 was declared. The dividend was paid on January 15, 2003 to shareholders of record on January 15, 2003. The tax character of distributions paid during the fiscal years ended December 31, 2002 and December 31, 2001 was as follows: 12/31/2002 12/31/2001 ----------- ----------- Distributions paid from: Tax-exempt income $20,456,922 $20,597,212 Ordinary income -- 90,422 ----------- ----------- Total distributions $20,456,922 $20,687,634 =========== =========== As of December 31, 2002, the components of accumulated losses on a tax basis were as follows: Undistributed tax-exempt income--net $ 967,214 Undistributed long-term capital gains--net -- ------------ Total undistributed earnings--net 967,214 Capital loss carryforward (31,333,719)* Unrealized gains--net 18,857,336** ------------ Total accumulated losses--net $(11,509,169) ============ *On December 31, 2002, the Fund had a net capital loss carryforward of $31,333,719, of which $12,553,988 expires in 2007, $18,431,171 expires in 2008 and $348,560 expires in 2010. This amount will be available to offset like amounts of any future taxable gains. **The difference between book-basis and tax-basis net unrealized gains is attributable primarily to the tax deferral of losses on wash sales, the tax deferral of losses on straddles and the realization for tax purposes of unrealized gains (losses) on certain futures contracts. The Municipal Fund Accumulation Program, Inc. Independent Auditors' Report The Board of Directors and Shareholders, The Municipal Fund Accumulation Program, Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of The Municipal Fund Accumulation Program, Inc. as of December 31, 2002, 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 financial highlights for each of the years presented. These financial statements and the financial highlights are the responsibility of the Program'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 auditing standards generally accepted in the United States of America. 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 December 31, 2002 by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. 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 Municipal Fund Accumulation Program, Inc. as of December 31, 2002, the results of its operations, the changes in its net assets, and the financial highlights for the respective stated periods in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Princeton, New Jersey February 7, 2003 The Municipal Fund Accumulation Program, Inc. Important Tax Information (unaudited) All of the net investment income distributions paid monthly by The Municipal Fund Accumulation Program, Inc. during its taxable year ended December 31, 2002 qualify as tax-exempt interest dividends for Federal income tax purposes. Please retain this information for your records. The Municipal Fund Accumulation Program, Inc. Officers and Directors
Number of Portfolios Other in Fund Director- Position(s) Length Complex ships Held by of Time Overseen Held Name, Address & Age with Fund Served Principal Occupation(s) during Past 5 Years by Director Director ---------------------- ----------- ------- --------------------------------------------- -------------- ---------
Interested Director Terry K. Glenn* President 1999 to Chairman, Americas Region since 2001 and 117 Funds None 800 Scudders Mill Road and present Executive Vice President since 1983 of 162 Portfolios Plainsboro, Director and Fund Asset Management ("FAM") and Merrill NJ 08536 1985 to Lynch Investment Managers, L.P. ("MLIM"); Age: 62 present President of Merrill Lynch Mutual Funds since 1999; President of FAM Distributors, Inc. ("FAMD") since 1986 and Director thereof since 1991; Executive Vice President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; President of Princeton Administrators, L.P. since 1988; Director of Financial Data Services, Inc. since 1985.
*Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which FAM or MLIM acts as investment adviser. Mr. Glenn is an "interested person," as described in the Investment Company Act, of each Fund based on his positions as Chairman (Americas Region) and Executive Vice President of FAM and MLIM; President of FAMD; Executive Vice President of Princeton Services; and President of Princeton Administrators, L.P. The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund President, Mr. Glenn serves at the pleasure of the Board of Directors.
