<PAGE>
As filed with the Securities and Exchange Commission on May 28, 1999
Securities Act File No. 2-72724
Investment Company Act File No. 811-3205
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [_]
Post-Effective Amendment No. 20 [X]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 21 [X]
(Check appropriate box or boxes)
----------------
CMA GOVERNMENT SECURITIES FUND
(Exact Name of Registrant as Specified in Charter)
----------------
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
(609) 282-2800
(Registrant's Telephone Number, including Area Code)
----------------
TERRY K. GLENN
CMA Government Securities Fund
800 Scudders Mill Road, Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
----------------
Copies to:
Counsel for the Fund: Michael J. Hennewinkel, Esq.
BROWN & WOOD LLP FUND ASSET MANAGEMENT, L.P.
One World Trade Center P.O. Box 9011
New York, New York 10048-0557 Princeton, New Jersey
Attention: Thomas R. Smith, Jr., 08543-9011
Esq.
Jeffrey S. Alexander, Esq.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
World Financial Center
New York, New York 10281
----------------
It is proposed that this filing will become effective (check appropriate box)
[_]immediately upon filing pursuant to paragraph (b)
[_]on (date) pursuant to paragraph (b)
[X]60 days after filing pursuant to paragraph (a) (1)
[_]on (date) pursuant to paragraph (a) (1)
[_]75 days after filing pursuant to paragraph (a) (2)
[_]on (date) pursuant to paragraph (a) (2) of Rule 485
If appropriate, check the following box:
[_]this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
----------------
Title of Securities Being Registered: Shares of Beneficial Interest, Par Value
$.10 Per Share
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not use this prospectus to sell securities until the registration statement
containing this prospectus, which has been filed with the Securities and
Exchange Commission, is effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
[LOGO] Prospectus
SUBJECT TO COMPLETION
Preliminary Prospectus Dated May 28, 1999
[LOGO] Merrill Lynch
CMA Money Fund
CMA Government Securities Fund
CMA Tax-Exempt Fund
CMA Treasury Fund
July , 1999
This Prospectus contains information you should know
before investing, including information about risks.
Please read it before you invest and keep it for
future reference.
The Securities and Exchange Commission has not
approved or disapproved these securities or passed
upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
[LOGO] Table of Contents
PAGE
[LOGO]
KEY FACTS
- -------------------------------------------------------------------------------
Merrill Lynch Cash Management Account(R)..................................... 3
CMA Money Fund at a Glance................................................... 3
Risk/Return Bar Chart for CMA Money Fund................................... 5
Fees and Expenses for CMA Money Fund ...................................... 6
CMA Government Securities Fund at a Glance................................... 7
Risk/Return Bar Chart for CMA Government Securities Fund................... 9
Fees and Expenses for CMA Government Securities Fund...................... 10
CMA Tax-Exempt Fund at a Glance............................................. 11
Risk/Return Bar Chart for CMA Tax-Exempt Fund............................. 13
Fees and Expenses for CMA Tax-Exempt Fund................................. 14
CMA Treasury Fund at a Glance............................................... 15
Risk/Return Bar Chart for CMA Treasury Fund............................... 16
Fees and Expenses for CMA Treasury Fund................................... 17
[LOGO]
DETAILS ABOUT THE FUNDS
- -------------------------------------------------------------------------------
How Each Fund Invests....................................................... 18
CMA Money Fund............................................................ 18
CMA Government Securities Fund............................................ 20
CMA Tax-Exempt Fund....................................................... 22
CMA Treasury Fund......................................................... 24
Investment Risks............................................................ 25
Additional Risks of CMA Money Fund........................................ 26
Additional Risks of CMA Tax-Exempt Fund................................... 26
[LOGO]
YOUR ACCOUNT
- -------------------------------------------------------------------------------
How to Buy, Sell and Transfer Shares........................................ 28
How Shares are Priced....................................................... 32
Dividends................................................................... 32
[LOGO]
MANAGEMENT OF THE FUNDS
- -------------------------------------------------------------------------------
Fund Asset Management....................................................... 34
Financial Highlights for CMA Money Fund..................................... 35
Financial Highlights for CMA Government Securities Fund..................... 36
Financial Highlights for CMA Tax-Exempt Fund................................ 37
Financial Highlights for CMA Treasury Fund.................................. 37
[LOGO]
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
Shareholder Reports................................................. Back Cover
Statement of Additional Information................................. Back Cover
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
<PAGE>
Key Facts [LOGO]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this
prospectus in the sidebar.
U.S. Government Securities -- obligations that are issued or have their
principal and interest guaranteed by the U.S. Government and are backed by the
full faith and credit of the United States.
Foreign bank money instruments -- Debt securities issued by foreign depository
institutions and their foreign branches and subsidiaries.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT(R)
- --------------------------------------------------------------------------------
A Cash Management Account ("CMA Account") is a conventional Merrill Lynch cash
securities or margin account that is linked to the CMA Funds, to money market
deposit accounts maintained with the depository institutions and to a Visa(R)
card/check account ("Visa(R) Account"). Subscribers to the CMA service may
automatically invest free credit balances held in their CMA Accounts in shares
of one of the CMA Funds, including various series of CMA Multi-State Municipal
Series Trust.
CMA Money Fund (the "Money Fund"), CMA Government Securities Fund (the
"Government Securities Fund"), CMA Tax-Exempt Fund (the "Tax-Exempt Fund") and
CMA Treasury Fund (the "Treasury Fund") are four of the money market funds
(collectively, with the CMA Multi-State Municipal Series Trust, the "CMA
Funds") shares of which are offered to subscribers of the CMA service. Each CMA
Fund is a no-load money market fund that seeks current income, preservation of
capital and liquidity available from investing in short-term securities.
Each CMA Fund has its own goals, investment strategies and risks, which are
described below. We cannot guarantee that any of the CMA Funds will achieve
their goals.
CMA MONEY FUND AT A GLANCE
- --------------------------------------------------------------------------------
What are the Fund's investment objectives?
The investment objectives of the Fund are to seek current income, preservation
of capital and liquidity available from investing in a diversified portfolio of
short term money market securities.
What are the Fund's main investment strategies?
The Fund tries to achieve its objectives by investing in a diversified
portfolio of U.S. dollar denominated money market securities. These securities
consist primarily of short term U.S. Government securities, U.S. Government
agency securities, bank obligations, commercial paper and repurchase
agreements. The Fund may also invest in obligations of domestic and foreign
banks and other short term debt securities issued by U.S. and foreign entities.
The Fund will not invest more than 25% of its total assets in foreign bank
money instruments.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
3
<PAGE>
[LOGO] Key Facts
Fund management decides which of these securities to buy and sell based on its
assessment of the relative values of different securities and future interest
rates. Fund management seeks to improve the Fund's yield by taking advantage of
differences in yield that regularly occur between securities of a similar kind.
We cannot guarantee that the Fund will achieve its objectives.
What are the main risks of investing in the Fund?
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks
to preserve the value of your investment at $1.00 per share, it is possible to
lose money by investing in the Fund.
Who should invest?
Shares of the Fund are offered to participants in the Cash Management
Account(R) financial service program. Shares may also be purchased by investors
by opening accounts directly at the Fund's transfer agent. Such accounts will
not provide any of the features of the CMA program, such as the Visa Account or
the automatic investment of cash balances in the account.
The Fund may be an appropriate investment for you if you:
. Are looking for current income
and liquidity.
. Are looking for preservation of
capital.
. Are investing with short term
goals in mind, such as for cash
reserves.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
4
<PAGE>
RISK/RETURN BAR CHART FOR CMA MONEY FUND
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for the past ten calendar years. The table shows the average annual total
returns of the Fund for the periods shown. How the Fund performed in the past
is not necessarily an indication of how the Fund will perform in the future.
[CHART APPEARS HERE]
9.03% 8.07% 6.04% 3.52% 2.86% 3.80% 5.61% 5.08% 5.21% 5.15%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
During the ten year period shown in the bar chart, the highest return for a
quarter was 2.37% (quarter ended June 30, 1989) and the lowest return for a
quarter was 0.68% (quarter ended June 30, 1993). The Fund's year-to-date return
as of March 31, 1999 was 1.11%.
<TABLE>
<CAPTION>
Average Annual Total
Returns (as of the
calendar year ended) Past Past Past
December 31, 1998 One Year Five Years Ten Years
- ----------------------------------------------------
<S> <C> <C> <C>
CMA Money Fund 5.15% 4.97% 5.42%
- ----------------------------------------------------
</TABLE>
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
5
<PAGE>
[LOGO] Key Facts
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
Expenses paid indirectly by the shareholder (these costs are deducted from the
Fund's total assets).
Annual Fund Operating Expenses -- expenses that cover the costs of operating
the Fund.
Investment Advisory Fee -- a fee paid to the Investment Adviser for managing
the Fund.
Distribution Fees -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants and others for distribution
and for shareholder servicing.
FEES AND EXPENSES FOR CMA MONEY FUND
- --------------------------------------------------------------------------------
This table shows the different fees and expenses that you may pay if you buy
and hold shares of the Fund. Future expenses may be greater or less than those
indicated below.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (expenses that are
deducted from Fund assets)
- -----------------------------------------------------------
<S> <C>
Investment Advisory Fee 0.38%
- -----------------------------------------------------------
Distribution (12b-1) Fees(a) 0.13%
- -----------------------------------------------------------
Other Expenses (including transfer agency fees)(b) 0.06%
- -----------------------------------------------------------
Total Annual Fund Operating Expenses 0.57%
- -----------------------------------------------------------
</TABLE>
(a) The Fund is authorized to pay Merrill Lynch distribution fees of 0.125%
each year under a distribution plan that the Fund has adopted under rule
12b-1. For the fiscal year ended March 31, 1999, $67,833,239 was paid to
Merrill Lynch pursuant to the distribution plan.
(b) The Fund pays the Transfer Agent $10.00 for each shareholder account and
reimburses the Transfer Agent's out-of-pocket expenses. For the fiscal year
ended March 31, 1999, the Fund paid the Transfer Agent fees totaling
$20,816,495. The Investment Adviser provides accounting services to the
Fund at its cost. For the fiscal year ended March 31, 1999, the Fund
reimbursed the Investment Adviser $1,735,401 for these services.
Example:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other money market funds.
This example assumes that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------
<S> <C> <C> <C> <C>
CMA Money Fund $58 $183 $318 $714
- -------------------------------------------------
</TABLE>
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
6
<PAGE>
Direct U.S. Government Obligations -- securities that are issued or have their
principal and interest guaranteed by the U.S. government and are backed by the
full faith and credit of the United States.
Repurchase Agreements --agreements where another party sells securities to the
Fund and at the same time agrees to repurchase the securities at a particular
time and price.
CMA GOVERNMENT SECURITIES FUND AT A GLANCE
- --------------------------------------------------------------------------------
What are the Fund's investment objectives?
The Fund's investment objectives are to seek preservation of capital, current
income and liquidity available from investing exclusively in a diversified
portfolio of short-term marketable securities, including variable rate
securities, that are direct U.S. Government obligations, and repurchase
agreements pertaining to such securities.
What are the Fund's main investment strategies?
The Fund tries to achieve its goals by investing in a diversified portfolio
made up only of direct U.S. Government obligations and repurchase agreements
with banks and securities dealers that involve direct U.S. Government
obligations. Fund management decides on which securities to buy and sell based
on its assessment of the relative values of different securities and future
interest rates. Fund management seeks to improve the Fund's yield by taking
advantage of differences in yield that regularly occur between securities of a
similar kind. We cannot guarantee that the Fund will achieve its goals.
What are the main risks of investing in the Fund?
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks
to preserve the value of your investment at $1.00 per share, it is possible to
lose money by investing in the Fund.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
7
<PAGE>
[LOGO] Key Facts
Who should invest?
Shares of the Fund are offered to participants in the Cash Management
Account(R) financial service program. Shares may also be purchased by investors
by opening accounts directly at the Fund's transfer agent. Such accounts will
not provide any of the features of the CMA program, such as the Visa Account or
the automatic investment of cash balances in the account.
The Fund may be an appropriate investment for you if you:
. Are looking for current income
and liquidity.
. Are looking for preservation of
capital.
. Are investing with short-term
goals in mind, such as for cash
reserves, and want to focus on
U.S. Government securities.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
8
<PAGE>
RISK/RETURN BAR CHART FOR CMA GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for the past ten calendar years. The table shows the average annual total
returns of the Fund for the periods shown. How the Fund performed in the past
is not necessarily an indication of how the Fund will perform in the future.
[CHART APPEARS HERE]
8.85% 7.85% 5.89% 3.44% 2.79% 3.65% 5.46% 4.99% 5.11% 5.00%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
During the ten year period shown in the bar chart, the highest return for a
quarter was 2.28% (quarter ended June 30, 1989) and the lowest return for a
quarter was 0.68% (quarter ended June 30, 1993). The Fund's year-to-date return
as of March 31, 1999 was 1.06%.
<TABLE>
<CAPTION>
Average Annual Total
Returns (as of the
calendar year ended) Past Past Past
December 31, 1998 One Year Five Years Ten Years
- ---------------------------------------------------------------
<S> <C> <C> <C>
CMA Government Securities Fund 5.00% 4.84% 5.29%
- ---------------------------------------------------------------
</TABLE>
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
9
<PAGE>
[LOGO] Key Facts
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
Expenses paid indirectly by the shareholder (these costs are deducted from the
Fund's total assets).
Annual Fund Operating Expenses -- expenses that cover the costs of operating
the Fund.
Investment Advisory Fee -- a fee paid to the Investment Adviser for managing
the Fund.
Distribution Fees -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants and others for distribution
and for shareholder servicing.
FEES AND EXPENSES FOR CMA GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
This table shows the different fees and expenses that you may pay if you buy
and hold shares of the Fund. Future expenses may be greater or less than those
indicated below.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (expenses that are
deducted from Fund assets)
- -----------------------------------------------------------
<S> <C>
Investment Advisory Fee 0.40%
- -----------------------------------------------------------
Distribution (12b-1) Fees(a) 0.13%
- -----------------------------------------------------------
Other Expenses (including transfer agency fees)(b) 0.04%
- -----------------------------------------------------------
Total Annual Fund Operating Expenses 0.57%
- -----------------------------------------------------------
</TABLE>
(a) The Fund is authorized to pay Merrill Lynch distribution fees of 0.125%
each year under a distribution plan that the Fund has adopted under rule
12b-1. For the fiscal year ended March 31, 1999, $4,383,190 was paid to
Merrill Lynch pursuant to the distribution plan.
(b) The Fund pays the Transfer Agent $10.00 for each shareholder account and
reimburses the Transfer Agent's out-of-pocket expenses. For the fiscal year
ended March 31, 1999, the Fund paid the Transfer Agent fees totaling
$488,200. The Investment Adviser provides accounting services to the Fund
at its cost. For the fiscal year ended March 31, 1999, the Fund reimbursed
the Investment Adviser $228,558 for these services.
Example:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other money market funds.
This example assumes that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
CMA Government Securities Fund $58 $183 $318 $714
- ----------------------------------------------------------------
</TABLE>
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
10
<PAGE>
Short Term Tax-Exempt Securities -- securities with maturities of not more than
397 days (13 months) that pay interest exempt from Federal income tax.
Maturity -- time at which the full principal amount of a money market
instrument is scheduled to be repaid.
CMA TAX-EXEMPT FUND AT A GLANCE
- --------------------------------------------------------------------------------
What are the Fund's investment objectives?
The Fund's investment objectives are to seek current income exempt from Federal
income taxes, preservation of capital and liquidity available from investing in
a diversified portfolio of short term high quality tax exempt money market
securities.
What are the Fund's main investment strategies?
The Fund tries to achieve its goals by investing in a diversified portfolio of
short term tax-exempt securities. These securities consist principally of tax-
exempt notes and commercial paper, short-term municipal bonds, tax-exempt
variable rate demand obligations and short term tax-exempt derivatives. Certain
short term tax-exempt securities have stated maturities that are longer than
397 days, but give the Fund the right to demand payment from a financial
institution within that period. The Fund treats these securities as having a
maturity of 397 days or less.
The Fund only invests in short term tax-exempt securities having one of the two
highest short term ratings from a nationally recognized credit rating
organization or unrated securities which, in the opinion of Fund management,
are of similar quality. Certain short term tax-exempt securities are entitled
to the benefit of insurance, guarantees, letters of credit or similar
arrangements provided by a financial institution. When this is the case, Fund
management may consider the obligation of the financial institution and its
creditworthiness in determining whether the security is an appropriate
investment for the Fund.
The Fund does not presently intend to invest more than 25% of its total assets
in short term tax-exempt securities of issuers located in the same state.
Fund management determines which securities to buy based on its assessment of
relative values of different securities and future interest rates. Fund
management seeks to improve the Fund's yield by taking advantage of differences
in yields of similar kinds of securities.
We cannot guarantee that the Fund will achieve its objectives.
What are the main risks of investing in the Fund?
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks
to preserve the value of your investment at $1.00 per share, it is possible to
lose money by investing in the Fund.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
11
<PAGE>
[LOGO] Key Facts
- --------------------------------------------------------------------------------
Who should invest?
Shares of the Fund are offered to participants in the Cash Management
Account(R) financial service program. Shares may also be purchased by investors
by opening accounts directly at the Fund's transfer agent. Such accounts will
not provide any of the features of the CMA program, such as the Visa Account or
the automatic investment of cash balances in the account.
The Fund may be an appropriate investment for you if you:
. Are looking for liquidity as well
as current income that is exempt
from Federal income tax.
. Are looking for preservation of
capital.
. Are investing with short term
goals in mind, such as for cash
reserves.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
12
<PAGE>
RISK/RETURN BAR CHART FOR CMA TAX-EXEMPT FUND
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for the past ten calendar years. The table shows the average annual total
returns of the Fund for the periods shown. How the Fund performed in the past
is not necessarily an indication of how the Fund will perform in the future.
[CHART APPEARS HERE]
6.08% 5.62% 4.21% 2.60% 1.97% 2.40% 3.39% 3.03% 3.16% 2.98%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
During the ten year period shown in the bar chart, the highest return for a
quarter was 1.60% (quarter ended June 30, 1989) and the lowest return for a
quarter was 0.46% (quarter ended March 31, 1994). The Fund's year-to-date
return as of March 31, 1999 was 0.61%.
<TABLE>
<CAPTION>
Average Annual Total
Returns (as of the
calendar year ended) Past Past Past
December 31, 1998 One Year Five Years Ten Years
- ----------------------------------------------------
<S> <C> <C> <C>
CMA Tax-Exempt Fund 2.98% 2.99% 3.54%
- ----------------------------------------------------
</TABLE>
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
13
<PAGE>
[LOGO] Key Facts
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
Expenses paid indirectly by the shareholder (these costs are deducted from the
Fund's total assets).
Annual Fund Operating Expenses -- expenses that cover the costs of operating
the Fund.
Investment Advisory Fee -- a fee paid to the Investment Adviser for managing
the Fund.
Distribution Fees -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants and others for distribution
and for shareholder servicing.
FEES AND EXPENSES FOR CMA TAX-EXEMPT FUND
- --------------------------------------------------------------------------------
This table shows the different fees and expenses that you may pay if you buy
and hold shares of the Fund. Future expenses may be greater or less than those
indicated below.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (expenses that are
deducted from Fund assets)
- -----------------------------------------------------------
<S> <C>
Investment Advisory Fee 0.38%
- -----------------------------------------------------------
Distribution (12b-1) Fees(a) 0.13%
- -----------------------------------------------------------
Other Expenses (including transfer agency fees)(b) 0.04%
- -----------------------------------------------------------
Total Annual Fund Operating Expenses 0.55%
- -----------------------------------------------------------
</TABLE>
(a) The Fund is authorized to pay Merrill Lynch distribution fees of 0.125%
each year under a distribution plan that the Fund has adopted under rule
12b-1. For the fiscal year ended March 31, 1999, $11,618,652 was paid to
Merrill Lynch pursuant to the distribution plan.
(b) The Fund pays the Transfer Agent $10.00 for each shareholder account and
reimburses the Transfer Agent's out-of-pocket expenses. For the fiscal year
ended March 31, 1999, the Fund paid the Transfer Agent fees totaling
$1,482,266. The Investment Adviser provides accounting services to the Fund
at its cost. For the fiscal year ended March 31, 1999, the Fund reimbursed
the Investment Adviser $386,107 for these services.
Example:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other money market funds.
This example assumes that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------
<S> <C> <C> <C> <C>
CMA Tax-Exempt Fund $56 $176 $307 $689
- ------------------------------------------------------
</TABLE>
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
14
<PAGE>
Direct Obligations of the U.S. Treasury -- Securities issued directly by the
U.S. Treasury rather than by any U.S. Government agency or instrumentality.
CMA TREASURY FUND AT A GLANCE
- --------------------------------------------------------------------------------
What are the Fund's investment objectives?
The Fund's investment objectives are to seek preservation of capital, liquidity
and current income available from investing exclusively in a diversified
portfolio of short-term direct obligations of the U.S. Treasury with remaining
maturities of 25 months or less.
What are the Fund's main investment strategies?
The Fund tries to achieve its goals by investing exclusively in a diversified
portfolio made up only of short-term marketable securities that are direct
obligations of the U.S. Treasury with remaining maturities of 25 months or
less. Fund management decides on which securities to buy and sell based on its
assessment of the relative values of different securities and future interest
rates. Fund management seeks to improve the Fund's yield by taking advantage of
differences in yields that occur between securities of a similar kind. We
cannot guarantee that the Fund will achieve its goals.
What are the main risks of investing in the Fund?
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks
to preserve the value of your investment at $1.00 per share, it is possible to
lose money by investing in the Fund.
Who should invest?
Shares of the Fund are offered to participants in the Cash Management
Account(R) financial service program. Shares may also be purchased by investors
by opening accounts directly at the Fund's transfer agent. Such accounts will
not provide any of the features of the CMA program, such as the Visa Account or
the automatic investment of cash balances in the account.
The Fund may be an appropriate investment for you if you:
. Are looking for preservation of
capital.
. Are looking for current income
and liquidity.
. Are investing with short-term
goals in mind, such as for cash
reserves.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
15
<PAGE>
[LOGO] Key Facts
RISK/RETURN BAR CHART FOR CMA TREASURY FUND
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for each complete calendar year since the Fund's inception. The table shows the
average annual total returns of the Fund for the periods shown. How the Fund
performed in the past is not necessarily an indication of how the Fund will
perform in the future.
[CHART APPEARS HERE]
3.25% 2.62% 3.51% 5.25% 4.78% 4.84% 4.74%
1992 1993 1994 1995 1996 1997 1998
During the period shown in the bar chart, the highest return for a quarter was
1.33% (quarter ended June 30, 1995) and the lowest return for a quarter was
0.62% (quarter ended June 30, 1993). The Fund's year-to-date return as of March
31, 1999 was 0.99%.
<TABLE>
<CAPTION>
Average Annual Total
Returns (as of the
calendar year ended) Past Past Since
December 31, 1998 One Year Five Years Inception+
- -----------------------------------------------------
<S> <C> <C> <C>
CMA Treasury Fund 4.74% 4.62% 4.27%
- -----------------------------------------------------
</TABLE>
+ Inception date is April 15, 1991.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
16
<PAGE>
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
Expenses paid indirectly by the shareholder (these costs are deducted from the
Fund's total assets).
Annual Fund Operating Expenses -- expenses that cover the costs of operating
the Fund.
Investment Advisory Fee -- a fee paid to the Investment Adviser for managing
the Fund.
Distribution Fees -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants and others for distribution
and for shareholder servicing.
Yield -- the amount of income generated by an investment in the Fund, in a
specified time period, which is annualized (projected over a full year) and
expressed as a percentage of the amount invested.
FEES AND EXPENSES FOR CMA TREASURY FUND
- --------------------------------------------------------------------------------
This table shows the different fees and expenses that you may pay if you buy
and hold shares of the Fund. Future expenses may be greater or less than those
indicated below.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (expenses that are
deducted from Fund assets)
- -----------------------------------------------------------
<S> <C>
Investment Advisory Fee 0.41%
- -----------------------------------------------------------
Distribution (12b-1) Fees(a) 0.13%
- -----------------------------------------------------------
Other Expenses (including transfer agency fees)(b) 0.04%
- -----------------------------------------------------------
Total Annual Fund Operating Expenses 0.58%
- -----------------------------------------------------------
</TABLE>
(a) The Fund is authorized to pay Merrill Lynch distribution fees of 0.125%
each year under a distribution plan that the Fund has adopted under rule
12b-1. For the fiscal year ended March 31, 1999, $3,135,312 was paid to
Merrill Lynch pursuant to the distribution plan.
(b) The Fund pays the Transfer Agent $10.00 for each shareholder account and
reimburses the Transfer Agent's out-of-pocket expenses. For the fiscal year
ended March 31, 1999, the Fund paid the Transfer Agent fees totaling
$440,392. The Investment Adviser provides accounting services to the Fund
at its cost. For the fiscal year ended March 31, 1999, the Fund reimbursed
the Investment Adviser $228,563 for these services.
Example:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other money market funds.
This example assumes that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------
<S> <C> <C> <C> <C>
CMA Treasury Fund $59 $186 $324 $726
- ----------------------------------------------------
</TABLE>
Yield Information
The yield on Fund shares normally will go up and down on a daily basis.
Therefore, yields for any given past periods are not an indication or
representation of future yields. Each Fund's yield is affected by changes in
interest rates, average portfolio maturity and operating expenses. Current
yield information may not provide the basis for a comparison with bank deposits
or other investments, which pay a fixed yield over a stated period of time.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
17
<PAGE>
Details About the Fund [LOGO]
ABOUT THE
PORTFOLIO MANAGER
Kevin J. McKenna is the portfolio manager of the Fund. Mr. McKenna has been a
First Vice President of Merrill Lynch Asset Management since 1997, was a Vice
President of MLAM from 1985 to 1997 and has been employed by MLAM since 1982.
ABOUT THE
INVESTMENT ADVISER
The Fund is managed by Fund Asset Management.
HOW EACH FUND INVESTS
- --------------------------------------------------------------------------------
CMA Money Fund
The Fund seeks current income, preservation of capital and liquidity. The Fund
tries to achieve its goals by investing in a diversified portfolio of short
term money market securities. These instruments are dollar-denominated fixed-
income securities that mature or reset to a new interest rate within 13 months
(25 months if the U.S. government or a government agency has issued or
guaranteed the debt). Other than U.S. government and government agency
securities, the Fund only invests in money market instruments of issuers with
one of the two highest short-term ratings from a nationally recognized credit
rating organization or unrated instruments which, in the opinion of Fund
management, are of similar credit quality.
Fund management will vary the types of money market instruments in the Fund's
portfolio, as well as the Fund's average maturity, in response to its
assessment of the relative value of different securities and future short-term
interest rates. The Fund's dollar-weighted average maturity will not exceed 90
days.
Among the money market obligations the Fund may buy are:
United States Government Securities -- Debt 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 United States.
United States Government Agency Securities -- Debt securities issued by U.S.
Government agencies, government-sponsored enterprises and government
instrumentalities. Agency securities may be supported only by the credit of the
issuer, not the full faith and credit of the United States.
Bank Money Instruments -- Obligations of commercial banks or other depository
institutions, such as certificates of deposit, bankers' acceptances, bank notes
and time deposits. The Fund may only invest in obligations of savings banks and
savings and loan associations organized and operating in the United States. The
Fund may invest in obligations of commercial banks issued by U.S. depository
institutions, foreign branches or subsidiaries of U.S. depository institutions
(called Eurodollar obligations) or U.S. branches or subsidiaries of foreign
depository institutions (called Yankeedollar obligations). The Fund may invest
in Eurodollar obligations only if they are general obligations of the parent
bank.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
18
<PAGE>
The Fund may also invest up to 25% of its total assets in bank money
instruments issued by foreign branches and subsidiaries of foreign banks.
. Commercial Paper. Obligations, usually of nine months or less, issued by
corporations, securities firms and other businesses for short-term
funding.
. Short-Term Obligations. Corporate or foreign government debt and asset-
backed securities with a period of 397 days or less remaining to maturity.
. Floating Rate Obligations. Obligations of government agencies,
corporations, depository institutions or other issuers that periodically
reset their interest rate to reflect a current market rate, such as the
federal funds rate or a bank's prime rate, or the level of an interest
rate index, such as LIBOR (a well-known short-term interest rate index).
. Insurance Company Obligations. Short-term funding agreements and
guaranteed insurance contracts with fixed or floating interest rates.
. Master Notes. Variable principal amount demand instruments issued by
securities firms and other corporate issuers.
. Other Eligible Investments. Other money market instruments permitted by
SEC rules governing money market funds.
Repurchase Agreements -- In a repurchase agreement the Fund buys a security
from another party, which agrees to buy it back at an agreed upon time and
price. The Fund may invest in repurchase agreements involving the money market
securities described above (without regard to maturity).
Reverse Repurchase Agreements -- In a reverse repurchase agreement the Fund
sells a security to another party and agrees to buy it back at a specific time
and price. The Fund may engage in reverse repurchase agreements involving the
money market securities described above.
When-Issued, Delayed-Delivery and Forward Commitments -- The Fund may buy or
sell money market securities on a when-issued, delayed-delivery and forward
commitment basis. In these transactions, the Fund buys or sells the securities
at an established price with payment and delivery taking place in the future.
The value of the security on the delivery date may be more or less than its
purchase or sale price.
agencies -- entities that are part of or sponsored by the federal government,
such as the Government National Mortgage Administration ("Ginnie Mae"), the
Tennessee Valley Authority or the Federal Housing Administration.
government sponsored enterprises -- private corporations sponsored by the
federal government which have the legal status of government agencies, such as
the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Student Loan
Marketing Association ("Sallie Mae") or Fannie Mae.
instrumentalities -- supranational entities sponsored by the U.S. and other
governments, such as the World Bank or the Inter-American Development Bank.
asset-backed securities -- fixed-income securities issued by a trust or other
legal entity established for the purpose of issuing securities and holding
certain assets, such as credit card receivables or auto leases, that pay down
over time and generate sufficient cash to pay holders of the securities.
index -- a measure of value or rates.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
19
<PAGE>
[LOGO] Details About the Fund
ABOUT THE
PORTFOLIO MANAGER
Carlo J. Giannini is the portfolio manager of the Fund. Mr. Giannini has been a
Vice President of Merrill Lynch Asset Management since 1981 and has been
employed by MLAM since 1971.
CMA Government Securities Fund
The Fund seeks preservation of capital, current income and liquidity. The Fund
tries to achieve its goals by investing in a diversified portfolio of short-
term marketable securities that are direct obligations of the U.S. Government.
The Fund also uses repurchase agreements with banks and securities dealers that
involve direct obligations of the U.S. Government.
In seeking to achieve the Fund's objectives, Fund management varies the kinds
of direct U.S. Government securities held in the portfolio and its average
maturity. Fund management decides on which securities to buy and sell based on
its assessment of the relative values of different securities and future
interest rates. Fund management seeks to improve the Fund's yield by taking
advantage of differences in yield that regularly occur among securities of a
similar kind. For example, market conditions frequently result in similar
securities trading at different prices. Fund management seeks to improve the
Fund's yield by buying and selling securities based on these yield differences.
Among the direct U.S. Government obligations the Fund may buy are:
. U.S. Treasury obligations.
. U.S. Government agency securities
that are backed by the full faith
and credit of the United States.
. Variable rate U.S. Treasury
Government agency obligations,
which have interest rates that
reset periodically prior to
maturity based on a specific
index or interest rate.
. Deposit receipts, which represent
interests in component parts of
U.S. Treasury bonds or other U.S.
Government or U.S. Government
agency securities.
The Fund may invest in securities with maturities of up to 762 days (25
months). The Fund's dollar-weighted average maturity will not exceed 90 days.
The Fund may also enter into repurchase agreements involving U.S. Government
securities described above. The Fund may also
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
20
<PAGE>
invest in the U.S. Government securities described above pursuant to purchase
and sale contracts.
The Fund may buy and sell U.S. Government securities on a when-issued, delayed-
delivery or forward commitment basis. In these transactions, the Fund buys or
sells a security at an established price with payment and delivery taking place
in the future. The value of the security on the delivery date may be more or
less than its purchase or sale price.
The Fund may not invest in securities that are issued or guaranteed by U.S.
Government entities, but not backed by the full faith and credit of the United
States.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
21
<PAGE>
[LOGO] Details About the Fund
ABOUT THE
PORTFOLIO MANAGER
Peter J. Hayes is the portfolio manager of the Fund. Mr. Hayes has been a First
Vice President of Merrill Lynch Asset Management since 1989 and was a Vice
President of MLAM from 1988 to 1997 and has been employed by MLAM since 1987.
Illiquid -- securities that cannot be resold within seven days under normal
circumstances at prices approximating carrying value or that have legal or
contractual restrictions on resale.
CMA Tax-Exempt Fund
The Fund seeks current income exempt from Federal income taxes, preservation of
capital and liquidity. The Fund tries to achieve its goals by investing in a
diversified portfolio of short term tax-exempt securities.
Management of the Fund will seek to keep its assets fully invested to maximize
the yield on the Fund's portfolio. There may be times when the Fund has
uninvested cash, however, which will reduce its yield. The Fund will not invest
in taxable securities except that certain municipal bonds, known as "private
activity bonds," may be subject to a Federal alternative minimum tax. No more
than 10% of the Fund's net assets will be invested in illiquid securities. The
Fund's dollar-weighted average maturity will not exceed 90 days.
Fund management determines which securities to buy based on its assessment of
relative values of different securities and future interest rates. Fund
management seeks to improve the Fund's yield by taking advantage of differences
in yields of similar kinds of securities.
Among the short term tax-exempt securities the Fund may buy are:
Tax-Exempt Notes -- short term municipal debt obligations often used to provide
interim financing in anticipation of tax collection, bond sales or other
revenues.
Tax-Exempt Commercial Paper -- short term unsecured promissory notes used to
finance general short term credit needs.
Tax-Exempt Bonds -- long term debt obligations that pay interest exempt from
Federal income tax. The Fund will only invest in long-term debt obligations
that have remaining maturities of 397 days or less or that the Fund has a
contractual right to sell (put) periodically or on demand within that time.
Variable Rate Demand Obligations -- floating rate securities that combine an
interest in a long term municipal bond with a right to demand payment
periodically or on notice. The Fund may also buy a participation interest in a
variable rate demand note owned by a commercial bank or other financial
institution. When the Fund purchases a participation interest, it receives the
right to demand payment on notice to the owner of the obligation. The Fund will
not invest more than 20% of its total assets in participation interests in
variable rate demand obligations.
Short Term Tax-Exempt Derivatives -- a variety of securities that generally
represent the Fund's ownership interest in one or more municipal bonds held by
a trust or partnership coupled with a contractual right to sell (put) that
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
22
<PAGE>
interest to a financial institution, periodically or on demand, for a price
equal to face value. Income on the underlying municipal bonds is "passed
through" the trust or partnership to the Fund and other institutions that have
an ownership interest. Depending on the particular security, the Fund may
receive pass-through income at a fixed interest rate or a floating municipal
money market interest rate. Each Fund may also invest in certain other
derivatives whose value is derived from an index, such as the BMA Swap Index.
Municipal Lease Obligations -- participation certificates issued by government
authorities to finance the acquisition, development or construction of
equipment, land or facilities. The certificates represent participations in a
lease or similar agreement backed by the municipal issuer's promise to budget
for and appropriate funds to make payments due under the lease.
When-Issued and Delayed Delivery Securities -- The Fund may buy or sell short
term tax-exempt securities on a when-issued or delayed delivery basis. In these
transactions, the Fund buys or sells the securities at an established price
with payment and delivery taking place in the future. The value of the security
on the delivery date may be more or less than its purchase or sale price.
The Fund's portfolio represents a significant percentage of the market in short
term tax-exempt securities. A shortage of available high quality short term
tax-exempt securities will affect the yield on the Fund's portfolio. The Fund
may suspend or limit sales of shares if, due to such a shortage, the sale of
additional shares would not be in the best interest of the Fund's shareholders.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
23
<PAGE>
[LOGO] Details About the Fund
ABOUT THE
PORTFOLIO MANAGER
Jacqueline Ayoub is the portfolio manager of the Fund. Ms. Ayoub has been a
Vice President of Merrill Lynch Asset Management since 1985 and has been
employed by MLAM since 1982.
CMA Treasury Fund
The Fund seeks preservation of capital, liquidity and current income. The Fund
tries to achieve its goals by investing exclusively in a diversified portfolio
of short-term marketable securities that are direct obligations of the U.S.
Treasury.
In seeking to achieve the Fund's objectives, Fund management varies the kinds
of U.S. Treasury obligations the Fund buys and their average maturity. Fund
management decides on which securities to buy and sell based on its assessment
of the relative values of different securities and future interest rates. Fund
management seeks to improve the Fund's yield by taking advantage of differences
in yield that occur between securities of a similar kind. For example, market
conditions frequently result in similar securities trading at different prices.
Fund management seeks to improve the Fund's yield by buying and selling
securities based on these yield differences. The Fund's dollar weighted average
maturity will not exceed 90 days.
The Fund may buy or sell U.S. Treasury securities on a when-issued, delayed-
delivery or a forward commitment basis. In these transactions, the Fund buys or
sells a security at an established price with payment and delivery taking place
in the future. The value of the security on the delivery date may be more or
less than the purchase or sale price.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
24
<PAGE>
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
CMA Money Fund, CMA Government Securities Fund, CMA Tax-Exempt Fund and CMA
Treasury Fund. As with any mutual fund, there can be no guarantee that a Fund
will meet its goals or that a Fund's performance will be positive for any
period of time.
Credit Risk -- Credit risk is the risk that the issuer of a security owned by
the Fund will be unable to pay the interest or principal when due. The degree
of credit risk depends on both the financial condition of the issuer and the
terms of the obligation.
Selection Risk -- Selection risk is the risk that the securities that Fund
management selects will underperform those of other funds with similar
investment objectives and investment strategies.
Interest Rate Risk -- Interest rate risk is the risk that prices of money
market securities generally increase when interest rates decline and decrease
when interest rates increase. Prices of longer term securities generally change
more in response to interest rate changes than prices of shorter term
securities.
Share Reduction Risk -- In order to maintain a constant net asset value of
$1.00 per share, the Fund may reduce the number of shares held by its
shareholders.
Borrowing Risk -- The Fund may borrow only to meet redemptions. Borrowing may
exaggerate changes in the net asset value of Fund shares and in the yield on
the Fund's portfolio. Borrowing will cost the Fund interest expense and other
fees. The cost of borrowing money may reduce the Fund's return.
When-Issued Securities, Delayed Delivery Securities and Forward Commitments --
When-issued and delayed delivery securities and forward commitments involve
the risk that the security the Fund buys will lose value prior to its delivery.
There is also the risk that the security will not be issued that the other
party will not meet its obligation. If this occurs, the Fund loses both the
investment opportunity for the assets it has set aside to pay for the security
and any gain in the security's price. When issued and delayed
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
25
<PAGE>
[LOGO] Details About the Fund
delivery securities also involve the risk that the yields available in the
market when delivery takes place may be higher than those fixed in the
transaction at the time of commitment. If this happens, the value of the when-
issued or delayed delivery security will generally decline.
Repurchase Agreement Risk (applicable to all the CMA Funds, except the Tax-
Exempt Fund) -- If the party with whom the Fund has entered into a repurchase
agreement fails to meet its obligation under the agreement, the Fund may suffer
delays and incur costs or even lose money in exercising its rights under the
agreement.
Additional Risks of CMA Money Fund
Reverse Repurchase Agreement Risk -- The Fund may lose money if the other party
defaults and the Fund has to buy the underlying securities elsewhere at more
than the agreed-upon price. In addition, in a declining market the Fund may be
unable to sell securities that are the subject of a reverse repurchase
agreement until it repurchases them, which may result in the Fund receiving a
lower sale price than it otherwise would have.
Securities Lending Risk -- The Fund may lend securities to financial
institutions that provide cash or government securities as collateral.
Securities lending involves the risk that the borrower may fail to return the
securities in a timely manner or at all. As a result, the Fund may lose money
if it is unable to recover its securities or if the value of its collateral
falls. These events could trigger adverse tax consequences to the Fund.
Foreign Market Risk -- The Fund may invest in U.S. dollar denominated money
market instruments and other short-term debt obligations issued by foreign
banks and other foreign entities. Although the Fund will invest in these
securities only if Fund management determines they are of comparable quality to
the Fund's U.S. investments, investing in securities of foreign issuers
involves some additional risks. These risks include the possibly higher costs
of foreign investing, and the possibility of adverse political, economic or
other developments.
Additional Risks of CMA Tax-Exempt Fund
VRDN and Municipal Derivatives Credit Risk -- When the Fund invests in variable
rate demand notes or short-term municipal derivatives, it assumes
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
26
<PAGE>
credit risk with respect to the financial institution providing the Fund with
the right to demand payment or put (sell) the security. While the Fund invests
only in short-term municipal securities of high quality issuers, or which are
backed by high quality financial institutions, those issuers or financial
institutions may still default on their obligations.
Short Term Municipal Derivatives -- Short term municipal derivatives present
certain unresolved tax, legal, regulatory and accounting issues not presented
by investments in other short term municipal securities. These issues might be
resolved in a manner adverse to the Fund. For example, the Internal Revenue
Service has never ruled on the subject of whether pass-through income paid to
the Fund is tax-exempt. The Fund receives an opinion of counsel that pass-
through income is tax-exempt, but that does not mean that the IRS will never
rule that pass-through income is taxable.
Municipal Lease Obligations -- In a municipal lease obligation, the issuer
agrees to budget for and appropriate municipal funds to make payments due on
the lease obligation. However, this does not ensure that funds will actually be
appropriated in future years. The issuer does not pledge its unlimited taxing
power for the payment of the lease obligation. The obligation is generally
secured by a pledge of the leased property, but disposition of the property in
the event of foreclosure might be difficult and the proceeds of sale might not
cover the Fund's loss.
Illiquid Securities -- If the Fund buys illiquid securities, it may be unable
to quickly resell them or may be able to sell them only at a price below
current value.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the CMA Funds, including how each
Fund invests, please see the Statement of Additional Information.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
27
<PAGE>
Your Account [LOGO]
HOW TO BUY, SELL AND TRANSFER SHARES
- --------------------------------------------------------------------------------
The chart below summarizes how to buy, sell and transfer shares of each Fund
through Merrill Lynch. You may also buy shares through the Transfer Agent. To
learn more about buying shares through the Transfer Agent, call 1-800-221-7210.
Because the selection of a mutual fund involves many considerations, your
Merrill Lynch Financial Consultant may help you with this decision.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
28
<PAGE>
<TABLE>
<CAPTION>
Information Important for You to
If You Want To Your Choices Know
- -------------------------------------------------------------------------------
<C> <C> <S>
Buy Shares Determine the amount of If you are a CMA program subscriber,
your investment there is no minimum initial
investment for Fund shares, but the
minimum for the program is $20,000
cash and/or securities.
If you are not a CMA program
subscriber, the minimum initial
investment for a Fund is $5,000.
--------------------------------------------------------------------
Have credit balances If you are a CMA program subscriber
from your account and you choose to have your cash
automatically invested balances automatically invested in
in shares of the Fund shares of a designated Fund, they
designated as your will be invested as follows:
primary money account
. Credit balances from (i) a sale of
securities that does not settle on
the day the sale is made or (ii)
repayments of principal on debt
securities held in your CMA
account will be invested in shares
of the Fund on the next business
day following the day on which the
sale proceeds are received in your
CMA account.
. Credit balances from a sale of
securities that settles on the
same day as the sale will be
invested in shares of the Fund on
the next business day following
the day on which the sale proceeds
are received in your CMA account.
. Credit balances of $1,000 or more
from (i) payment of dividends or
interest on securities held in
your CMA account or (ii) a cash
deposit to your CMA account will
generally be invested in shares of
the Fund on the next business day
following receipt of the money in
your CMA Account, subject to
certain timing considerations.
. Credit balances of less than
$1,000 are invested in shares on
the next weekly automatic sweep,
usually a Monday.
--------------------------------------------------------------------
Have your Merrill Lynch If you are a CMA program subscriber,
Financial Consultant you may make manual investments of
submit your purchase $1,000 or more in any CMA Fund not
order designated as your primary money
account.
Generally, manual purchases placed
through Merrill Lynch will be
effective on the day following the
day the order is placed, subject to
certain timing considerations.
Manual purchases of $500,000 or more
can be made effective on the same
day the order is placed provided
certain requirements are met.
Each Fund may reject any order to
buy shares and may suspend the sale
of shares at any time for any
reason.
Merrill Lynch reserves the right to
terminate a subscriber's
participation in the CMA program at
any time for any reason.
When purchasing shares as a CMA
program subscriber, you will be
subject to the applicable annual
program participation fee. To
receive all the services available
as a CMA program subscriber, you
must complete the account opening
process, including completing or
supplying requested documentation.
- -------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
29
<PAGE>
[LOGO] Your Account
<TABLE>
<CAPTION>
Information Important for You to
If You Want To Your Choices Know
- -------------------------------------------------------------------------------
<C> <C> <S>
Buy Shares Or contact the Transfer If you maintain an account directly
(continued) Agent with the Transfer Agent, and are not
a CMA program subscriber, you may
call the Transfer Agent at
1-800-221-7210 and request a
purchase application. Mail the
completed purchase application to
the Transfer Agent at the address on
the inside back cover of this
prospectus.
- -------------------------------------------------------------------------------
Add to Your Purchase additional The minimum investment for
Investment shares additional purchases (other than
automatic purchases) is $1,000 for
all accounts.
--------------------------------------------------------------------
Acquire additional All dividends are automatically
shares through the reinvested in the form of additional
automatic dividend shares at net asset value.
reinvestment plan
- -------------------------------------------------------------------------------
Transfer Shares Transfer to a You may transfer your Fund shares
to Another participating securities only to another securities dealer
Securities dealer that has entered into an agreement
Dealer with Merrill Lynch. All shareholder
services will be available for the
transferred shares. You may only
purchase additional shares of funds
previously owned before the
transfer. All future trading of
these assets must be coordinated by
the receiving firm.
--------------------------------------------------------------------
Transfer to a non- If you no longer maintain a CMA
participating securities account, you must either transfer
dealer your shares to an account with the
Transfer Agent or they will be
automatically redeemed.
Shareholders maintaining accounts
with the Transfer Agent are not
entitled to the services available
to CMA program subscribers.
- -------------------------------------------------------------------------------
Sell Your Automatic Redemption Each Fund has instituted an
Shares automatic redemption procedure for
CMA program subscribers who have
elected to have cash balances in
their accounts automatically
invested in shares of a designated
Fund. For these subscribers, unless
directed otherwise, Merrill Lynch
will redeem a sufficient number of
shares of the Fund to satisfy debit
balances in the account (i) created
by activity therein or (ii) created
by Visa(R) card purchases, cash
advances or checks written against
the Visa(R) account. Each CMA
account will be automatically
scanned for debits each business day
prior to 12 noon, Eastern time.
After application of any cash
balances in the account to these
debits, shares of the Fund
designated as the primary money
account and, to the extent
necessary, shares of other CMA Funds
or money accounts will be redeemed
at net asset value at the 12 noon,
Eastern time, to satisfy remaining
debits.
- -------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
30
<PAGE>
<TABLE>
<CAPTION>
Information Important for You to
If You Want To Your Choices Know
- -------------------------------------------------------------------------------
<C> <C> <S>
Sell Your Have your Merrill Lynch If you are a CMA program subscriber,
Shares Financial Consultant you may redeem your shares directly
(continued) submit your sales order by submitting a written notice of
redemption to Merrill Lynch, which
will submit the request to the
Transfer Agent. Cash proceeds from
the redemption generally will be
mailed to you at your address of
record, or upon request, mailed or
wired (if $10,000 or more) to your
bank account. Redemption requests
should not be sent to the Fund or
its Transfer Agent. If inadvertently
sent to the Fund or the Transfer
Agent, redemption requests will be
forwarded to Merrill Lynch. All
shareholders on the account must
sign the letter and signatures must
be guaranteed.
Redemptions of Fund shares will be
confirmed to CMA program subscribers
(rounded to the nearest share) in
their monthly transaction
statements.
--------------------------------------------------------------------
Sell through the You may sell shares held at the
Transfer Agent Transfer Agent by writing to the
Transfer Agent at the address on the
inside back cover of this
prospectus. All shareholders on the
account must sign the letter and
signatures must be guaranteed.
Redemption requests should not be
sent to the Fund or Merrill Lynch.
If inadvertently sent to the Fund or
Merrill Lynch, redemption requests
will be forwarded to the Transfer
Agent. The Transfer Agent will mail
redemption proceeds to you at your
address of record following receipt
of a properly completed request. If
you make a redemption request before
the Fund has collected payment for
the purchase of shares, the Fund or
the Transfer Agent may delay mailing
your proceeds. This delay will
usually not exceed ten days.
Check with the Transfer Agent or
your Merrill Lynch Financial
Consultant for details.
- -------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
31
<PAGE>
[LOGO] Your Account
Net Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
Dividends -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the net asset value (normally $1.00 per share)
without a sales charge. For the Money Fund, the Government Fund and the
Treasury Fund, the "penny-rounding" method is used in calculating net asset
value, meaning that the calculation is rounded to the nearest whole cent. For
the Tax-Exempt Fund, net asset value is determined using the "amortized cost"
method, meaning that the calculation is based on a valuation of the assets held
by the Fund at cost, with an adjustment for any discount or premium on a
security at the time of purchase. The net asset value is the offering price.
Shares are also redeemed at their net asset value. Each Fund calculates its net
asset value at 12 noon Eastern time on each business day the New York Stock
Exchange or New York banks are open, immediately after the daily declaration of
dividends. The net asset value used in determining your price is the one
calculated after your purchase or redemption order becomes effective. Share
purchase orders are effective on the date Federal Funds become available to the
Fund.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
Dividends are declared and reinvested daily in the form of additional shares at
net asset value. You will begin accruing dividends on the day following the
date your purchase becomes effective. In most cases, shareholders will receive
statements monthly as to such reinvestments. Shareholders redeeming their
holdings will receive all dividends declared and reinvested through the date of
redemption. The Money Fund, the Government Fund and the Treasury Fund intend to
make distributions, most of which will be taxed as ordinary income, although
each Fund may distribute capital gains as well. The Tax-Exempt Fund intends to
make distributions most of which will be excludable from your gross income for
Federal income tax purposes, but may distribute taxable capital gains as well.
If you redeem shares of the Money Fund, Government Fund or Treasury Fund or
exchange them for shares of another fund, any gain on the transaction may be
subject to tax. Capital gain dividends are generally taxed at different rates
than ordinary income dividends.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
32
<PAGE>
[LOGO] Your Account
Generally, within 60 days after the end of each Fund's taxable year, each Fund
will tell you the amount of exempt interest dividends and capital gain
dividends you received that year. Capital gain dividends are taxable as long
term capital gains to you regardless of how long you have held your shares. The
tax treatment of distributions from a Fund is the same whether you choose to
receive distributions in cash or to have them reinvested in shares of the Fund.
If the value of assets held by a Fund declines, the Trustees may authorize a
reduction in the number of outstanding shares in shareholders' accounts so as
to preserve a net asset value of $1.00 per share. After such a reduction, the
basis of your eliminated shares would be added to the basis of your remaining
Fund shares, and you could recognize a capital loss if you disposed of your
shares at that time. Dividends from the Money Market Fund, the Government Fund
or the Treasury Fund, including dividends reinvested in additional shares of
such Fund, will nonetheless be fully taxable, even if the number of shares in
your account has been reduced as described above.
If you are neither a lawful permanent resident nor a citizen of the U.S., or if
you are a foreign entity, each Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
By law, each Fund must withhold 31% of your dividends and proceeds if you have
not provided a taxpayer identification number to the Fund or the number is
incorrect.
This section summarizes some of the consequences under current Federal tax law
of an investment in each Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in each Fund under all applicable tax laws.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
33
<PAGE>
Management of the Fund [LOGO]
FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Fund Asset Management, the Investment Adviser for each Fund, manages each
Fund's investments and business operations under the overall supervision of
each Fund's Board of Trustees. The Investment Adviser has the responsibility
for making all investment decisions for the Fund. Each Fund pays the Investment
Adviser a fee at the annual rate of 0.500% of the Fund's average daily net
assets not exceeding $500 million; 0.425% of the average daily net assets
exceeding $500 million but not exceeding $1 billion; and 0.375% of the average
daily net assets exceeding $1 billion.
Fund Asset Management is part of Merrill Lynch Asset Management Group, which
had approximately $ billion in investment company and other portfolio assets
under management as of April 1999. This amount includes assets managed for
Merrill Lynch affiliates.
A Note About Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). Each Fund could be adversely
affected if the computer systems used by Fund management or other Fund service
providers do not properly address this problem before January 1, 2000. Fund
management expects to have addressed this problem before then, and does not
anticipate that the services it provides will be adversely affected. Each
Fund's other service providers has told Fund management that it also expects to
resolve the Year 2000 Problem, and Fund management will continue to monitor the
situation as the Year 2000 approaches. However, if the problem has not been
fully addressed, each Fund could be negatively affected. The Year 2000 Problem
could also have a negative impact on the issuers in which each Fund invests,
and this could hurt each Fund's investment returns.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
34
<PAGE>
FINANCIAL HIGHLIGHTS FOR CMA MONEY FUND
- --------------------------------------------------------------------------------
The following Financial Highlights tables are intended to help you understand
each Fund's financial performance for the past five years. Certain information
reflects financial results for a single Fund share. The total returns in the
tables represent the rate an investor would have earned on an investment in the
respective Fund (assuming reinvestment of all dividends). This information has
been audited by Deloitte & Touche llp, whose report, along with the Fund's
financial statements, are included in each Fund's annual report to
shareholders, which is available upon request.
<TABLE>
<CAPTION>
CMA Money Fund
---------------------------------------------------------
For the Year Ended March 31,
---------------------------------------------------------
Increase (Decrease) in
Net Asset Value 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
- -------------------------------------------------------------------------------------
Net asset value,
beginning of year $ $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------
Investment income --
net .0512 .0490 .0529 .0437
- -------------------------------------------------------------------------------------
Realized and unrealized
gain on investments --
net .0004 -- .0003 .0005
- -------------------------------------------------------------------------------------
Total from investment
operations .0516 .0490 .0532 .0442
- -------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income --
net (.0512) (.0490) (.0529) (.0437)
Realized gain on
investments -- net (.0001) (.0002) (.0006) (.0003)
- -------------------------------------------------------------------------------------
Total dividends and
distributions (.0513) (.0492) (.0535) (.0440)
- -------------------------------------------------------------------------------------
Net asset value, end of
year $ $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------
Total Investment
Return: % 5.26% 5.04% 5.49% 4.50%
- -------------------------------------------------------------------------------------
Ratios to Average Net
Assets:
- -------------------------------------------------------------------------------------
Expenses excluding
interest expense % .56% .55% -- --
- -------------------------------------------------------------------------------------
Expenses % .57% .56% .56% .56%
- -------------------------------------------------------------------------------------
Investment income and
realized gain on
investments -- net % 5.13% 4.89% 5.35% 4.42%
- -------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------
Net assets, end of year
(in thousands) $ $50,923,780 $41,984,753 $36,922,858 $29,066,762
- -------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
35
<PAGE>
[LOGO] Management of the Funds
FINANCIAL HIGHLIGHTS FOR CMA GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CMA Government Securities Fund
-----------------------------------------------------
For the Year Ended March 31,
-----------------------------------------------------
Increase (Decrease) in
Net Asset Value 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
- ---------------------------------------------------------------------------------
Net asset value,
beginning of year $ $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------
Investment income --
net .0501 .0477 .0521 .0419
- ---------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on
investments -- net .0007 (.0004) .0002 .0008
- ---------------------------------------------------------------------------------
Total from investment
operations .0508 .0473 .0523 .0427
- ---------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income --
net (.0501) (.0477) (.0521) (.0419)
Realized gain on
investments -- net (.0001) --+ (.0003) (.0002)
- ---------------------------------------------------------------------------------
Total dividends and
distributions (.0502) (.0477) (.0524) (.0421)
- ---------------------------------------------------------------------------------
Net asset value, end of
year $ $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------
Total Investment
Return: % 5.15% 4.96% 5.37% 4.30%
- ---------------------------------------------------------------------------------
Ratios to Average Net
Assets:
- ---------------------------------------------------------------------------------
Expenses % .57% .56% .57% .58%
- ---------------------------------------------------------------------------------
Investment income and
realized gain on
investments -- net % 5.02% 4.81% 5.25% 4.18%
- ---------------------------------------------------------------------------------
Supplemental Data:
- ---------------------------------------------------------------------------------
Net assets, end of year
(in thousands) $ $3,540,040 $3,423,468 $3,345,603 $3,132,803
- ---------------------------------------------------------------------------------
</TABLE>
+ Amount is less than $.0001 per share.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
36
<PAGE>
FINANCIAL HIGHLIGHTS FOR CMA TAX-EXEMPT FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CMA Tax-Exempt Fund
-----------------------------------------------------
For the Year Ended March 31,
-----------------------------------------------------
Increase (Decrease) in
Net Asset Value 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
- ----------------------------------------------------------------------------------
Net asset value,
beginning of year $ $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------
Investment income -- net .03 .03 .03 .03
- ----------------------------------------------------------------------------------
Realized gain (loss) on
investments -- net --+ --+ --+ --+ --+
- ----------------------------------------------------------------------------------
Total from investment
operations .03 .03 .03 .03
- ----------------------------------------------------------------------------------
Less dividends from
investment income -- net (.03) (.03) (.03) (.03)
- ----------------------------------------------------------------------------------
Net asset value, end of
year $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------
Total Investment Return 3.16% 3.00% 3.31% 2.76%
- ----------------------------------------------------------------------------------
Ratios to Average Net
Assets:
- ----------------------------------------------------------------------------------
Expenses .55% .55% .55% .55%
- ----------------------------------------------------------------------------------
Investment income -- net % 3.11% 2.94% 3.26% 2.70%
- ----------------------------------------------------------------------------------
Supplemental Data:
- ----------------------------------------------------------------------------------
Net assets, end of year
(in thousands) $ $9,356,705 $8,347,278 $8,164,160 $7,391,964
- ----------------------------------------------------------------------------------
</TABLE>
+ Amount is less than $.0001 per share.
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
37
<PAGE>
[LOGO] Management of the Funds
FINANCIAL HIGHLIGHTS FOR CMA TREASURY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CMA Treasury Fund
-----------------------------------------------------
For the Year Ended March 31,
-----------------------------------------------------
Increase (Decrease) in
Net Asset Value 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
- ---------------------------------------------------------------------------------
Net asset value,
beginning of year $ $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------
Investment income --
net .0475 .0461 .0498 .0409
- ---------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on
investments -- net .0008 (.0001) .0001 .0004
- ---------------------------------------------------------------------------------
Total from investment
operations .0483 .0460 .0499 .0413
- ---------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income --
net (.0475) (.0461) (.0498) (.0409)
Realized gain on
investments -- net (.0005) (.0001) (.0003) (.0002)
- ---------------------------------------------------------------------------------
Total dividends and
distributions (.0480) (.0462) (.0501) (.0411)
- ---------------------------------------------------------------------------------
Net asset value, end of
year $ $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------
Total Investment
Return: % 4.92% 4.74% 5.14% 4.18%
- ---------------------------------------------------------------------------------
Ratios to Average Net
Assets:
- ---------------------------------------------------------------------------------
Expenses % .60% .59% .60% .62%
- ---------------------------------------------------------------------------------
Investment income and
realized gain on
investments -- net % 4.82% 4.59% 5.01% 4.20%
- ---------------------------------------------------------------------------------
Supplemental Data:
- ---------------------------------------------------------------------------------
Net assets, end of year
(in thousands) $ $2,279,822 $1,968,516 $1,791,760 $1,428,724
- ---------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
38
<PAGE>
[This page intentionally left blank]
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
<PAGE>
[This page intentionally left blank]
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
<PAGE>
[THE FOLLOWING IS REPRESENTED BY A FLOW CHART]
POTENTIAL
INVESTORS
Open an account (two options).
<TABLE>
<CAPTION>
<S> <C> <C>
1 2
CMA PROGRAM DISTRIBUTOR TRANSFER AGENT
SUBSCRIBER'S MERRILL LYNCH
FINANCIAL CONSULTANT Merrill Lynch, Pierce, Fenner & Smith Financial Data Services, Inc.
Incorporated P.O. Box 45290
Advises shareholders on their North Tower Jacksonville, Florida 32232-5290
Fund investments. World Financial Center 1-800-221-7210
250 Vesey Street Performs recordkeeping and
New York, New York 10281 reporting services.
Arranges for the sale of Fund shares.
COUNSEL THE FUND CUSTODIAN
Brown & Wood LLP The Board of Trustees State Street Bank and Trust Company
One World Trade Center oversees the Fund. P.O. Box 1713
New York, New York 10048-0557 Boston, Massachusetts 02101
Provides legal advice to the Fund. Holds the Fund's assets for safekeeping.
INDEPENDENT AUDITORS MANAGER
Deloitte & Touche LLP Fund Asset Management, L.P.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders. MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER 1-800-MER-FUND
Manages the Fund's day-to-day activities.
</TABLE>
MERRILL LYNCH CASH MANAGEMENT ACCOUNT
<PAGE>
For More Information [LOGO]
Shareholder Reports
Additional information about each Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. You may obtain these reports at
no cost by calling 1-800-MER-FUND.
Each Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive sepa-
rate shareholder reports for each account, call your Merrill Lynch Financial
Consultant or write to the Transfer Agent at its mailing address. Include your
name, address, tax identification number and Merrill Lynch brokerage or mutual
fund account number. If you have any questions, please call your Merrill Lynch
Financial Consultant or the Transfer Agent at 1-800-MER-FUND.
Statement of Additional Information
The Statement of Additional Information contains further information about each
Fund and is incorporated by reference (legally considered to be part of this
prospectus). You may request a free copy by writing the Fund at Financial Data
Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289 or by calling
1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated above if you have any questions.
Information about each Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public refer-
ence room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-
6009.
You should rely only on the information contained in this prospectus. No one is
authorized to provide you with information that is different from the informa-
tion contained in this prospectus.
Investment Company Act file #811-2752
Code # -0599
(C)Fund Asset Management, L.P.
[LOGO Prospectus]
[LOGO] Merrill Lynch
CMA Money Fund
CMA Government
Securities Fund
CMA Tax-Exempt Fund
CMA Treasury Fund
[July , 1999]
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this Statement of Additional Information is not complete +
+and may be changed. This Statement of Additional Information is not an offer +
+to sell these securities in any state where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 28, 1999
STATEMENT OF ADDITIONAL INFORMATION
CMA Money Fund
CMA Government Securities Fund
CMA Tax-Exempt Fund
CMA Treasury Fund
P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800
-----------
CMA Money Fund (the "Money Market Fund"), CMA Government Securities Fund (the
"Government Fund"), CMA Tax-Exempt Fund (the "Tax-Exempt Fund") and CMA
Treasury Fund (the "Treasury Fund") are no-load money market funds whose shares
are offered to participants in the Cash Management Account(R) ("CMA" or "CMA
account") financial service program of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") to provide a medium for the investment of free
credit balances held in CMA accounts. A CMA account is a conventional Merrill
Lynch cash securities account or margin securities account ("Securities
Account") that is linked to the Money Market Fund, the Government Fund, the
Tax-Exempt Fund and the Treasury Fund (collectively, the "Funds"), money market
deposit accounts maintained with depository institutions and to a Visa(R)
card/check account ("Visa(R) Account"). In addition, investors may have their
free credit balances invested in certain series of CMA Multi-State Municipal
Series Trust, each of which is designed to provide income that is exempt from
taxation in a particular state (the "CMA State Funds"). Merrill Lynch markets
its margin account under the name Investor CreditLine SM service.
Each CMA Fund is a no-load money market fund seeking current income,
preservation of capital and liquidity available from investing in short-term
securities. Of the CMA Funds offered by this Prospectus, CMA Money Fund invests
in money market securities generally; CMA Government Securities Fund invests in
direct U.S. Government obligations; CMA Tax-Exempt Fund invests in tax-exempt
securities and pays dividends exempt from Federal income taxation; and CMA
Treasury Fund invests in U.S. Treasury securities. The CMA Funds also include
the CMA State Funds. At the date hereof, CMA State Funds exist with respect to
Arizona, California, Connecticut, Massachusetts, Michigan, New Jersey, New
York, North Carolina, Ohio and Pennsylvania.
(continued on next page)
-----------
This Statement of Additional Information of the Funds is not a prospectus and
should be read in conjunction with the Prospectus of the Funds, dated July ,
1999 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
(800) MER-FUND or by writing each Fund at the above 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. Each Fund's audited financial statements are incorporated in this
Statement of Additional Information by reference to each Fund's 1999 annual
report to shareholders. You may request a copy of each annual report at no
charge by calling (800) MER-FUND ext. 789 between 8:00 a.m. and 8:00 p.m. on
any business day.
-----------
Fund Asset Management--Investment Adviser
-----------
The date of this Statement of Additional Information is July , 1999.
<PAGE>
(continued from previous page)
A customer of Merrill Lynch may subscribe to the CMA program with a minimum
of $20,000 in securities or cash. Subject to the conditions described in the
Prospectus referred to below, free credit balances in the Securities Account
of CMA participants will be invested periodically in shares of one of the four
Funds or one of the CMA State Funds. This permits the subscriber to earn a
return on such funds pending further investment in other aspects of the CMA
program or utilization through the Visa(R) Account.
Merrill Lynch charges an annual program participation fee, presently $100
for individuals, for the CMA program (an additional $25 annual program fee is
charged for participation in the CMA Visa(R) Gold Program or an additional $75
annual program fee is charged for participation in the CMA Visa Signature SM
Program, as described in the CMA Program Description). A different fee may be
charged to certain group plans and special accounts. Participants in such
plans or special accounts should refer to the relevant program descriptions or
other explanatory material to determine which of the CMA Funds are available
to them. Merrill Lynch reserves the right to change the fee for the CMA
program or the CMA Visa(R) Gold Program or the CMA Visa SignatureSM Program at
any time. The shares of each Fund also may be purchased without the imposition
of the annual program participation fee by investors maintaining accounts
directly with the Transfer Agent who do not subscribe to the CMA program. The
minimum initial purchase for non-CMA subscribers is $5,000 and subsequent
purchases must be $1,000 or more. Such investors will not receive any of the
additional services available to CMA program subscribers, such as a Visa
card/check account or the automatic investment of free credit balances.
The information in this document should be read in conjunction with the
description of the Merrill Lynch Cash Management Account program that is
furnished to all CMA subscribers. Reference is made to such description for
information with respect to the CMA program, including the fees related
thereto. Information concerning the other CMA Funds is contained in the
prospectus relating to each of such Funds, and information concerning the
Insured Savings Account is contained in the Insured Savings Account Fact
Sheet. All CMA subscribers are furnished with the prospectuses of CMA Money
Fund, CMA Government Securities Fund, CMA Tax-Exempt Fund and CMA Treasury
Fund. The prospectuses of the CMA State Funds and the Insured Savings Account
Fact Sheet are available from Merrill Lynch. For more information about the
Merrill Lynch Cash Management Account program, call toll-free from anywhere in
the U.S., 1-800-CMA-INFO (1-800-262-4636).
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objectives and Policies......................................... 2
Money Market Fund........................................................ 2
Government Fund.......................................................... 6
Tax-Exempt Fund.......................................................... 8
Treasury Fund............................................................ 13
Management of the Funds.................................................... 14
Trustees and Officers.................................................... 14
Compensation of Trustees................................................. 16
Investment Advisory Arrangements......................................... 16
Transfer Agency Services................................................. 18
Code of Ethics........................................................... 18
Purchase of Shares......................................................... 19
Purchase of Shares by Cash Management Account Subscribers................ 19
Purchase of Shares by Non-Cash Management Account Subscribers............ 20
Redemption of Shares....................................................... 22
Redemption of Shares by Cash Management Account Subscribers.............. 22
Redemption of Shares by Non-Cash Management Account Subscribers.......... 23
Determination of Net Asset Value........................................... 24
Money Market Fund, Government Fund and Treasury Fund..................... 24
Tax-Exempt Fund.......................................................... 25
Yield Information.......................................................... 26
Portfolio Transactions..................................................... 26
Dividends and Taxes........................................................ 28
Dividends................................................................ 28
Taxes.................................................................... 28
General Information........................................................ 31
Organization of the Funds................................................ 31
Description of Shares.................................................... 31
Independent Auditors..................................................... 32
Custodian................................................................ 32
Transfer Agent........................................................... 32
Legal Counsel............................................................ 32
Reports to Shareholders.................................................. 32
Shareholder Inquiries.................................................... 32
Additional Information................................................... 32
Financial Statements....................................................... 32
Appendix................................................................... I-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Money Market Fund
The Money Market Fund is a no-load money market fund. The investment
objectives of the Money Market Fund are to seek current income, preservation
of capital and liquidity available from investing in a diversified portfolio
of short-term money market securities. The investment objectives are
fundamental policies of the Money Market Fund that may not be changed without
a vote of the majority of the outstanding shares of the Money Market Fund.
There can be no assurance that the investment objectives of the Money Market
Fund will be realized.
The Money Market Fund's investments in U.S. Government and Government agency
securities will be in instruments with a remaining maturity of 762 days (25
months) or less. The Money Market Fund's other investments will be in
instruments with a remaining maturity of 397 days (13 months) or less that
have received a short-term rating, or that have been issued by issuers that
have received a short-term rating with respect to a class of debt obligations
that are comparable in priority and security with the instruments, from the
requisite nationally recognized statistical rating organizations ("NRSROs") in
one of the two highest short-term rating categories or, if neither the
instrument nor its issuer is so rated, will be of comparable quality as
determined by the Trustees of the Money Market Fund (or by Fund Asset
Management, L.P. (the "Investment Adviser" or "FAM") pursuant to delegated
authority). Currently, there are five NRSROs: Duff & Phelps Inc., Fitch IBCA
Inc., Thomson Bankwatch, Inc., Moody's Investors Service, Inc. and Standard &
Poor's Ratings Services. The Money Market Fund will determine the remaining
maturity of its investments in accordance with Commission regulations. The
dollar-weighted average maturity of the Fund's portfolio will not exceed 90
days. During the Fund's fiscal year ended March 31, 1999, the average maturity
of its portfolio ranged from days to days.
Investment in Money Market Fund shares offers several potential benefits.
The Money Market Fund seeks to provide as high a yield potential, consistent
with its objectives, as is available through investment in short-term money
market securities using professional money market management, block purchases
of securities and yield improvement techniques. It provides high liquidity
because of its redemption features and seeks the reduced risk that generally
results from diversification of assets. The shareholder is also relieved from
administrative burdens associated with direct investment in short-term
securities, such as coordinating maturities and reinvestments, safekeeping and
making numerous buy-sell decisions. These benefits are at least partially
offset by certain expenses borne by investors, including management fees,
distribution fees, administrative costs and operational costs.
In managing the Fund, the Investment Adviser will employ a number of
professional money management techniques, including varying the composition of
investments and the average maturity of the portfolio based on its assessment
of the relative values of the various securities and future interest rate
patterns. These assessments will respond to changing economic and money market
conditions and to shifts in fiscal and monetary policy. The Investment Adviser
also will seek to improve yield by taking advantage of yield disparities that
regularly occur in the money market. For example, market conditions frequently
result in similar securities trading at different prices. Also, there
frequently are differences in yields between the various types of money market
securities. The Money Market Fund seeks to enhance yield by purchasing and
selling securities based on these yield differences.
The following is a description of some of the types of money market
securities in which the Money Market Fund may invest:
U.S. Government Securities. 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 United States.
U.S. Government Agency Securities: Debt securities issued by U.S.
Government-sponsored enterprises, agencies and instrumentalities, including,
but not limited to, the Federal National Mortgage Association, the Federal
Home Loan Mortgage Corporation, the Student Loan Marketing Association and the
Federal Agricultural Mortgage Corporation. Such securities may also include
debt securities issued by international organizations designated or supported
by multiple governmental entities, such as the International Bank for
Reconstruction and Development (the "World Bank"). Government Agency
securities are not direct obligations of the U.S. Government but involve
various forms of U.S. Government sponsorship or guarantees and are issued, in
general, under the authority of an act of Congress. The U.S. Government is not
obligated to provide financial support to any of these agencies,
instrumentalities or organizations.
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Bank Money Instruments: U.S. dollar-denominated obligations of commercial
banks, savings banks, savings and loan associations or other depository
institutions such as, but not limited to, certificates of deposit, including
variable rate certificates of deposit, time deposits, deposit notes, bank
notes and bankers' acceptances. The obligations of commercial banks may be
issued by U.S. banks, foreign branches or subsidiaries of U.S. banks
("Eurodollar" obligations) or U.S. branches or subsidiaries of foreign banks
("Yankeedollar" obligations). The Money Market Fund may invest only in
Eurodollar obligations which by their terms are general obligations of the
U.S. parent bank. Yankeedollar obligations in which the Money Market Fund may
invest must be issued by U.S. branches or subsidiaries of foreign banks which
are subject to state or Federal banking regulations in the U.S. and by their
terms must be general obligations of the foreign parent.
Eurodollar and Yankeedollar obligations, as well as other obligations of
foreign depository institutions and short-term obligations issued by other
foreign entities, may involve additional investment risks, including adverse
political and economic developments, the possible imposition of withholding
taxes on interest income payable on such obligations, the possible seizure or
nationalization of foreign deposits and the possible establishment of exchange
controls or other foreign governmental laws or restrictions which might
adversely affect the repayment of principal and the payment of interest. The
issuers of such obligations may not be subject to U.S. regulatory
requirements. Foreign branches or subsidiaries of U.S. banks may be subject to
less stringent reserve requirements than U.S. banks. U.S. branches or
subsidiaries of foreign banks are subject to the reserve requirements of the
states in which they are located. There may be less publicly available
information about a U.S. branch or subsidiary of a foreign bank or other
issuer than about a U.S. bank or other issuer, and such entities may not be
subject to the same accounting, auditing and financial record keeping
standards and requirements as U.S. issuers. Evidence of ownership of
Eurodollar and foreign obligations may be held outside the United States, and
the Money Market Fund may be subject to the risks associated with the holding
of such property overseas. Eurodollar and foreign obligations of the Money
Market Fund held overseas will be held by foreign branches of the Money Market
Fund's custodian or by other U.S. or foreign banks under subcustodian
arrangements complying with the requirements of the Investment Company Act of
1940, as amended (the "Investment Company Act").
The Investment Adviser will carefully consider the above factors in making
investments in Eurodollar obligations, Yankeedollar obligations of foreign
depository institutions and other foreign short-term obligations, and will not
knowingly purchase obligations which, at the time of purchase, are subject to
exchange controls or withholding taxes. Generally, the Money Market Fund will
limit its Yankeedollar investments to obligations of banks organized in
Canada, France, Germany, Japan, the Netherlands, Switzerland, the United
Kingdom and other industrialized nations.
Bank money instruments in which the Money Market Fund invests must be issued
by depository institutions with total assets of at least $1 billion, except
that the Money Market Fund may invest in certificates of deposit of smaller
institutions if such certificates of deposit are Federally insured and if, as
a result of such purchase, no more than 10% of total assets (taken at market
value), are invested in such certificates of deposit.
Commercial Paper and Other Short-Term Obligations. Commercial paper
(including variable amount master demand notes) refers to short-term unsecured
promissory notes issued by corporations, partnership, trusts or other entities
to finance short-term credit needs and non-convertible debt securities (e.g.,
bonds and debentures) with no more than 397 days (13 months) remaining to
maturity at the date of purchase. Short-term obligations issued by trusts,
corporations, partnerships or other entities include mortgage-related or
asset-backed instruments, including pass-through certificates such as
participations in, or bonds and notes backed by, pools of mortgage,
automobile, manufactured housing or other types of consumer loans; credit card
or trade receivables; or pools of mortgage- or asset-backed securities. These
structured financings will be supported by sufficient collateral and other
credit enhancements, including letters of credit, insurance, reserve funds and
guarantees by third parties, to enable such instruments to obtain the
requisite quality rating by an NRSRO.
Foreign Bank Money Instruments. U.S. dollar-denominated obligations of
foreign depository institutions and their foreign branches and subsidiaries,
such as, but not limited to, certificates of deposit, bankers' acceptances,
time deposits, bank notes and deposit notes. The obligations of such foreign
depository institutions and their foreign branches and subsidiaries may be the
general obligations of the parent bank or may be limited to
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the issuing branch or subsidiary by the terms of the specific obligation or by
government regulation. Such investments will only be made if determined to be
of comparable quality to other investments permissible for the Money Market
Fund. The Money Market Fund will not invest more than 25% of its total assets
(taken at market value at the time of each investment) in these obligations.
Foreign Short-Term Debt Instruments. U.S. dollar-denominated commercial
paper and other short-term obligations issued by foreign entities. Such
investments are subject to quality standards similar to those applicable to
investments in comparable obligations of domestic issuers.
The following is a description of other types of investments or investment
practices in which the Money Market Fund may invest or engage:
Repurchase Agreements. The Money Market Fund may invest in the money market
securities described above pursuant to repurchase agreements. Under such
agreements, the counterparty agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a
fixed rate of return insulated from market fluctuations during such period.
Such agreements usually cover short periods, such as under a week. The Money
Market Fund will require the seller to provide additional collateral if the
market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of a default by the
seller, the Money Market Fund ordinarily will retain ownership of the
securities underlying the repurchase agreement, and instead of a contractually
fixed rate of return, the rate of return to the Money Market Fund shall be
dependent upon intervening fluctuations of the market value of such securities
and the accrued interest on the securities. In such event, the Money Market
Fund would have rights against the seller for breach of contract with respect
to any losses arising from market fluctuations following the failure of the
seller to perform. In certain circumstances, repurchase agreements may be
construed to be collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Money Market Fund but only
constitute collateral for the seller's obligation to pay the repurchase price.
Therefore, the Money Market Fund may suffer time delays and incur costs or
possible losses in connection with the disposition of the collateral. From
time to time, the Money Market Fund also may invest in money market securities
pursuant to purchase and sale contracts. While purchase and sale contracts are
similar to repurchase agreements, purchase and sale contracts are structured
so as to be in substance more like a purchase and sale of the underlying
security than is the case with repurchase agreements.
Reverse Repurchase Agreements. The Money Market Fund may enter into reverse
repurchase agreements which involve the sale of money market securities held
by the Money Market Fund, with an agreement to repurchase the securities at an
agreed- upon price, date and interest payment. During the time a reverse
repurchase agreement is outstanding, the Money Market Fund will maintain a
segregated custodial account containing U.S. Government or other appropriate
high-grade debt securities having a value equal to the repurchase price.
The Money Market Fund may invest in variable amount master demand notes.
These are demand obligations that permit the investment of fluctuating amounts
at varying market rates of interest.
Lending of Portfolio Securities. The Money Market Fund may lend portfolio
securities (with a value not in excess of 33 1/3% of its total assets) to
brokers, dealers and financial institutions and receive collateral in cash or
securities issued or guaranteed by the U.S. Government which will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. This limitation is a fundamental policy
of the Money Market Fund and may not be changed without the approval of the
holders of a majority of the Money Market Fund's outstanding voting
securities, as defined in the Investment Company Act of 1940. During the
period of the loan, such cash collateral will be invested in short-term
securities, the income from which will increase the return to the Money Market
Fund. Such loans will be terminable at any time. The Money Market Fund will
have
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the right to regain record ownership of loaned securities to exercise
beneficial rights. The Money Market Fund may pay reasonable fees in connection
with the arranging of such loans.
Forward Commitments. The Money Market Fund may purchase or sell money market
securities on a forward commitment basis at fixed purchase or sale terms. The
purchase of money market securities on a forward commitment 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
increase, the value of the securities purchased on a forward commitment basis
will generally decrease. A separate account of the Money Market Fund will be
established with the Money Market Fund's custodian consisting of cash or
liquid money market securities having a market value at all times at least
equal to the amount of the forward purchase commitment. By doing so, the Money
Market Fund foregoes the opportunity to sell such securities at a higher price
should they increase in value between the trade and settlement dates.
----------------
Preservation of capital is a prime investment objective of the Money Market
Fund, and while the types of money market securities in which the Money Market
Fund invests generally are considered to have low principal risk, such
securities are not completely risk free. There is a risk of the failure of
issuers to meet their principal and interest obligations. With respect to
repurchase agreements, reverse repurchase agreements and the lending of
portfolio securities by the Money Market Fund, there is also the risk of the
failure of the parties involved to repurchase at the agreed-upon price or to
return the securities involved in such transactions, in which event the Money
Market Fund may suffer time delays and incur costs or possible losses in
connection with such transactions.
Rule 2a-7 under the Investment Company Act presently limits investments by
the Money Market Fund in securities issued by any one issuer (other than the
U.S. Government, its agencies or instrumentalities) ordinarily to not more
than 5% of its total assets, or, in the event that such securities are not
First Tier Securities (as defined in the Rule), not more than 1% of its total
assets. In addition, Rule 2a-7 requires that not more than 5% of the Money
Market Fund's total assets be invested in Second Tier Securities (as defined
in the Rule). The Rule requires the Money Market Fund to be diversified (as
defined in the Rule) other than with respect to government securities and
securities subject to guarantee issued by a non-controlled person (as defined
in the Rule).
Investment Restrictions. The Money Market Fund has adopted a number of
restrictions and policies relating to the investment of its assets and its
activities, which are fundamental policies and may not be changed without the
approval of the holders of a majority of the Money Market Fund's outstanding
voting securities (which for this purpose 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). The
Money Market Fund may not:
(1) purchase any securities other than types of money market securities
and investments described under "Investment Objectives and Policies";
(2) invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any particular
industry (other than U.S. Government securities, U.S. Government agency
securities or domestic bank money market instruments);
(3) purchase the securities of any one issuer, other than the U.S.
Government, its agencies or instrumentalities, if immediately after the
purchase, more than 5% of the value of its total assets (taken at market
value) would be invested in such issuer, except that, in the case of bank
money market instruments or repurchase agreements with any one bank, up to
25% of the value of the Fund's total assets may be invested without regard
to such 5% limitation but shall instead be subject to a 10% limitation;
(4) purchase more than 10% of the outstanding securities, or more than
10% of the outstanding voting securities, of an issuer;
(5) enter into repurchase agreements if, as a result, more than 10% of
the Fund's total assets (taken at market value at the time of each
investment, together with any other investments deemed illiquid) would be
subject to repurchase agreements maturing in more than seven days;
(6) make investments for the purpose of exercising control or management;
(7) underwrite securities issued by other persons;
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(8) purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization;
(9) purchase or sell real estate (other than money market securities
secured by real estate or interests therein or money market securities
issued by companies which invest in real estate or interests therein),
commodities or commodity contracts, interests in oil, gas or other mineral
exploration or development programs;
(10) purchase any securities on margin, except for the use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities;
(11) make short sales of securities or maintain a short position or
write, purchase or sell puts, calls, straddles, spreads or combinations
thereof;
(12) make loans to other persons, provided that the Money Market Fund may
purchase money market securities or enter into repurchase agreements and
lend securities owned or held by it pursuant to (13) below;
(13) lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value, provided that such loans are made according
to the guidelines set forth below;
(14) borrow amounts in excess of 20% of its total assets, taken at market
value (including the amount borrowed), and then only from banks as a
temporary measure for extraordinary or emergency purposes (the borrowing
provisions shall not apply to reverse repurchase agreements). (Usually only
"leveraged" investment companies may borrow in excess of 5% of their
assets; however, the Money Market Fund will not borrow to increase income
but only to meet redemption requests which might otherwise require untimely
dispositions of portfolio securities. The Money Market Fund will not
purchase securities while borrowings are outstanding. Interest paid on such
borrowing will reduce net income.);
(15) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (13) above) as security for indebtedness any securities owned
or held by the Money Market Fund except as may be necessary in connection
with borrowings referred to in investment restriction (14) above, and then
such mortgaging, pledging or hypothecating may not exceed 10% of the Money
Market Fund's net assets, taken at market value;
(16) invest in securities with legal or contractual restrictions on
resale (except for repurchase agreements) or for which no readily available
market exists if, regarding all such securities, more than 10% of its net
assets (taken at market value) would be invested in such securities;
(17) invest in securities of issuers (other than issuers of U.S.
Government agency securities) having a record, together with predecessors,
of less than three years of continuous operation if, regarding all such
securities, more than 5% of its total assets (taken at market value) would
be invested in such securities;
(18) enter into reverse repurchase agreements if, as a result thereof,
the Money Market Fund's obligations with respect to reverse repurchase
agreements would exceed one-third of its net assets (defined to be total
assets, taken at market value, less liabilities other than reverse
repurchase agreements); and
(19) purchase or retain the securities of any issuer, if those individual
officers and Trustees of the Money Market Fund, the Investment Adviser or
any subsidiary thereof each owning beneficially more than 1% of the
securities of such issuer own in the aggregate more than 5% of the
securities of the issuer.
Government Fund
The Government Fund is a no-load money market fund. The investment
objectives of the Government Fund are to seek preservation of capital, current
income and liquidity available from investing exclusively in a diversified
portfolio of short-term marketable securities that are direct obligations of
the U.S. Government and repurchase agreements pertaining to such securities.
Direct U.S. Government obligations consist of securities issued, or guaranteed
as to principal and interest, by the U.S. Government and which are backed by
the full faith and credit of the United States. The Government Fund may not
invest in securities issued or guaranteed by U.S. Government agencies,
instrumentalities or Government-sponsored enterprises which are not backed by
the full
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faith and credit of the United States. There can be no assurance that the
investment objectives of the Government Fund will be realized.
Investment in Government Fund shares offers several potential benefits. The
Government Fund seeks to provide as high a yield potential, consistent with
its objectives, as is available from investments in short-term U.S. Government
securities utilizing professional money market management and block purchases
of securities. It provides high liquidity because of its redemption features
and seeks the reduced market risk that generally results from diversification
of assets. The shareholder is also relieved from administrative burdens
associated with direct investment in short-term U.S. Government securities,
such as coordinating maturities and reinvestments, safekeeping and making
numerous buy-sell decisions. These benefits are at least partially offset by
certain expenses borne by investors, including management fees, distribution
fees, administrative costs and operational costs.
The Government Fund may invest in the U.S. Government securities described
above pursuant to repurchase agreements. Under such agreements, the
counterparty agrees, upon entering into the contract, to repurchase the
security from the Government Fund at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results
in a fixed rate of return insulated from market fluctuations during such
period.
Preservation of capital is a prime investment objective of the Government
Fund and the direct U.S. Government obligations in which it will invest are
generally considered to have the lowest principal risk among money market
securities. Historically, direct U.S. Government obligations have generally
had lower rates of return than other money market securities with less safety.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the
purchaser. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Government Fund but only constitute collateral for the seller's
obligation to pay the repurchase price. With respect to repurchase agreements,
there is also the risk of the failure of parties involved to repurchase at the
agreed upon price, in which event the Government Fund may suffer time delays
and incur costs or possible losses in connection with such transactions.
The Government Fund may purchase or sell portfolio securities on a forward
commitment basis at fixed purchase or sale terms. The purchase of portfolio
securities on a forward commitment 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 increase, the value
of the securities purchased on a forward commitment basis will generally
decrease. A separate account of the Government Fund will be established with
its custodian consisting of cash or liquid money market securities having a
market value at all times at least equal to the amount of the forward purchase
commitment. The Government Fund may also sell money market securities on a
forward commitment basis. By doing so, the Fund foregoes the opportunity to
sell such securities at a higher price should they increase in value between
the trade and settlement dates.
For purposes of its investment policies, the Government Fund defines short-
term U.S. Government securities as securities having a maturity of not more
than 762 days (25 months). Fund Asset Management, L.P. (the "Investment
Adviser") expects that substantially all the assets of the Government Fund
will be invested in securities maturing in not more than 397 days (13 months)
but at times some portion may have maturities up to not more than 762 days (25
months). The dollar-weighted average maturity of the Government Fund's
portfolio will not exceed 90 days. During the Government Fund's fiscal year
ended March 31, 1999, the average maturity of its portfolio ranged from
days to days.
Investment Restrictions. The Government Fund has adopted a number of
restrictions and policies relating to the investment of its assets and its
activities, which are fundamental policies and may not be changed without the
approval of the holders of a majority of the Government Fund's outstanding
voting securities (which for this purpose 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).The
Government Fund may not:
(1) purchase any securities other than short-term marketable securities
which are direct obligations of the U.S. Government and repurchase
agreements pertaining to such securities;
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(2) enter into repurchase agreements with any one bank or primary dealer
or an affiliate thereof, if immediately thereafter, more than 5% of the
value of its total assets (taken at market value) would be invested in
repurchase agreements with such bank or primary dealer or an affiliate
thereof;
(3) enter into repurchase agreements if, as a result thereof, more than
10% of the Government Fund's total assets (taken at market value at the
time of each investment) would be subject to repurchase agreements maturing
in more than seven days;
(4) act as an underwriter of securities issued by other persons;
(5) purchase any securities on margin, except for use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities;
(6) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof;
(7) make loans to other persons, provided that the Government Fund may
purchase short-term marketable securities which are direct obligations of
the U.S. Government or enter into repurchase agreements pertaining thereto;
(8) borrow amounts in excess of 20% of its total assets, taken at market
value (including the amount borrowed), and then only from banks as a
temporary measure for extraordinary or emergency purposes. (Usually only
"leveraged" investment companies may borrow in excess of 5% of their
assets; however, the Government Fund will not borrow to increase income but
only to meet redemption requests which might otherwise require untimely
dispositions of portfolio securities. The Government Fund will not purchase
securities while borrowings are outstanding. Interest paid on such
borrowings will reduce net income); and
(9) mortgage, pledge, hypothecate or in any manner transfer as security
for indebtedness any securities owned or held by the Government Fund except
as may be necessary in connection with borrowings mentioned in (8) above,
and then such mortgaging, pledging or hypothecating may not exceed 10% of
the Government Fund's net assets, taken at market value.
Tax-Exempt Fund
Investment Objectives. The Tax-Exempt Fund is a no-load tax-exempt money
market fund. The investment objectives of the Tax-Exempt Fund are to seek
current income exempt from Federal income taxes, preservation of capital and
liquidity available from investing in a diversified portfolio of short-term
high quality tax-exempt securities. The Tax-Exempt Fund seeks to achieve its
objectives by investing in a diversified portfolio of obligations issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities or derivative or synthetic municipal instruments, the
interest on which, according to bond counsel to the issuer, is exempt from
Federal income tax (such obligations are herein referred to as "Tax-Exempt
Securities"). The Tax-Exempt Fund may invest in certain otherwise tax-exempt
securities which are classified as "private activity bonds" which may be
subject to a Federal alternative minimum tax. See "Taxes." The investment
objectives of the Tax-Exempt Fund described in this paragraph are a
fundamental policy of the Tax-Exempt Fund and may not be changed without a
vote of the majority of the outstanding shares of the Tax-Exempt Fund. There
can be no assurance that the investment objectives of the Tax-Exempt Fund will
be realized.
The Tax-Exempt Fund can be expected to offer a lower yield than longer-term
municipal bond funds since Tax-Exempt Securities with longer maturities tend
to produce higher yields. Interest rates in the short-term Tax-Exempt
Securities market also may fluctuate more widely from time to time than
interest rates in the long-term municipal bond market. However, because of the
shorter maturities, the market value of the Tax-Exempt Securities held by the
Tax-Exempt Fund can be expected to fluctuate less in value as a result of
changes in interest rates.
Investment in Tax-Exempt Fund shares offers several potential benefits. The
Tax-Exempt Fund seeks to provide as high a tax-exempt yield potential,
consistent with its objectives, as is available from investments in short-term
Tax-Exempt Securities utilizing professional management and block purchases of
securities. It provides high liquidity because of its redemption features and
seeks the reduced risk that generally results from
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diversification of assets. The shareholder is also relieved from
administrative burdens associated with direct investment in short-term
securities, such as coordinating maturities and reinvestments, safekeeping and
making numerous buy-sell decisions. These benefits are at least partially
offset by certain expenses borne by investors, including management fees,
distribution fees, administrative costs and operational costs.
The Tax-Exempt Securities in which the Tax-Exempt Fund invests include
municipal notes, municipal commercial paper and municipal bonds with a
remaining maturity of not more than 397 days (13 months). The Tax-Exempt Fund
will also invest in variable rate demand notes and participations therein (see
"Variable Rate Demand Notes" below) and derivative or synthetic municipal
instruments (see "Derivative Products" below). Municipal notes include tax
anticipation notes, bond anticipation notes and revenue anticipation notes.
Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales or revenue receipts. Municipal commercial paper refers
to short-term unsecured promissory notes issued generally to finance short-
term credit needs. The Tax-Exempt Fund may invest in all types of tax-exempt
instruments currently outstanding or to be issued in the future which satisfy
the short-term maturity and quality standards of the Tax-Exempt Fund.
The Tax-Exempt Fund presently contemplates that it will not invest more than
25% of its total assets in Tax-Exempt Securities whose issuers are located in
the same state. The Tax-Exempt Fund does not intend to invest more than 25% of
its total assets in industrial development bonds or private activity bonds
where the entities supplying the revenues from which the issues are to be paid
are in the same industry.
Certain of the instruments in which the Tax-Exempt Fund invests, including
variable rate demand notes ("VRDNs") and derivative or synthetic municipal
instruments ("Derivative Products"), effectively provide the Tax-Exempt Fund
with economic interests in long-term municipal bonds, coupled with rights to
demand payment of the principal amounts of such instruments from designated
counterparties. Under Securities and Exchange Commission rules, the Tax-Exempt
Fund treats these instruments as having maturities shorter than the stated
maturity dates of the notes, in the case of VRDNs, or the long-term bonds
underlying Derivative Products (the "Underlying Bonds"). Such maturities are
sufficiently short-term to allow such instruments to qualify as eligible
investments for money market funds such as the Tax-Exempt Fund. A demand right
is dependent on the financial ability of the counterparty, which is typically
a bank, broker-dealer or other financial institution, to purchase the
instrument at its principal amount. In addition, the right of the Tax-Exempt
Fund to demand payment from a counterparty may be subject to certain
conditions, including the creditworthiness of the instrument or the Underlying
Bond. If a counterparty is unable to purchase the instrument or, because of
conditions on the right of the Tax-Exempt Fund to demand payment, the
counterparty is not obligated to purchase the instrument on demand, the Tax-
Exempt Fund may be required to dispose of the instrument or the Underlying
Bond in the open market, which may be at a price which adversely affects the
Tax-Exempt Fund's net asset value.
Variable Rate Demand Notes. VRDNs are tax-exempt obligations that use a
floating or variable interest rate adjustment formula and provide a right of
demand to receive payment of the unpaid principal balance plus accrued
interest on a short notice period. The interest rates are adjustable at
periodic intervals to some prevailing market rate for similar investments,
such adjustment formula being calculated to maintain the market value of the
VRDN at approximately the par value of the VRDN on the adjustment date. The
adjustments are frequently based on the prime rate of a bank or some other
appropriate interest rate adjustment index.
The Tax-Exempt Fund may also invest in VRDNs in the form of participation
interests ("Participating VRDNs") in variable rate tax-exempt obligations held
by a financial institution, typically commercial banks ("institutions").
Participating VRDNs provide the Tax-Exempt Fund with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDNs from the institution upon a specified number of days'
notice, presently not to exceed 30 days. In addition, each Participating VRDN
is backed by an irrevocable letter of credit or similar commitment of the
institution. The Tax-Exempt 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 or issuing the repurchase commitment.
VRDNs that contain a right of demand to receive payment of the unpaid
principal balance plus accrued interest on a notice period exceeding seven
days may be deemed to be illiquid securities. A VRDN with a demand
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notice period exceeding seven days will therefore be subject to the Fund's
restriction on illiquid investments unless, in the judgment of the Trustees,
such VRDN is liquid. The Trustees may adopt guidelines and delegate to the
Investment Adviser the daily function of determining and monitoring liquidity
of such VRDNs. The Trustees, however, will retain sufficient oversight and be
ultimately responsible for such determinations.
The Tax-Exempt Fund has been advised by its counsel that the Tax-Exempt Fund
should be entitled to treat the income received on Participating VRDNs as
interest from tax-exempt obligations provided that the Tax-Exempt 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 presently
contemplated that the Tax-Exempt Fund will not invest more than a limited
amount (not more than 20%) of its total assets in Participating VRDNs.
Because of the interest rate adjustment formula on VRDNs (including
Participating VRDNs), the VRDNs are not comparable to fixed rate securities.
The Tax-Exempt Fund's yield on VRDNs will decline and its shareholders will
forego the opportunity for capital appreciation during periods when prevailing
interest rates have declined. On the other hand, during periods when
prevailing interest rates have increased, the Tax-Exempt Fund's yield on VRDNs
will increase and its shareholders will have a reduced risk of capital
depreciation.
Derivative Products. The Tax-Exempt Fund may invest in a variety of
Derivative Products. Derivative Products are typically structured by a bank,
broker-dealer or other financial institution. A Derivative Product generally
consists of a trust or partnership through which the Fund holds an interest in
one or more Underlying Bonds coupled with a conditional right to sell ("put")
the Fund's interest in the Underlying Bonds at par plus accrued interest to a
financial institution (a "Liquidity Provider"). Typically, a Derivative
Product is structured as a trust or partnership which provides for pass-
through tax-exempt income. There are currently three principal types of
derivative structures: (1) "Tender Option Bonds," which are instruments which
grant the holder thereof the right to put an Underlying Bond at par plus
accrued interest at specified intervals to a Liquidity Provider; (2) "Swap
Products," in which the trust or partnership swaps the payments due on an
Underlying Bond with a swap counterparty who agrees to pay a floating
municipal money market interest rate; and (3) "Partnerships," which allocate
to the partners income, expenses, capital gains and losses in accordance with
a governing partnership agreement. The Tax-Exempt Fund may also invest in
other forms of Derivative Products.
Investments in Derivative Products raise certain tax, legal, regulatory and
accounting issues which may not be presented by investments in other municipal
bonds. There is some risk that certain issues could be resolved in a manner
which could adversely impact the performance of the Tax-Exempt Fund. For
example, the tax-exempt treatment of the interest paid to holders of
Derivative Products is premised on the legal conclusion that the holders of
such Derivative Products have an ownership interest in the Underlying Bonds.
While the Fund receives an opinion of legal counsel to the effect that the
income from each Derivative Product is tax-exempt to the same extent as the
Underlying Bond, the Internal Revenue Service (the "IRS") has not issued a
ruling on this subject. Were the IRS to issue an adverse ruling, there is a
risk that the interest paid on such Derivative Products would be deemed
taxable.
Municipal Lease Obligations. Also included within the general category of
the Tax-Exempt Securities 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 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. Certain investments in lease obligations may be
illiquid. The Tax-Exempt Fund may not invest in illiquid lease obligations if
such investments, together with all other illiquid investments, would exceed
10% of the Tax-Exempt Fund's net assets. The Tax-Exempt Fund 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 Trustees 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
10
<PAGE>
have received an investment grade rating of Baa or better by Moody's Investors
Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's ("Standard &
Poor's") or Fitch IBCA, Inc. ("Fitch"). 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 unrated
lease obligations, the Investment Adviser must, among other things, also
review the creditworthiness of the municipality 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.
Purchase or Sale of Tax-Exempt Securities on a Delayed Delivery Basis or on
a When-Issued Basis. Tax-Exempt Securities may at times be purchased or sold
on a delayed delivery basis or on a when-issued basis. These transactions
arise when securities are purchased or sold by the Tax-Exempt Fund 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 Tax-Exempt Fund will only
make commitments to purchase such securities with the intention of actually
acquiring the securities, but the Tax-Exempt Fund may sell these securities
prior to settlement date if it is deemed advisable. No new when-issued
commitments will be made if more than 40% of the Tax-Exempt Fund's net assets
would become so committed. Purchasing Tax-Exempt Securities 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. The Tax-Exempt Fund will maintain a
separate account at its custodian consisting of cash or liquid Tax-Exempt
Securities (valued on a daily basis) equal at all times to the amount of the
when-issued commitment.
Purchase of Securities with Fixed Price "Puts." The Tax-Exempt Fund has
authority to purchase fixed rate Tax-Exempt Securities and, for a price,
simultaneously acquire the right to sell such securities back to the seller at
an agreed upon price at any time during a stated period or on a certain date.
Such a right is generally denoted as a fixed price put. Puts with respect to
fixed rate instruments are to be distinguished from the demand or repurchase
features of VRDNs and Participating VRDNs which enable the Tax-Exempt Fund to
dispose of the security at a time when the market value of the security
approximates its par value. The Tax-Exempt Fund does not currently intend to
enter into fixed price put transactions but reserves the right to do so in the
future. No such transactions will be entered into unless such transactions are
permissible under applicable rules under the Investment Company Act and the
Trustees of the Tax-Exempt Fund have approved the proposed terms of such
transactions.
Short-Term Maturity Standards. All of the investments of the Tax-Exempt Fund
will be in securities with remaining maturities of not more than 397 days (13
months). The dollar-weighted average maturity of the Tax-Exempt Fund's
portfolio will be 90 days or less. The maturity of VRDNs (including
Participating VRDNs) is deemed to be the longer of (i) the notice period
required before the Tax-Exempt Fund is entitled to receive payment of the
principal amount of the VRDN upon demand or (ii) the period remaining until
the VRDN's next
interest rate adjustment. If not redeemed by the Tax-Exempt Fund through the
demand feature, VRDNs mature on a specified date which may range up to 30
years from the date of issuance.
High Quality Standards. The Tax-Exempt Fund's portfolio investments in
municipal notes and short-term tax-exempt commercial paper will be limited to
those obligations which (i) are secured by a pledge of the full faith and
credit of the United States, or (ii) are rated, or issued by issuers who have
been rated, in one of the two highest rating categories for short-term
municipal debt obligations by an NRSRO or, if not rated, will be of comparable
quality as determined by the Trustees of the Tax-Exempt Fund. The Tax-Exempt
Fund's investments in municipal bonds (which must have maturities at the date
of purchase of 397 days (13 months) or less) will be in issuers who have
received from the requisite NRSROs a rating, with respect to a class of short-
term debt obligations that is comparable in priority and security with the
investment, in one of the two highest rating categories for short-term
obligations or, if not rated, will be of comparable quality as determined by
the Trustees of the Tax-Exempt Fund. Currently, there are three NRSROs which
rate municipal obligations: Fitch, Moody's and Standard & Poor's. Certain tax-
exempt obligations (primarily VRDNs and Participating VRDNs) may be entitled
to the benefit of standby letters of credit or similar commitments issued by
financial institutions and, in such instances, the Board of Trustees and the
Investment Adviser will take into account the obligation of the financial
institution in assessing the quality of such instrument. The Tax-Exempt Fund
may also purchase other
11
<PAGE>
types of tax-exempt instruments if, in the opinion of the Trustees, such
obligations are equivalent to securities having the ratings described above.
For a description of Tax-Exempt Securities and such ratings, see "Information
Concerning Tax-Exempt Securities" in the Appendix.
Preservation of capital is a prime investment objective of the Tax-Exempt
Fund, and, while the types of short-term Tax-Exempt Securities in which the
Tax-Exempt Fund invests are not completely risk free, such securities are
generally considered by the Investment Adviser to have low risk of the failure
of issuers or credit enhancers to meet their principal and interest
obligations. These securities have a lower principal risk compared to lower
rated obligations and generally to longer term obligations which entail the
risk of changing conditions over a longer period of time.
Other Factors. Management of the Tax-Exempt Fund will endeavor to be as
fully invested as reasonably practicable in order to maximize the yield on the
Tax-Exempt Fund's portfolio. Because the Tax-Exempt Fund does not intend to
realize taxable investment income, it will not invest in taxable short-term
money market securities. Tax-Exempt Securities generally do not trade on the
basis of same day settlements and, accordingly, a portfolio of such securities
cannot be managed on a daily basis with the same flexibility as a portfolio of
money market securities which can be bought and sold on a same day basis.
There may be times when the Tax-Exempt Fund has uninvested cash resulting from
an influx of cash due to large purchases of shares or maturities of portfolio
securities. The Tax-Exempt Fund may also be required to maintain cash reserves
or incur temporary bank borrowings to make redemption payments which are made
on the same day the redemption request is received. Such inability to be fully
invested would lower the yield on the portfolio.
The Tax-Exempt Fund's portfolio holdings represent a significant percentage
of the market in short-term tax-exempt securities and the yield on the
portfolio could be negatively impacted from time to time by the lack of
availability of short-term high quality Tax-Exempt Securities. The Tax-Exempt
Fund reserves the right to suspend or otherwise limit sales of its shares if,
as a result of difficulties in acquiring portfolio securities, it is
determined that it is not in the interests of the Tax-Exempt Fund's
shareholders to issue additional shares.
Investment Restrictions. The Tax-Exempt Fund has adopted a number of
restrictions and policies relating to the investment of its assets and its
activities, which are fundamental policies and may not be changed without the
approval of the holders of a majority of the Tax-Exempt Fund's outstanding
shares (which for this purpose 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). The Tax-Exempt
Fund may not:
(1) purchase any securities other than Tax-Exempt Securities referred to
herein and in the Appendix under the heading "Information Concerning Tax-
Exempt Securities;"
(2) invest more than 5% of its total assets (taken at market value at the
time of each investment) in the securities of any one issuer except that
such restriction shall not apply to securities backed (i.e., guaranteed) by
the United States Government or its agencies or instrumentalities (for
purposes of this restriction, the Tax-
Exempt Fund will regard each state and each political subdivision, agency
or instrumentality of such state and each multi-state agency of which such
state is a member and each public authority which issues securities on
behalf of a private entity as a separate issuer, except that if the
security is backed only by the assets and revenues of a non-government
entity then the entity with the ultimate responsibility for the payment of
interest and principal may be regarded as the sole issuer);
(3) invest more than 5% of its total assets (taken at market value at the
time of each investment) in industrial revenue bonds where the entity
supplying the revenues from which the issue is to be paid, including
predecessors, has a record of less than three years of continuous
operation;
(4) make investments for the purpose of exercising control or management;
(5) purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization;
(6) purchase or sell real estate (provided that such restriction shall
not apply to Tax-Exempt Securities secured by real estate or interests
therein or issued by companies which invest in real estate or interests
therein), commodities or commodity contracts, interests in oil, gas or
other mineral exploration or development programs;
12
<PAGE>
(7) purchase any securities on margin, except for use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities;
(8) make short sales of securities or maintain a short position or invest
in put, call, straddle, or spread options or combinations thereof;
provided, however, that the Tax-Exempt Fund shall have the authority to
purchase Tax-Exempt Securities subject to put options as set forth herein
and in the Appendix under the heading "Information Concerning Tax-Exempt
Securities;"
(9) make loans to other persons, provided that the Tax-Exempt Fund may
purchase a portion of an issue of Tax-Exempt Securities (the acquisition of
a portion of an issue of Tax-Exempt Securities or bonds, debentures or
other debt securities which are not publicly distributed is considered to
be the making of a loan under the Investment Company Act);
(10) borrow amounts in excess of 20% of its total assets taken at market
value (including the amount borrowed), and then only from banks as a
temporary measure for extraordinary or emergency purposes. (Usually only
"leveraged" investment companies may borrow in excess of 5% of their
assets; however, the Tax-Exempt Fund will not borrow to increase income but
only to meet redemption requests which might otherwise require untimely
dispositions of portfolio securities. The Tax-Exempt Fund will not purchase
securities while borrowings are outstanding. Interest paid on such
borrowings will reduce net income.);
(11) mortgage, pledge, hypothecate or in any manner transfer as security
for indebtedness any securities owned or held by the Tax-Exempt Fund except
as may be necessary in connection with borrowings mentioned in (10) above,
and then such mortgaging, pledging or hypothecating may not exceed 10% of
its total assets, taken at value;
(12) invest in securities with legal or contractual restrictions on
resale or for which no readily available market exists if, regarding all
such securities, more than 10% of its net assets (taken at value), would be
invested in such securities; and
(13) act as an underwriter of securities, except to the extent that the
Tax-Exempt Fund may technically be deemed an underwriter when engaged in
the activities described in (9) above or insofar as the Tax-Exempt Fund may
be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
Treasury Fund
The Treasury Fund is a no-load money market fund. The investment objectives
of the Treasury Fund are to seek preservation of capital, liquidity and
current income available from investing exclusively in a diversified portfolio
of short-term marketable securities that are direct obligations of the U.S.
Treasury. There can be no assurance that the investment objectives of the
Treasury Fund will be realized.
Preservation of capital is a prime investment objective of the Treasury Fund
and the direct U.S. Treasury obligations in which it will invest are generally
considered to have the lowest principal risk among money market securities.
Historically, direct U.S. Treasury obligations have generally had lower rates
of return than other money market securities with less safety.
For purposes of its investment objectives, the Treasury Fund defines short-
term marketable securities which are direct obligations of the U.S. Treasury
as any U.S. Treasury obligations having maturities of no more than 762 days
(25 months). The dollar-weighted average maturity of the Treasury Fund's
portfolio will not exceed 90 days. For the year ended March 31, 1999, the
average maturity of the Treasury Fund's portfolio ranged from days to
days.
Investment in Treasury Fund shares offers several potential benefits. The
Treasury Fund seeks to provide as high a yield potential, consistent with its
objectives, as is available through investment in short-term U.S. Treasury
obligations utilizing professional money market management and block purchases
of securities. It provides high liquidity because of its redemption features
and seeks the reduced market risk that generally results from diversification
of assets. The shareholder is also relieved from administrative burdens
associated with direct investment in U.S. Treasury securities, such as
coordinating maturities and reinvestments, and making numerous
13
<PAGE>
buy-sell decisions. These benefits are at least partially offset by certain
expenses borne by investors, including management fees, distribution fees,
administrative costs and operational costs.
Forward Commitments. The Treasury Fund may purchase or sell portfolio
securities on a forward commitment basis at fixed purchase or sale terms. The
purchase of portfolio securities on a forward commitment 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
increase, the value of the securities purchased on a forward commitment basis
will generally decrease. A separate account of the Treasury Fund will be
established with its custodian consisting of cash or Treasury securities
having a market value at all times at least equal to the amount of the forward
purchase commitment. The Treasury Fund may also sell securities on a forward
commitment basis. By doing so, the Fund foregoes the opportunity to sell such
securities at a higher price should they increase in value between the trade
and settlement dates.
Investment Restrictions. The Treasury Fund has adopted the following
restrictions and policies relating to the investment of its assets and its
activities, which are fundamental policies and may not be changed without the
approval of the holders of a majority of the Treasury Fund's outstanding
voting securities (which for this purpose 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). The
Treasury Fund may not:
(1) purchase any securities other than direct obligations of the U.S.
Treasury with remaining maturities of more than 762 days (25 months);
(2) act as an underwriter of securities issued by other persons;
(3) purchase any securities on margin, except for use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities;
(4) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof;
(5) make loans to other persons, provided that the Treasury Fund may
purchase short-term marketable securities which are direct obligations of
the U.S. Treasury;
(6) borrow amounts in excess of 20% of its total assets, taken at market
value (including the amount borrowed), and then only from banks as a
temporary measure for extraordinary or emergency purposes. (Usually only
"leveraged" investment companies may borrow in excess of 5% of their
assets; however, the Treasury Fund will not borrow to increase income but
only to meet redemption requests which might otherwise require untimely
dispositions of portfolio securities. The Treasury Fund will not purchase
securities while borrowings are outstanding. Interest paid on such
borrowings will reduce net income.); and
(7) mortgage, pledge, hypothecate or in any manner transfer as security
for indebtedness any securities owned or held by the Treasury Fund except
as may be necessary in connection with borrowings mentioned in (6) above,
and then such mortgaging, pledging or hypothecating may not exceed 10% of
the Treasury Fund's net assets, taken at market value.
MANAGEMENT OF THE FUNDS
Trustees and Officers
The Board of Trustees of each Fund consists of seven individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act (the "non-interested Trustees"). The Trustees of each Fund are
responsible for the overall supervision of the operations of the Fund and
perform the various duties imposed on the directors of investment companies by
the Investment Company Act.
Information about the Trustees, executive officers and portfolio managers of
the Funds, including their ages and their principal occupations for at least
the last five years, is set forth below. With the exception of eight officers,
the persons named below hold the same positions with each of the Funds. Unless
otherwise noted, the address of each Trustee, executive officer and portfolio
manager is P.O. Box 9011, Princeton, New Jersey 08543-9011.
14
<PAGE>
Terry K. Glenn (58) -- President and Trustee (1)(2) -- Executive Vice
President of the Investment Adviser and Merrill Lynch Asset Management
("MLAM") (which terms as used herein include their corporate predecessors),
since 1983; Executive Vice President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; President of Princeton Funds Distributor,
Inc. ("PFD") since 1986 and Director thereof since 1991; President of
Princeton Administrators, L.P. since 1988.
Ronald W. Forbes (58) -- Trustee (2) -- 1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany since 1989; Consultant, Urban Institute, Washington, D.C. since
1995.
Cynthia A. Montgomery (46) -- Trustee (2) -- Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02163. Professor, Harvard Business
School since 1989; Associate Professor, J.L. Kellogg Graduate School of
Management, Northwestern University from 1985 to 1989; Assistant Professor,
Graduate School of Business Administration, The University of Michigan from
1979 to 1985; Director, UNUM Corporation since 1990 and Director of Newell Co.
since 1995.
Charles C. Reilly (68) -- Trustee (2) -- 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 Arnold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television from 1986 to 1997.
Kevin A. Ryan (66) -- Trustee (2) -- 127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director of The Boston University
Center for the Advancement of Ethics and Character; Professor of Education at
Boston University since 1982; Formerly taught on the faculties of The
University of Chicago, Stanford University and Ohio State University.
Richard R. West (61) -- Trustee (2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, and Dean from 1984 to 1993, and currently
Dean Emeritus of New York University, Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc., Vornado Realty Trust, Inc.,
Vornado Operating Company and Alexander's Inc.
Arthur Zeikel (67) -- Trustee (1)(2) -- 300 Woodland Avenue, Westfield, New
Jersey 07090. Chairman of the Investment Adviser and MLAM from 1997 to 1999
and President thereof from 1977 to 1997; Chairman of Princeton Services from
1997 to 1999, Director thereof from 1993 to 1999 and President thereof from
1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co.") from 1990 to 1999.
Vincent R. Giordano (54) -- Senior Vice President of the Tax-Exempt Fund
(1)(2) -- Senior Vice President of the Investment Adviser and MLAM since 1984;
Senior Vice President of Princeton Services since 1993.
Joseph T. Monagle, Jr. (51) -- Senior Vice President of the Money Market
Fund, the Government Fund and the Treasury Fund (1)(2) -- Senior Vice
President of the Investment Adviser and MLAM since 1990; Department Head of
the Global Fixed Income Division of the Investment Adviser and MLAM since
1997; Senior Vice President of Princeton Services since 1993.
Kenneth A. Jacob (48) -- Vice President of the Tax-Exempt Fund (1)(2) --
First Vice President of MLAM since 1997; Vice President of MLAM from 1984 to
1997.
Kevin J. McKenna (42) -- Senior Vice President of the Money Market Fund, the
Government Fund and the Treasury Fund (1)(2) -- First Vice President of MLAM
since 1997; Vice President of MLAM from 1985 to 1997.
Donald C. Burke (39) -- Vice President and Treasurer (1)(2) -- Senior Vice
President and Treasurer of MLAM and FAM since 1999, Vice President of MLAM
from 1990 to 1997; Director of Taxation of MLAM since 1990; Vice President of
PFD since 1999.
Jacqueline Ayoub (41) -- Vice President of the Treasury Fund (1)(2) -- Vice
President and Portfolio Manager of MLAM since 1985.
15
<PAGE>
Carlo J. Giannini (55) -- Vice President of the Government Fund (1) -- Vice
President and portfolio manager of MLAM since 1981.
Peter J. Hayes (41) -- Vice President of the Tax-Exempt Fund (1)(2) -- First
Vice President of MLAM since 1997; Vice President of MLAM from 1988 to 1997.
Helen Marie Sheehan (39) -- Vice President of the Tax-Exempt Fund (1)(2) --
Vice President of MLAM since 1991; Assistant Vice President of MLAM from 1989
to 1991; employee of MLAM since 1985.
Robert Harris (47) -- Secretary (1)(2) -- First Vice President of MLAM since
1997; Vice President of MLAM from 1984 to 1997; Secretary of PFD since 1982.
- ----------
(1) Interested person, as defined in the Investment Company Act, of the
Funds.
(2) Such Trustee or officer is a director, trustee or officer of certain
other investment companies for which the Investment Adviser or MLAM acts
as the investment adviser or manager.
As of the date of this Statement of Additional Information, the Trustees and
officers of the Funds as a group (17 persons) owned an aggregate of less than
1% of the outstanding shares of the Funds. At such date, Mr. Zeikel, a Trustee
of each Fund, Mr. Glenn, a Trustee and officer of each Fund and the other
officers of the Funds owned an aggregate of less than 1% of the outstanding
shares of common stock of Merrill Lynch & Co., Inc. ("ML & Co.").
Compensation of Trustees
Pursuant to the terms of its Investment Advisory Agreement (the "Investment
Advisory Agreements") with each Fund, the Investment Adviser pays all
compensation of officers and employees of such Fund as well as the fees of all
Trustees of the Fund who are affiliated persons of ML & Co. or its
subsidiaries. Each Fund pays each Trustee who is not affiliated with the
Investment Adviser (each a "non-affiliated Trustee") an annual fee plus a fee
for each meeting attended and pays all Trustees' actual out-of-pocket expenses
relating to attendance at meetings. Each Fund also compensates members of its
Audit and Nominating Committee (the "Committee"), which consists of all of the
non-affiliated Trustees. The Chairman of the Committee receives an additional
annual fee of $1,000 per year.
The following table shows the compensation earned by the non-interested
Trustees for the fiscal year ended March 31, 1999 and also the aggregate
compensation paid to them from all registered investment companies advised by
the Investment Adviser and its affiliate, MLAM ("FAM/MLAM-advised funds"), for
the calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
Aggregate
Compensation
Pension or from Fund
Retirement and
Compensation Compensation Compensation Benefits MLAM/FAM-
Compensation from from from Accrued as Advised Funds
from Money Government Tax-Exempt Treasury Part of Paid to
Name of Trustee Market Fund Fund Fund Fund Fund Expense Trustee(1)
- --------------- ------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Ronald W. Forbes(1)..... $19,000 $5,600 $8,500 $5,600 None $192,567
Cynthia A.
Montgomery(1).......... $19,000 $5,600 $8,500 $5,600 None $192,567
Charles C. Reilly(1).... $20,000 $6,600 $9,500 $6,600 None $362,858
Kevin A. Ryan(1)........ $19,000 $5,600 $8,500 $5,600 None $192,567
Richard R. West(1)...... $19,000 $5,600 $8,500 $5,600 None $346,125
</TABLE>
- ----------
(1) The Trustees serve on the boards of FAM/MLAM-advised funds as follows:
Mr. Forbes (38 registered investment companies consisting of 51
portfolios); Ms. Montgomery (38 registered investment companies
consisting of 51 portfolios); Mr. Reilly (57 registered investment
companies consisting of 70 portfolios); Mr. Ryan (38 registered
investment companies consisting of 51 portfolios); and Mr. West (57
registered investment companies consisting of 70 portfolios).
Investment Advisory Arrangements
Investment Advisory Services. Each Fund has entered into a separate
Investment Advisory Agreement with the Investment Adviser. The Investment
Advisory Agreements provide that, subject to the supervision of the Board
16
<PAGE>
of Trustees, the Investment Adviser is responsible for the actual management
of the Funds' portfolios and constantly reviews the Funds' holdings in light
of its own research analysis and that from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser, subject to the review of the Board of
Trustees. The Investment Adviser also performs certain other administrative
services and provides all of the office space, facilities, equipment and
necessary personnel for portfolio management of the Funds.
Securities held by each Fund may also be held by, or be appropriate
investments for, other funds or clients (collectively referred to as
"clients") for which the Investment Adviser or MLAM acts as an investment
adviser. Because of different investment objectives or other factors, a
particular security may be bought for one or more clients when one or more
clients are selling the security. If purchases or sales of securities for each
Fund or other clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective clients in a manner deemed equitable to all by the Investment
Adviser or MLAM. To the extent that transactions on behalf of more than one
client of the Investment Adviser or MLAM during the same period may increase
the demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price.
Investment Advisory Fee. The Investment Adviser presently receives a fee
from each Fund at the end of each month at the following annual rates:
Portion of average daily value of net assets:
<TABLE>
<CAPTION>
Rate
-----
<S> <C>
Not exceeding $500 million......................................... 0.500%
In excess of $500 million but not exceeding $1 billion............. 0.425%
In excess of $1 billion............................................ 0.375%
</TABLE>
The table below sets forth information about the total advisory fees payable
by each Fund to the Investment Adviser for the periods indicated. The
information does not include amounts paid under each Fund's Distribution Plan
to Merrill Lynch.
<TABLE>
<CAPTION>
Advisory Fee
--------------------------------------
For Fiscal Year Ended March 31,
--------------------------------------
CMA Fund 1997 1998 1999
-------- ------------- ------------- ----------
<S> <C> <C> <C>
Money Market............................ $ 143,662,831 $ 170,196,721
Government.............................. $ 13,466,157 $ 13,436,885
Tax-Exempt.............................. $ 30,793,066 $ 32,978,418
Treasury................................ $ 8,329,150 $ 8,821,989
</TABLE>
Payment of Expenses. The Investment Advisory Agreements obligate the
Investment Adviser to provide investment advisory services, to furnish
administrative services, office space and facilities for management of the
affairs of each Fund, to pay all compensation of and furnish office space for
officers and employees of the Fund, as well as the fees of all Trustees of the
Funds who are affiliated persons of ML & Co. or any of its subsidiaries.
Except for certain expenses incurred by Merrill Lynch (see "Purchase of
Shares" and "Redemption of Shares" below), the Funds pay all other expenses
incurred in their operations, including, among other things, taxes, expenses
for legal and auditing services, costs of printing proxies, reports,
prospectuses and statements of additional information sent to current
shareholders (except to the extent paid for by the Distributor), charges of
the custodian and transfer agent, expenses of redemption of shares, Commission
fees, expenses of registering the shares under Federal and state securities
laws, fees and expenses of non-affiliated Trustees, accounting and pricing
costs (including the daily calculation of net asset value), insurance,
interest, brokerage costs, litigation and other extraordinary or non-recurring
expenses, and other expenses properly payable by the Funds. Accounting
services are provided to each of the Funds by the Investment Adviser, and each
Fund reimburses the Investment Adviser for its costs in connection with such
services.
For the fiscal year ended March 31, 1999, the amounts of such reimbursement
paid by the Money Market Fund, the Government Fund, the Tax-Exempt Fund and
the Treasury Fund aggregated $ , $ , $ and $ , respectively. For the
fiscal year ended March 31, 1999, the ratio of total expenses to
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average net assets was % for the Money Market Fund, % for the Government
Fund, % for the Tax-Exempt Fund and % for the Treasury Fund (excluding
payments under the Funds' Distribution Plans).
For information as to the distribution fee paid by each Fund to Merrill
Lynch pursuant to the Distribution Agreement, see "Purchase of Shares" and
"Redemption of Shares" below.
Organization of the Investment Adviser. The Investment Adviser is a limited
partnership, the partners of which are ML & Co., a financial services holding
company and the parent of Merrill Lynch, 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.
The Asset Management Group of ML & Co. (which includes the Investment
Adviser) acts as the investment adviser for more than registered investment
companies and provides investment advisory services to individuals and
institutional accounts. As of April 30, 1999, the Asset Management Group had a
total of approximately $ billion in investment company and other portfolio
assets under management. This amount includes assets managed for certain
affiliates of the Investment Adviser.
Duration and Termination. Unless earlier terminated as described herein,
each Investment Advisory Agreement will continue in effect from year to year
if approved annually (a) by the Board of Trustees of the Fund or by a majority
of the outstanding voting shares of the Fund and (b) by a majority of the
Trustees who are not parties to such contract or interested persons (as
defined in the Investment Company Act) of any such party. Such contract is not
assignable and may be terminated without penalty on 60 days' written notice at
the option of either party thereto or by vote of the shareholders of the Fund.
Transfer Agency Services
Financial Data Services, Inc. (the "Transfer Agent"), a subsidiary of ML &
Co., acts as the Funds' Transfer Agent pursuant to a Transfer Agency,
Shareholder Servicing Agency and Proxy 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 a fee of $10.00 per account and
is entitled to reimbursement from the Fund for certain transaction charges and
out-of-pocket expenses incurred by it under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which 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.
Code of Ethics
The Board of Trustees of each Fund has adopted a Code of Ethics under Rule
17j-1 under the Investment Company Act that incorporates the Code of Ethics of
the Investment Adviser (together, the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of the manager
and, as described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser pre-clear any
personal securities investment (with limited exceptions, such as government
securities). The pre-clearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security 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 Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Trust within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
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PURCHASE OF SHARES
Reference is made to "How to Buy, Sell and Transfer Shares" in the
Prospectus.
The shares of the Funds are offered to participants in the CMA program to
provide a medium for the investment of free credit balances held in CMA
accounts and to individual investors maintaining accounts directly with the
Funds' Transfer Agent. Persons subscribing to CMA services will have free
credit balances invested in shares of the Money Market Fund, the Government
Fund, the Tax-Exempt Fund or the Treasury Fund, depending on which Fund has
been designated by the participant as the primary investment account (the
"Primary Money Account"). Alternatively, subscribers may designate the Insured
Savings Account or one of the CMA State Funds as their Primary Money Account.
As described in the description of the Merrill Lynch Cash Management Account
program, a subscriber to CMA financial services may also elect to have free
credit balances in CMA accounts deposited in individual money market deposit
accounts established for such subscriber at designated depository institutions
pursuant to the Insured Savings SM Account (the "Insured Savings Account"). In
addition, investors may also have their free credit balances invested in
certain series of CMA Multi-State Municipal Series Trust (the "CMA State
Funds"), each of which is designed to provide income that is exempt from
Federal income taxes, personal income taxes of the designated state and, in
certain instances, local personal income taxes, local personal property taxes
and/or state intangible personal property taxes. The Funds, the CMA State
Funds and the Insured Savings Account are collectively referred to in this
Statement of Additional Information as the Money Accounts. This document does
not purport to describe the Insured Savings Account or the CMA State Funds.
Prospective participants in the Insured Savings Account are referred to the
fact sheet with respect thereto which is available from Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), and prospective investors in
the CMA State Funds are referred to the prospectus for those funds which is
available from Merrill Lynch. For more information about the CMA State Funds,
investors should contact their Merrill Lynch Financial Consultants.
Purchases of shares of a Fund designated as the Primary Money Account will
be made pursuant to the CMA automatic or manual purchase procedures described
below. Purchases of shares of the Funds may also be made by investors
maintaining accounts with the Funds' Transfer Agent pursuant to the procedures
described below.
The purchase price for shares of the Funds is the net asset value per share
next determined after receipt by a Fund of an automatic or manual purchase
order in proper form. Shares purchased will receive the next dividend declared
after such shares are issued which will be immediately prior to the 12 noon,
Eastern time, pricing on the following business day. A purchase order will not
be effective until cash in the form of Federal funds becomes available to the
Fund (see below for information as to when free credit balances held in CMA
accounts become available to the Funds). There are no minimum investment
requirements for subscribers to the Cash Management Account program other than
for manual purchases.
Purchase of Shares by Cash Management Account Subscribers
Subscribers to the CMA service have the option to change the designation of
their Primary Money Account at any time by notifying their Merrill Lynch
Financial Consultants. At that time, a subscriber may instruct his or her
Financial Consultant to redeem shares of a Fund designated as the Primary
Money Account and to transfer the proceeds to the newly-designated Primary
Money Account.
Automatic Purchases. Free credit balances arising in a CMA account are
automatically invested in shares of a Fund designated as the Primary Money
Account not later than the first business day of each week on which either the
New York Stock Exchange or New York banks are open, which normally will be
Monday. Free credit balances arising from the following transactions will be
invested automatically prior to the automatic weekly sweeps. Free credit
balances arising from the sale of securities which do not settle on the day of
the transaction (such as most common and preferred stock transactions) and
from principal repayments on debt securities become available to the Funds and
will be invested in shares on the business day following receipt of the
proceeds with respect thereto in the CMA account. Proceeds from the sale of
securities settling on a same day basis will also be invested in shares on the
next business day following receipt. Free credit balances of $1,000 or more
arising from cash deposits into a CMA account, dividend and interest payments
or any other source become available to the Funds and are invested in shares
on the next business day following receipt in the CMA account unless such
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<PAGE>
balance results from a cash deposit made after the cashiering deadline of the
Merrill Lynch office in which the deposit is made, in which case the resulting
free credit balances are invested on the second following business day. A CMA
participant desiring to make a cash deposit should contact his or her Merrill
Lynch Financial Consultant for information concerning the local office's
cashiering deadline, which is dependent on such office's arrangements with its
commercial banks. Free credit balances of less than $1,000 are invested in
shares in the automatic weekly sweep. Free credit balances of $1.00 or more
are invested daily in certain accounts including those established under the
Working Capital Management(TM) account program or the CMA for Retirement Plans
program. Additional information on these programs is available from Merrill
Lynch.
Manual Purchases. Subscribers to the CMA service may make manual investments
of $1,000 or more at any time in shares of a Fund not selected as their
Primary Money Account. Manual purchases shall be effective on the day
following the day the order is placed with Merrill Lynch, except that orders
involving cash deposits made on the date of a manual purchase shall become
effective on the second business day thereafter if they are placed after the
cashiering deadline referred to in the preceding paragraph. As a result, CMA
customers who enter manual purchase orders which include cash deposits made on
that day after such cashiering deadline will not receive the daily dividend
which would have been received had their orders been entered prior to the
deadline. In addition, manual purchases of $500,000 or more can be made
effective on the same day the order is placed with Merrill Lynch provided that
requirements as to timely notification and transfer of a Federal funds wire in
the proper amount are met. CMA customers desiring further information on this
method of purchasing shares should contact their Merrill Lynch Financial
Consultants.
Merrill Lynch reserves the right to terminate a subscriber's participation
in the Cash Management Account program for any reason.
All purchases of the Funds' shares and dividend reinvestments will be
confirmed to Cash Management Account subscribers (rounded to the nearest
share) in the transaction statement which is sent to all participants in such
Account monthly.
Purchase of Shares by Non-Cash Management Account Subscribers
Shares of the Funds may be purchased by investors maintaining accounts
directly with the Funds' Transfer Agent who are not subscribers to the Cash
Management Account program. Shareholders of the Funds not subscribing to such
program will not be charged the applicable program fee, but will not receive
any of the services available to program subscribers, such as the Visa
card/check account or the automatic investment of free credit balances. The
minimum initial purchase for non-program subscribers is $5,000 and the minimum
subsequent purchase is $1,000. Investors desiring to purchase shares directly
through the Transfer Agent as described below should contact Financial Data
Services, Inc., P.O. Box 45290, Jacksonville, Florida 32232-5290 or call (800)
221-7210.
Payment to the Transfer Agent. Investors who are not subscribers to the CMA
program may submit purchase orders directly by mail or otherwise to the
Transfer Agent. Purchase orders by mail should be sent to Financial Data
Services, Inc., P.O. Box 45290, Jacksonville, Florida 32232-5290. Purchase
orders which are sent by hand should be delivered to Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Investors
opening a new account must enclose a completed Purchase Application which is
available from Financial Data Services, Inc. Existing shareholders should
enclose the detachable stub from a monthly account statement which they have
received. Checks should be made payable to Merrill Lynch, Pierce, Fenner &
Smith Incorporated. Certified checks are not necessary, but checks are
accepted subject to collection at full face value in U.S. funds and must be
drawn in U.S. dollars on a U.S. bank. Payments for the accounts of
corporations, foundations and other organizations may not be made by third
party checks. Since there is a three-day settlement period applicable to the
sale of most securities, delays may occur when an investor is liquidating
other investments for investment in one of the Funds.
As described under "Tax-Exempt Fund--Investment Objectives and Policies,"
the Tax-Exempt Fund has reserved the right to suspend or otherwise limit sales
of its shares if, as a result of difficulties in obtaining portfolio
securities, it is determined that it is not in the interests of the Tax-Exempt
Fund's shareholders to issue additional shares. If sales of shares of the Tax-
Exempt Fund are suspended, shareholders who have designated such Fund as
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<PAGE>
their Primary Money Account will be permitted to designate the Money Market
Fund, the Government Fund, the Treasury Fund, one of the CMA State Funds (if
available) or the Insured Savings Account as their Primary Money Account.
Pending such an election, Merrill Lynch will consider various alternatives
with respect to automatic investments for such accounts, including the
investment of free credit balances in such accounts in shares of the Money
Market Fund, the Government Fund or the Treasury Fund.
Each Fund has entered into a distribution agreement (each, a "Distribution
Agreement") with Merrill Lynch pursuant to which Merrill Lynch acts as the
distributor for the Fund. The Distribution Agreements obligate Merrill Lynch
to pay certain expenses in connection with the offering of the shares of the
Funds. After the prospectus, statement of additional information and periodic
reports have been prepared, set in type and mailed to shareholders, Merrill
Lynch will pay for the printing and distribution of copies thereof used in
connection with the offering to investors. Merrill Lynch will also pay for
other supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Investment Advisory Agreements described above.
Each Fund has adopted a Distribution and Shareholder Servicing Plan (each, a
"Distribution Plan") in compliance with Rule 12b-1 under the Investment
Company Act pursuant to which Merrill Lynch receives a distribution fee under
the Distribution Agreement from each Fund at the end of each month at the
annual rate of 0.125% of average daily net assets of such Fund attributable to
subscribers to the CMA program and to investors maintaining securities
accounts with Merrill Lynch or maintaining accounts directly with the Transfer
Agent who are not subscribers to such program, except that the value of Fund
shares in accounts maintained directly with the Transfer Agent which are not
serviced by Merrill Lynch Financial Consultants will be excluded. The
Distribution Plans reimburse Merrill Lynch only for actual expenses incurred
in the fiscal year in which the fees are paid. The distribution fees are
principally to compensate Merrill Lynch Financial Consultants and other
Merrill Lynch personnel for selling shares of each Fund and for providing
direct personal services to shareholders of the Funds. The distribution fee is
not compensation for the administrative and operational services rendered to
shareholders by Merrill Lynch which are covered by Investment Advisory
Agreements between each Fund and the Investment Adviser. See "Management of
the Funds--Investment Advisory Arrangements").
The Trustees believe that each Fund's expenditures under its Distribution
Plan benefit such Fund and its shareholders by providing better shareholder
services by facilitating the sale and distribution of Fund shares. For the
year ended March 31, 1999, the Money Market Fund paid $ , to Merrill Lynch
pursuant to its Distribution Plan. For the year ended March 31, 1999, the
Government Fund paid $ , to Merrill Lynch pursuant to its Distribution
Plan. For the year ended March 31, 1999, the Tax-Exempt Fund paid $ , to
Merrill Lynch pursuant to its Distribution Plan. For the year ended March 31,
1999, the Treasury Fund paid $ , to Merrill Lynch pursuant to the
Distribution Plan. All of the amounts expended under the Distribution Plans
for the year ended March 31, 1999 were allocated to Merrill Lynch Financial
Consultants, other Merrill Lynch personnel and related administrative costs.
Among other things, each Distribution Plan provides that Merrill Lynch shall
provide and the Trustees of each Fund shall review quarterly reports of the
distribution expenses made by Merrill Lynch pursuant to the Distribution Plan.
In their consideration of each Distribution Plan, the Trustees must consider
all factors they deem relevant, including information as to the benefits of
the Distribution Plan to the related Fund and its shareholders. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Trustees of the Fund who
are not "interested persons" of the Fund as defined in the Investment Company
Act ("Independent Trustees") shall be committed to the discretion of the
Independent Trustees then in office. Each Distribution Plan can be terminated
at any time, without penalty, by the vote of a majority of the Independent
Trustees or by the vote of the holders of a majority of the outstanding voting
securities of each Fund. Finally, the Distribution Plans cannot be amended to
increase materially the amount to be spent by the Fund thereunder without
shareholder approval, and all material amendments are required to be approved
by vote of the Trustees of the Fund, including a majority of the Independent
Trustees, cast in person at a meeting called for that purpose.
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<PAGE>
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell and Transfer Shares" in the
Prospectus.
Each Fund is required to redeem for cash all full and fractional shares of
the Fund. The redemption price is the net asset value per share next
determined after receipt by the Transfer Agent of proper notice of redemption
as described in accordance with either the automatic or manual procedures set
forth below. If such notice is received by the Transfer Agent prior to the 12
noon, Eastern time, pricing on any business day, the redemption will be
effective on such day. Payment of the redemption proceeds will be made on the
same day the redemption becomes effective. If the notice is received after 12
noon, Eastern time, the redemption will be effective on the next business day
and payment will be made on such next day.
Redemption of Shares by Cash Management Account Subscribers
Automatic Redemptions. Redemptions will be effected automatically by Merrill
Lynch to satisfy debit balances in the Securities Account created by activity
therein or to satisfy debit balances created by Visa card purchases, card
advances (which may be obtained through participating banks and automated
teller machines) or checks written against the Visa Account. Each CMA account
will be automatically scanned for debits each business day prior to 12 noon,
Eastern time. After application of any free credit balances in the account to
such debits, shares of the Funds (or the CMA State Funds, if applicable) will
be redeemed at net asset value at the 12 noon, Eastern time pricing, and funds
deposited pursuant to the Insured Savings Account will be withdrawn, to the
extent necessary to satisfy any remaining debits in either the Securities
Account or the Visa Account. Automatic redemptions or withdrawals will be made
first from the participant's Primary Money Account and then, to the extent
necessary, from Money Accounts not designated as the Primary Money Account.
Unless otherwise requested, in those instances where shareholders request
transactions that settle on a "same-day" basis (such as Federal Funds wire
redemptions, branch office checks, transfers to other Merrill Lynch accounts
and certain securities transactions) the Fund shares necessary to effect such
transactions will be deemed to have been transferred to Merrill Lynch prior to
the Fund's declaration of dividends on that day. In such instances,
shareholders will receive all dividends declared and reinvested through the
date immediately preceding the date of redemption. Unless otherwise requested
by the participant, redemptions or withdrawals from non-Primary Money Accounts
will be made in the order the Money Accounts were established; thus,
redemptions or withdrawals will first be made from the non-Primary Money
Account which the participant first established. Margin loans through the
Investor CreditLine SM service will be utilized to satisfy debits remaining
after the liquidation of all funds invested in or deposited through Money
Accounts, and shares of the Funds may not be purchased, nor may deposits be
made pursuant to the Insured Savings Account, until all debits and margin
loans in the account are satisfied.
Merrill Lynch, in conjunction with an affiliate, offers modified features,
the CMA Visa(R) Gold Program, and the CMA Visa(R) Signature SM Program to the
CMA account for individual shareholders. Participants in the CMA Visa(R) Gold
Program or CMA Visa(R) Signature SM Program may purchase goods or services at
participating merchants with the Visa(R) Gold or Visa Signature card. Such
purchases may be paid for by automatic debit on the fourth Wednesday of each
month. See the Merrill Lynch Cash Management Account Program Description for
more information concerning the CMA Visa(R) Gold Program and CMA Visa
Signature Programs.
As set forth in the current description of the CMA program, a participant
whose Securities Account is a margin account through the Investor
CreditLine SM service may designate a minimum balance to be maintained in
shares of the Funds or the CMA State Funds or deposits made pursuant to the
Insured Savings Account (the "Minimum Money Accounts Balance"). If a
participant designates a Minimum Money Accounts Balance, the shares or
deposits representing such balance will not be redeemed or withdrawn until
loans equal to the available margin loan value of securities in the Securities
Account have been made. Participants considering the establishment of a
Minimum Money Accounts Balance should review the description of this service
contained in the description of the CMA program which is available from
Merrill Lynch.
Shareholders of the Funds may arrange to have periodic investments made in
certain other mutual funds sponsored by Merrill Lynch through the CMA
Automated Investment Program. Under this program, the
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<PAGE>
shareholder's Money Account will be automatically debited at periodic
intervals in an amount of $250 or more, as selected by the shareholder, and
investment made in the fund the shareholder has designated. Further
information on this program is available from Merrill Lynch.
Manual Redemptions. Shareholders may redeem shares of a Fund directly by
submitting a written notice of redemption directly to Merrill Lynch, which
will submit the requests to the Funds' Transfer Agent. Cash proceeds from the
manual redemption of Fund shares will be ordinarily mailed to the shareholder
at his or her address of record, or upon request, mailed or wired (if $10,000
or more) to his or her bank account. Redemption requests should not be sent to
the Fund or the Transfer Agent. If inadvertently sent to the Fund or the
Transfer Agent, redemption requests will be forwarded to Merrill Lynch. The
notice requires the signatures of all persons in whose name the shares are
registered, signed exactly as their names appear on their monthly statement.
The signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, the existence and validity of which may be verified by
the Transfer Agent through the use of industry publications. Notarized
signatures are not sufficient. In certain instances, additional documents such
as, but not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority may be
required. CMA customers desiring to effect manual redemptions should contact
their Merrill Lynch Financial Consultants.
All redemptions of Fund shares will be confirmed to Cash Management Account
subscribers (rounded to the nearest share) in the CMA Transaction Statement
which is sent to all CMA participants monthly.
Redemption of Shares by Non-Cash Management Account Subscribers
Shareholders may redeem shares of the Funds held in a Merrill Lynch
securities account directly by submitting a written notice of redemption to
Merrill Lynch, which will submit the requests to the Funds' Transfer Agent as
described above under "Redemption of Shares--Redemption of Shares by Cash
Management Account Subscribers--Manual Redemptions."
Shareholders maintaining an account directly with the Transfer Agent, who
are not CMA program participants, may redeem shares of the Funds by submitting
a written notice by mail directly to the Transfer Agent, Financial Data
Services, Inc., P.O. Box 45290, Jacksonville, Florida 32232-5290. Redemption
requests which are sent by hand should be delivered to Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Cash proceeds from the manual redemption of Fund shares will be mailed to the
shareholder at his or her address of record. Redemption requests should not be
sent to the Funds or Merrill Lynch. If inadvertently sent to the Funds or
Merrill Lynch, such redemption requests will be forwarded to the Transfer
Agent. The notice requires the signatures of all persons in whose names the
shares are registered, signed exactly as their names appear on their monthly
statement. The signature(s) on the notice must be guaranteed by an "eligible
guarantor institution" as defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, the existence and validity of which may be verified by
the Transfer Agent by the use of industry publications. Notarized signatures
are not sufficient. In certain instances, additional documents such as, but
not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority may be
required.
----------------
At various times the Funds may be requested to redeem shares, in manual or
automatic redemptions, with respect to which good payment has not yet been
received by Merrill Lynch. A Fund may delay, or cause to be delayed, the
payment of the redemption proceeds until such time as it has assured itself
that good payment has been collected for the purchase of such shares.
Normally, this delay will not exceed 10 days. In addition, the Funds reserve
the right not to effect automatic redemptions where the shares to be redeemed
have been purchased by check within 15 days prior to the date the redemption
request is received.
The right to receive payment with respect to any redemption of Fund shares
may be suspended by each Fund for a period of up to seven days. Suspensions of
more than seven days may not be made except (1) for any period (A) during
which the New York Stock Exchange (the "NYSE") is closed other than customary
weekend and holiday closings or (B) during which trading on the NYSE is
restricted; (2) for any period during which an
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emergency exists as a result of which (a) disposal by the Fund of securities
owned by it is not reasonably practicable or (b) it is not reasonably
practicable for the Fund fairly to determine the value of its net assets; or
(3) for such other periods as the Commission may by order permit for the
protection of securityholders of the Fund. The Commission shall by rules and
regulations determine the conditions under which (i) trading shall be deemed
to be restricted and (ii) an emergency shall be deemed to exist within the
meaning of clause (2) above.
The value of shares of the Funds at the time of redemption may be more or
less than the shareholders' cost, depending on the market value of the
securities held by the Funds at any such time.
Merrill Lynch has offered the CMA program since September 1977. While no
significant problems have occurred to date, no predictions can be made as to
the rate of purchases and redemptions of shares which will result from the
automatic features of the CMA program. The portfolio securities of the Funds
are highly liquid and the Funds have the right to borrow up to 20% of their
total assets on a temporary basis to meet unexpected redemptions.
Nevertheless, an erratic redemption pattern could force the Investment Adviser
to invest in securities or maintain an average portfolio maturity which might
lessen the yield that would otherwise be available to the Funds.
Merrill Lynch, in conjunction with another subsidiary of ML & Co., offers a
modified version of the CMA account which has been designed for corporations
and other businesses. This account, the Working Capital Management(TM) account
("WCMA(R) account"), provides participants with the features of a regular CMA
account and also optional lines of credit. A brochure describing the WCMA
program, as well as information concerning charges for participation in the
program, is available from Merrill Lynch.
Participants in the WCMA program are able to invest funds in one or more of
the Funds designated by them. Checks and other funds transmitted to a WCMA
account will generally be applied, first to the payment of pending securities
transactions or other charges in the participant's securities account, second,
to reduce outstanding balances in the lines of credit available through such
program and, third, to purchase shares of the designated Fund. To the extent
not otherwise applied, funds transmitted by Federal funds wire or an automated
clearinghouse service will be invested in shares of the designated Fund on the
business day following receipt of such funds by Merrill Lynch. Funds received
in a WCMA account from the sale of securities will be invested in the
designated Fund as described above. The amount payable on a check received in
a WCMA account prior to the cashiering deadline referred to above will be
invested on the second business day following receipt of the check by Merrill
Lynch. Redemptions of Fund shares will be effected as described above to
satisfy debit balances, such as those created by purchases of securities or by
checks written against a bank providing checking services to WCMA
participants. WCMA participants that have a line of credit will, however, be
permitted to maintain a minimum Fund balance; for participants who elect to
maintain such a balance, debits from check usage will be satisfied through the
line of credit so that such balance is maintained. However, if the full amount
of available credit is not sufficient to satisfy the debit, it will be
satisfied from the minimum balance.
From time to time, Merrill Lynch also may offer the Funds to participants in
certain other programs sponsored by Merrill Lynch. Some or all of the features
of the CMA account may not be available in such programs. For more information
on the services available under such programs, participants should contact
their financial consultants.
DETERMINATION OF NET ASSET VALUE
Money Market Fund, Government Fund and Treasury Fund
The net asset value of the Money Market Fund, the Government Fund and the
Treasury Fund is determined by the Investment Adviser at 12:00 noon, Eastern
time, on each business day during which the NYSE or New York banks are open
for business, immediately after the daily declaration of dividends. As a
result of this procedure, the net asset value is determined each business day
except for days on which both the NYSE and New York banks are closed. Both the
NYSE and New York banks are closed for New Year's Day, Martin Luther King, Jr.
Day, Presidents Day, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day. The net asset value per share of the Money Market Fund,
the Government Fund and the Treasury Fund is
24
<PAGE>
determined under the "penny rounding" method by adding the value of all
securities and other assets in each Fund's portfolio, deducting such Fund's
liabilities, dividing by the number of shares of the Fund outstanding and
rounding the result to the nearest whole cent. It is anticipated that the net
asset value per share of each Fund will remain constant at $1.00 per share,
but no assurance can be offered in this regard. Securities with remaining
maturities of greater than 60 days for which market quotations are readily
available will be valued at market value. Securities with remaining maturities
of 60 days or less will be valued on an amortized cost basis, i.e., by valuing
the instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. Other securities held by
the Money Market Fund, the Government Fund and the Treasury Fund will be
valued at their fair value as determined in good faith by or under direction
of the Board of Trustees.
Tax-Exempt Fund
The net asset value of the Tax-Exempt Fund for the purpose of pricing orders
for the purchase and redemption of shares is determined by the Investment
Adviser at 12:00 noon, Eastern time, on each day the NYSE or New York banks
are open for business, immediately after the daily declaration of dividends.
As a result of this procedure, the net asset value is determined each day
except for days on which both the NYSE and New York banks are closed. Both the
NYSE and New York banks are closed on New Year's Day, Martin Luther King, Jr.
Day, Presidents Day, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day. The net asset value is determined by adding the value
of all securities and other assets in the portfolio, deducting its liabilities
and dividing by the number of shares outstanding. It is anticipated that the
net asset value per share of the Tax-Exempt Fund will remain constant at $1.00
per share, but no assurance can be offered in this regard.
The Tax-Exempt Fund values its portfolio securities based upon their
amortized cost in accordance with the terms of a rule adopted by the
Commission. This involves valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may
result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Tax-Exempt Fund would receive if it sold
the instrument.
----------------
In accordance with the Commission regulations applicable to the valuation of
portfolio securities, the Funds will maintain a dollar-weighted average
portfolio maturity of 90 days or less and will purchase instruments having
remaining maturities of not more than 397 days (13 months), with the exception
of U.S. Government and U.S. Government agency securities, which may have
remaining maturities of up to 762 days (25 months). The Funds will invest only
in securities determined by the Trustees to be of high quality with minimal
credit risks. In addition, the Trustees have established procedures designed
to stabilize, to the extent reasonably possible, each Fund's price per share
as computed for the purpose of sales and redemptions at $1.00. Deviations of
more than an insignificant amount between the net asset value calculated using
market quotations and that calculated on a "penny rounded" basis or, in the
case of the Tax-Exempt Fund, an amortized cost basis, will be reported to the
Trustees of the Fund by the Investment Adviser. In the event the Trustees
determine that a deviation exists with respect to any Fund that may result in
material dilution or other unfair results to investors or existing
shareholders of that Fund, the Fund will take such corrective action as it
regards necessary and appropriate, including the reduction of the number of
outstanding shares of the Fund by having each shareholder proportionately
contribute shares to the Fund's capital; the sale of portfolio instruments
prior to maturity to realize capital gains or losses or to shorten average
portfolio maturity; withholding dividends; or establishing a net asset value
per share solely by using available market quotations. If the number of
outstanding shares is reduced in order to maintain a constant net asset value
of $1.00 per share, the shareholders will contribute proportionately to the
Fund's capital. Each shareholder will be deemed to have agreed to such
contribution by such shareholder's investment in such Fund.
Since the net income of the Funds is determined and declared as a dividend
immediately prior to each time the net asset value of each Fund is determined,
the net asset value per share of the Funds normally remains at $1.00 per share
immediately after each such dividend declaration. Any increase in the value of
a shareholder's investment in a Fund, representing the reinvestment of
dividend income, is reflected by an increase in the number
25
<PAGE>
of shares of the Fund in the account and any decrease in the value of a
shareholder's investment may be reflected by a decrease in the number of
shares in the account. See "Taxes" below.
YIELD INFORMATION
Each Fund normally computes its annualized yield by determining the net
income for a seven-day base period for a hypothetical pre-existing account
having a balance of one share at the beginning of the base period, dividing
the net income by the net asset value of the account at the beginning of the
base period to obtain the base period return, multiplying the result by 365
and then dividing by seven. Under this calculation, the yield on the Money
Market Fund, the Government Fund and the Treasury Fund shares reflects, and
the yield on the Tax-Exempt Fund does not reflect, realized gains and losses
on portfolio securities. In accordance with regulations adopted by the
Commission, each Fund is required to disclose its annualized yield for certain
seven-day base periods in a standardized manner that does not take into
consideration any realized or unrealized gains or losses on portfolio
securities. The Commission also permits the calculation of a standardized
effective or compounded yield. This is computed by compounding the
unannualized base period return, which is done by adding one to the base
period return, raising the sum to a power equal to 365 divided by seven, and
subtracting one from the result. The annualized compounded yield will be
somewhat higher than the yield because of the effect of assumed reinvestment.
In the case of the Money Market Fund, the Government Fund and the Treasury
Fund, this compounded yield calculation also reflects realized gains or losses
on portfolio securities. Realized gains and losses are not reflected in the
compounded yield calculation of the Tax-Exempt Fund.
The yield on each Fund's shares normally will fluctuate on a daily basis.
Therefore, the yield for any given past period is not an indication or
representation by the Fund of future yields or rates of return on its shares.
The yield is affected by such factors as changes in interest rates on the
Fund's portfolio securities, average portfolio maturity, the types and quality
of portfolio securities held and operating expenses. Current yield information
may not provide a basis for comparison with bank deposits or other investments
that pay a fixed yield over a stated period of time. The yield on Government
Fund shares and Treasury Fund shares may not, for various reasons, be
comparable to the yield on shares of other money market funds or other
investments.
<TABLE>
<CAPTION>
Excluding
gains and
Seven-Day Period Ended March 31, 1999 losses
---------------------------------------------------------------- ---------
<S> <C>
Money Market Fund............................................... %
Government Fund................................................. %
Tax-Exempt Fund................................................. %
Treasury Fund................................................... %
</TABLE>
On occasion, each Fund may compare its yield to (i) the average yield
reported by the Bank Rate Monitor National Index TM for money market deposit
accounts offered by the 100 leading banks and thrift institutions in the ten
largest standard metropolitan statistical areas, (ii) yield data published by
Lipper Analytical Services, Inc., (iii) performance data published by
Morningstar Publications, Inc., Money Magazine, U.S. News & World Report,
Business Week, CDA Investment Technology, Inc., Forbes Magazine and Fortune
Magazine or (iv) historical yield data relating to other central asset
accounts similar to the CMA program. In addition, on occasion, the Money
Market Fund, the Government Fund and the Treasury Fund may each compare their
yields to the yield on an investment in 90-day Treasury bills on a rolling
basis, assuming quarterly compounding. As with yield quotations, yield
comparisons should not be considered indicative of the Fund's yield or
relative performance for any future period.
PORTFOLIO TRANSACTIONS
The Funds have no obligations to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to a policy
established by the Trustees and officers of each Fund, the Investment Adviser
is primarily responsible for the Fund's portfolio decisions and the placing of
the Fund's portfolio transactions. In placing orders, it is the policy of the
Funds to obtain the best net results taking into account such factors as price
of the securities offered, the type of transaction involved, the firm's
general execution and
26
<PAGE>
operational facilities, and the firm's risk in positioning the securities
involved. While the Investment Adviser generally seeks reasonably competitive
spreads or commissions, the Funds will not necessarily be paying the lowest
spread or commission available. The Fund's policy of investing in securities
with short maturities will result in high portfolio turnover.
The portfolio securities in which each Fund invests are traded primarily in
the over-the-counter ("OTC") market. Where possible, the Funds will deal
directly with the dealers who make a market in the securities involved except
in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principals for their own
accounts. On occasion, securities may be purchased directly from the issuer.
The money market securities in which the Money Market Fund, the Government
Fund and the Treasury Fund invest and the Tax-Exempt Securities in which the
Tax-Exempt Fund invests are generally traded on a net basis and do not
normally involve either brokerage commissions or transfer taxes. The cost of
executing portfolio securities transactions of the Funds primarily will
consist of dealer spreads and underwriting commissions. Under the Investment
Company Act, a person affiliated with the Funds is prohibited from dealing
with the Funds as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the Commission.
Since OTC transactions are usually principal transactions, an affiliated
person of the Funds may not serve as the Funds' dealer in connection with such
transactions, except pursuant to the exemptive order described below. However,
an affiliated person of the Funds may serve as the Funds' broker in OTC
transactions conducted on an agency basis. The Funds may not purchase
securities from any underwriting syndicate of which Merrill Lynch is a member,
except in accordance with applicable rules under the Investment Company Act
or, likewise, under an exemptive order.
The Commission has issued an exemptive order permitting the Money Market
Fund, the Government Fund and the Treasury Fund to conduct principal
transactions with Merrill Lynch Government Securities Inc. ("GSI") in U.S.
Government and U.S. Government agency securities, with Merrill Lynch Money
Markets Inc. ("MMI") in certificates of deposit and other short-term bank
money market instruments and commercial paper and with Merrill Lynch in fixed
income securities including medium-term notes. The order contains a number of
conditions, including conditions designed to insure that the price to the
Money Market Fund, the Government Fund and the Treasury Fund from GSI, MMI or
Merrill Lynch is equal to or better than that available from other sources.
GSI, MMI and Merrill Lynch have informed such Funds that they will in no way,
at any time, attempt to influence or control the activities of the Fund or the
Investment Adviser in placing such principal transactions. The exemptive order
allows GSI, MMI or Merrill Lynch to receive a dealer spread on any transaction
with the Money Market Fund, the Government Fund or the Treasury Fund no
greater than its customary dealer spread for transactions of the type
involved. Generally such spreads do not exceed 0.25% of the principal amount
of the securities involved. For the fiscal years ended March 31, 1997, 1998
and 1999 the Money Market Fund engaged in 184, 146 and such transactions,
respectively, aggregating approximately $11.7 billion, $10.4 billion and $ ,
respectively. For the fiscal years ended March 31, 1997, 1998 and 1999, the
Government Fund engaged in 4, no and , such transactions, respectively,
aggregating approximately $469.0 million, $0 and $ , respectively. For the
fiscal years ended March 31, 1997, 1998 and 1999 the Treasury Fund engaged in
15, 7 and , such transactions, respectively, aggregating approximately
$353.9 million, $48.6 million and $ , respectively.
Prior to the receipt of a separate exemptive order also described below, the
Tax-Exempt Fund could not purchase securities in principal transactions with
Merrill Lynch, although it could purchase tax-exempt securities from
underwriting syndicates of which Merrill Lynch was a member under certain
conditions in accordance with the provisions of a rule adopted under the
Investment Company Act. In 1987, the Commission issued an exemptive order
permitting the Tax-Exempt Fund to conduct principal transactions with Merrill
Lynch in Tax-Exempt Securities with remaining maturities of one year or less.
This order contains a number of conditions, including conditions designed to
insure that the price to the Tax-Exempt Fund from Merrill Lynch is equal to or
better than that available from other sources. Merrill Lynch has informed the
Tax-Exempt Fund that it will in no way, at any time, attempt to influence or
control the activities of the Fund or the Investment Adviser in placing such
principal transactions. The exemptive order allows Merrill Lynch to receive a
dealer spread on any transaction with the Tax-Exempt Fund no greater than its
customary dealer spread for transactions of the type involved. For the fiscal
years ended March 31, 1997, 1998 and 1999, the Tax-Exempt Fund engaged in 31,
20 and principal transactions, respectively, with Merrill Lynch, aggregating
approximately $773.4 million, $353.7 million and $ , respectively.
27
<PAGE>
The Trustees of each Fund have considered the possibilities of recapturing
for the benefit of the Funds expenses of possible portfolio transactions, such
as dealers' spreads and underwriting commissions, by conducting such portfolio
transactions through affiliated entities, including Merrill Lynch. After
considering all factors deemed relevant, the Trustees made a determination not
to seek such recapture. The Trustees will reconsider this matter from time to
time. The Investment Adviser has arranged for the Funds' custodian to receive
any tender offer solicitation fees on behalf of the Funds payable with respect
to portfolio securities of the Funds.
The Funds do not expect to use one particular dealer, but, subject to
obtaining the best price and execution, dealers who provide supplemental
investment research to the Investment Adviser may receive orders for
transactions by the Funds. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under its Investment Advisory Agreement and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information.
DIVIDENDS AND TAXES
Dividends
Dividends are declared and reinvested daily by each Fund in the form of
additional shares at net asset value. Each Fund's net income for dividend
purposes is determined at 12 noon, Eastern time, on each day the NYSE or New
York banks are open for business, immediately prior to the determination of
such Fund's net asset value on that day (see "Determination of Net Asset
Value"). Such reinvestments will be reflected in shareholders' monthly CMA
transaction statements. Shareholders liquidating their holdings will receive
on redemption all dividends declared and reinvested through the date of
redemption, except that, in those instances where shareholders request
transactions that settle on a "same-day" basis (such as Federal Funds wire
redemptions, branch office checks, transfers to other Merrill Lynch accounts
and certain securities transactions) the Fund shares necessary to effect such
transactions will be deemed to have been transferred to Merrill Lynch prior to
the Fund's declaration of dividends on that day. In such instances,
shareholders will receive all dividends declared and reinvested through the
date immediately preceding the date of redemption. Since the net income
(including realized gains and losses on the portfolio assets) is declared as a
dividend in shares each time the net income of the Fund is determined, the net
asset value per share of the Fund normally remains constant at $1.00 per
share.
Net income of each Fund (from the time of the immediately preceding
determination thereof) consists of (i) interest accrued and/or discount earned
(including both original issue and market discount), (ii) less amortization of
premiums and the estimated expenses of the Fund (including the fees payable to
the Investment Adviser) for the period, (iii) plus or minus all realized gains
and losses on portfolio securities. The amount of discount or premium on
portfolio securities is fixed at the time of their purchase and consists of
the difference between the purchase price for such securities and the
principal amount of such securities. Unrealized gains and losses are reflected
in the Tax-Exempt Fund's net assets and are not included in net income.
Taxes
The Funds intend to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as the Money Market Fund, the
Government Fund, the Treasury Fund or the Tax-Exempt Fund so qualifies, such
Fund (but not its shareholders) will not be subject to Federal income tax on
the part of its net ordinary income and net realized capital gains which it
distributes to shareholders. The Funds intend to distribute substantially all
of such income.
Taxation of Ordinary Income and Capital Gain Dividends
Dividends paid by the Money Market Fund, the Government Fund and the
Treasury Fund or, if applicable, the Tax-Exempt Fund from their ordinary
income or from an excess of net short-term capital gains over net long-term
capital losses (together referred to hereafter as "ordinary income dividends")
are taxable to shareholders as ordinary income. Distributions made from an
excess of net long-term capital gains over net short-term capital losses
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned the Fund
shares. Different categories of capital gain dividends are taxable at
28
<PAGE>
different rates. Generally not later than 60 days after the close of their
taxable years, the Funds will provide their respective shareholders with a
written notice designating the amounts of any capital gain dividends or
exempt-interest dividends, if applicable, as well as the amount of capital
gains in the different categories of capital gain referred to above. Ordinary
income and capital gain dividends are taxable to shareholders even though they
are reinvested in additional shares of a Fund.
Tax Rules Applicable to the Tax-Exempt Fund and its Shareholders
The Tax-Exempt Fund intends to qualify to pay "exempt-interest dividends" as
defined in Section 852(b)(5) of the Code. Under such 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") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Tax-Exempt Fund shall
be qualified to pay exempt-interest dividends to its shareholders. Exempt-
interest dividends are dividends or any part thereof paid by the Tax-Exempt
Fund which are attributable to interest on tax-exempt obligations and
designated by the Tax-Exempt Fund as exempt-interest dividends in a written
notice mailed to the Tax-Exempt Fund's shareholders within sixty days after
the close of its taxable year. To the extent that the dividends distributed to
the Tax-Exempt Fund's shareholders are derived from interest income exempt
from Federal income tax under Code Section 103(a) and are properly designated
as exempt-interest dividends, they will be excludable from a shareholder's
gross income for Federal income tax purposes. Exempt-interest dividends are
included, however, in determining the portion, if any, of a person's social
security and railroad retirement benefits subject to Federal income taxes.
Interest on indebtedness incurred or continued to purchase or carry shares of
a RIC paying exempt-interest dividends, such as the Tax-Exempt Fund, will not
be deductible by the investor for Federal income tax purposes to the extent
attributable to exempt-interest dividends. Shareholders are advised to consult
their tax advisers with respect to whether exempt-interest dividends retain
the exclusion under Code Section 103(a) if a shareholder would be treated as a
"substantial user" or "related person" under Code Section 147(a) with respect
to property financed with the proceeds of an issue of "industrial development
bonds" or "private activity bonds," if any, held by the Tax-Exempt Fund.
As discussed above, different categories of capital gain dividends are
taxable at different rates. All or a portion of the Tax-Exempt Fund's gain
from the sale or redemption of tax-exempt obligations purchased at a market
discount will be treated as ordinary income rather than capital gain. This
rule may increase the amount of ordinary income dividends received by
shareholders. Any loss upon the sale or exchange of Tax-Exempt Fund shares
held for six months or less will be disallowed to the extent of any exempt-
interest dividends received by the shareholder. In addition, any such loss
that is not disallowed under the rule stated above will be treated as long-
term capital loss to the extent of any capital gain dividends received by the
shareholder.
The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal alternative minimum tax. The Federal alternative
minimum tax applies to interest received on "private activity bonds" issued
after August 7, 1986. Private activity bonds are bonds which, although tax
exempt, are used for purposes other than those generally performed by
governmental units and which benefit non-governmental entities (e.g., bonds
used for industrial development or housing purposes). Income received on such
bonds is classified as an item of "tax preference," which could subject
certain investors in such bonds, including shareholders of the Tax-Exempt
Fund, to a Federal alternative minimum tax. The Tax-Exempt Fund will purchase
such "private activity bonds" and will report to shareholders within 60 days
after its calendar year-end the portion of the Tax-Exempt Fund's dividends
declared during the year which constitutes an item of tax preference for
Federal alternative minimum tax purposes. The Code further provides that
corporations are subject to a Federal alternative minimum tax based, in part,
on certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Tax-Exempt Fund will be included in adjusted current
earnings, a corporate shareholder may be required to pay Federal alternative
minimum tax on exempt-interest dividends paid by the Tax-Exempt Fund.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Tax-Exempt Fund) during the
taxable year.
29
<PAGE>
General Taxation
If the Money Market Fund, the Government Fund, the Treasury Fund or the Tax-
Exempt Fund pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by such Fund and received by its shareholders on December 31 of the
year in which such dividend was declared. Distributions by the Funds, whether
from exempt-interest income, ordinary income or capital gains, will not be
eligible for the dividends received deduction allowed to corporations under
the Code. Distributions in excess of a Fund's earnings and profits will first
reduce the adjusted tax basis of a holder's shares and, after such adjusted
tax basis is reduced to zero, will constitute capital gains to such holder
(assuming the shares are held as a capital asset). Any loss upon the sale or
exchange of Fund shares held for six months or less will be treated as long-
term capital loss to the extent of any capital gain dividends received by the
shareholder.
If the value of assets held by the Money Market Fund, the Government Fund,
the Treasury Fund or the Tax-Exempt Fund declines, the Board of Trustees may
authorize a reduction in the number of outstanding shares in the respective
shareholders' accounts so as to preserve a net asset value of $1.00 per share.
After such a reduction, the basis of eliminated shares would be added to the
basis of shareholders' remaining Fund shares, and any shareholders disposing
of shares at that time may recognize a capital loss. Distributions paid by the
Money Market Fund, the Government Fund and the Treasury Fund, including
distributions reinvested in additional shares of an affected Fund, will
nonetheless be fully taxable, even if the number of shares in shareholders'
accounts has been reduced as described above.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Dividends and interest received by a Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with a Fund or who, to such Fund's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, will generally
not apply to the tax-exempt income of a fund, such as the Tax-Exempt Fund,
that pays exempt-interest dividends. Although the Money Market Fund, the
Government Fund and the Treasury Fund intend to distribute their income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of each Fund's taxable
ordinary income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, any such Fund will be liable for the tax
only on the amount by which it does not meet the foregoing distribution
requirements.
A loss realized on a sale or exchange of shares of any of the Funds will be
disallowed if other shares of such Fund 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.
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
30
<PAGE>
sections and the Treasury Regulations promulgated thereunder. The Code and the
Treasury Regulations are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Ordinary income dividends and capital gain dividends may also be subject to
state and local taxes. Certain states exempt from state income taxation
dividends paid by RICs which are derived in whole or in part from interest on
U.S. Government obligations. State law varies as to whether and what
percentage of dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Funds.
GENERAL INFORMATION
Organization of the Funds
The Money Market Fund, the Government Fund and the Tax-Exempt Fund are
unincorporated business trusts organized on June 5, 1989 under the laws of
Massachusetts. The Money Market Fund is the successor to a Massachusetts
business trust organized on September 19, 1977, the Government Fund is the
successor to a Massachusetts business trust organized on August 3, 1981 and
the Tax-Exempt Fund is the successor to a Massachusetts business trust
organized on January 15, 1981. The Treasury Fund is an unincorporated business
trust organized on October 24, 1990 under the laws of Massachusetts. Each Fund
is a no-load, diversified, open-end investment company. The Declaration of
Trust of each Fund permits the Trustees to issue an unlimited number of full
and fractional shares of a single class. Upon liquidation of any of the Funds,
shareholders of that Fund are entitled to share pro rata in the net assets of
the Fund available for distribution to shareholders. Shares are fully paid and
nonassessable by the Funds. Shareholders are entitled to one vote for each
full share held and fractional votes for fractional shares held and to vote in
the election of Trustees and on other matters submitted to the vote of
shareholders.
The Declarations of Trust do not require that the Funds hold annual meetings
of shareholders. However, each Fund will be required to call special meetings
of shareholders in accordance with the requirements of the Investment Company
Act to seek approval of new management and advisory arrangements, of a
material increase in distribution fees or of a change in the fundamental
policies, objectives or restrictions of such Fund. Each Fund also would be
required to hold a special shareholders' meeting to elect new Trustees at such
time as less than a majority of the Trustees holding office have been elected
by shareholders. Each Declaration of Trust provides that a shareholders'
meeting may be called for any reason at the request of 10% of the outstanding
shares of the related Fund or by a majority of the Trustees. Except as set
forth above, the Trustees shall continue to hold office and appoint successor
Trustees.
The Declarations of Trust establishing the Funds refer to the Trustees under
the Declarations of Trust collectively as Trustees, but not as individuals or
personally; and no Trustee, shareholder, officer, employee or agent of any of
the Funds shall be held to any personal liability, nor shall resort be had to
their private property for the satisfaction of any obligation or claim of any
Fund but the Trust Property only shall be liable. Copies of the Declarations
of Trust, together with all amendments thereto, are on file in the office of
the Secretary of the Commonwealth of Massachusetts.
Description of Shares
The Declaration of Trust of each Fund permits the Trustees to issue an
unlimited number of full and fractional shares of a single class and to divide
or combine the shares into a greater or lesser number of shares without
thereby changing the proportionate beneficial interest in the Fund. Each share
represents an equal proportionate interest in the Fund with each other share.
Upon liquidation of the Fund, shareholders are entitled to share pro rata in
the net assets of the Fund available for distribution to shareholders. Shares
have no preemptive or conversion rights. The rights of redemption and exchange
are described elsewhere herein and in the Prospectus of the Funds. Shares of
each Fund are fully paid and non-assessable by the Fund.
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<PAGE>
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Trustees and on
other matters submitted to the vote of shareholders. Voting rights are not
cumulative, so that the holders of more than 50% of the shares voting in the
election of Trustees can, if they choose to do so, elect all of the Trustees
of a Fund, in which event the holders of the remaining shares are unable to
elect any person as a Trustee. No amendment may be made to any Declaration of
Trust without the affirmative vote of a majority of the outstanding shares of
the related Fund except under certain limited circumstances set forth in the
Declaration of Trust.
Independent Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of each Fund. The selection of
independent auditors is subject to ratification by the shareholders of each
Fund. The independent auditors are responsible for auditing the annual
financial statements of each Fund.
Custodian
State Street Bank and Trust Company, P.O. Box 1713, Boston, Massachusetts
02101 (the "Custodian"), acts as custodian of the Funds' assets. The Custodian
is responsible for safeguarding and controlling the Funds' cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Funds' investments.
Transfer Agent
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484 (the "Transfer Agent"), acts as the Funds' 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
"How to Buy, Sell and Transfer Shares --Through the Transfer Agent" in the
Prospectus.
Legal Counsel
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Funds.
Reports to Shareholders
The fiscal year of each Fund ends on the last day of March of each year.
Each Fund sends to its shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report containing
financial statements audited by independent auditors is sent to each Fund's
shareholders each year.
Shareholder Inquiries
Shareholder inquiries may be addressed to each 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 with respect to
the shares of the Funds do not contain all the information set forth in the
Registration Statement and the exhibits relating thereto, which each 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.
To the knowledge of the Funds, no person owned beneficially 5% or more of
any Fund's shares on May 28, 1999.
FINANCIAL STATEMENTS
Each Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1999 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) MER-FUND between 8:00 a.m. and 8:00 p.m. on any business day.
32
<PAGE>
APPENDIX
Description of Commercial Paper, Bank Money Instruments
and Corporate Bond Ratings
Commercial Paper and Bank Money Instruments
Commercial paper with the greatest capacity for timely payment is rated A by
Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. ("S&P").
Issues within this category are further redefined with designations 1, 2 and 3
to indicate the relative degree of safety; A-1, the highest of the three,
indicates the degree of safety is either overwhelming or very strong; and A-2
indicates that capacity for timely repayment is strong.
Moody's Investors Service, Inc. ("Moody's") employs the designations of
Prime-1, Prime-2 and Prime-3 to indicate the relative repayment ability of
rated issuers. Prime-1 issuers have a superior capacity for repayment. Prime-2
issuers have a strong capacity for repayment, but to a lesser degree than
Prime-1.
Fitch IBCA, Inc. ("Fitch") employs the rating F1+ to indicate issues
regarded as having the strongest degree of assurance for timely payment. The
rating F1 reflects an assurance of timely payment only slightly less in degree
than issues rated F1+, while the rating F2 indicates a satisfactory degree of
assurance for timely payment, although the margin of safety is not as great as
indicated by the F1+ and F1 categories.
Duff & Phelps Credit Rating Co. ("Duff & Phelps") employs the designation of
Duff 1 with respect to top grade commercial paper and bank money instruments.
Duff 1+ indicates the highest certainty of timely payment: short-term
liquidity is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations. Duff 1- indicates high certainty of timely payment.
Duff 2 indicates good certainty of timely payment: liquidity factors and
company fundamentals are sound.
Thomson BankWatch, Inc. ("Thomson") employs the designation TBW-1, TBW-2,
TBW-3 and TBW-4 as ratings for commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has
been assigned. TBW-1 is the highest category and indicates a very high degree
of likelihood that principal and interest will be paid on a timely basis. TBW-
2 is the second highest category and indicates that while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated TBW-1.
Corporate Bonds
Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest-rated issues only in small degree.
Bonds rated Aaa by Moody's are judged to be of the best quality. Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. Bonds rated Aa are judged to be of high quality by all
standards. They are rated lower than the best bonds because margins of
protection may not be as large 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. Moody's applies
numerical modifiers 1, 2 and 3 in each generic rating classification from Aa
through B in its corporate 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 the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
Bonds rated AAA by Fitch IBCA are 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. Bonds rated AA are 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.
I-1
<PAGE>
Bonds rated AAA by Duff & Phelps are deemed to be of the highest credit
quality: the risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt. AA indicates high credit quality: protection
factors are strong, and risk is modest but may vary slightly from time to time
because of economic conditions.
Bonds rated AAA by Thomson are accorded the highest rating category which
indicates that the ability to repay principal and interest on a timely basis
is extremely high. AA is the second highest rating category and indicates a
very strong ability to repay principal and interest on a timely basis with
limited incremental risk compared to issues rated in the highest rating
category.
Information Concerning Tax-Exempt Securities
Description of Tax-Exempt Securities
Tax-Exempt Securities 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 of 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 facilities
operated for private profit, including pollution control facilities. Such
obligations are included within the term Tax-Exempt Securities if the interest
paid thereon is exempt from Federal income tax.
The two principal classifications of Tax-Exempt Securities are "general
obligation" bonds and "revenue" or "special obligation" bonds. General
obligation bonds are secured by the issuer's pledge of its faith, credit, and
taxing power for the repayment of principal and the payment of 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 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 repayment of the principal and the payment of
interest on such industrial revenue bonds depends solely on the ability of the
user of the facilities financed by the bonds to meet its financial obligations
and the pledge, if any, of real and personal property so financed as security
for such payment. The portfolio may generally include "moral obligation" bonds
which are normally issued by special purpose public authorities. If an issuer
of moral obligations bonds is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
Yields on Tax-Exempt Securities 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 the Tax-Exempt Fund to achieve its
investment objective is also dependent on the continuing ability of the
issuers of the Tax-Exempt Securities in which the Tax-Exempt Fund invests to
meet their obligations for the payment of interest and repayment of principal
when due. There are variations in the risks involved in holding Tax-Exempt
Securities, both within a particular classification and between
classifications, depending on numerous factors. Furthermore, the rights of
holders of Tax-Exempt Securities and the obligations of the issuers of such
Tax-Exempt Securities may be subject to applicable bankruptcy, insolvency and
similar laws and court decisions affecting the rights of creditors generally,
and such laws, if any, which may be enacted by Congress or state legislatures
affecting specifically the rights of holders of Tax-Exempt Securities.
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 Tax-Exempt Securities. Similar proposals may be introduced in the
future. If such a proposal were enacted, the ability of the Tax-Exempt Fund to
pay "exempt-interest dividends" would be adversely affected and the Tax-Exempt
Fund would re-evaluate its investment objective and policies and consider
changes in its structure. See "Taxes".
I-2
<PAGE>
Ratings of Municipal Notes and Short-Term Tax-Exempt Commercial Paper
Commercial paper with the greatest capacity for timely payment is rated A by
Standard & Poor's. Issues within this category are further redefined with
designations 1, 2 and 3 to indicate the relative degree of safety; A-1
indicates the degree of safety is strong; issues that possess extremely strong
safety characteristics will be given an A-1+ designation; A-2 indicates that
capacity for timely repayment is satisfactory. A Standard & Poor's rating with
respect to certain municipal note issues with a maturity of less than three
years reflects the liquidity concerns and market access risks unique to notes.
SP-1, the highest note rating, indicates a very strong, or strong, capacity to
repay principal and pay interest. Issues that possess overwhelming safety
characteristics will be given an "SP-1+" designation. SP-2, the second highest
note rating, indicates a satisfactory capacity to repay principal and pay
interest.
Moody's employs the designations of Prime-1, Prime-2 and Prime-3 with
respect to commercial paper to indicate the relative capacity of the rated
issuers (or related supporting institutions) to repay punctually. Prime-1
issues have a superior capacity for repayment. Prime-2 issues have a strong
capacity for repayment, but to a lesser degree than Prime-1. Moody's highest
rating for short-term notes and VRDOs is MIG-1/VMIG-1; MIG-1/VMIG-1 denotes
"best quality", enjoying "strong protection by established cash flows"; MIG-
2/VMIG-2 denotes "high quality" with margins of protection that are ample
although not so large as MIG-1/VMIG-1.
Fitch employs the rating F-1+ to indicate short-term debt issues regarded as
having the strongest degree of assurance for timely payment. The rating F-1
reflects an assurance of timely payment only slightly less in degree than
issues rated F-1+. The rating F-2 indicates a satisfactory degree of assurance
for timely payment, although the margin of safety is not as indicated by the
F-1+ and F-1 categories.
Ratings of Municipal Bonds
Bonds 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. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree. 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 and
insurers of lessees.
Bonds rated Aaa by Moody's are judged to be of the best quality. Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. Bonds rated Aa are judged to be of high quality by all
standards. They are rated lower than the best bonds because the margins of
protection may not be as large 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. Moody's applies the
numerical modifier 1 to the classifications Aa through B to indicate that
Moody's believes the issue possesses the strongest investment attributes in
its rating category. 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 operating 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.
Bonds rated AAA by Fitch are 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. Bonds rated AA are 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. The
ratings take into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operative performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality. Bonds that have 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.
I-3
<PAGE>
PART C: OTHER INFORMATION
Item 23. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1 -- Declaration of Trust of the Registrant dated June 5,
1989.(a)
2 -- By-Laws of the Registrant.(a)
3 -- Portions of the Declaration of Trust and By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant.(b)
4(a) -- Management Agreement between the Registrant and Fund Asset
Management, Inc.(c)
(b) -- Supplement to Management Agreement with Fund Asset
Management, L.P.(c)
5 -- Form of Distribution Agreement between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated.(a)
6 -- None.
7(a) -- Custody Agreement between the Registrant and State Street
Bank and Trust Company.(a)
(b) -- Amendment to Custody Agreement dated December 12, 1988.(a)
8(a) -- Amended Transfer Agency Agreement between the Registrant
and Financial Data Services, Inc.(a)
(b) -- Form of Cash Management Account Agreement.(a)
9 -- None.
10 -- Consent of Deloitte & Touche LLP, independent auditors for
the Registrant.
11 -- None.
12 -- None.
13 -- Form of Distribution and Shareholder Servicing Plan of the
Registrant.(a)
14 -- Financial Data Schedule for the fiscal year ended March 31,
1999.
15 -- None.
</TABLE>
- ----------
(a) Previously filed pursuant to the Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") phase-in requirements on July 28, 1995 as an exhibit to
Post-Effective Amendment No. 16 to the Registration Statement.
(b) Reference is made to Article II, Section 2.3 and Articles III, V, VI,
VIII, IX, X and XI of the Registrant's Declaration of Trust, filed as
Exhibit 1 to Post-Effective Amendment No. 16 to the Registrant's
Registration Statement under the Securities Act of 1933, as amended (the
"Registration Statement"); and to Articles I, V and VI of the Registrant's
By-Laws, filed as Exhibit 2 to Post-Effective Amendment No. 16 to the
Registration Statement.
(c) Previously filed on July 28, 1994 as an exhibit to Post-Effective
Amendment No. 15 to the Registration Statement.
Item 24. Persons Controlled by or under Common Control with Registrant.
None.
Item 25. Indemnification.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers
or trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened, while in office or thereafter, by reason of his
being or having been such a trustee, officer, employee or agent, except
with respect to any matter as to
C-1
<PAGE>
which he shall have been adjudicated to have acted in bad faith, willful
misfeasance, gross negligence or reckless disregard of his duties;
provided, however, that as to any matter disposed of by a compromise
payment by such person, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other expenses shall be
provided unless the Trust shall have received a written opinion from
independent legal counsel approved by the Trustees to the effect that if
either the matter of willful misfeasance, gross negligence or reckless
disregard of duty, or the matter of good faith and reasonable belief as to
the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any person
under these provisions shall not exclude any other right to which he may be
lawfully entitled; provided that no person may satisfy any right of
indemnity or reimbursement granted herein or in Section 5.1 or to which he
may be otherwise entitled except out of the property of the Trust, and no
Shareholder shall be personally liable to any person with respect to any
claim for indemnity or reimbursement or otherwise. The Trustees may make
advance payments in connection with indemnification under this Section 5.3,
provided that the indemnified person shall have given a written undertaking
to reimburse the Trust in the event it is subsequently determined that he
is not entitled to such indemnification."
The Registrant's By-Laws provide that insofar as the conditional advancing
of indemnification moneys pursuant to Section 5.3 of the Declaration of Trust
for actions based upon the Investment Company Act of 1940 may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount to which it is ultimately determined he is
entitled to receive from the Registrant by reason of indemnification; and
(iii) (a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested, non-
party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that the recipient
of the advance ultimately will be found entitled to indemnification.
In Section 8 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 ( the "1933 Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or
Prospectus.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of the Investment Adviser.
Fund Asset Management, L.P. (the "Investment Adviser" or "FAM") acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program,
Inc., Financial Institutions Series Trust, Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch Corporate
Bond Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, Merrill Lynch Multi-State
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<PAGE>
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Puerto Rico Tax Exempt Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc. and The
Municipal Fund Accumulation Program, Inc.; and for the following closed-end
registered investment companies: Apex Municipal Fund, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate High Yield
Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc.,
Debt Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings California Insured Fund III, Inc., MuniHoldings California
Insured Fund IV, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida
Insured Fund II, MuniHoldings Florida Insured Fund III, MuniHoldings Florida
Insured Fund IV, MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc.,
MuniHoldings Insured Fund, Inc., MuniHoldings Insured Fund II, Inc.,
MuniHoldings Michigan Insured Fund, Inc., MuniHoldings New Jersey Insured
Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New
Jersey Insured Fund III, Inc., MuniHoldings New York Fund, Inc., MuniHoldings
New York Insured Fund, Inc., MuniHoldings New York Insured Fund II, Inc.,
MuniHoldings New York Insured Fund III, Inc., MuniHoldings Pennsylvania
Insured Fund, MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest
New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona
Fund, Inc., MuniYield California Fund, Inc., MuniYield California Insured
Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida
Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured
Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund,
Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund,
Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund
II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., and Worldwide
DollarVest Fund, Inc.
Merrill Lynch Asset Management L.P. ("MLAM"), an affiliate of FAM, acts as
investment adviser for the following open-end registered investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill Lynch
Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund,
Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill
Lynch Intermediate Government Bond Fund, Merrill Lynch International Equity
Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa
Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund,
Inc., Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Ready Assets Trusts,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.A.
Government Reserves, Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch
Utility Income Fund, Inc., Merrill Lynch Variable Series Fund, Inc., and
Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM);
and for the following closed-end registered investment companies: Merrill
Lynch High Income Muncipal Bond Fund, Inc., Merrill Lynch Senior Floating Rate
Fund, Inc., and Merrill Lynch Senior Floating Rate Fund II, Inc. MLAM also
acts as sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill
Lynch Basic Value Equity Portfolio, two investment portfolios of EQ Advisors
Trust.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for
Institutions Series and Merrill Lynch Intermediate Bond Fund is One Financial
Center, 23rd Floor, Boston, Massachusetts 02111-2665. The address of the
Investment Adviser, MLAM, Princeton Services, Inc. ("Princeton Services") and
Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds Distributor ("MLFD") is also
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
and Merrill Lynch & Co., Inc. ("ML & Co.") is North Tower, World Financial
Center, 250 Vesey Street, New York, New York 10281-1201. The address of
Financial Data Services, Inc. ("FDS"), is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
C-3
<PAGE>
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged since April 1, 1997 for his, her or its own account or in the
capacity of director, officer, employee, partner or trustee. In addition, Mr.
Glenn is President or Executive Vice President and Mr. Burke is Treasurer of
all or substantially all of the investment companies listed in the first two
paragraphs of this Item 26. Messrs. Glenn and Burke also hold the same
position with substantially all of the investment companies advised by MLAM as
they do with those advised by the Investment Adviser and Messrs. Giordano and
Monagle are officers or director/trustees of one or more of such companies.
<TABLE>
<CAPTION>
Position(s) with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- ---- -------------------- ----------------------------------
<S> <C> <C>
ML & Co. ............... Limited Partner Financial Services Holding Company; Limited
Partner of MLAM
Princeton Services...... General Partner General Partner of MLAM
Jeffrey M. Peek......... President President of MLAM; President and Director of
Princeton Services; Executive Vice
President of ML & Co.; Managing Director
and Co-Head of the Investment Banking
Division of Merrill Lynch in 1997; Senior
Vice President and Director of the Global
Securities and Economic Division of Merrill
Lynch from 1995 to 1997
Terry K. Glenn.......... Executive Vice Executive Vice President of MLAM; