Exhibit17.b
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch Municipal Bond Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800
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Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is a professionally
managed, diversified, open-end investment company that seeks to provide
shareholders with as high a level of income exempt from Federal income taxes
as is consistent with the investment policies of each of its Portfolios. The
Fund is comprised of three separate Portfolios: the Insured Portfolio, the
National Portfolio and the Limited Maturity Portfolio (each, a "Portfolio"),
each of which invests primarily in a diversified portfolio of debt obligations
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies and instrumentalities, the
interest on which, in the opinion of bond counsel to the issuer, is exempt
from Federal income tax (such obligations are herein referred to as "Municipal
Bonds").
The Fund is a series fund and is comprised of three separate Portfolios.
Each Portfolio is, in effect, a separate fund issuing its own shares. Pursuant
to the Merrill Lynch Select Pricing (SM) System, each Portfolio of the Fund
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. Class C shares of the Limited
Maturity Portfolio are available only through the Exchange Privilege. The
Merrill Lynch Select Pricing (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.
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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 27, 2000, which has been filed with the Securities
and Exchange Commission (the "Commission") and is available upon oral or
written request without charge. Copies of the Prospectus can be obtained by
calling or writing the Fund at the above telephone number or address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
2000 annual report to shareholders.
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Fund Asset Management --- Investment Adviser
FAM Distributors, Inc. --- Distributor
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The date of this Statement of Additional Information is October 27, 2000.
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TABLE OF CONTENTS
Page
Investment Objective and Policies 4
Investment Objective 4
Investment Policies of the Portfolios 5
Insured Portfolio 5
National Portfolio 6
Limited Maturity Portfolio 8
Description of Municipal Bonds 8
Municipal Lease Obligations 10
Forward Commitments 10
Description of Temporary Investments 10
Financial Futures Contracts and Derivatives 11
Description of Financial Futures Contracts 12
Indexed and Inverse Floating Obligations 16
Investment Restrictions 16
Management of the Fund 18
Directors and Officers 18
Compensation of Directors 19
Management and Advisory Arrangements 20
Transfer Agency Services 22
Code of Ethics 23
Purchase of Shares 23
Initial Sales Charge Alternatives --- Class A and Class D Shares 24
Reduced Initial Sales Charges --- Class A and Class D Shares 27
Right of Accumulation 27
Letter of Intention 27
Employee Access Accounts 28
TMA Managed Trusts 28
Merrill Lynch Blueprint Program 28
Purchase Privileges of Certain Persons 28
Acquisition of Certain Investment Companies 29
Purchases by Banks 29
Fee-Based Investment Programs 29
Deferred Sales Charge Alternatives --- Class B and Class C Shares 30
Contingent Deferred Sales Charge --- Class B Shares 30
Contingent Deferred Sales Charges --- Class C Shares 31
Conversion of Class B Shares to Class D Shares 32
Distribution Plans 33
Limitations on the Payment of Deferred Sales Charges 35
Redemption of Shares 38
Redemption 38
Repurchase 39
Reinstatement Privilege --- Class A and Class D Shares 39
Deferred Sales Charge --- Class B and Class C Shares 40
Merrill Lynch Blueprint Program 40
Determination of Net Asset Value 40
Portfolio Transactions and Brokerage Commissions 41
Dividends and Taxes 43
Dividends 43
Federal Income Taxes 43
State and Local Taxes 46
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Page
Shareholder Services 46
Investment Account 47
Automatic Investment Plans 47
Fee-Based Programs 48
Automatic Reinvestment of Dividends 49
Systematic Withdrawal Plans 49
Exchange Privilege 51
Performance Data 54
Additional Information 54
Organization of the Fund 54
Transfer Agent 54
Custodian 54
Counsel and Auditor 54
Shareholder Reports 55
Shareholder Inquiries 55
Additional Information 55
Computation of Offering Price Per Share 55
Financial Statements 56
Appendix A --- Descriptions of Ratings A-1
Appendix B --- Insurance on Portfolio Securities B-1
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INVESTMENT OBJECTIVE AND POLICIES
Reference is made to "How Each Portfolio Invests" in the Prospectus for
a discussion of the investment objective and policies of the Fund.
At June 30, 2000, the average maturity of the Insured Portfolio,
National Portfolio and the Limited Maturity Portfolio was approximately 18.17
years, 22.25 years and 1.89 years, respectively.
Investment Objective
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. 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 their political
subdivisions, agencies and instrumentalities, the interest on which, in the
opinion of bond counsel to the issuer, is exempt from Federal income tax.
Municipal Bonds include general obligations bonds, revenue or special
obligation bonds, industrial development bonds, variable rate demand notes,
and short-term tax-exempt municipal obligations such as tax anticipation
notes. Each Portfolio at all times, except during temporary defensive periods,
maintains at least 80% of its net assets invested in Municipal Bonds. In
addition, each Portfolio may not purchase securities other than Municipal
Bonds and certain temporary investments described below. These are fundamental
policies of each Portfolio and may not be changed without a vote of the
majority of the outstanding shares of the Portfolio. Each Portfolio currently
contemplates that it will not invest more than 25% of its total assets (taken
at market value) in Municipal Bonds whose issuers are located in the same
state. There can be no assurance that the objective of any Portfolio can be
attained.
While the Fund does not intend to realize taxable investment income,
each Portfolio has the authority to invest as much as 20% of its net assets on
a temporary basis in taxable money market securities with remaining maturities
not in excess of one year from the date of purchase ("Temporary Investments")
for liquidity purposes or as a temporary investment of cash pending investment
of such cash in Municipal Bonds. In addition, the Fund reserves the right to
invest temporarily a greater portion of its assets in Temporary Investments
for defensive purposes, when, in the judgment of Fund Asset Management, L.P.
(the "Investment Adviser" or "FAM"), market conditions warrant. Temporary
Investments consist of U.S. Government securities, U.S. Government agency
securities, domestic bank certificates of deposit and bankers' acceptances,
short-term corporate debt securities such as commercial paper, and repurchase
agreements. From time to time, the Fund may realize capital gains that will
constitute taxable income. In addition, the Fund may invest in certain
tax-exempt securities that are classified as "private activity bonds," which
may subject certain investors to an alternative minimum tax. See "Dividends
and Taxes."
Certain instruments in which the Fund may invest may be characterized as
derivative instruments. The Insured Portfolio, the National Portfolio and the
Limited Maturity Portfolio are authorized to engage in transactions in
financial futures contracts only for hedging purposes. For a more complete
description of futures transactions, see "Financial Futures Contracts and
Derivatives" below. Each Portfolio is also authorized to invest in indexed and
inverse floating rate obligations both for hedging purposes and to enhance
income. See "Indexed and Inverse Floating Obligations" below.
Investment in the Fund offers several potential benefits. The Fund
offers investors the opportunity to receive income exempt from Federal income
taxes from a diversified, professionally managed portfolio of Municipal Bonds.
The Fund also provides a comparatively high level liquidity because of its
redemption features and relieves the investor of the burdensome administrative
details involved in managing a portfolio of tax-exempt securities. These
potential benefits are at least partially offset by the fact that there are
expenses in operating an investment company such as the Fund. Such expenses
consist primarily of the investment advisory fee and operational expenses,
including, in the case of the Insured Portfolio, premiums for insurance on
portfolio securities.
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INVESTMENT POLICIES OF THE PORTFOLIOS
Each Portfolio pursues its investment objective through the separate
investment policies described below. These policies differ with respect to the
maturity and quality of portfolio securities in which a Portfolio may invest,
and these policies can be expected to affect the yield on each Portfolio and
the degree of market, financial and interest rate risk to which the Portfolio
is subject. Generally, Municipal Bonds with longer maturities tend to produce
higher yields and are subject to greater market fluctuations as a result of
changes in interest rates ("interest rate risk") than are Municipal Bonds with
shorter maturities. In addition, lower rated Municipal Bonds generally will
provide a higher yield than higher rated Municipal Bonds of similar maturity
but are also generally subject to greater market risk and to a greater degree
of risk with respect to the ability of the issuer to meet its principal and
interest obligations ("credit risk"). A Portfolio's net asset value may fall
when interest rates rise and rise when interest rates fall. Because of its
emphasis on investments in Municipal Bonds, each portfolio should be
considered as a means of diversifying an investment portfolio and not in
itself a balanced investment plan. See "Appendix --- Description of Ratings"
for information with respect to ratings assigned to Municipal Bonds and
Temporary Investments by rating agencies.
Insured Portfolio
The Insured Portfolio invests primarily in higher quality (investment
grade) Municipal Bonds covered by portfolio insurance guaranteeing the timely
payment of principal at maturity and interest when due. Investment grade
Municipal Bonds are those rated at the date of purchase in the four highest
rating categories of Standard & Poor's ("S&P") (AAA, AA, A and BBB), Fitch,
Inc. ("Fitch") (AAA, AA, A and BBB) or Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa, A and Baa) in the case of long-term debt, rated MIG 1
through MIG 3 by Moody's, rated F-1+ through F-3 by Fitch, or rated SP-1
through SP-2 by S&P in the case of short-term notes, and rated P-1 or P-2 in
the case of Moody's, rated F-1+ through F-3 by Fitch or A-1 through A-3 by S&P
in the case of tax-exempt commercial paper. Depending on market conditions, it
is expected that Municipal Bonds with maturities beyond five years will
comprise a major portion of this Portfolio. See Appendix B "Insurance on
Portfolio Securities" for more information.
The Insured Portfolio will invest only in Municipal Bonds that, at the
time of purchase, either (1) are insured under an insurance policy purchased
by the Fund or (2) are insured under an insurance policy obtained by the
issuer thereof or any other party from an insurance carrier meeting the
criteria of the Fund set forth below. The Fund has purchased from AMBAC
Assurance 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
timely 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. In the event interest or principal on an Insured Municipal Bond
is not paid when due, AMBAC or MBIA or FSA (depending on which Policy covers
the bond) is obligated under its Policy to make payment not later than 30 days
after it has been notified by, and provided with documentation from, the Fund
that such nonpayment has occurred. The insurance feature reduces financial
risk, but the cost thereof and the restrictions on investments imposed by the
guidelines in the insurance policy may reduce the yield to shareholders.
The Policies guarantee the payment of principal at maturity and interest
on all Municipal Bonds that are purchased by the Insured Portfolio at a time
when they are eligible for insurance. Municipal Bonds are eligible for
insurance if they are, at the time of purchase by the Insured Portfolio,
identified separately or by category in qualitative guidelines furnished by
AMBAC, MBIA or FSA and are in compliance with the aggregate limitations on
amounts set forth in such guidelines. AMBAC, MBIA and/or FSA may withdraw
particular
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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.
The Policies will be effective only as to Insured Municipal Bonds
beneficially owned by the Insured Portfolio. In the event of a sale of any
Municipal Bonds held by the Insured Portfolio, the issuer of the relevant
Policy is liable only for those payments of interest and principal that are
then due and owing. The Policies do not guarantee the market value of the
Insured Municipal Bonds or the value of the shares of the Insured Portfolio.
It is the intention of the Insured Portfolio to retain any Insured Municipal
Bonds that are in default or in significant risk of default and to place a
value on the insurance, which ordinarily will be the difference between the
market value of the defaulted security and the market value of similar
securities that are not in default. In certain circumstances, however, the
Fund's management may determine that an alternate value for the insurance,
such as the difference between the market value of the defaulted security and
its par value, is more appropriate. As the result of the value placed on the
insurance with respect to securities held in the Insured Portfolio that were
in default at the end of the Fund's last fiscal year, such Insured Municipal
Bonds were effectively valued at par. The Insured Portfolio's ability to
manage its portfolio will be limited to the extent it holds defaulted Insured
Municipal Bonds, which may limit its ability in certain circumstances to
purchase other Municipal Bonds. See "Determination of Net Asset Value" for a
more complete description of the Insured Portfolio's method of valuing
defaulted Insured Municipal Bonds and Insured Municipal Bonds that have a
significant risk of default.
AMBAC, MBIA and FSA may not withdraw coverage on securities insured by
their Policies and held by the Insured Portfolio so long as they remain in the
Insured Portfolio. AMBAC, MBIA and FSA may not cancel their Policies for any
reason except failure to pay premiums when due. AMBAC and FSA have reserved
the right at any time upon written notice to the Fund to refuse to insure any
additional Municipal Bonds purchased by the Insured Portfolio after the
effective date of such notice. The Board of Directors of the Fund has reserved
the right to terminate any of the Policies if it determines that the benefits
to the Insured Portfolio of having its portfolio insured are not justified by
the expense involved.
The premiums for the Policies are paid by the Insured Portfolio and the
yield on the Portfolio is reduced thereby. The Investment Adviser estimates
that the cost of insurance on bonds currently in the Portfolio will range from
approximately 0.23% to 0.37% of the Portfolio's average net assets during the
upcoming year. The estimate is based on the expected composition of the
Portfolio.
National Portfolio
The National Portfolio may invest in Municipal Bonds rated in any rating
category or unrated Municipal Bonds, with maturities beyond five years. The
Investment Adviser considers ratings as one of several factors in its
independent credit analysis of issuers. This Portfolio normally can be
expected to offer the highest yields of the three Portfolios, but also be
subject to the highest market and financial risks.
The investment policies of the National Portfolio are not governed by
specific rating categories. The National Portfolio may invest in Municipal
Bonds rated in any rating category or unrated Municipal Bonds. The Portfolio
will usually invest in Municipal Bonds having a maturity of five years or
longer. Portfolio management will choose Municipal Bond investments that it
believes offer a relatively high potential for total return relative to their
total risk. Although the Portfolio's investment policies are not governed by
specific rating categories, Portfolio management does not presently intend to
invest more than 35% of the Portfolio's assets in Municipal Bonds rated below
investment grade (below BBB by S&P or Fitch or below Baa by Moody's) or
unrated Municipal Bonds that Portfolio management believes are of comparable
quality. These lower-rated obligations are commonly known as "junk bonds."
Junk bonds have a high level of financial risk and there is a greater
potential for the Portfolio to lose income and principal on these investments.
The 35% limitation on junk bond investments reflects only the present
intention of Portfolio management, and may be changed without approval by the
Board of Directors of the Fund. Therefore, it is possible that the Portfolio
could invest up to 100% of its assets in junk bonds. Because investment in
medium to lower rated Municipal
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Bonds entails relatively greater risks of loss of income or principal than an
investment in higher rated securities, an investment in the National Portfolio
may not be appropriate for all investors. Investors should consider these
risks before investing.
Risk factors in transactions in Junk Bonds. Junk bonds are generally
considered to have varying degrees of speculative characteristics.
Consequently, although junk bonds can be expected to provide higher yields,
such securities may be subject to greater risk of default, volatility of price
and risks to principal and income than lower yielding, higher rated debt
securities. Investments in junk bonds will be made only when, in the judgment
of Portfolio management, such securities provide attractive total return
potential relative to the risk of such securities, as compared to higher rated
debt securities. The National Portfolio will not invest in debt securities in
the lowest rating categories (those rated CC or lower by S&P or Fitch or Ca or
lower by Moody's) unless Portfolio management believes that the financial
condition of the issuer or the protection afforded the particular securities
is stronger than would otherwise be indicated by such low ratings. The
National Portfolio does not intend to purchase debt securities that are in
default or that Portfolio management 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. During an economic downturn or recession,
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
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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.
Limited Maturity Portfolio
The Limited Maturity Portfolio invests primarily in a portfolio of
short-term investment grade Municipal Bonds. Municipal Bonds in the Limited
Maturity Portfolio will be either Municipal Bonds with a remaining maturity of
less than four years or short-term municipal notes, which typically are issued
with a maturity of not more than one year. The Limited Maturity Portfolio will
treat Municipal Bonds that it has the option to require the issuer to redeem
within four years as having a remaining maturity of less than four years, even
if the period to the stated maturity date of such Bonds is greater than four
years. Municipal notes include tax anticipation notes, bond anticipation notes
and revenue anticipation notes. The Limited Maturity Portfolio may generally
be expected to offer a lower yield than the other Portfolios. Interest rates
on short term Municipal Bonds may fluctuate more widely from time to time than
interest rates on longer term Municipal Bonds. However, because of the shorter
maturities, the market value of the Municipal Bonds held by the Limited
Maturity Portfolio may generally be expected to fluctuate less as a result of
changes in prevailing interest rates.
The Limited Maturity Portfolio will invest primarily in Municipal Bonds
rated at the date of purchase in the four highest rating categories by S&P
(AAA, AA, A and BBB) Fitch (AAA, AA, A and BBB) or Moody's (Aaa, Aa, A and
Baa) in the case of long-term debt, rated by Moody's as MIG 1 through MIG 3,
F-1+ through F-3 by Fitch, or rated SP-1+ through SP-2 by S&P in the case of
short-term tax-exempt notes, and rated by Moody's P-1 through P-2, F-1+
through F-3 by Fitch or rated A-1+ through A-3 by S&P in the case of
tax-exempt commercial paper. The Limited Maturity Portfolio will primarily
invest in other Municipal Bonds deemed to qualify for such ratings and in
variable rate tax-exempt demand notes. Securities rated in the lowest of these
categories are considered to have some speculative characteristics. The
Limited Maturity Portfolio may continue to hold securities that, after being
purchased by the Portfolio, are downgraded to a rating lower than those set
forth above.
Description of Municipal Bonds
Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to finance various privately
operated facilities, including pollution control facilities. Such obligations
are included within the term Municipal Bonds if the interest paid thereon is
exempt from Federal income tax. Municipal Bonds also include short term
tax-exempt municipal obligations such as tax anticipation notes, bond
anticipation notes, revenue anticipation notes, variable rate demand notes and
Public Housing Authority notes that are fully secured by a pledge of the full
faith and credit of the United States.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special obligation" bonds. General obligation
bonds are secured by the issuer's pledge of faith, credit and taxing power for
the payment of principal and interest. Revenue or special obligation bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source such as from the user of the facility being
financed. Industrial development bonds are, in most cases, revenue bonds and
do not generally constitute the pledge of the credit or taxing power of the
issuer of such bonds. The payment of the principal of and interest on such
industrial revenue bonds depends solely on the ability of the user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. A Portfolio may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such
bonds becomes a moral commitment but not a legal obligation of the state or
municipality in question.
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Municipal Bonds may at times be purchased or sold on a delayed delivery
basis or a when-issued basis. These transactions arise when securities are
purchased or sold by a Portfolio with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligation and
the interest rate are each fixed at the time the buyer enters into the
commitment. The Fund will only make commitments to purchase such securities
with the intention of actually acquiring the securities, but the Fund may sell
these securities prior to the settlement date if the Investment Adviser deems
it advisable. Purchasing Municipal Bonds on a when-issued basis involves the
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself; if yields so
increase, the value of the when-issued obligation will generally decrease.
When a Portfolio engages in when-issued and delayed delivery transactions, the
Portfolio relies on the buyer or seller, as the case may be, to consummate the
trade. Failure of the buyer or seller to do so may result in a Portfolio
missing the opportunity of obtaining a price considered to be advantageous.
The Fund will maintain a separate account at 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 obligations ("VRDOs") are floating rate securities
that combine an interest in a long term municipal bond with the right to
demand payment before maturity from a bank or other financial institution. 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 VRDO at
approximately the par value of the VRDO 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 VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank ("institution").
Participating VRDOs 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 VRDOs from
the institution upon a specified number of days' notice, not to exceed seven
days. In addition, the Participating VRDO 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 VRDOs 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 VRDOs.
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 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 and Taxes."
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Municipal Lease Obligations
Also included within the general category of bonds are participation
certificates in a lease, an installment purchase contract or a conditional
sales contract (hereinafter collectively called "lease obligations") entered
into by a state or political subdivision to finance the acquisition,
development or construction of equipment, land or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
lessee's unlimited taxing power is pledged, a lease obligation is frequently
backed by the lessee's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the lessee has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that has not yet
developed the depth of marketability associated with more conventional
securities. Certain investments in lease obligations may be illiquid. The
Portfolios may not invest in illiquid lease obligations if such investment,
together with all other illiquid investments, would exceed 15% of a
Portfolio's net assets. A Portfolio may, however, invest without regard to
such limitation in lease obligations which the Investment Adviser, pursuant to
guidelines which have been adopted by the Board of Directors and subject to
the supervision of the Board, determines to be liquid. The Investment Adviser
will deem lease obligations liquid if they are publicly offered and have
received an investment grade rating of BBB or better by S&P or Fitch, or Baa
or better by Moody's. Unrated lease obligations, or those rated below
investment grade, will be considered liquid if the obligations come to the
market through an underwritten public offering and at least two dealers are
willing to give competitive bids. In reference to the latter, the Investment
Adviser must, among other things, also review the creditworthiness of the
entity obligated to make payment under the lease obligation and make certain
specified determinations based on such factors as the existence of a rating or
credit enhancement such as insurance, the frequency of trades or quotes for
the obligation and the willingness of dealers to make a market in the
obligation.
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.
Description of Temporary Investments
The short term money market securities in which the Portfolios may
invest as temporary investments consist of U.S. Government securities, U.S.
Government agency securities, domestic bank certificates of deposit and
bankers' acceptances, short term corporate debt securities such as commercial
paper and repurchase agreements. The money market securities must have a
stated maturity not in excess of one year from the date of purchase. U.S.
Government securities consist of various types of marketable securities issued
by or guaranteed as to principal and interest by the U.S. Government and
supported by the full faith and credit of the U.S. Treasury. U.S. Government
agency securities consist of debt securities issued by government sponsored
enterprises, federal agencies and international institutions. Such securities
are not direct obligations of the Treasury but involve government sponsorship
or guarantees by government agencies or enterprises. The Fund has established
the following standards with respect to money market securities in which the
Portfolios invest. Commercial paper investments at the time of purchase must
be rated "A" by S&P, "Prime" by Moody's or F-1 by Fitch or, if not rated,
issued by companies having an outstanding debt issue rated at least "A" by
S&P, Moody's or Fitch. Investments in corporate bonds and debentures (which
must have maturities at the date of purchase of one year or less) must be
rated at the time of purchase at least "A" by S&P, Moody's or Fitch. The
Portfolios may not invest in any securities issued by a commercial bank or a
savings and
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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.
Financial Futures Contracts and Derivatives
The Portfolios are authorized to purchase and sell certain financial
futures contracts ("futures contracts") and options on such futures contracts
solely for the purpose of hedging their investments in Municipal Bonds against
declines in value and to hedge against increases in the cost of securities the
Portfolios intend to purchase. A financial futures contract obligates the
seller of a contract to deliver and the purchaser of a contract to take
delivery of the type of financial instrument covered by the contract or, in
the case of index-based futures contracts, to make and accept a cash
settlement, at a specific future time for a specified price. A sale of
financial futures contracts may provide a hedge against a decline in the value
of portfolio securities because such depreciation may be offset, in whole or
in part, by an increase in the value of the position in the futures contracts.
A purchase of financial futures contracts may provide a hedge against an
increase in the cost of securities intended to be purchased, because such
appreciation may be offset, in whole or in part, by an increase in the value
of the position in the futures contracts. None of the Portfolios is required
to engage in hedging transactions and each may choose not to do so.
The Portfolios intend to trade in futures contracts based upon The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large, recently issued tax-exempt bonds, and to engage in transactions in
exchange-traded futures contracts on U.S. Treasury securities and options on
such futures. If making or accepting delivery of the underlying commodity is
not desired, a position in a futures contract or an option on a futures
contract may be terminated only by entering into an offsetting transaction on
the exchange on which the position was established and only if there is a
liquid market for such contract. If it is not economically practicable, or
otherwise possible to close a futures position or certain option positions
entered into by a Portfolio, the Portfolio could be required to make
continuing daily cash payments of variation margin in the event of adverse
price movements. In such situations, if the Portfolio has insufficient cash,
it may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition,
the Portfolio may be required to perform under the terms of its contracts. The
inability to close futures or options positions could also have an adverse
impact on the Portfolio's ability to hedge effectively. There is also risk of
loss by a Portfolio of margin deposits in the event of bankruptcy of a broker
with whom the Portfolio has an open position in a futures contract, or the
exchange or clearing organization on which that contract is traded. The
Portfolios may also engage in transactions in other futures contracts, such as
futures contracts on other municipal bond indexes that may become available,
if the Investment Adviser believes such contracts would be appropriate for
hedging the Portfolios' investments in Municipal Bonds.
Utilization of futures or option contracts involves the risk of
imperfect correlation in movements in the price of such contracts and
movements in the price of the security or securities that are the subject of
the hedge. If the price of the futures or option contract moves more or less
than the price of the security or securities that are subject of the hedge, a
Portfolio will experience a gain or loss that will not be completely offset by
movements in the price of such security, which could occur as a result of many
factors, including where the securities underlying futures or option contracts
have different maturities, ratings, or geographic mixes than the security
being hedged. In addition, the correlation may be affected by additions to or
deletions from the index that serves as a basis for an index futures contract.
The trading of futures contracts or options on futures contracts based on
indexes of securities also involves a risk of imperfect correlation between
the value of the futures contracts and the value of the underlying index. The
anticipated spread between such values or in the correlation between the
futures contract and the underlying security may be affected by differences in
markets, such as 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
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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.
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 not actually
leveraged.
The trading of futures contracts and options thereon is subject to
certain market risks, such as trading halts, suspensions, exchange or clearing
house equipment failures, government intervention or other disruptions of
normal trading activity, which could at times make it difficult or impossible
to liquidate existing positions.
The liquidity of the market in futures contracts may be further
adversely affected by "daily price fluctuation limits" established by contract
markets, which limit the amount of a fluctuation in the price of a futures
contract or option thereon during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open positions at prices
beyond the limit. Prices of existing contracts have in the past reached the
daily limit on a number of consecutive trading days. The Portfolios will enter
into a futures position only if, in the judgment of the Investment Adviser,
there appears to be an actively traded market for such futures contracts.
The successful use of transactions in futures contracts and options
thereon depends on the ability of the Investment Adviser correctly to forecast
the direction and extent of price movements of these instruments, as well as
price movements of the securities held by the Portfolios within a given time
frame. To the extent these price movements are not correctly forecast or move
in a direction opposite to that anticipated, the Portfolios may realize a loss
on the hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the participating
Portfolio's total return for such period may be less than if it had not
engaged in the hedging transaction. See "Additional Information ---
Description of Financial Futures Contracts" below for a further discussion of
the risks of futures trading.
Under regulations of the Commodity Futures Trading Commission ("CFTC"),
the futures trading activities described herein will not result in the
Portfolios being deemed to be "commodity pools," as defined under such
regulations, provided that certain restrictions are adhered to. In particular,
among other requirements, the Portfolios may either (a) purchase and sell
futures contracts only for bona fide hedging purposes, as defined under CFTC
regulations, or (b) limit any transaction not qualifying as bona fide hedging
so that the sum of the amount of initial margin deposits and premiums paid on
such positions would not exceed 5% of the market value of a Portfolio's net
assets. Margin deposits may consist of cash or securities acceptable to the
broker and the relevant contract market.
When a Portfolio purchases a futures contract, it will maintain an
amount of cash, cash equivalents or commercial paper or other liquid
securities in a segregated account with the Fund's custodian, so that the
amount segregated plus the amount of initial margin and option premiums held
in the account of its broker equals the value represented by the futures
contract, as reflected by its daily settlement price, thereby ensuring that
the use of such futures contract is unleveraged. It is not anticipated that
transactions in the futures contracts will have the effect of increasing
portfolio turnover.
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
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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. Each Portfolio intends to close out
its futures contracts prior to the delivery date of such contracts.
The Portfolios may sell futures contracts in anticipation of a decline
in value of their investments in Municipal Bonds. The loss associated with any
such decline could be reduced without employing futures as a hedge by selling
long term securities and either reinvesting the proceeds in securities with
shorter maturities or by holding assets in cash. This strategy, however,
entails increased transaction costs in the form of brokerage commissions and
dealer spreads and will typically reduce the Portfolio's average yields as a
result of the shortening of maturities.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that the total cash value reflected by the futures
contract is not paid. Instead, an amount of cash or securities acceptable to
the Fund's futures commission merchant ("FCM") and the relevant contract
market, which varies but is generally about 5% or less of the contract amount,
must be deposited with the FCM. This amount is known as "initial margin," and
represents a "good faith" deposit assuring the performance of both the
purchaser and the seller under the futures contract. Subsequent payments to
and from the FCM, known as "maintenance" or "variation margin," are required
to be made on a daily basis as the price of the futures contract fluctuates,
making the long or short position in the futures contract more or less
valuable, a process known as "marking to the market." Prior to the settlement
date of the futures contract, the position may be closed out by taking an
opposite position which will operate to terminate the position in the futures
contract. A final determination of variation margin is then made, additional
cash is required to be paid to or released by the FCM and the purchaser
realizes a loss or gain. In addition, a commission is paid on each completed
purchase and sale transaction.
The sale of financial futures contracts provides an alternate 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 S&P or A or
higher by Moody's and must have a remaining maturity of 19 years or more.
Twice a month new issues satisfying the eligibility requirements are added to,
and an equal number of old issues will be deleted from, the index. The value
of the index is computed daily according to a formula based upon the price of
each bond in the Index, as evaluated by four dealer-to-dealers brokers.
The Portfolios may also purchase and sell futures contracts on U.S.
Treasury bills, notes and bonds for the same types of hedging purposes. Such
futures contracts provide for delivery of the underlying security at a
specified future time for a fixed price, and the value of the futures contract
generally fluctuates with movements in interest rates.
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The municipal bond index futures contract, futures contracts on U.S.
Treasury securities and options on such futures contracts are traded on the
CBT and the Chicago Mercantile Exchange, which, like other contract markets,
assures the performance of the parties to each futures contract through a
clearing corporation, a nonprofit organization managed by the exchange
membership, which is also responsible for handling daily accounting of
deposits or withdrawals of margin.
The Portfolios may also purchase financial futures contracts when they
are not fully invested in municipal bonds in anticipation of an increase in
the cost of securities they intend to purchase. As such securities are
purchased, an equivalent amount of futures contracts will be closed out. In a
substantial majority of these transactions, the Portfolios will purchase
municipal bonds upon termination of the futures contracts. Due to changing
market conditions and interest rate forecasts, however, a futures position may
be terminated without a corresponding purchase of securities. Nevertheless,
all purchases of futures contracts by the Portfolios will be subject to
certain restrictions, described below.
Options on Futures Contracts. An option on a futures contract provides
the purchaser with the right, but not the obligation, to enter into a long
position in the underlying futures contract (i.e., purchase the futures
contract), in the case of a "call" option, or to enter into a short position
(i.e., sell the futures contract), in the case of a "put" option, for a fixed
price (the "exercise" or "strike" price) up to a stated expiration date. The
option is purchased for a nonrefundable fee, known as the "premium." Upon
exercise of the option, the contract market clearing house assigns each party
the appropriate position in the underlying futures contract. In the event of
exercise, therefore, the parties are subject to all of the risks of futures
trading, such as payment of initial and variation margin. In addition, the
seller, or "writer," of the option is subject to margin requirements on the
option position. Options on futures contracts are traded on the same contract
markets as the underlying futures contracts.
The Portfolios may purchase options on futures contracts for the same
types of hedging purposes described above in connection with futures
contracts. For example, in order to protect against an anticipated decline in
the value of securities it holds, a Portfolio could purchase put options on
futures contracts, instead of selling the underlying futures contracts.
Conversely, in order to protect against the adverse effects of anticipated
increases in the cost of securities to be acquired, a Portfolio could purchase
call options on futures contracts, instead of purchasing the underlying
futures contracts. The Portfolios generally will sell options on futures
contracts only to close out an existing position.
The Portfolios will not engage in transactions in such instruments
unless and until the Investment Adviser determines that market conditions and
the circumstances of the Portfolios warrant such trading. To the extent the
Portfolios engage in the purchase and sale of futures contracts or options
thereon, they will do so only at a level that reflects the Investment
Adviser's view of the hedging needs of the Portfolios, the liquidity of the
market for futures contracts and the anticipated correlation between movements
in the value of the futures or option contract and the value of securities
held by the Portfolios.
Restrictions on the Use of Futures Contracts and Options on Futures
Contracts. Under regulations of the CFTC, the futures trading activities
described herein will not result in the Portfolios' being deemed to be
"commodity pools," as defined under such regulations, provided that certain
trading restrictions are adhered to. In particular, CFTC regulations require
that a notice of eligibility be filed and that all futures and option
positions entered into by the Portfolios qualify as bona fide hedge
transactions, as defined under CFTC regulations, or that any nonqualifying
positions be limited so that the sum of the amount of initial margin deposits
and premiums paid on such positions would not exceed 5% of the market value of
the respective Portfolio's net assets.
When either Portfolio purchases a futures contract, it will maintain an
amount of cash, cash equivalents or commercial paper or liquid securities in a
segregated account with the Fund's custodian, so that the amount so segregated
plus the amount of initial margin held in the account of its broker equals the
market value of the futures contract, thereby ensuring that the use of such
futures is unleveraged.
Risk Factors in Transactions in Futures Contracts and Options Thereon.
The particular municipal bonds comprising the index underlying the municipal
bond index futures contract may vary from the bonds held by the Portfolios. In
addition, the securities underlying futures contracts on U.S. Treasury
securities will not be the same as securities held by the Portfolios. As a
result, the Portfolios' ability effectively to hedge all or
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a portion of the value of their municipal bonds through the use of futures
contracts will depend in part on the degree to which price movements in the
index underlying the municipal bond index futures contract, or the U.S.
Treasury securities underlying other futures contracts traded, correlate with
price movements of the Municipal Bonds held by the Portfolios.
For example, where prices of securities in the Portfolios do not move in
the same direction or to the same extent as the values of the securities or
index underlying a futures contract, the trading of such futures contracts may
not effectively hedge the Portfolios' investments and may result in trading
losses. The correlation may be affected by disparities in the average
maturity, ratings, geographical mix or structure of the Portfolios'
investments as compared to those comprising the index, and general economic or
political factors. In addition, the correlation between movements in the value
of the index underlying a futures contract may be subject to change over time,
as additions to and deletions from the index alter its structure. In the case
of futures contracts on U.S. Treasury securities and options thereon, the
anticipated correlation of price movements between the U.S. Treasury
securities underlying the futures or options and Municipal Bonds may be
adversely affected by economic, political, legislative or other developments
that have a disparate impact on the respective markets for such securities. In
the event that the Investment Adviser determines to enter into transactions in
financial futures contracts other than the municipal bond index futures
contract or futures on U.S. Treasury securities, the risk of imperfect
correlation between movements in the prices of such futures contracts and the
prices of Municipal Bonds held by the Portfolios may be greater.
The trading of futures contracts on an index also entails the risk of
imperfect correlation between movements in the price of the futures contract
and the value of the underlying index. The anticipated spread between the
prices may be affected due to differences in the nature of the markets, such
as margin requirements, liquidity and the participation of speculators in the
futures markets. The risk of imperfect correlation, however, generally
diminishes as the delivery month specified in the futures contract approaches.
Prior to exercise or expiration, and absent delivery, a position in
futures contracts or options thereon may be terminated only by entering into a
closing purchase or sale transaction on the relevant contract market. A
Portfolio will enter into a futures or option position only if there appears
to be a liquid market therefore, 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
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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.
Indexed and Inverse Floating Obligations
The Fund may invest in Municipal Bonds, the return on which is based on
a particular index of value or interest rates. For example, the Fund may
invest in Municipal Bonds that pay interest based on an index of Municipal
Bond interest rates. The principal amount payable upon maturity of certain
Municipal Bonds also may be based on the value of an index. To the extent the
Fund invests in these types of Municipal Bonds, the Fund's return on such
Municipal Bonds will be subject to risk with respect to the value of the
particular index. Also, the Fund may invest in so-called "inverse floating
obligations" or "residual interest bonds" on which the variable long term
interest rates typically decline as short term market rates increase and
increase as short term market rates decline. The Fund may purchase
synthetically created inverse floating rate bonds evidenced by custodial or
trust receipts. Generally, interest rates on inverse floating rate bonds will
decrease when short term rates increase and will increase when short term
rates decrease. Such securities have the effect of providing a degree of
investment leverage, since they may increase or decrease in value in response
to changes, as an illustration, in market interest rates at a rate which is a
multiple (typically two) of the rate at which fixed-rate long term exempt
securities increase or decrease in response to such changes. As a result, the
market values of such securities will generally be more volatile than the
market values of fixed-rate tax-exempt securities. To seek to limit the
volatility of these securities, the Fund may purchase inverse floating
obligations with shorter term maturities or which contain limitations on the
extent to which the interest rate may vary. The Investment Adviser believes
that indexed and inverse floating obligations represent a flexible portfolio
management instrument for the Fund that allows the Investment Adviser to vary
the degree of investment leverage relatively efficiently under different
market conditions. Certain investments in such obligations may be illiquid.
The Fund may not invest in such illiquid securities if such investments,
together with other illiquid investments, would exceed 15% of the Fund's net
assets.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities, including a majority of the shares of each Portfolio
affected (which for this purpose and under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares).
Under the fundamental investment restrictions, none of the Portfolios of
the Fund may:
1. Make any investment inconsistent with the Fund's classification
as a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management.
4. 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
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portfolio securities, provided that the lending of portfolio securities
may be made only in accordance with applicable law and the guidelines
set forth in the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) each Portfolio of the Fund may
borrow from banks (as defined in the Investment Company Act) in amounts
up to 33 1/3% of its total assets (including the amount borrowed), (ii)
each Portfolio of the Fund may, to the extent permitted by applicable
law, borrow up to an additional 5% of its total assets for temporary
purposes, (iii) each Portfolio of the Fund may obtain such short term
credit as may be necessary for the clearance of purchases and sales of
portfolio securities and (iv) each Portfolio of the Fund may purchase
securities on margin to the extent permitted by applicable law. The
Fund may not pledge its assets other than to secure such borrowings or,
to the extent permitted by the Fund's investment policies as set forth
in its Prospectus and Statement of Additional Information, as they may
be amended from time to time, in connection with hedging transactions,
short sales, when-issued and forward commitment transactions and
similar investment strategies.
8. Underwrite securities of other issuers except insofar as a
Portfolio of the Fund technically may be deemed an underwriter under
the Securities Act of 1933, as amended (the "Securities Act"), in
selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except
to the extent that a Portfolio of the Fund may do so in accordance with
applicable law and the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time, and without
registering as a commodity pool operator under the Commodity Exchange
Act.
The Fund has also adopted certain non-fundamental investment
restrictions, which may be changed by the Board of Directors without approval
by the Fund's shareholders.
Under the Fund's non-fundamental investment restrictions, none of the
Portfolios of the Fund may:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions)
of the Investment Company Act, at any time its shares are owned by
another investment company that is part of the same group of investment
companies as the Fund.
b. Make short sales of securities or maintain a short position,
except to the extent permitted by applicable law. The Fund currently
does not intend to engage in short sales, except short sales "against
the box."
c. Invest in securities that cannot be readily resold because of
legal or contractual restrictions or that cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities that the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Securities purchased in accordance with Rule 144A under the Securities
Act (a "Rule 144A Security") and determined to be liquid by the Fund's
Board of Directors are not subject to the limitations set forth in this
investment restriction.
d. Notwithstanding fundamental investment restriction (7) above, the
Fund currently does not intend to borrow amounts in any Portfolio in
excess of 10% of the total assets of such Portfolio, taken at market
value, and then only from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund
shares. In addition, the Fund will not purchase securities while
borrowings are outstanding.
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MANAGEMENT OF THE FUND
Directors and Officers
The Board of Directors of the Fund consists of nine individuals, seven
of whom are not "interested persons" of the Fund as defined in the Investment
Company Act (the "non-interested Directors"). The Directors 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.
Information about the Directors, executive officers and portfolio
managers of the Fund, including their ages and their principal occupations for
at least the last five years, is set forth below. Unless otherwise noted, the
address of each Director, officer and portfolio manager is P.O. Box 9011,
Princeton, New Jersey 08543-9011.
TERRY K. GLENN (60) --- President and Director (1)(2) --- Executive Vice
President of the Investment Adviser and Merrill Lynch Investment Managers,
L.P. ( "MLIM") since 1983; Executive Vice President and Director of Princeton
Services, Inc. ( "Princeton Services") since 1993; President of FAM
Distributors, Inc. ( "FAMD") since 1986 and Director thereof since 1991;
President of Princeton Administrators, L.P. since 1988.
RONALD W. FORBES (60) --- Director (2)(3) --- 1400 Washington Avenue,
Albany, New York 12222. Professor of Finance, School of Business, State
University of New York at Albany since 1989; International Consultant, Urban
Institute, Washington, D.C. from 1995 to 1999.
CYNTHIA A. MONTGOMERY (48) --- Director (2)(3) --- Harvard Business
School, Soldiers Field Road, Boston, Massachusetts 02163. Professor, Harvard
Business School, since 1989; Associate Professor, J.L. Kellog Graduate School
of Management, Northwestern University from 1985 to 1989; Assistant Professor,
Graduate School of Business Administration, The University of Michigan from
1979 to 1985; Director, UNUMProvident Corporation since 1990 and Director of
NewellRubbermaid Co. since 1995.
CHARLES C. REILLY (69) --- Director (2)(3) --- 9 Hampton Harbor Road,
Hampton Bays, New York 11946. Self-employed financial consultant since 1990;
President and Chief Investment Officer of Verus Capital, Inc. from 1979 to
1990; Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to
1990; Adjunct Professor, Columbia University Graduate School of Business from
1990 to 1991; Adjunct Professor, Wharton School, University of Pennsylvania
from 1989 to 1990; Partner, Small Cities Cable Television from 1986 to 1997.
KEVIN A RYAN (67) --- Director (2)(3) --- 127 Commonwealth Avenue,
Chestnut Hill, Massachusetts 02467. Founder and currently Director Emeritus of
the Boston University Center for Advancement of Ethics and Character and
Director thereof from 1989 to 1999; Professor from 1982 to 1999 and currently
Professor Emeritus of Education at Boston University; formerly taught on the
faculties of The University of Chicago, Stanford University and Ohio State
University.
ROSCOE S. SUDDARTH (64) --- Director (2)(3) --- 1761 N Street, N.W.,
Washington, D.C. 20036. President, Middle East Institute since 1995; Foreign
Service Officer, United States Foreign Service from 1961 to 1995; Career
Minister from 1989 to 1995; Deputy Inspector General, U.S. Department of State
from 1991 to 1994; U.S. Ambassador to the Hashemite Kingdom of Jordan from
1987 to 1990.
RICHARD R. WEST (62) --- Director (2)(3) --- Box 604, Genoa, Nevada
89411. Professor of Finance since 1984, Dean from 1984 to 1993 and currently
Dean Emeritus of New York University Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado
Realty Trust, Inc. (real estate holding company) and Alexanders Inc. (real
estate holding company).
ARTHUR ZEIKEL (68) --- Director (1)(2) --- 300 Woodland Avenue,
Westfield, New Jersey 07090-1826. Chairman of the Investment Adviser and MLIM
from 1997 to 1999 and President thereof from 1977 to 1997; Chairman of
Princeton Services from 1997 to 1999, Director thereof from 1977 to 1997 and
President thereof from 1993 to 1997; Executive Vice President of Merrill Lynch
& Co., Inc. ("ML & Co.") from 1990 to 1999.
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EDWARD D. ZINBARG (65) --- Director (2)(3) --- 5 Hardwell Road, Short
Hills, New Jersey 07078-2117. Self-employed financial consultant since 1994;
Executive Vice President of The Prudential Insurance Company of America from
1988 to 1994; Former Director of Prudential Reinsurance Company and former
Trustee of The Prudential Foundation.
VINCENT R. GIORDANO (55) --- Senior Vice President (1)(2) --- Managing
Director of the Investment Adviser and MLIM since 2000; Senior Vice President
of the Investment Adviser and MLIM from 1994 to 2000; Senior Vice President of
Princeton Services since 1993.
KENNETH A. JACOB (49) --- Vice President (1)(2) --- First Vice President
of MLIM since 1997; Vice President of MLIM from 1984 to 1997; Vice President
of the Investment Adviser since 1984.
DONALD C. BURKE (40) --- Vice President and Treasurer (1)(2) --- First
Vice President and Treasurer of the Investment Adviser and MLIM since 2000;
Senior Vice President and Treasurer of the Investment Adviser and MLIM from
1999 to 2000; Director of Taxation of MLIM since 1990; Senior Vice President
and Treasurer of Princeton Services since 1999; Vice President of FAMD since
1999; First Vice President of MLIM from 1997 to 1999; Vice President of MLIM
from 1990 to 1997.
PETER J. HAYES (40) --- Vice President and Portfolio Manager of Limited
Maturity Portfolio (1)(2) --- First Vice President of MLIM since 1997; Vice
President of MLIM from 1988 to 1997.
ROBERT A. DIMELLA, CFA (33) --- Vice President and Portfolio Manager of
Insured Portfolio (1)(2) --- Vice President of MLIM since 1997; Assistant Vice
President of MLIM from 1995 to 1997; Assistant Portfolio Manager of MLIM from
1993 to 1995.
WALTER O'CONNOR (38) --- Vice President and Portfolio Manager of
National Portfolio (1)(2) --- Director (Municipal Tax-Exempt) of MLIM since
1997; Vice President of MLIM from 1993 to 1997; Assistant Vice President of
MLIM from 1991 to 1993.
ALICE A. PELLEGRINO (40) --- Secretary (1)(2) --- Vice President of MLIM
since 1999; Attorney associated with MLIM since 1997; Associate with
Kirkpatrick & Lockhart LLP from 1992 to 1997.
- ----------------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) The Directors and officers of the Fund are Directors and officers of
certain other investment companies for which the Adviser or MLIM acts as
investment adviser.
(3) Member of the Fund's Audit and Nominating Committee, which is
responsible for the selection of the independent auditors and the
selection and nomination of non-interested Directors.
At September 1, 2000, the Directors and officers of the Fund as a group
(16 persons) owned an aggregate of less than 1% of the outstanding shares of
the Fund. At that date, Mr. Glenn, a Director and officer of the Fund, Mr.
Zeikel, a Director of the Fund, and the other officers of the Fund, owned less
than 1% of the outstanding Common Stock of ML & Co.
Compensation of Directors
Pursuant to the terms of the investment advisory agreement between FAM
and the Fund (the "Investment Advisory Agreement"), the Investment Adviser
pays all compensation of officers and employees of the Fund as well as the
fees of all Directors of the Fund who are affiliated persons of ML&Co. or its
subsidiaries.
The Fund pays each non-interested Director an annual fee of $3,000 plus
a fee of $400 per meeting attended, together with such Director's actual
out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit and Nominating Committee (the "Committee"),
which consists of all of the non-interested Directors with a fee of $2,900 per
year. The Chairman of the Committee is paid an additional annual fee of
$1,000.
The following table sets forth the compensation paid by the Fund to the
non-interested Directors for the fiscal year ended June 30, 2000 and the
aggregate compensation paid to them by all investment companies
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advised by MLIM and its affiliate, FAM ("MLIM/ FAM-Advised Funds"), to the
non-interested Directors for the calendar year ended December 31, 1999:
Aggregate
Compensation
Pension or From Fund and
Retirement Benefit MLIM/FAM-Advised
Compensation Accrued as Part Funds Paid to
Director/Trustee from Fund of Fund Expense Director(1)
- ---------------------- ------------ ------------------ ----------------
Ronald W. Forbes(2) $ 7,900 None $ 213,900
Cynthia A. Montgomery 7,900 None 213,900
Charles C. Reilly(2) 8,900 None 400,025
Kevin A. Ryan 7,900 None 213,900
Roscoe S. Suddarth(3) 0 None 0
Richard R. West 7,900 None 388,175
Edward D. Zinbarg(3) 0 None 140,875
- ----------------------
(1) The Directors serve on the boards of MLIM/ FAM-Advised Funds as follows:
Mr. Forbes (51 registered investment companies consisting of 65
portfolios); Ms. Montgomery (51 registered investment companies
consisting of 65 portfolios); Mr. Reilly (51 registered investment
companies consisting of 65 portfolios); Mr. Ryan (51 registered
investment companies consisting of 65 portfolios); Mr. Suddarth (42
registered investment companies consisting of 47 portfolios); Mr. West
(65 registered investment companies consisting of 79 portfolios); and
Mr. Zinbarg (42 registered investment companies consisting of 47
portfolios).
(2) Effective July 2000, Mr. Forbes and Mr. Reilly became Co-Chairman of the
Committee and each will receive an additional annual fee of $500 in
connection with their service.
(3) Mr. Suddarth and Mr. Zinbarg were elected Directors of the Fund on July
10, 2000. Mr. Suddarth was elected a director of certain other
MLIM/FAM-Advised Funds in January 2000.
As of September 1, 2000, the following were the only shareholders of
record of 5% or more of the outstanding shares of a class of the Fund: Mrs.
Lillian Reinhardt, 29 East 64th Street, #11C, New York, New York 10021, owning
27.47% of Class C of the Limited Maturity Portfolio, C.H. Welles IV, c/o
Welles & McGrath, 11th Floor Bank Towers, 321 Spruce Street, Scranton, PA
18503, owning 18.32% of Class C of the Limited Maturity Portfolio, Mr. Royal
H. Gibson and Mrs. Kimberly L. Gibson JTWROS, 1151 Tidal View Lane,
Charleston, SC 28412, owning 13.43% of Class C of the Limited Maturity
Portfolio, Mrs. Mary Peyton Yehle and Mr. Richard E. Yehle TIC, 6401 Rutgers
Street, Houston, TX 77005, owning 9.98% of Class C of the Limited Maturity
Portfolio, Jean F. Friscia & Augustine M. Friscia Co-TTEE U/A DTD 3/27/96 By
Friscia Family Trust, 115 Anona Place, Indian Harbor Beach, FL 32937, owning
7.47% of Class C of the Limited Maturity Portfolio, Douglas L. Taylor TTEE U/A
DTD 7/19/99 By Craig M. Taylor, 8219 S. 86th East Avenue, Tulsa, OK 74133,
owning 5.34% of Class C of the Limited Maturity Portfolio, The Cornelsen
Family Partnership L.P., 506 Fox Ridge Road, St. Louis, MO 63131, owning 7.59%
of Class D of the Limited Maturity Portfolio, Mrs. Roe Jasen, 108-48 68th
Avenue, Forest Hills, NY 11375, owning 7.57% of Class D of the Limited
Maturity Portfolio, Mr. B. Franklin Kahn TTEE U/A DTD 12/4/95 by Mr. B.
Franklin Kahn Securities Sub Account, 5600 Wisconsin Avenue, #18B, Chevy
Chase, MD 20815, owning 7.53% of Class D of the Limited Maturity Portfolio,
Jack Nash, c/o Ulysses Partners, L.P., 21st Floor, 280 Park Avenue, New York,
NY 10017, owning 5.13% of Class D of the Insured Portfolio, and Jack Nash, c/o
Ulysses Partners, L.P., 21st Floor, 280 Park Avenue, New York, NY 10017,
owning 5.95% of Class D of the National Portfolio.
Management and Advisory Arrangements
Pursuant to the Investment Advisory Agreement, Fund Asset Management,
L.P., a subsidiary of ML & Co., acts as the investment adviser for the Fund
and provides the Fund with management services. Subject to the supervision of
the Board of Directors of the Fund, FAM is responsible for the actual
management of each Portfolio and constantly reviews the holdings of each
Portfolio in light of its own research analysis and analyses from other
relevant sources. The responsibility for making decisions to buy, sell or hold
a particular security rests with FAM. FAM provides the portfolio managers for
each Portfolio, who consider analyses from various sources, make the necessary
investment decisions and place transactions accordingly. FAM is also obligated
to
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perform certain administrative management services for the Fund and provides
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 MLIM acts as an adviser or by investment advisory clients of MLIM. If
purchases or sales of securities for the Fund or other funds for which FAM or
MLIM 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 MLIM during the same period may
increase the demand for securities being purchased or the supply of securities
being sold, there may be an adverse effect on price.
Advisory Fee. As compensation for its services to the Portfolios, the
Investment Adviser receives at the end of each month a fee with respect to
each Portfolio. The fee for each Portfolio is determined based on the annual
advisory fee rates for that Portfolio set forth in the table below. These fee
rates are applied to the average daily net assets of each Portfolio, with the
reduced rates shown below applicable to portions of the assets of each
Portfolio to the extent that the aggregate of the average daily net assets of
the three combined Portfolios exceeds $250 million, $400 million, $550 million
and $1.5 billion (each such amount being a "breakpoint level"). The portion of
the assets of a Portfolio to which the rate at each breakpoint level applies
will be determined on a "uniform percentage" basis. The uniform percentage
applicable to a breakpoint level is determined by dividing the amount of the
aggregate of the average daily net assets of the three combined Portfolios
that falls within that breakpoint level by the aggregate of the average daily
net assets of the three combined Portfolios. The amount of the fee for a
Portfolio at each breakpoint level is determined by multiplying the average
daily net assets of that Portfolio by the uniform percentage applicable to
that breakpoint level and multiplying the product by the advisory fee rate.
Rate of Advisory Fee
-----------------------------------
Limited
Aggregate of average daily net assets Insured National Maturity
of the 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
For the last three fiscal years ended June 30, FAM received advisory
fees as follows:
Limited
Insured National Maturity
Fiscal Year Ended June 30, Portfolio Portfolio Portfolio
- -------------------------- ------------ ------------ ------------
1998 $ 7,298,381 $ 7,125,632 $ 1,353,388
1999 $ 6,832,049 $ 7,068,892 $ 1,350,646
2000 $ 5,507,883 $ 5,692,201 $ 1,145,746
Payment of Expenses. The Investment Advisory Agreement obligates FAM to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
economic research, investment research, trading and investment management of
the Fund, as well as the fees of all Directors of the Fund who are affiliated
persons of ML & Co. or any of its subsidiaries. Each Portfolio pays all other
expenses incurred in its operation and a portion of the Fund's general
administrative expenses allocated on the basis of the asset size of the
respective Portfolios. Expenses that will be borne directly by the Portfolios
include redemption expenses, expenses of portfolio transactions, shareholder
servicing costs, portfolio insurance maintained and paid by the Insured
Portfolio, expenses of registering the shares under Federal and state
securities laws, pricing costs (including the daily calculation of net asset
value), interest, certain taxes, charges of the custodian and Transfer Agent
and other expenses attributable to a particular Portfolio. Expenses that will
be allocated on the basis of the size of the respective Portfolios include
Directors' fees, legal expenses, state franchise taxes, auditing services,
costs of printing
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proxies, stock certificates, shareholder reports and prospectuses (except to
the extent paid by FAMD), 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 currently provided for the Fund
by FAM, and the Fund pays FAM a fee 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. The Fund's total expenses for the fiscal year ended
June 30, 2000 was $20,579,863, of which $9,423,415 was attributable to the
Insured Portfolio (representing .43%, 1.19%, 1.24%, and .68% of average net
assets for Class A, Class B, Class C and Class D shares, respectively),
$9,562,282 was attributable to the National Portfolio (representing .56%,
1.32%, 1.37%, and .81% of average net assets for Class A, Class B, Class C and
Class D shares, respectively), and $1,594,166 was attributable to the Limited
Maturity Portfolio (representing .40%, .76%, .76%, and .50% of average net
assets for Class A, Class B, Class C and Class D shares, respectively). FAM
was not required to reduce its fee or reimburse any of the Fund's expenses for
the fiscal year ended June 30, 2000.
As required by the distribution agreement between FAMD and the Fund (the
"Distribution Agreement"), FAMD will pay certain of the expenses of each
Portfolio incurred in connection with the offering of shares of each
Portfolio, including the expense of printing the prospectuses used in
connection with the continuous offering of shares by each Portfolio. See
"Purchase of Shares --- Distribution Plans."
The Investment Adviser is a limited partnership, the partners of which
are ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the
Investment Company Act because of their ownership of its voting securities or
their power to exercise a controlling influence over its management or
policies.
Duration and Termination. Unless earlier terminated as described below,
the Investment Advisory Agreement will continue in effect from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority
of the outstanding voting shares of each Portfolio and (b) by a majority of
the Directors who are not parties to such contract or interested persons (as
defined in the Investment Company Act) of any such party. Such contract
terminates upon assignment and may be terminated without penalty on 60 days'
written notice at the option of either party thereto or by the vote of the
shareholders of the Fund.
If the Directors or shareholders (as applicable) of any Portfolio fail
to approve the continuance of the Investment Advisory Agreement as set forth
above, the Investment Advisory Agreement will continue in effect as to any
other Portfolio if the Directors or shareholders (as applicable) of such
Portfolio have approved the contract as set forth above.
Transfer Agency Services
Financial Data Services, Inc. (the "Transfer Agent"), a subsidiary of ML
& Co., acts as the Fund's Transfer Agent pursuant to a Transfer Agency,
Dividend Disbursing Agency and Shareholder Servicing Agency Agreement (the
"Transfer Agency Agreement"). Pursuant to the Transfer Agency Agreement, the
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening and maintenance of shareholder accounts. Pursuant to
the Transfer Agency Agreement, the Transfer Agent receives an annual fee of
$11.00 per Class A or Class D account and $14.00 per Class B or Class C
account and is entitled to reimbursement for certain transaction charges and
out-of-pocket expenses incurred by the Transfer Agent under the Transfer
Agency Agreement. Additionally, a $0.20 monthly closed account charge will be
assessed to all accounts that close during the calendar year. Application of
this fee will commence the month following the month the account is closed. At
the end of the calendar year, no further fees will be due. For purposes of the
Transfer Agency Agreement, the term "account" includes a shareholder account
maintained directly by the Transfer Agent and any other account representing
the beneficial interest of a person in the relevant share class on a
recordkeeping system, provided the recordkeeping system is maintained by a
subsidiary of ML & Co.
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Code of Ethics
The Board of Directors of the Fund has approved a Code of Ethics under
Rule 17j-1 of the Investment Company Act that covers the Fund and the Fund's
Investment Adviser and Distributor (the "Code of Ethics"). The Code of Ethics
significantly restricts the personal investing activities of all employees of
the Investment Adviser and Distributor and, as described below, imposes
additional, more onerous restrictions on Fund investment personnel.
The Code of Ethics requires that all employees of the Investment Adviser
and Distributor preclear any personal securities investments (with limited
exceptions such as mutual funds, high-quality short term securities and direct
obligations of the U.S. government). 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 and Distributor include
a ban on acquiring any securities in a "hot" initial public offering and
investment personnel are prohibited from profiting on short term trading in
securities. In addition, no employee may purchase or sell any security that 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 Code of Ethics provides for
trading "blackout periods" which prohibit trading by investment personnel of
the Fund within seven calendar days before or after trading by the Fund in the
same or an equivalent security.
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus for certain information as to the purchase of Fund shares. The
Fund has entered into a Distribution Agreement with FAMD (the "Distributor")
in connection with the offering of each class of shares of the three
Portfolios. The Distribution Agreement obligates the Distributor to pay
certain expenses in connection with the offering of the Fund's shares. After
the prospectuses, statements of additional information and periodic reports
have been prepared, set in type and mailed to shareholders, the Distributor
pays for the printing and distribution of copies thereof used in connection
with the offering to dealers and investors. The Distributor also pays for
other supplementary sales literature and advertising costs. The Distribution
Agreement is subject to the same renewal requirements and termination
provisions as the Investment Advisory Agreement described above.
Each of the Portfolios issues four classes of shares under the Merrill
Lynch Select Pricing(SM) System, which permits each investor to choose the
method of purchasing shares that the investor believes is most beneficial
given the amount of the purchase, the length of time the investor expects to
hold the shares and other relevant circumstances. Shares of Class A and Class
D shares are sold to investors choosing the initial sales charge alternatives
and shares of Class B and Class C shares are sold to investors choosing the
deferred sales charge alternatives. Class C shares of the Limited Maturity
Portfolio are available only through the Exchange Privilege and may not be
purchased except through exchange of Class C shares of another Portfolio or
another MLIM/FAM-advised mutual 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 the contingent deferred sales charge ("CDSC") and
ongoing distribution fees. Each Class A, Class B, Class C and Class D share of
a Portfolio represents an identical interest in the Portfolio and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges, distribution fees and account maintenance fees
that are imposed on Class B and Class C shares, as well as the account
maintenance fees that are imposed on Class D shares, will be imposed directly
against those classes and not against all assets of the Fund and, accordingly,
such charges will not affect the net asset value of any other class or have
any impact on investors choosing another sales charge option. Dividends paid
by a Portfolio for each class of shares will be calculated in the same manner
at the same time and will differ only to the extent that account maintenance
and distribution fees and any incremental transfer agency costs relating to a
particular class are borne exclusively by that class. Class B,
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Class C and Class D shares each have exclusive voting rights with respect to
the Rule 12b-1 distribution plan adopted with respect to such class pursuant
to which account maintenance and/ or distribution fees are paid (except that
Class B shareholders may vote upon any material changes to expenses charged
under the Class D Distribution Plan). See "Purchase of Shares --- Distribution
Plans" below. 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 Class A and Class D shares are the same as those
of the deferred sales charges and distribution fees with respect to Class B
and Class C shares in that the sales charges and distribution fees applicable
to each class provide for the financing of the distribution of the shares of
the Fund. The distribution-related revenues paid with respect to a class will
not be used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLIM or FAM. Funds advised by MLIM
or FAM that use the Merrill Lynch Select Pricing(SM) System are referred to
herein as "Select Pricing Funds."
Each Portfolio offers its shares at a public offering price equal to the
next determined net asset value per share plus any sales charge applicable to
the class of shares selected by the investor. The applicable offering price
for purchase orders is based upon the net asset value of the Portfolio next
determined after receipt of the purchase order by the Distributor. As to
purchase orders received by securities dealers or other financial
intermediaries prior to the close of business on the New York Stock Exchange
(the "NYSE") (generally 4:00 p.m., Eastern time) which includes orders
received after the determination of net asset value on the previous day, the
applicable offering price will be based on the net asset value on the day the
order is placed with the Distributor, provided that the orders are received by
the Distributor prior to 30 minutes after the close of business on the NYSE on
that day. If the purchase orders are not received prior to 30 minutes after
the close of business on the NYSE on that day, such orders shall be deemed
received on the next business day. Dealers have the responsibility of
submitting purchase orders to the Fund not later than 30 minutes after the
close of business on the NYSE in order to purchase Portfolio shares at that
day's offering price.
The Fund or the Distributor may suspend the continuous offering of a
Portfolio's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Fund or the Distributor.
Neither the Distributor nor the dealers nor other financial intermediaries are
permitted to withhold placing orders to benefit themselves by a price change.
Merrill Lynch may charge its customers a processing fee (presently $5.35) to
confirm a sale of shares to such customers. Purchases made directly through
the Transfer Agent are not subject to the processing fee.
Initial Sales Charge Alternatives --- Class A and Class D Shares
The Fund sells its Class A and Class D shares through the Distributor
and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") as
dealers. 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 there is an 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 who previously purchased
Class A shares may no longer be eligible to purchase Class A shares of other
Select Pricing 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 charge
on new initial sales charge
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purchases. In addition, the ongoing Class B and Class C account maintenance
and distribution fees will cause Class B and Class C shares to have higher
expense ratios, pay lower dividends and have lower total returns than the
initial sales charge shares. The ongoing Class D account maintenance fees will
cause Class D shares to have a higher expense ratio, pay lower dividends and
have a lower total return than Class A shares.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of a Portfolio, 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 other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under
Section 401 of the Code) although more than one beneficiary is involved. The
term "purchase" also includes purchases by any "company," as that term is
defined in the Investment Company Act, but does not include purchases by any
such company which has not been in existence for at least six months or which
has no purpose other than the purchase of shares of a Portfolio or shares of
other registered investment companies at a discount; provided, however, that
it does not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders
of a company, policyholders of an insurance company, customers of either a
bank or broker-dealer or clients of an investment adviser.
Eligible Class A Investors. Class A shares are offered to a limited
group of investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors that currently own Class A shares of a
Portfolio in a shareholder account, including participants in the Merrill
Lynch Blueprint(SM) program, are entitled to purchase additional Class A shares
of that Portfolio in that account. Class A shares are available at net asset
value to corporate warranty insurance reserve fund programs and U.S. branches
of foreign banking institutions, provided that the program or branch has $3
million or more initially invested in MLIM/ FAM-Advised Funds. Also eligible
to purchase Class A shares at net asset value are participants in certain
investment programs, including TMA(SM) Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services, collective investment
trusts for which Merrill Lynch Trust Company serves as trustee, certain
Merrill Lynch investment programs that offer pricing alternatives for
securities transactions and purchases made in connection with certain
fee-based programs. In addition, Class A shares will be offered at net asset
value to ML & Co. and its subsidiaries and their directors and employees and
to members of the Boards of MLIM/ FAM-Advised Funds, including the Fund.
Certain persons who acquired shares of certain MLIM/FAM-Advised closed-end
funds in their initial offerings who wish to reinvest the net proceeds from a
sale of their closed-end fund shares of common stock in shares of the Fund
also may purchase Class A shares of the Fund if certain conditions set forth
below are met (for closed-end funds that commenced operations prior to October
21, 1994). In addition, Class A shares of the Fund and certain other MLIM/
FAM-Advised Funds are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc. and, if certain conditions are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds
from a sale of certain of their shares of common stock pursuant to a tender
offer conducted by such funds in shares of the Fund and certain other MLIM/
FAM-Advised Funds.
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Class A and Class D Sales Charge Information
Class A Shares
- ----------------------------------------------------------------------------------------------------
Gross Sales Sales Charges Sales Charges CDSCs Received on
Charges Retained by Paid to Redemption of
For the fiscal year ended June 30, Collected Distributor Merrill Lynch Load-Waived Shares
Insured Portfolio
1998 $ 204,924 $ 23,596 $ 181,328 $ 0
1999 $ 209,153 $ 20,406 $ 188,747 $ 0
2000 $ 84,731 $ 9,943 $ 74,788 $ 0
National Portfolio
1998 $ 144,059 $ 15,549 $ 128,510 $ 3,330
1999 $ 124,057 $ 12,026 $ 112,031 $ 0
2000 $ 56,355 $ 5,914 $ 50,441 $ 0
Limited Maturity Portfolio
1998 $ 7,852 $ 875 $ 6,977 $ 0
1999 $ 7,074 $ 736 $ 6,338 $ 0
2000 $ 6,353 $ 703 $ 5,650 $ 843
Class D Shares
- ----------------------------------------------------------------------------------------------------
Gross Sales Sales Charges Sales Charges CDSCs Received on
Charges Retained by Paid to Redemption of
For the fiscal year ended June 30, Collected Distributor Merrill Lynch Load-Waived Shares
Insured Portfolio
1998 $ 76,976 $ 7,738 $ 69,238 $ 0
1999 $ 181,373 $ 8,778 $ 172,595 $ 49,520
2000 $ 31,460 $ 3,063 $ 28,397 $ 0
National Portfolio
1998 $ 123,483 $ 13,622 $ 109,861 $ 0
1999 $ 322,812 $ 12,332 $ 310,480 $ 37,014
2000 $ 35,869 $ 3,415 $ 32,454 $ 1,009
Limited Maturity Portfolio
1998 $ 14,989 $ 1,509 $ 13,480 $ 37,656
1999 $ 22,334 $ 2,020 $ 20,314 $ 42,224
2000 $ 5,726 $ 343 $ 5,383 $ 430
Closed-End Fund Reinvestment Options. Class A shares of the Fund and
other Select Pricing Funds ("Eligible Class A Shares") are offered at net
asset value to shareholders of certain closed-end funds advised by the
Investment Adviser or MLIM who purchased such closed-end fund shares prior to
October 21, 1994 (the date the Merrill Lynch Select Pricing(SM) System commenced
operations) and wish to reinvest the net proceeds from a sale of such shares
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
those shares may purchase Class A shares (if eligible to purchase Class A
shares) or Class D shares of a Portfolio and other Select Pricing Funds
("Eligible Class D Shares") at net asset value 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 Eligible Class D shares. Second, the closed-end fund
shares must either have been acquired in that fund's initial public offering
or represent 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 reinvestment option.
Subject to the conditions set forth below, shares of each Portfolio are
offered at net asset value to holders of the common stock of certain
MLIM/FAM-advised continuously offered closed-end funds who wish to reinvest
the net proceeds from a sale of such shares. Upon exercise of this
reinvestment option, shareholders of
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Merrill Lynch Senior Floating Rate Fund, Inc. will receive Class A shares of a
Portfolio, shareholders of Merrill Lynch Senior Floating Rate Fund II, Inc.
will receive Class C shares of a Portfolio and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of a Portfolio, except that
shareholders of Merrill Lynch Municipal Strategies Fund, Inc. and Merrill
Lynch High Income Municipal Bond Fund, Inc. who already own Class A shares of
a Portfolio may be eligible to purchase additional Class A shares pursuant to
this option, if such additional Class A shares will be held in the same
account as the existing Class A shares and the other requirements pertaining
to the reinvestment privilege are met. In order to exercise this reinvestment
option, a shareholder of one of the above-referenced continuously offered
closed-end funds (an "eligible fund") must sell his or her shares of common
stock of the eligible fund (the "eligible shares") back to the eligible fund
in connection with a tender offer conducted by the eligible fund and reinvest
the proceeds immediately in the designated class of shares of a Portfolio.
This option is available only with respect to eligible shares as to which no
Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders who
wish to exercise this reinvestment option will be accepted only on the day
that the related tender offer terminates and will be effected at the net asset
value of the designated class of shares of the Portfolio on such day. The
Class C CDSC may be waived upon redemption of Class C shares purchased by an
investor pursuant to this closed-end fund reinvestment option. Such waiver is
subject to the requirement that the investor have held the tendered shares for
a minimum of one year and to such other conditions as are set forth in the
prospectus for the related closed-end fund.
Reduced Initial Sales Charges --- Class A and Class D Shares
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.
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.
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 MLIM/
FAM-Advised 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 Intent. Reduced sales charges are applicable to purchases of
Class A and Class D shares of the Portfolios, or any other MLIM/ FAM-Advised
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 Intent in the form
provided by the Distributor. The Letter of Intent 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 Intent 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 Intent 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 MLIM/ FAM-Advised
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
Intent, 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
Intent will be applied only to new purchases. If the total amount of shares
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purchased does not equal the amount stated in the Letter of Intent (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 Intent must be at least five percent of the dollar amount of such Letter.
If during the term of such Letter a purchase brings the total amount invested
to an amount equal to or in excess of the amount indicated in the Letter, the
purchaser will be entitled on that purchase and subsequent purchases to the
reduced percentage sales charge which would be applicable to a single purchase
equal to the total dollar value of the shares then being purchased plus the
total cost of all shares previously purchased under such Letter, but there
will be no retroactive reduction of the sales charges on any previous
purchase. The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of Intent will be
deducted from the total purchases made under such Letter. An exchange from a
MLIM/FAM-advised money market fund into any Portfolio that creates a sales
charge will count toward completing a new or existing Letter of Intent in any
Portfolio.
Employee Access(SM) Accounts.Class A or Class D shares are offered at net
asset value to Employee Access(SM) Accounts available through employers that
provide employer sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum investment for
such accounts is $500, except that the initial minimum investment for shares
purchased for such accounts pursuant to the Automatic Investment Program is
$50.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Merrill Lynch Blueprint(SM)Program. Class D shares of any of the three
Portfolios are offered to participants in the Merrill Lynch Blueprint(SM)
Program ("Blueprint"). In addition, participants in Blueprint who own Class A
shares of a Portfolio may purchase additional Class A shares of the Portfolio
through Blueprint. Blueprint is directed to small investors, group IRAs and
participants in certain affinity groups such as credit unions and trade
associations. Investors placing orders to purchase Class A or Class D shares
of a Portfolio through Blueprint will acquire the shares at net asset value
plus a sales charge calculated in accordance with Blueprint sales charge
schedule (i.e., up to $5,000 at 0.80% for Limited Maturity Portfolio, up to
$5,000 at 3.5% for the Insured Portfolio or National Portfolio, and $5,000.01
or more at the standard disclosed sales charge rate in the Prospectus).
However, services, including the exchange privilege, available to Class A or
Class D shareholders through Blueprint may differ from those available to
other investors. Class A and Class D shares are offered at net asset value, to
Blueprint participants through the Merrill Lynch Directed IRA Rollover Program
("IRA Rollover Program") available from Merrill Lynch Business Financial
Services, a business unit of Merrill Lynch. Orders for purchases and
redemptions of Class A or Class D shares of the Portfolios may be grouped for
execution purposes which, in some circumstances, may involve the execution of
such orders two business days following the day such orders are placed. The
minimum initial purchase price is $100, with a $50 minimum for subsequent
purchases through Blueprint. There are no minimum initial or subsequent
purchase requirements for participants who are part of an automatic investment
plan. Additional information concerning purchases through Blueprint, including
any annual fees and transaction charges, is available from Merrill Lynch,
Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program, P.O. Box 30441,
New Brunswick, New Jersey 08989-0441.
Purchase Privileges of Certain Persons. Directors of the Fund, members
of the Boards of other MLIM/FAM-Advised Funds, ML & Co. and its subsidiaries
(the term "subsidiaries," when used herein with respect to ML & Co., includes
MLIM, FAM and certain other entities directly or indirectly wholly owned and
controlled by ML & Co.), and their directors and employees and any trust,
pension, profit-sharing or other benefit plan for such persons, may purchase
Class A shares of the Fund at net asset value.
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Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption of
a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis. Second, the investor also must establish that such redemption
had been made within 60 days prior to the investment in the Fund, and the
proceeds from the redemption had been maintained in the interim in cash or a
money market fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, such purchase of Class D shares must be made within 90 days
after such notice.
Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of such
shares of other mutual fund and that such shares have been outstanding for a
period of no less than six months. Second, such purchase of Class D shares
must be made within 60 days after the redemption and the proceeds from the
redemption must be maintained in the interim in cash or a money market fund.
A purchase of $1 million or more in a single transaction by an investor,
or a purchase by a TMA(SM) Managed Trust, of Class A and Class D Shares of the
Fund's Portfolios may not be subject to an initial sales charge. Such
purchases may instead be subject to a 1.0% contingent deferred sales charge if
the shares are redeemed within one year after purchase in lieu of paying an
initial sales charge.
Acquisition of Certain Investment Companies. Class D shares may be
offered at net asset value 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.
Purchases Through Certain Financial Intermediaries. Reduced sales
charges may be applicable for purchases of Class A or Class D shares of a
Portfolio through certain financial advisers, selected securities dealers and
other financial intermediaries that meet and adhere to standards established
by the Investment Adviser from time to time.
Purchases by Banks. Class A shares of the Fund's Insured Portfolio may
be purchased at net asset value, without a sales charge, by banks that have
invested a minimum of $25 million in such shares.
Fee-Based Investment Programs. Certain Merrill Lynch fee-based
investment programs, including pricing alternatives for securities
transactions, (each referred to in this paragraph as a "Program") may permit
the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares, which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified. Termination of participation in a Program may result in the
redemption of such shares or the automatic exchange thereof to another class
at net asset value. In addition, upon termination of participation in a
Program, shares that have been held for less than specified periods within
such Program may be subject to a fee based upon the current value of such
shares. These Programs also generally prohibit such shares from being
transferred to another account at Merrill Lynch, to another broker-dealer or
to the Transfer Agent. Except in limited circumstances (which may also involve
an exchange as described above), such shares must be redeemed and another
class of shares purchased (which may involve the imposition of initial or
deferred sales charges and distribution and
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account maintenance fees) in order for the investment not to be subject to
Program fees. Additional information regarding a specific Program (including
charges and limitations on transferability applicable to shares that may be
held in such Program) is available in the Program's client agreement and from
the Transfer Agent at 1-800-MER-FUND or 1-800-637-3863.
Deferred Sales Charge Alternatives --- Class B and Class C Shares
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares of the Insured and National
Portfolios are subject to a four year CDSC charged on redemption and Class B
shares of the Limited Maturity Portfolio are subject to a one year CDSC, while
Class C shares of each Portfolio are subject only to a one year 1.00% CDSC.
Approximately ten years after Class B shares are issued, such Class B shares,
together with Class B shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the relevant
Portfolio and thereafter will be subject to lower continuing fees. See
"Conversion of Class B Shares to Class D Shares" below. Class C shares of the
Limited Maturity Portfolio are available only through the Exchange Privilege.
Both Class B and Class C shares of each Portfolio are subject to an account
maintenance fee of 0.25% (in the case of the National and Insured Portfolios)
and 0.15% (in the case of the Limited Maturity Portfolio) of net assets. Class
B and Class C shares of the Insured and National Portfolios are subject to
distribution fees equal to 0.50% and 0.55%, respectively, of net assets. Class
B and Class C shares of the Limited Maturity Portfolio are subject to a
distribution fee of 0.20% of net assets. See "Distribution Plans." The
proceeds from account maintenance fees are used to compensate Merrill Lynch
for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so
that the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to financial
consultants for selling Class B and Class C shares from the dealers' own
funds. The combination of the CDSC and the ongoing distribution fee
facilitates the ability of the Fund to sell the Class B and Class C shares
without a sale charge being deducted at the time of purchase. Approximately
ten years after issuance, Class B shares of a Portfolio will convert
automatically into Class D shares of that Portfolio, which are subject to an
account maintenance fee but no distribution fee; Class B shares of certain
other MLIM/ FAM-Advised 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
MLIM/FAM-advised mutual fund, the conversion period applicable to the Class B
shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations
on the Payment of Deferred Sales Charges" below. Class B shareholders of the
Fund exercising the exchange privilege described under "Shareholder Services
- --- Exchange Privilege" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the
Class B shares acquired as a result of the exchange.
Contingent Deferred Sales Charge --- Class B Shares. Class B shares of
the Insured and National Portfolios redeemed within four years of purchase and
Class B shares of the Limited Maturity Portfolio redeemed within one year of
purchase, may be subject to a CDSC at the rates set forth below charged as a
percentage of the dollar amount subject thereto. The charge will be assessed
on an amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. Accordingly, no CDSC will be imposed on increases
in net asset value above the initial purchase price. In addition, no CDSC will
be assessed on the redemption of shares received upon the reinvestment of
dividends or capital gains distributions.
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The following table sets forth the rates of the CDSC on Class B shares
applicable for the period starting October 21, 1994:
Contingent Deferred
Sales Charge as a
Percentage of
Insured or National Portfolio; Dollar Amount
Year Since Purchase Payment Made Subject to Charge
- ------------------------------------------------------------------------
0-1 4.00 %
1-2 3.00 %
2-3 2.00 %
3-4 1.00 %
4 and thereafter 0.00 %
Contingent Deferred
Sales Charge as a
Percentage of
Limited Maturity Portfolio; Dollar Amount
Year Since Purchase Payment Made Subject to Charge
-------------------------------------------------------------------------
0-1 1.0%
1 and thereafter 0.0%
For the fiscal year ended June 30, 2000, the Distributor received
$968,411 in CDSCs with respect to redemptions of Class B shares, amounting to
$404,887, $540,744 and $22,780 in the Insured, National and Limited Maturity
Portfolios, respectively, all of which were paid to Merrill Lynch. For the
fiscal year ended June 30, 1999, the Distributor received CDSCs of $321,449
for the Insured Portfolio, $491,369 for the National Portfolio, and $35,386
for the Limited Maturity Portfolio, with regard to redemptions of Class B
shares, all of which were paid to Merrill Lynch. For the fiscal year ended
June 30, 1998, the Distributor received CDSCs of $319,626 for the Insured
Portfolio, $430,021 for the National Portfolio and $24,619 for the Limited
Maturity Portfolio, with regard to redemptions of Class B shares, all of which
were paid to Merrill Lynch. Additional CDSCs payable to the Distributor may
have been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible
applicable rate being charged. Therefore, with respect to the Insured and
National Portfolios, it will be assumed that the redemption is first of shares
held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the
applicable four-year period. It will be assumed, with respect to the Limited
Maturity Portfolio, that the redemption is of shares held for over one year or
shares acquired pursuant to reinvestment of dividends or distributions and
then of shares held longest during the one-year period. The charge will not be
applied to dollar amounts representing an increase in the net asset value
since the time of purchase. A transfer of shares from a shareholder's account
to another account will be assumed to be made in the same order as a
redemption.
To provide an example, assume an investor purchased 100 Class B shares
of the Insured Portfolio at $10 per share (at a cost of $1,000) and in the
third year after purchase, the net asset value per share is $12 and, during
such time, the investor has acquired 10 additional shares upon dividend
reinvestment. If at such time the investor makes his or her first redemption
of 50 shares (proceeds of $600), 10 shares will not be subject to charge
because of dividend reinvestment. With respect to the remaining 40 shares, the
CDSC is applied only to the original cost of $10 per share and not the
increase in net asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds will be charged at a rate of 2.00% (the applicable rate in
the third year after purchase for shares purchased on or after October 21,
1994).
Additional information concerning the waiver of the Class B CDSC is set
forth in "Redemption of Shares --- Deferred Sales Charge --- Class B and Class
C Shares."
Contingent Deferred Sales Charges --- Class C Shares. Class C shares
that are redeemed within one year of purchase may be subject to a 1.00% CDSC
charged as a percentage of the dollar amount subject
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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 Class C CDSC may be waived in connection with certain fee-based programs.
See "Shareholder Services --- Fee-Based Programs." The Class C CDSC of the
Fund and certain other MLIM/ FAM-Advised Funds may be waived with respect to
Class C shares purchased by an investor with the net proceeds of a tender
offer made by certain MLIM/FAM-advised closed end funds, including Merrill
Lynch Senior Floating Rate Fund II, Inc. Such waiver is subject to the
requirement that the tendered shares shall have been held by the investor for
a minimum of one year, and to such other conditions as are set forth in the
prospectus for the related closed end fund.
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
Dollar Amount
Year Since Purchase Payment Made Subject to Charge
--------------------------------------------------------------------
0-1 1.00%
Thereafter 0.00%
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be made in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
one-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
For the fiscal year ended June 30, 2000, the Distributor received
$28,148 in CDSCs with respect to redemptions of Class C shares, amounting to
$2,183, $24,262 and $1,703 in the Insured, National and Limited Maturity
Portfolios, respectively, all of which were paid to Merrill Lynch. For the
fiscal year ended June 30, 1999, the Distributor received CDSCs of $11,099 for
the Insured Portfolio, $20,051 for the National Portfolio, and $866 for the
Limited Maturity Portfolio, with regard to redemptions of Class C shares, all
of which were paid to Merrill Lynch. For the fiscal year ended June 30, 1998,
the Distributor received CDSCs of $2,099 for the Insured Portfolio, $8,715 for
the National Portfolio and $1,128 for the Limited Maturity Portfolio, with
regard to redemptions of Class C shares, all of which were paid to Merrill
Lynch. Additional CDSCs payable to the Distributor may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"). Class B shares of a Portfolio will be
converted automatically into Class D shares of the relevant Portfolio. Class D
shares are subject to an ongoing account maintenance fee of 0.25% (in the case
of Insured Portfolio and National Portfolio) and 0.10% (in the case of the
Limited Maturity Portfolio) of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of
Class B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for federal income tax
purposes.
In addition, shares purchased through reinvestment of dividends on Class
B shares also will convert automatically to Class D shares. The Conversion
Date for dividend reinvestment shares will be calculated taking into account
the length of time the shares underlying such dividend reinvestment shares
were outstanding. If at a Conversion Date the conversion of Class B shares to
Class D shares of the Fund in a single account will result in less than $50
worth of Class B shares being left in the account, all of the Class B shares
of the Fund held in the account on the Conversion Date will be converted to
Class D shares of the Fund.
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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 MLIM/ FAM-Advised Funds will
convert approximately eight years after initial purchase, and Class B shares
of taxable and tax-exempt fixed income MLIM/ FAM-Advised Funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa,
the Conversion Period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.
The Conversion Period also may be modified in connection with certain
fee-based programs. See "Shareholder Services --- Fee Based Programs."
Distribution Plans
The Fund has adopted separate distribution plans for Class B, Class C
and Class D shares pursuant to Rule 12b-1 under the Investment Company Act
(each a "Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each
provide that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class of a Portfolio, accrued daily and paid
monthly, at the annual rate of 0.25% (in the case of the Class B, Class C and
Class D shares of the Insured Portfolio and the National Portfolio) and 0.15%
(in the case of Class B and Class C shares of the Limited Maturity) and 0.10%
(in the case of the Class D shares of the Limited Maturity Portfolio) of the
average daily net assets of the Portfolio attributable to shares of the
relevant class in order to compensate the Distributor, Merrill Lynch, a
selected securities dealer or other financial intermediary (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 .50% and .55% for the Class B and Class C shares, respectively,
of the Insured and National Portfolios and .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, Merrill Lynch, a selected securities dealer or
other financial intermediary (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 or other financial intermediaries 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 selected securities dealers and other financial intermediaries
without the assessment of an initial sales charge and at the same time permit
the dealer to compensate its financial consultants, a selected securities
dealer or other financial intermediary in connection with the sale of the
Class B and Class C shares. In this regard, the purpose and function of the
ongoing distribution fees and the CDSC are the same as those of the initial
sales charge with respect to the Class A and Class D shares of the Fund in
that the deferred sales charges provide for the financing of the distribution
of the Fund's Class B and Class C shares.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing
distribution fee, accrued daily and paid monthly, at the annual rate of 0.75%
(in the case of the Insured Portfolio and National Portfolio) and 0.35% (in
the case of the Limited Maturity Portfolio) of the average daily net assets of
the Class B shares of the respective Portfolio (the "Prior Plan") to
compensate the Distributor and Merrill Lynch for providing account maintenance
and distribution-related activities and services to Class B shareholders. The
fee rate payable and the services provided under the Prior Plan are nearly
identical to the aggregate fee rates payable and the
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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, 2000, the Insured, National and Limited Maturity
Portfolios paid the Distributor $2,511,198, $2,293,643 and $140,192,
respectively, pursuant to the Class B Distribution Plan (based on average net
assets subject to the Class B Distribution Plan of approximately $333.0
million, $304.2 million and $39.8 million, respectively), all of which were
paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B
shares. For the fiscal year ended June 30, 2000, the Insured, National and
Limited Maturity Portfolios paid the Distributor $114,185, $308,907 and
$1,777, respectively, pursuant to the Class C Distribution Plan (based on
average net assets subject to the Class C Distribution Plan of approximately
$14.2 million, $38.4 million and $0.5 million, respectively), all of which
were paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C
shares. For the fiscal year ended June 30, 2000, the Insured, National and
Limited Maturity Portfolios paid the Distributor $231,832, $227,525 and
$64,944, respectively, pursuant to the Class D Distribution Plan (based on
average net assets subject to the Class D Distribution Plan of approximately
$92.2 million, $90.5 million and $64.6 million, respectively), all of which
were paid to Merrill Lynch for providing account maintenance services in
connection with Class D shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the relevant shares regardless of the
amount of expenses incurred and, accordingly, distribution-related revenues
from Distribution Plans may be more or less than distribution-related
expenses. Information with respect to the distribution-related revenues and
expenses incurred by the Distributor and Merrill Lynch is presented to the
Directors for their consideration in connection with their deliberations as to
the continuance of the Class B and Class C Distribution Plans. This
information is presented annually as of December 31, of each year on a "fully
allocated accrual" basis and quarterly on a "direct expense and revenue/cash"
basis. On the fully allocated accrual basis, revenues consist of account
maintenance fees, the distribution fees, the CDSCs and certain other related
revenues, and expenses consist of financial consultant compensation, branch
office and regional operation center selling and transaction procession
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and the
CDSCs, and expenses consist of financial consultant compensation.
As of December 31, 1999, the last date for which fully allocated accrual
data is available, the fully allocated accrual revenues incurred by the
Distributor and Merrill Lynch since October 21, 1988 (commencement of
operations) with respect to Class B shares of the Insured Portfolio exceeded
fully allocated expenses for that period by $2,163,000 (representing .67% of
the Insured Portfolio's Class B net assets at that date), and the fully
allocated accrual revenues incurred by the Distributor and Merrill Lynch
during that period with respect to Class B shares of the National Portfolio
exceeded the fully allocated accrual expenses for that period by $1,885,000
(representing .64% of the National Portfolio's Class B net assets at that
date). The fully allocated accrual revenues incurred by the Distributor and
Merrill Lynch during the period from November 2, 1992 (commencement of
operations) to December 31, 1999, with respect to Class B shares of the
Limited Maturity Portfolio exceeded fully allocated expenses by $102,000
(representing .24% of the Limited Maturity Portfolio's Class B net assets at
that date). As of June 30, 2000, direct cash revenues received with respect to
the Class B shares of the Insured Portfolio for the period since October 21,
1988 (commencement of operations) exceeded direct cash expenses by $39,427,604
(representing 14.26% of Insured Portfolio Class B net assets at that date) and
direct cash revenues received with respect to Class B shares of the National
Portfolio for the same period exceeded direct cash expenses by $22,385,012
(representing 8.78% of National Portfolio Class B net assets at that date). As
of June 30, 2000, direct cash revenues received with respect to the Class B
shares of the Limited Maturity Portfolio for the period since November 2, 1992
(commencement of operations) exceeded direct cash expenses by $2,046,563
(representing 6.24% of Limited Maturity Portfolio Class B net assets at that
date).
As of December 31, 1999, the last date for which fully allocated accrual
data is available, the fully allocated accrual revenues incurred by the
Distributor and Merrill Lynch since October 21, 1994 (commencement of
operations) with respect to Class C shares of the Insured Portfolio exceeded
fully allocated expenses
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for that period by $57,000 (representing .42% of the Insured Portfolio's Class
C net assets at that date), and the fully allocated accrual revenues incurred
by the Distributor and Merrill Lynch during that period with respect to Class
C shares of the National Portfolio exceeded the fully allocated accrual
expenses for that period by $175,000 (representing .47% of the National
Portfolio's Class C net assets at that date) and the fully allocated accrual
revenues incurred by the Distributor and Merrill Lynch during that period with
respect to Class C shares of the Limited Maturity Portfolio exceeded the fully
allocated accrual expenses for that period by $3,000 (representing .50% of the
Limited Maturity Portfolio's Class C net assets at that date). As of June 30,
2000, direct cash revenues received with respect to the Class C shares of the
Insured Portfolio for the period since October 21, 1994 (commencement of
operations) exceeded direct cash expenses by $400,738 (representing 3.12% of
Insured Portfolio Class C net assets at that date), and the direct cash
revenues received with respect to the Class C shares of the National Portfolio
for the same period exceeded direct cash expenses by $816,466 (representing
2.69% of National Portfolio Class C net assets at that date) and the direct
cash revenues with respect to Class C shares of the Limited Maturity Portfolio
exceeded direct cash expenses by $5,980 (representing 1.94% of Limited
Maturity Portfolio Class C net assets at that date).
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act.
Among other things, each Distribution Plan provides that the Distributor shall
provide and the Directors shall review quarterly reports of the disbursement
of the account maintenance and/or distribution fees paid to the Distributor.
In their consideration of each Distribution Plan, the Directors must consider
all factors they deem relevant, including information as to the benefits of
the Distribution Plan to the Fund and the related class of shareholders of the
relevant Portfolio. Each Distribution Plan further provides that, so long as
the Distribution Plan remains in effect, the selection and nomination of
Directors who are not "interested persons" of the Fund, as defined in the
Investment Company Act (the "Independent Directors"), shall be committed to
the discretion of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is reasonable likelihood that such Distribution Plan will
benefit the Fund and the related class of shareholders of the Portfolio. Each
Distribution Plan can be terminated at any time, without penalty, by the vote
of a majority of the Independent Directors or by the vote of the holders of a
majority of the outstanding related voting securities of the relevant
Portfolio. A Distribution Plan cannot be amended to increase materially the
amount to be spent by any Portfolio without the approval of the related class
of shareholders of such Portfolio and all material amendments are required to
be 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.
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 "Purchase of Shares --- Deferred Sales
Charge Alternatives --- Class B and Class C Shares --- Conversion of Class B
to Class D Shares."
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the
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CDSC borne by the Class B and Class C shares but not the account maintenance
fee. The maximum sales charge rule is applied separately to each class of each
Portfolio. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund with
respect to Class B or Class C shares of a Portfolio to (1) 6.25% of eligible
gross sales of such shares, computed separately for each class of a Portfolio
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares of a Portfolio is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges
at any time. To the extent payments would exceed the voluntary maximum, the
Fund will not make further payments of the distribution fee with respect to
Class B shares of the relevant Portfolio, and any CDSCs with respect to that
class will be paid to the Fund rather than to the Distributor; however, the
Fund will continue to make payments of the account maintenance fee. In certain
circumstances the amount payable pursuant to the voluntary maximum may exceed
the amount payable under the NASD formula. In such circumstances payment in
excess of the amount payable under the NASD formula will not be made.
The following tables set forth comparative information as of June 30,
2000 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, 2000 for the Class B shares of
the National and Insured Portfolios, for the period November 2, 1992
(commencement of operations) to June 30, 2000 for Class B shares of the
Limited Maturity Portfolio, and for the period October 21, 1994 (commencement
of operations) to June 30, 2000 for the shares of the Insured, National and
Limited Maturity Portfolios.
Data Calculated as of June 30, 2000
- --------------------------------------------------------------------------------------------------------------------------
Insured Portfolio
- --------------------------------------------------------------------------------------------------------------------------
(in thousands)
Annual
Distribution
Allowable Allowable Amounts Fee At
Eligible Aggregate Interest Maximum Previously Aggregate Current
Gross Sales On Unpaid Amount Paid To Unpaid Net Asset
Sales(1) Charges Balance(2) Payable Distributor(3) Balance Level(4)
------------ --------- ---------- ---------- -------------- --------- ------------
Class B
Under NASD Rule as $ 1,346,498 $ 83,520 $ 60,791 $144,311 $ 46,186 $98,125 $ 1,383
Adopted
Under Distributor's $ 1,346,498 $ 83,520 $ 7,369 $ 90,889 $ 46,186 $44,703 $ 1,383
Voluntary Waiver
Class C
Under NASD Rule as $ 35,757 $ 2,231 $ 786 $ 3,017 $ 458 $ 2,559 $ 71
Adopted
National Portfolio
- --------------------------------------------------------------------------------------------------------------------------
(in thousands)
Annual
Distribution
Allowable Allowable Amounts Fee At
Eligible Aggregate Interest Maximum Previously Aggregate Current
Gross Sales On Unpaid Amount Paid To Unpaid Net Asset
Sales(1) Charges Balance(2) Payable Distributor(3) Balance Level(4)
---------- --------- ---------- --------- -------------- --------- ------------
Class B
Under NASD Rule as Adopted $ 787,198 $ 48,689 $ 30,546 $ 79,235 $ 26,495 $ 52,740 $ 1,275
Under Distributor's $ 787,198 $ 48,689 $ 4,447 $ 53,136 $ 26,495 $ 26,641 $ 1,275
Voluntary Waiver
Class C
Under NASD Rule as Adopted $ 63,109 $ 3,928 $ 1,081 $ 5,009 $ 904 $ 4,105 $ 167
36
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Limited Maturity Portfolio
(in thousands)
- --------------------------------------------------------------------------------------------------------------------------
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)
-------- --------- ---------- ------- -------------- --------- ------------
Class B
Under NASD Rule as Adopted $ 188,877 $ 11,777 $ 8,005 $ 19,782 $ 2,186 $ 17,596 $ 66
Under Distributor's $ 188,877 $ 11,777 $ 972 $ 12,749 $ 2,186 $ 10,563 $ 66
Voluntary Waiver
Class C
Under NASD Rule as Adopted $ 3,361 $ 225 $ 132 $ 357 $ 13 $ 344 $ 1
- ----------------------
(1) Purchase price of all eligible Class B shares sold since October 21,
1988 (commencement of Class B operations) other than shares acquired
through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly average Prime Rate basis, based upon
the prime rate as reported in The Wall Street Journal, plus 1.0%, as
permitted under the NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of
these distribution fee payments made prior to July 6, 1993 under the
Prior Plan at the 0.75% rate, 0.50% of average daily net assets has been
treated as a distribution fee and 0.25% of average daily net assets has
been deemed to have been a service fee and not subject to the NASD
maximum sales charge rule. This figure may include CDSCs that were
deferred when a shareholder redeemed shares prior to the expiration of
the applicable CDSC period and invested the proceeds, without the
imposition of a sales charge, in Class A shares in conjunction with the
Shareholder's participation in the Merrill Lynch Mutual Funds Advisor
("MFA") Program. The CDSC is booked as a contingent obligation that may
be payable if the shareholder terminates participation in the MFA
Program.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is
amortizing the unpaid balance. No assurance can be given that payments
of the distribution fee will reach either the voluntary maximum or the
NASD maximum.
(5) Purchase price of all eligible Class B shares sold since November 2,
1992 (commencement of Class B operations) other than shares acquired
through dividend reinvestment and exchange privilege.
(6) Consists of CDSC payments, distribution fee payments and accruals. Of
these distribution fee payments made prior to July 6, 1993 under the
Prior Plan at the 0.35% rate, 0.25% of average daily net assets has been
treated as a distribution fee and 0.10% of average daily net assets has
been deemed to have been a service fee and not subject to the NASD
maximum sales charge rule.
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REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares"
in the Prospectus.
The Fund is required to redeem for cash all shares of each Portfolio
upon receipt of a written request in proper form. The redemption price is the
net asset value per share of the Portfolio next determined after the initial
receipt of proper notice of redemption. Except for any CDSC that may be
applicable, there will be no charge for redemption if the redemption request
is sent directly to the Transfer Agent. Shareholders liquidating their
holdings will receive upon redemption all dividends declared through the date
of redemption. 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. The right to
redeem shares or to receive payment with respect to any such redemption may be
suspended for more than seven days for any period during which trading on the
New York Stock Exchange (the "NYSE") is restricted as determined by the
Commission or the NYSE is closed (other than customary weekend and holiday
closings), for any period during which an emergency exists, as defined by the
Commission, as a result of which disposal of portfolio securities or
determination of the net asset value of any Portfolio is not reasonably
practicable, and for such other periods as the Commission may by order permit
for the protection of shareholders of each Portfolio.
The value of shares at the time of redemption may be more or less than
the shareholder's cost, depending on the market value of the securities held
by each Portfolio at such time.
The Fund has entered into a joint committed line of credit with other
investment companies advised by the Investment Adviser and its affiliates and
a syndicate of banks that is intended to provide the Fund with a temporary
source of cash to be used to meet redemption requests from Fund shareholders
in extraordinary or emergency circumstances.
Redemption
A shareholder wishing to redeem shares held with the Transfer Agent may
do so by tendering the shares directly to the Transfer Agent, Financial Data
Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption
requests delivered other than by mail should be delivered to Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Proper notice of redemption in the case of shares deposited with the Transfer
Agent may be accomplished by a letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may
be accomplished by a written letter as noted above accompanied by the
certificate(s) for the shares to be redeemed. The notice in either event
requires the signature(s) of all persons in whose name(s) the shares are
registered, signed exactly as their name(s) appear(s) on the Transfer Agent's
register or on the certificate(s), as the case may be. The signature(s) on the
redemption request must be guaranteed by an "eligible guarantor institution"
as such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934
(the "Exchange Act"), the existence and validity of which may be verified by
the Transfer Agent through the use of industry publications. Notarized
signatures are not sufficient. Examples of eligible guarantor institutions
include most commercial banks and other broker dealers (including for example,
Merrill Lynch branch offices). Information regarding other financial
institutions that qualify as "eligible guarantor institutions" may be obtained
from the Transfer Agent. In certain instances, the Transfer Agent may require
additional documents such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with the Transfer
Agent, payment will be mailed within seven days of receipt of proper notice of
redemption.
At various times the Fund may be requested to redeem shares of a
Portfolio for which it has not yet received good payment. The Fund may delay
or cause to be delayed the mailing of a redemption check until such time as it
has assured itself that good payment (e.g., cash, Federal funds, or a
certified check drawn on a
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United States bank) has been collected for the purchase of such shares.
Normally this delay will not exceed ten days.
A shareholder may also redeem shares held with the Transfer Agent by
telephone request. To request a redemption from your account, call the
Transfer Agent at 1-800-MER-FUND. The request must be made by the shareholder
of record and be for an amount less than $50,000. Before telephone requests
will be honored, signature approval from all shareholders of record on the
account must be obtained. The shares being redeemed must have been held for at
least 15 days. Telephone redemption requests will not be honored in the
following situations: the accountholder is deceased, the proceeds are to be
sent to someone other than the shareholder of record, funds are to be wired to
the client's bank account, a systematic withdrawal plan is in effect, the
request is by an individual other than the accountholder of record, the
account is held by joint tenants who are divorced, the address on the account
has changed within the last 30 days or share certificates have been issued on
the account.
Since this account feature involves a risk of loss from unauthorized or
fraudulent transactions, the Transfer Agent will take certain precautions to
protect your account from fraud. Telephone redemption may be refused if the
caller is unable to provide: the account number, the name and address
registered on the account and the social security number registered on the
account. The Fund or the Transfer Agent may temporarily suspend telephone
transactions at any time.
Repurchase
The Fund will also repurchase shares of each Portfolio through a
shareholder's listed selected securities dealer or other financial
intermediary. 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 selected securities dealer or other
financial intermediary, provided that the request for repurchase is received
by the selected securities dealer or other financial intermediary prior to the
close of business on the New York Stock Exchange (generally 4:00 p.m. Eastern
time) on the day received and is received by the Fund from the selected
securities dealer or other financial intermediary not later than 30 minutes
after the close of business on the NYSE on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later
than 30 minutes after the close of business on the NYSE in order to obtain
that day's closing price. These repurchase arrangements are for the
convenience of shareholders and do not involve a charge by the Fund (other
than any applicable CDSC). Securities dealers that do not have selected dealer
agreements with the Distributor may impose a charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch, selected
securities dealers or other financial intermediaries may charge its customers
a processing fee (Merrill Lynch currently charges $5.35) to confirm a
repurchase of shares. Redemptions made directly through the Fund's Transfer
Agent are not subject to the processing fee. The Fund reserves the right to
reject any order for repurchase. The exercise of this right of rejection might
adversely affect shareholders seeking redemption through the repurchase
procedure.
For shareholders redeeming through their listed securities dealer,
payment for full and fractional shares will be made by the securities dealer
within seven days of the proper tender of the certificates, if any, and stock
power or letter requesting redemption, in each instance with signatures
guaranteed as noted above.
Reinstatement Privilege --- Class A and Class D Shares
Holders of Class A or Class D shares of any Portfolio who have redeemed
their shares have a one-time privilege to reinstate their accounts by
purchasing Class A or Class D shares, as the case may be, of the Portfolio in
which they had invested at net asset value without a sales charge up to the
dollar amount redeemed. The reinstatement privilege may be exercised as
follows. A notice to exercise this privilege along with a check for the amount
to be reinstated must be received by the Transfer Agent within 30 days after
the date the request for redemption was executed by the Transfer Agent or the
Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot
exceed the amount of the redemption proceeds. Alternatively, the reinstatement
privilege may be
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exercised through the investor's Merrill Lynch Financial Consultant within 30
days after the date the request for redemption was accepted by the Transfer
Agent or Distributor.
Deferred Sales Charge --- Class B and Class C Shares
As discussed in "Purchase of Shares --- Deferred Sales Charge
Alternatives --- Class B and Class C Shares," herein, while under most
circumstances, Class B shares of the Insured Portfolio and National Portfolio
redeemed within four years of purchase and Class B shares of the Limited
Maturity Portfolio redeemed within one year of purchase are subject to a CDSC,
the charge is waived on redemptions of Class B shares in certain instances,
including following the death or disability of a Class B shareholder.
Redemptions for which the waiver applies in the case of such withdrawal are
any partial or complete redemption following the death or disability (as
defined in the Code) of a Class B shareholder (including one who owns the
Class B shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial determination
of disability.
Merrill Lynch Blueprint(SM) Program. Class B shares of all three
Portfolios are offered to certain participants in the Merrill Lynch
Blueprint(SM) Program ("Blueprint"). Blueprint is directed to small investors
and participants in certain affinity groups such as trade associations and
credit unions. Class B shares are offered through Blueprint only to members of
certain affinity groups. The CDSC is waived for shareholders who are members
of such affinity groups at the time of placing orders to purchase Class B
shares through Blueprint. However, services, including the exchange privilege,
available to Class B shareholders through Blueprint may differ from those
available to other Class B investors. Orders for purchases and redemptions of
Class B shares of any of the three Portfolios may be grouped for execution
purposes which, in some circumstances, may involve the execution of such
orders two business days following the day such orders are placed. The minimum
initial purchase price is $100, with a $50 minimum for subsequent purchases
throughout Blueprint. There is no minimum initial or subsequent purchase
requirement for investors who are part of the Blueprint automatic investment
plan. Additional information concerning Blueprint, including any annual fees
or transaction charges, is available from Merrill Lynch, Pierce, Fenner &
Smith Incorporated. The Blueprint(SM) Program, P.O. Box 30441, New Brunswick,
New Jersey 08989-0441.
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is
determined by the Investment Adviser once daily Monday through Friday as of
the close of business on the NYSE on each day the NYSE is open for trading (a
"Pricing Day") based on prices at the time of closing. The NYSE generally
closes at 4:00 p.m., Eastern time. The NYSE is not open for trading on New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net asset value is computed by dividing the value of the 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 fees payable to the
Investment Adviser and Distributor, are accrued daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
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 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 Class D shares reflecting the daily expense
accruals of the distribution fees and higher transfer agency fees applicable
with respect to Class B and Class C shares of the Fund. The per share net
asset value of Class C shares will generally be lower than the per share net
asset value of Class B shares reflecting the daily expense accruals of the
higher distribution fees applicable with respect to Class C shares. It is
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expected, however, that the per share net asset value of the four classes will
tend to converge (although not necessarily meet) immediately after the payment
of dividends or distributions, which will differ by approximately the amount
of the expense accrual differentials between the classes.
The Municipal Bonds and other portfolio securities in which the Fund
invests are traded primarily in over-the-counter ("OTC") municipal bond and
money markets and are valued at the last available bid price for long
positions and at the last available ask price for short positions in the OTC
market or on the basis of yield equivalents as obtained from one or more
dealers that make markets in the securities. One bond is the "yield
equivalent" of another bond when, taking into account market price, maturity,
coupon rate, credit rating and ultimate return of principal, both bonds will
theoretically produce an equivalent return to the bondholder. Financial
futures contracts and options thereon that are traded on exchanges are valued
at their settlement prices as of the close of such exchanges. Short-term
investments with a remaining maturity of 60 days or less are valued on an
amortized cost basis, 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, including valuations furnished by a pricing service retained by the
Fund, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the Board of Directors.
It is the intention of FAM, subject to guidelines established by the
Board of Directors of the Fund, to hold Insured Municipal bonds in the Insured
Portfolio that are in default, or in significant risk of default, in the
payment of principal or interest until the default has been cured or the
principal and interest are paid by the issuer or the insurer. In accordance
with such guidelines, FAM will consider the following factors in determining
the effective value of Insured Municipal Bonds in the Insured Portfolio that
are in default, or in significant risk of default, in the payment of principal
or interest: (1) the market value of the bonds; (2) the market value of
securities of similar Issuers whose securities carry similar interest rates;
and (3) the value of the insurance guaranteeing interest and principal
payments. Absent unusual or unforseen circumstances, the value ascribed to the
insurance feature of the bonds would be the difference between the market
value of the bonds and the market value of securities of a similar nature
which are not in default or significant risk of default. It is the position of
the Board of Directors that this is a fair method of valuing the insurance
feature and reflects a proper valuation method in accordance with the
provisions of the Investment Company Act. This method of valuing securities
will mean that shareholders of the Insured Portfolio, whether they decide to
redeem or decide to retain their investment in the Insured Portfolio, will in
normal circumstances receive the benefit of the insurance.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
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. 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.
Municipal Bonds and money market securities are generally traded on a net
basis and do not normally involve either brokerage commissions or transfer
taxes. The cost of the portfolio securities transactions of each Portfolio
consists primarily of dealer or underwriter spreads. Under the Investment
Company Act, persons
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affiliated with the Fund are prohibited from dealing with the Fund as a
principal in the purchase and sale of securities unless an exemptive order
allowing such transactions is obtained from the Commission. Since
over-the-counter ("OTC") transactions are usually principal transactions,
affiliated persons of the Fund, including Merrill Lynch, may not serve as a
dealer in connection with transactions with the Fund. However, the Fund has
obtained an exemptive order permitting it to engage in certain principal
transactions involving high quality short-term Municipal Bonds. Affiliated
persons of the Fund may serve as its broker in over-the-counter transactions
conducted on an agency basis. Certain court decisions have raised questions as
to the extent to which investment companies should seek exemptions under the
Investment Company Act in order to seek to recapture underwriting and dealer
spreads from affiliated entities. The Directors have considered the
possibilities of seeking to recapture spreads for the benefit of the Fund and,
after considering factors deemed relevant, have made a determination not to
seek such recapture at this time. The Board will reconsider this matter from
time to time. For the fiscal years ended June 30, 1998, 1999 and 2000, each
Portfolio paid total brokerage commissions as set forth below, none of which
was paid to Merrill Lynch.
Fiscal Year Ended Total Brokerage
June 30, Commissions Paid
-----------------------------------------------------
Insured Portfolio
1998 $ 13,000
1999 $ 9,750
2000 $ 39,000
National Portfolio
1998 $ 20,800
1999 $ 19,500
2000 $ 45,500
Limited Maturity Portfolio
1998 $ 0
1999 $ 0
2000 $ 0
The aggregate amount of transactions for each Portfolio during the
fiscal year ended June 30, 2000 in securities effected on an agency basis
through a broker in consideration of, among other things, research services
provided was $299,051,188 for the Insured Portfolio, $357,639,250 for the
National Portfolio and $0 for the Limited Maturity Portfolio, and the
commissions and concessions related to such transactions were $39,000 for the
Insured Portfolio, $45,500 for the National Portfolio and $0 for the Limited
Maturity Portfolio.
In addition, no Portfolio may purchase Municipal Bonds during the
existence of any underwriting syndicate of which Merrill Lynch is a member or
in a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Board of Directors which either comply
with rules adopted by the Securities and Exchange Commission (the
"Commission") or with interpretations of the Commission staff.
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. High portfolio turnover involves correspondingly higher
transaction costs in the form of commissions and dealer spreads, which are
borne directly by the applicable Portfolio.
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DIVIDENDS AND TAXES
Reference is made to "Dividends and Taxes" in the Prospectus.
Dividends
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
dividends 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 dividends, if any, are declared and paid to
the Fund's shareholders at least annually. Capital gains dividends will be
automatically reinvested in shares unless the shareholder elects to receive
such distributions in cash.
See "Shareholder Services --- Automatic Reinvestment of Dividends" for
information as to how to elect either dividend reinvestment or cash payments.
Any portions of dividends that are taxable to shareholders as described below
are subject to income tax whether they are reinvested in shares of any
Portfolio or received in cash.
Federal Income Taxes
Each Portfolio of the Fund generally will be treated as a separate
corporation for Federal income tax purposes. Each Portfolio has qualified and
expects to continue to qualify for the special tax treatment afforded
regulated investment companies under the Code. If each Portfolio qualifies for
that tax treatment, it will not be subject to Federal income tax on that part
of its net ordinary income and net realized long term capital gains that it
distributes to its shareholders.
Each Portfolio intends to qualify to pay "exempt-interest" dividends as
defined in Section 852(b)(5) of 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 or her tax adviser
with respect to whether exempt-interest dividends retain the exclusion under
Section 103(a) if such shareholder would be treated as a "substantial user"
under Section 147(a)(1) with respect to some or all of the tax-exempt
obligations held by the Portfolio. 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.
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Dividends paid by each Portfolio from its taxable income (i.e .,
interest on money market securities) and dividends of net realized short term
capital gains (whether from tax-exempt or taxable obligations) are taxable to
shareholders as ordinary income. Any dividends of designated as net long term
capital gains (whether from tax-exempt or taxable obligations) in a written
notice furnished annually to shareholders are taxable to shareholders as gains
from the sale or exchange of a capital asset held for more than one year,
regardless of a shareholder's holding period for shares of a Portfolio. 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 Portfolios will not invest in the stock of
domestic corporations, the dividends-received deduction for corporations will
not be available to shareholders. 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 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 "Determination of 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.
Some shareholders may be subject to a 31% withholding tax ("backup
withholding") on reportable dividends and redemption payments. Backup
withholding is not required with respect to exempt-interest dividends.
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.
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
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basis in the Class B shares converted, and the holding period of the acquired
Class D shares will include the holding period of the converted Class B
shares.
If a shareholder exercises his exchange privilege within 90 days after
the date such shares were acquired to acquire shares in such fund or another
fund ("New Fund"), then the loss, if any, recognized on the exchange will be
reduced (or the gain, if any, increased) to the extent the load charge paid to
the Fund reduces any load charge such shareholder would have been required to
pay on the acquisition of the New Fund shares in the absence of the exchange
privilege. Instead, such load charge will be treated as an amount paid for the
New Fund shares and will be included in the shareholder's basis for such
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
An exchange between funds pursuant to the Exchange Privilege (as
described below on page 42) is treated as a sale of the exchanged shares and a
purchase of the acquired shares for Federal income tax purposes and, depending
upon the circumstances, a short or long term capital gain or loss may be
realized. In addition, any shareholder of the Fund who exercises the Exchange
Privilege and becomes a shareholder of another fund must certify to such other
fund his or her Social Security Number or Taxpayer Identification Number and
that he is not subject to the backup withholding tax if he or she wishes to
avoid a 31% backup withholding tax on the gross proceeds paid by such other
fund on redemption of shares and on dividend distributions made to him or to
her by such other fund.
Any dividend declared by a Portfolio in October, November or December of
any year and made payable to shareholders of record in such a month will be
deemed to be received on December 31 of such year if actually paid during the
following January. Accordingly, those dividends, to the extent taxable, will
be taxable to shareholders in the year declared, and not in the year in which
shareholders actually receive the dividend.
Not later than sixty days after the end of each fiscal year of the Fund,
the Fund will send to its shareholders the written notice required by the Code
designating the amount of its dividends that constitute exempt-interest
dividends, the amount of the dividends which are ordinary taxable income and
the amount of dividends 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 shareholder's
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. 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-
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interest dividends may increase a corporate shareholder's liability for the
environmental tax imposed on a corporation's alternative minimum taxable
income (computed without regard to either the alternative tax net operating
loss deduction or the environmental tax deduction) at a rate of $12 per
$10,000 (0.12%) of alternative minimum taxable income in excess of $2,000,000.
The tax will be imposed even if the corporation is not required to pay an
alternative minimum tax.
The Code imposes a four percent nondeductible excise tax on a regulated
investment company, such as a Portfolio of the Fund, if the company does not
distribute to its shareholders during the calendar year an amount equal to 98
percent of the investment company's taxable income, with certain adjustments,
for such calendar year, plus 98 percent of the company's capital gain net
income for the one-year period ending on October 31 of such calendar year. In
addition, an amount equal to any undistributed investment company taxable
income or capital gain net income from the previous calendar year must also be
distributed to avoid the excise tax. The excise tax is imposed on the amount
by which a company does not meet the foregoing distribution requirements. The
excise tax will not, however, generally apply to the tax-exempt income of a
regulated investment company, such as a Portfolio of the Fund, that pays
exempt-interest dividends. In addition, if a Portfolio has taxable income that
would be subject to the excise tax, the Fund intends to distribute the income
of such Portfolio so as to avoid payment of the excise tax.
At June 30, 2000, the Insured Portfolio had a net capital loss
carryforward of approximately $17,630,000, all of which expires in 2008; the
National Portfolio had a net capital loss carryforward of approximately
$25,616,000, all of which expires in 2008; and the Limited Maturity Portfolio
had a net capital loss carryforward of approximately $2,048,000, of which
$1,928,000 expires in 2003 and $120,000 expires in 2008. These amounts 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.
Ordinary income and capital gains dividends may also be subject to state
and local taxes.
State and Local Taxes
Depending upon the extent of the Fund's activities in those states and
localities in which its offices are maintained or in which its agents or
independent contractors are located, the Fund may be subject to the tax laws
of such states or localities. In addition, the exemption of interest income
for Federal income tax purposes does not necessarily result in exemption under
the income or other tax laws of any state or local taxing authority. The laws
of the several states and local taxing authorities vary with respect to the
taxation of such interest income, and each holder of shares of the Fund is
advised to consult his or her own tax adviser in that regard. The Fund will
report annually the percentage of interest income received by each Portfolio
during the preceding year on tax-exempt obligations, indicating, on a
state-by-state basis, the source of such income.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services, described below, that
are designed to facilitate investment in its shares. Full details as to each
of such services and copies of the various plans and instructions as to how to
participate in the various services or plans, or how to change options with
respect thereto described below can be obtained from the Fund, by calling the
telephone number on the cover page hereof, or from the Distributor, Merrill
Lynch, a selected securities dealer or other financial intermediary. Certain
of these services are available only to United States investors and certain of
these services are not available to investors who place purchase orders for
the Fund's shares through the Merrill Lynch Blueprint(SM) Program.
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has
an Investment Account and will receive statements, at least quarterly, from
the Transfer Agent. These statements will serve as transaction
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confirmations for automatic investment purchases and the reinvestment of
income dividends and long term capital gains distributions. The quarterly
statements will also show any other activity in the account since the
preceding statement. Shareholders will receive separate transaction
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of ordinary income dividends and
long term capital gains distributions. A shareholder may make additions to his
Investment Account at any time by mailing a check directly to the Transfer
Agent. Upon the transfer of shares out of a Merrill Lynch brokerage account or
an account maintained with a selected securities dealer or other financial
intermediary, an Investment Account in the transferring shareholder's name
will be opened automatically, at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares
from Merrill Lynch to another brokerage firm or financial institution should
be aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue
to maintain an Investment Account at the Transfer Agent for those Class A or
Class D shares. Shareholders interested in transferring their Class B or Class
C shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent.
If the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he or she be issued certificates for
his or her shares, and then must turn the certificates over to the new firm
for re-registration in the new brokerage firm's name. Certain shareholder
services may not be available for the transferred shares.
Automatic Investment Plans
A shareholder may make additions to the Investment Account at any time
by purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder.
For investors who buy shares of the Fund through Blueprint, no minimum charge
to the investors' bank account is required. Investors who maintain CMA(R) or
CBA(R) Accounts may arrange to have periodic investments made in the Fund, in
the CMA(R) or CBA(R) Accounts or in certain related accounts in amounts of
$100 or more ($1 for retirement accounts) through the CMA(R) or CBA(R)
Automatic Investment Program. The Automatic Investment Plan is not available
for Class C shares of the Limited Maturity Portfolio.
Fee-Based Programs
Certain fee based programs offered by Merrill Lynch and other financial
intermediaries, including pricing alternatives for securities transactions
(each referred to in this paragraph as a "Program"), may permit the purchase
of Class A shares at net asset value. Under specified circumstances,
participants in certain Programs may deposit other classes of shares that will
be exchanged for Class A shares. Initial or deferred sales charges otherwise
due in connection with such exchanges may be waived or modified, as may the
Conversion Period applicable to the deposited shares. Termination of
participation in a Program may result in the redemption of shares held therein
or the automatic exchange thereof to another class at net asset value, which
may be shares of a money market fund. In addition, upon termination of
participation in a Program, shares that have been held for less than specified
periods within such Program may be subject to a fee based upon the current
value of such shares. These Programs also generally prohibit such shares from
being transferred to another account at Merrill Lynch, to another financial
intermediary, to another broker-dealer or to the Transfer Agent. Except
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in limited circumstances (which may also involve an exchange as described
above), such shares must be redeemed and another class of shares purchased
(which may involve the imposition of initial or deferred sales charges and
distribution and account maintenance fees) in order for the investment not to
be subject to Program fees. Additional information regarding a specific
Program (including charges and limitations on transferability applicable to
shares that may be held in such Program) is available in such Program's client
agreement and from the Transfer Agent at 1-800-MER-FUND or 1-800-637-3863.
Automatic Reinvestment of Dividends
Unless specific instructions are given as to the method of payment of
dividends will be reinvested automatically in additional shares of the Fund.
Such reinvestment will be at the net asset value of shares of the Fund,
without a sales charge, determined as of the close of business on the NYSE on
the ex-dividend date of such dividend. Shareholders may elect in writing to
receive their income dividends or capital gains dividends, or both, in cash,
in which event payment will be mailed or direct deposited on or about the
payment date.
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch, or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) if the shareholder's account
is maintained with the Transfer Agent, that they no longer wish to have their
dividends reinvested in shares of the Fund or vice versa and, commencing ten
days after the receipt by the Transfer Agent of such notice, those
instructions will be effected, except that any dividend or distribution of
less than $10 payable to an account maintained directly with the Fund's
Transfer Agent will not be paid in cash but will be reinvested in shares of
the Fund. If the shareholder's account is maintained with the Transfer Agent,
he or she may contact the Transfer Agent in writing or by telephone
(1-800-MER-FUND). For other accounts, the shareholder should contact his or
her Merrill Lynch Financial Consultant, selected securities dealer or other
financial intermediary. The Fund is not responsible for any failure of
delivery to the shareholder's addresses of record and no interest will accrue
on amounts represented by uncashed distribution or redemption checks. Cash
payments can also be directed to the shareholder's bank account. No CDSC will
be imposed upon redemption of shares issued as a result of the automatic
reinvestment of dividends.
Systematic Withdrawal Plans
A shareholder of any of the three Portfolios may elect to make
systematic withdrawals from an Investment Account of Class A, Class B, Class C
or Class D shares in the form of payments by check or through automatic
payment by direct deposit to such shareholder's bank account on either a
monthly or calendar quarterly basis as provided below. Quarterly withdrawals
are available for shareholders who have acquired shares of the Fund having a
value, based on cost or the current offering price, of $5,000 or more, and
monthly withdrawals are available for shareholders with shares having a value
of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed
from those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and class of shares to be redeemed. Redemptions will be made at net
asset value as determined once daily by FAM immediately after the declaration
of dividends as of the close of business on the NYSE (generally 4:00 p.m.
Eastern time) on the 24th day of each month or the 24th day of the last month
of each quarter, whichever is applicable. If the NYSE is not open for business
on that day, the shares will be redeemed as of close of business on the
following business day. The check for the withdrawal payment will be mailed or
the direct deposit for the withdrawal payment will be made, on the next
business day following redemption. When a shareholder is making systematic
withdrawals, dividends and distributions on all shares in the Investment
Account are reinvested automatically in shares of the Fund. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without a charge or
penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or
income. Each withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder's original
investment may be reduced correspondingly. Purchases of additional shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Fund will not
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knowingly accept purchase orders for shares of the Fund from investors who
maintain a Systematic Withdrawal Plan unless such purchase is equal to at
least one year's scheduled withdrawals or $1,200, whichever is greater.
Periodic investments may not be made into an Investment Account in which the
shareholder has elected to make systematic withdrawals. With respect to
redemptions of Class B and Class C shares pursuant to a systematic withdrawal
plan, the maximum number of Class B or Class C shares that can be redeemed
from an account annually shall not exceed 10% of the value of shares of such
class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares ---
Deferred Sales Charge Alternatives --- Class B and Class C Shares ---
Contingent Deferred Sales Charge --- Class B Shares" and "Contingent Deferred
Sales Charges --- Class C Shares." Where the systematic withdrawal plan is
applied to Class B Shares, upon conversion of the last Class B shares in an
account to Class D shares, the systematic withdrawal plan will automatically
be applied thereafter to Class D shares if the shareholder so elects. See
"Purchase of Shares --- Deferred Sales Charge Alternatives --- Class B and
Class C Shares --- Conversion of Class B Shares to Class D Shares;" if an
investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Financial Consultant.
Alternatively, a shareholder whose shares are held within a CMA(R) or
CBA(R) Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
three business days after the date the shares are redeemed all redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the
case of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
Exchange Privilege
U.S. Shareholders of each class of shares of a Portfolio of the Fund who
have held all or part of their shares in the Portfolio for at least 15 days
have an exchange privilege (the "Exchange Privilege") with other Portfolios of
the Fund and with certain other MLIM/ FAM-Advised 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
MLIM/FAM-Advised Fund if the shareholder holds any Class A shares of the other
Portfolio or second fund in the account in which the exchange is made at the
time of the exchange or is otherwise eligible to purchase Class A shares of
the second fund. If the Class A shareholder wants to exchange Class A shares
for shares of another Portfolio or a second MLIM/FAM-Advised 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 MLIM/FAM-Advised 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 MLIM/ FAM-Advised
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 MLIM/FAM-Advised
Fund as more fully described below.
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Class A and Class D shares also will be exchangeable for Class A shares, and
Class B and Class C shares also will be exchangeable for Class B shares, of
Summit Cash Reserves Fund, a series of Financial Institutions Series Trust,
which is a Merrill Lynch-sponsored money market fund specifically designated
as available for exchange by holders of Class A, Class B, Class C and Class D
shares as more fully described below. The Exchange Privilege available to
participants in the Merrill Lynch Blueprint(SM) Program may be different from
that available to other investors.
Exchanges of Class A and Class D shares of a Portfolio outstanding
("outstanding Class A and Class D shares") for Class A or Class D shares of
another Portfolio or another MLIM/FAM-Advised 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 MLIM/
FAM-Advised Funds ("new Class B or Class C shares") on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of a Portfolio exercising the Exchange Privilege will continue to
be subject to that Portfolio's CDSC schedule if such schedule is higher than
the CDSC schedule relating to the new Class B shares acquired through the use
of the Exchange Privilege. In addition, Class B shares of the Portfolio
acquired through the use of the Exchange Privilege will be subject to that
Portfolio's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the Class B shares of the fund or Portfolio from which the
exchange has been made. For purposes of computing the sales charge that may be
payable on a disposition of the new Class B or Class C shares, the holding
period for the outstanding Class B or Class C shares is "tacked" to the
holding period of the new Class B or Class C shares. For example, an investor
may exchange Class B or Class C shares of the National Portfolio for those of
the Merrill Lynch Small Cap Value Fund, Inc. after having held the National
Portfolio Class B shares for two and a half years. The 2% contingent deferred
sales charge that generally would apply to a redemption would not apply to the
exchange. Two years later the investor may decide to redeem the Class B shares
of Merrill Lynch Basic Value Fund, Inc. and receive cash. There will be no
CDSC due on this redemption, since by "tacking" the two and a half year
holding period of National Portfolio Class B shares to the two year holding
period for the Merrill Lynch Small Cap Value Fund, Inc. Class B shares, the
investor will be deemed to have held the new Class B shares for more than four
years.
Shareholders also may exchange their shares into shares of Summit Cash
Reserves Fund, a series of Financial Institutions Series Trust ("Summit").
Class A and Class D shares will be exchangeable for Class A shares of Summit,
and Class B and Class C shares will be exchangeable for Class B shares of
Summit. Class A shares of Summit have an exchange privilege back into Class A
or Class D shares of MLIM/FAM-Advised Funds; Class B shares of Summit have an
exchange privilege back into Class B shares or Class C shares of
MLIM/FAM-Advised Funds. The period of time that Class B shares of Summit are
held will count toward satisfaction of the holding period requirement for
purposes of reducing any CDSC and, with respect to Class B shares, toward
satisfaction of any conversion period. Class B shares of Summit will be
subject to a distribution fee at an annual rate of 0.75% of average daily net
assets of such Class B shares. The exchange privilege described in this
paragraph does not apply with respect to certain Merrill Lynch fee-based
programs, for which alternative exchange arrangements may exist. Please see
your Merrill Lynch Financial Consultant for further information.
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Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the Exchange Privilege is treated as a sale for Federal
income tax purposes and, depending on the circumstances, a short or long term
capital gain or loss may be realized. In addition, a shareholder exchanging
shares of any of the funds may be subject to a backup withholding tax unless
such shareholder certifies under penalty of perjury that the taxpayer
identification number on file with any such fund is correct and that such
shareholder is not otherwise subject to backup withholding. See "Dividends,
Distributions and Taxes" above.
To exercise the Exchange Privilege, shareholders should contact their
listed dealer, who will advise the Fund of the exchange, or the shareholder
may write to the Transfer Agent requesting that the exchange be effected. Such
letter must be signed exactly as the account is registered with signature(s)
guaranteed by "eligible guarantor institution" (including, for example,
Merrill Lynch branch offices and certain other financial institutions), as
such is defined in Rule 17Ad-15 under the Exchange Act, 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
or other financial intermediaries. 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.
Telephone exchange requests are also available in accounts held with the
Transfer Agent for amounts up to $50,000. To request an exchange from your
account, call the Transfer Agent at 1-800-MER-FUND. The request must be from
the shareholder of record. Before telephone requests will be honored,
signature approval from all shareholders of record must be obtained. The
shares being exchanged must have been held for at least 15 days. Telephone
requests for an exchange will not be honored in the following situations: the
account holder is deceased, the request is by an individual other than the
account holder of record, the account is held by joint tenants who are
divorced or the address on the account has changed within the last 30 days.
Telephone exchanges may be refused if the caller is unable to provide: the
account number, the name and address registered on the account and the social
security number registered on the account. The Fund or the Transfer Agent may
temporarily suspend telephone transactions at any time.
The Exchange Privilege may be modified or terminated at any time on 60
days' notice. The Fund reserves the right to limit the number of times an
investor may exercise the Exchange Privilege. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may
be made.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return
and other total return data, as well as yield and tax equivalent yield, in
advertisements or information furnished to present or prospective
shareholders. Total return, yield and tax equivalent yield figures are based
on the Fund's historical performance and are not intended to indicate future
performance. Average annual total return, yield and tax equivalent yield are
determined separately for Class A, Class B, Class C and Class D shares, in
accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares. 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
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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 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 or some other
amount, 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. 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.
On occasion, the Fund may compare its performance to that of the
Standard & Poor's 500 Index, the Value Line Composite Index, the Dow Jones
Industrial Average, other market indices or performance data contained in
publications such as Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week,
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other
industry publications. When comparing its performance to a market index, the
Fund may refer to various statistical measures derived from the historic
performances of the Fund and the index, such as standard deviation and beta.
As with other performance data, performance comparisons should not be
considered indicative of the Fund's relative performance for any future
period.
Set forth below is total return information for each class of shares of
each Portfolio for the periods indicated.
Average Annual Total Return
(including maximum applicable sales charges)
Expressed as a Percentage
Based on a
Hypothetical $1,000 Investment
-----------------------------------
Limited
Insured National Maturity
Portfolio Portfolio Portfolio
--------- --------- ---------
One Year Ended June 30, 2000
Class A -2.84% -3.45% 2.27%
Class B -3.21 -3.89 1.94
Class C -0.42 -1.08 1.94
Class D -3.08 -3.59 2.17
Five Years Ended June 30, 2000
Class A 3.92% 4.29% 3.61%
Class B 3.98 4.35 3.47
Class C 3.92 4.30 3.35
Class D 3.66 4.03 3.51
Ten Years Ended June 30, 2000
Class A 5.97% 6.14% 4.34%
Class B 5.60 5.78 ---
Class B (11/02/92--6/30/00) --- --- 3.49
Inception (October 21, 1994) to June 30, 2000
Class C 4.99% 5.18% 3.57%
Class D 4.82 5.01 3.74
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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, 2000 for each class of each Portfolio.
For the Period Ending June 30, 2000
--------------------------------------------------------------------
Yield
--------------------------------------------------------------------
Insured Portfolio National Portfolio Limited Maturity Portfolio
----------------- ------------------ --------------------------
Class A 5.15% 5.43% 4.35%
Class B 4.61% 4.89% 4.03%
Class C 4.56% 4.84% 4.03%
Class D 4.91% 5.18% 4.23%
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 7.15% 7.54% 6.04%
Class B 6.40% 6.79% 5.60%
Class C 6.33% 6.72% 5.60%
Class D 6.82% 7.19% 5.88%
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.
Each Portfolio may provide information designed to help investors
understand how the Portfolio is seeking to achieve its investment objectives.
This may include information about past, current or possible economic, market,
political, or other conditions, descriptive information on general principles
of investing such as asset allocation, diversification and risk tolerance,
discussion of the Portfolio's portfolio composition, investment philosophy,
strategy or investment techniques, comparisons of the Portfolio's performance
or portfolio composition to that of other funds or types of investments,
indices relevant to the comparison being made, or to a hypothetical or model
portfolio. Each Portfolio may also quote various measures of volatility and
benchmark correlation in advertising and other materials, and may compare
these measures to those of other funds or types of investments. As with other
performance data, performance comparisons should not be considered indicative
of the Portfolios' relative performance for any future period.
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ADDITIONAL INFORMATION
Organization of the Fund
The Fund is a diversified, open-end management investment company
organized under the laws of the State of Maryland that commenced operations on
October 21, 1977. Prior to September 21, 1979, the Fund consisted solely of
the Insured Portfolio. Currently, the Fund is comprised of three separate
Portfolios: Insured Portfolio, National Portfolio and Limited Maturity
Portfolio.
The authorized capital stock of the Fund consists of 3,850,000,000
shares of Common Stock, divided into three series, each of which is divided
into four classes, having a par value of $0.10 per share. The shares of
Insured Portfolio Series Common Stock (500,000,000 Class A, 375,000,000 Class
B shares, 375,000,000 Class C shares, 500,000,000 Class D shares authorized),
National Portfolio Series Common Stock (375,000,000 Class A, 375,000,000 Class
B shares, 375,000,000 Class C shares, 375,000,000 Class D shares authorized),
and Limited Maturity Portfolio Series Common Stock (150,000,000 Class A,
150,000,000 Class B shares, 150,000,000 Class C shares, 150,000,000 Class D
shares authorized) are divided into four classes, designated Class A, Class B,
Class C and Class D Common Stock. Each Class A, Class B, Class C and Class D
share of common stock of each of the Portfolios represents an interest in the
same assets of such Portfolio and are identical in all respects to the shares
of the other classes except that the Class B, Class C and Class D shares bear
certain expenses related to the account maintenance associated with such
shares, and Class B and Class C shares bear certain expenses related to the
distribution of such shares. Each Class of shares of a Portfolio has exclusive
voting rights with respect to matters relating to account maintenance services
and distribution expenditures relative to that Portfolio, as applicable
(except that Class B shareholders have certain voting rights with respect to
the Class D Distribution Plan). Only shares of each respective Portfolio are
entitled to vote on matters concerning only that Portfolio.
Each issued and outstanding share is entitled to one vote and to
participate equally in dividends and distributions declared by the respective
Portfolios and in net assets of the respective Portfolios upon liquidation or
dissolution remaining after satisfaction of outstanding liabilities, except,
as noted above, the Class B, Class C and Class D shares of the Portfolios bear
certain expenses related to the distribution of such shares. The shares of
each Portfolio, when issued, will be fully paid and nonassessable, have no
preference, pre-emptive, conversion, exchange or similar rights. Shares have
the conversion rights described in the Prospectus. Holders of shares of any
Portfolio 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."
Transfer Agent
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "Management of
the Fund --- Transfer Agency Services."
Custodian
The Bank of New York, 100 Church Street, New York, New York 10007, is
the Fund's Custodian. The Custodian is responsible for maintaining,
safeguarding and controlling each Portfolio's cash and securities, handling
receipt and delivery of securities and collecting interest on the investments.
Counsel and Auditor
Clifford Chance Rogers & Wells LLP, counsel to the Fund, passes upon
legal matters for the Fund in connection with the shares offered by this
Prospectus. Deloitte & Touche LLP, independent auditors, are auditors of the
Fund.
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Shareholder Reports
The Fund issues to its shareholders reports, at least semi-annually,
containing unaudited financial statements and annual reports containing
financial statements examined by auditors approved annually by the Directors.
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and/ or mutual fund account numbers.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
Additional Information
The Prospectus and this Statement of Additional Information do not
contain all the information set forth in the Registration Statement and the
exhibits relating thereto, which the Fund has filed with the Securities and
Exchange Commission, Washington, D.C., under the Securities Act and the
Investment Company Act, to which reference is hereby made.
Under a separate agreement, ML & Co. has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its
consent to the use of such name by the Fund at any time or to grant the use of
such name to any other company, and the Fund has granted ML & Co. under
certain conditions, the use of any other name it might assume in the future,
with respect to any corporation organized by ML & Co.
Computation of Offering Price Per Share
The offering price for Class A , Class B, Class C and Class D shares of
the Insured, National and Limited Maturity, based on the value of each
Portfolio's net assets and the number of shares outstanding as of June 30,
2000, is calculated as set forth below.
Insured Portfolio:
Class A Class B Class C Class D
-------------- -------------- ------------- -------------
Net Assets $ 972,420,120 $ 276,154,551 $ 12,855,886 $ 99,325,839
============= ============= ============ ============
Number of Shares Outstanding 132,063,243 37,529,673 1,746,718 13,492,271
============= ============= ============ ============
Net Asset Value Per Share
(net assets divided by number of shares outstanding) $ 7.36 $ 7.36 $ 7.36 $ 7.36
Sales Charge (Class A and Class D shares:
4.00% of offering price (4.17% of net asset value per .31 ** ** .31
------------- ------------- ------------ ------------
share))*
Offering Price $ 7.67 $ 7.36 $ 7.36 $ 7.67
============= ============= ============ ============
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National Portfolio:
Class A Class B Class C Class D
-------------- -------------- ------------- -------------
Net Assets $ 682,552,989 $ 254,859,798 $ 30,303,121 $ 86,701,521
============= ============= ============ ============
Number of Shares Outstanding 70,335,737 26,272,045 3,122,069 8,930,814
============= ============= ============ ============
Net Asset Value Per Share (net assets divided by number $ 9.70 $ 9.70 $ 9.71 $ 9.71
of shares outstanding)
Sales Charge (Class A and Class D shares:
4.00% of offering price (4.17% of net asset value per .40 ** ** .40
------------- ------------- ------------ ------------
share))*
Offering Price $ 10.10 $ 9.70 $ 9.71 $ 10.11
============= ============= ============ ============
Limited Maturity Portfolio:
Class A Class B Class C Class D
-------------- -------------- ------------- -------------
Net Assets $ 215,420,997 $ 32,741,774 $ 308,337 $ 39,090,075
============ =========== ========= ===========
Number of Shares Outstanding 21,859,312 3,321,807 31,399 3,964,538
============ =========== ========= ===========
Net Asset Value Per Share (net assets divided by number $ 9.85 $ 9.86 $ 9.82 $ 9.86
of shares outstanding)
Sales Charge (Class A and Class D shares:
1.00% of offering price (1.01% of the net asset value .10 ** ** .10
------------ ----------- --------- -----------
per share))*
Offering Price $ 9.95 $ 9.86 $ 9.82 $ 9.96
============ =========== ========= ===========
- ----------------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales
charge is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares within four years of
purchase (for Class B shares of Insured Portfolio and National Portfolio)
or within one year of purchase (for Class B shares of Limited Maturity
Portfolio and Class C shares). See "Purchase of Shares --- Deferred Sales
Charge Alternatives --- Class B and Class C Shares" in the Prospectus and
"Redemption of Shares --- Deferred Sales Charge --- Class B and Class C
Shares" herein.
Financial Statements
The Fund's audited financial statements are incorporated in this
Statement of Additional Information by reference to the Fund's 2000 annual
report to shareholders. You may request a copy of the annual report at no
charge by calling 1-800-637-3863 between 8:00 a.m. and 8:00 p.m. on any
business day.
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APPENDIX A
DESCRIPTIONS OF RATINGS
Descriptions of Moody's Investors Service, Inc.'s Municipal Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Other 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 form Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
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Short-term Notes: The three ratings of Moody's for short-term notes are
MIG 1, MIG 2 and MIG 3. MIG 1 denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing; MIG 2 denotes
high quality. Margins of protection are ample although not so large as in the
preceding group; MIG 3 denotes favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Descriptions of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations having an original maturity not in excess of
nine months. Moody's employs the following three designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Descriptions of Moody's Short-Term Note Ratings The two highest ratings
of Moody's for short-term notes are MIG-1 and MIG-2; MIG-1 denotes "best
quality, enjoying strong protection from established cash flows"; MIG-2
denotes "high quality" with "ample margins of protection."
Descriptions of Moody's Variable Rate Demand Obligation Ratings Moody's
has separate rating categories for variable rate demand obligations ("VRDOs").
VRDOs will receive two ratings. The first rating, depending of the maturity of
the VRDO, will be assigned either a bond or MIG rating which represents an
evaluation of the risk associated with scheduled principal and interest
payments. The second rating, designated as "VMIG," represents an evaluation of
the degree of risk associated with the demand feature. The VRDO demand feature
ratings symbols are:
VMIG 1: strong protection by established cash flows, superior
liquidity support, demonstrated access to the market for refinancing.
VMIG 2: ample margins of protection, high quality.
VMIG 3: favorable quality, liquidity and cash flow protection may be
narrow, market access for refinancing may be less well established.
Descriptions of Standard & Poor's Municipal Debt Ratings
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
rating may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
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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 although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debts
in higher rated categories.
BBB Debt rated "BBB" are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB Debt rated "BB," "B," "CCC" and "CC" are regarded, on balance, as
B predominantly speculative with respect to capacity to pay interest and
CCC repay principal in accordance with the terms of the obligation. "BB"
CC indicates the lowest degree of speculation and "CC" the highest of
speculation. While such debts will likely have some quality and
protective characteristics, these are out-weighed by large uncertainties
or major risk exposures to adverse conditions.
C The rating "C" is reserved for income bonds on which no interest is being
paid.
D Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
The investor should exercise his own judgment with respect to such likelihood
and risk.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
Descriptions of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into four categories, ranging from "A"
for the highest quality obligations to "D" for the lowest. The four categories
are as follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is very strong.
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A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issue is either in default or is expected
to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or sell
a security. The ratings are based on current information furnished to Standard
& Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of, such information.
Descriptions of Standard & Poor's 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.
Description of Fitch IBCA, Inc.'s ( "Fitch") Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guarantees unless otherwise indicated.
Bonds carrying the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect
small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt
nature or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
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information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
A Bond considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
Ratings Outlook: An outlook is used to describe the most likely
direction of any rating change over the intermediate term. It is described as
"Positive" or "Negative." The absence of a designation indicates a stable
outlook.
Description of Fitch's Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligations for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
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Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service
requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD Bonds are in default in interest and/or principal payments. Such bonds
DD D are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor.
"DDD" represents the highest potential for recovery on these bonds, and
"D" represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the "DDD," "DD," or
"D" categories.
Description of Fitch's Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch's short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment but the margin of safety is not
as great as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate:
however, near-term adverse changes could cause these securities to be
rated below investment grade.
F-5 Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D Default Issues assigned this rating are in actual or imminent payment
default.
LOC The symbol "LOC" indicates that the rating is based on a letter of
credit issued by a commercial bank.
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APPENDIX B
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
Assurance Corporation ("AMBAC"), Municipal Bond Investors Assurance
Corporation ("MBIA") and Financial Security Assurance Inc. ("FSA"), with
respect to Insured Municipal Bonds held by the Insured Portfolio (see
"Investment Policies of the Portfolios --- Insured Portfolio"). During the
fiscal year ended June 30, 2000, the premium for the Policies aggregated
$6,320 or approximately .0004% of the average net assets of the Insured
Portfolio.
In determining eligibility for insurance, AMBAC, MBIA and FSA have
applied their own standards, which correspond generally to the standards they
normally use in establishing the insurability of new issues of Municipal Bonds
and which are not necessarily the criteria which would be used in regard to
the purchase of Municipal Bonds by the Insured Portfolio. The Policies do not
insure (i) municipal securities ineligible for insurance, or (ii) municipal
securities that are no longer owned by the Insured Portfolio. In addition, the
AMBAC policy does not insure municipal obligations which were insured as to
the payment of principal and interest at the time of their issuance by AMBAC.
The Policies do not guarantee the market value of the Insured Municipal
Bonds or the value of the shares of the Insured Portfolio. In addition, if the
provider of an original issuance insurance policy is unable to meet its
obligations under such policy or if the rating assigned to the claims paying
ability of any such insurer deteriorates, neither AMBAC, MBIA nor FSA has any
obligation to insure any issue held by the Insured Portfolio which is
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, 2000, the
admitted assets of AMBAC were approximately $4.11 billion (unaudited) with a
qualified capital of approximately $2.58 billion (unaudited). Qualified
capital consists of the statutory contingency reserve and policyholders'
surplus of the insurance company.
FSA insures the prompt payment of interest and principal of new issues
of Municipal Bonds and Municipal Bond portfolios of individuals, banks, trust
companies, corporations, insurance companies and unit trusts. As of June 30,
2000, the total admitted assets (unaudited) of FSA were approximately $2.98
billion with a total capital and surplus (unaudited) of approximately $1.31
billion 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
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trusts. As of June 30, 2000, the total admitted assets of MBIA were
approximately $7.35 billion (unaudited) with total capital and surplus of
approximately $2.47 billion (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.
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