Number of Portfolios Other in Fund Director- Position(s) Length Complex ships Held of Time Overseen Held by
Name, Address & Age with Fund Served* Principal Occupation(s) during Past 5 Years by Director Director ---------------------- ----------- ------- ------------------------------------------- ------------- --------- Independent Directors Ronald W. Forbes Director 1980 to Professor Emeritus of Finance, School 45 Funds None P.O. Box 9095 present of Business, State University of New 54 Portfolios Princeton, York at Albany since 2000 and NJ 08543-9095 Professor thereof from 1989 to 2000. Age: 62 Cynthia A. Montgomery Director 1995 to Professor, Harvard Business School since 45 Funds Unum- P.O. Box 9095 present 1989. 54 Portfolios Provident Princeton, Corpora- NJ 08543-9095 tion; Age: 50 Newell Rubber- maid Inc. Charles C. Reilly Director 1990 to Self-employed financial consultant since 45 Funds None P.O. Box 9095 present 1990. 54 Portfolios Princeton, NJ 08543-9095 Age: 71 Kevin A. Ryan Director 1992 to Founder and Director Emeritus of The 45 Funds None P.O. Box 9095 present Boston University Center for the 54 Portfolios Princeton, Advancement of Ethics and Character; NJ 08543-9095 Professor of Education at Boston Age: 70 University from 1982 to 1999 and Professor Emeritus since 1999. Roscoe S. Suddarth Director 2000 to President and Chief Executive Officer of 45 Funds None P.O. Box 9095 present the Middle East Institute from 1995 to 54 Portfolios
Princeton, 2001; Associate with Global Business NJ 08543-9095 Access Ltd. from 1998 to 2002; Chairman Age: 67 of the Board of Advisors of the Center for Contemporary Arab Studies at Georgetown University and Secretary of the American Academy of Diplomacy.
The Municipal Fund Accumulation Program, Inc. Officers and Directors (concluded)
Number of Portfolios Other in Fund Director- Position(s) Length Complex ships Held of Time Overseen Held by Name, Address & Age with Fund Served* Principal Occupation(s) during Past 5 Years by Director Director ---------------------- ----------- ------- ------------------------------------------- ------------- ----------- Independent Directors (concluded) Richard R. West Director 1980 to Dean Emeritus of New York University, 45 Funds Bowne & P.O. Box 9095 present Leonard N. Stern School of Business 54 Portfolios Co., Inc.; Princeton, Administration since 1994. Vornado NJ 08543-9095 Realty Age: 64 Trust; Vornado Operating Company; Alexander's Inc.
Edward D. Zinbarg Director 2000 to Retired. 45 Funds None P.O. Box 9095 present 54 Portfolios Princeton, NJ 08543-9095 Age: 68
* The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
Position(s) Length Held of Time Name, Address & Age with Fund Served* Principal Occupation(s) during Past 5 Years ---------------------- ----------- ------- ------------------------------------------- Fund Officers Donald C. Burke Vice 1993 to First Vice President of FAM and MLM since 1997 and Treasurer thereof P.O. Box 9011 President present since 1999; Senior Vice President and Treasurer of Princeton Services Princeton, and and since 1999; Vice President of FAMD since 1999; Director of MLIM NJ 08543-9011 Treasurer 1999 to Taxation since 1990. Age: 42 present Kenneth A. Jacob Senior 2002 to Managing Director of MLIM since 2000 and First Vice President from P.O. Box 9011 Vice present 1997 to 2000. Princeton, President NJ 08543-9011 Age: 51 John M. Loffredo Senior 2002 to Managing Director of MLIM since 2000 and First Vice President from P.O. Box 9011 Vice present 1997 to 2000. Princeton, President NJ 08543-9011 Age: 39 Theodore R. Jaeckel Jr. Vice 2001 to Director (Municipal Tax-Exempt Fund Management) of MLIM since 1997. P.O. Box 9011 President present Princeton, NJ 08543-9011
Age: 43 Brian D. Stewart Secretary 2002 to Vice President (Legal Advisory) of MLIM since 2002; Attorney with P.O. Box 9011 present Reed Smith from 2001 to 2002; Attorney with Saul Ewing from 1999 Princeton, to 2001. NJ 08543-9011 Age: 33
*Officers of the Fund serve at the pleasure of the Board of Directors. Further information about the Fund's Directors is available in the Fund's Statement of Additional Information, which can be obtained without charge by calling 1-800-MER-FUND. Custodian and Transfer Agent The Bank of New York 101 Barclay Street New York, NY 10007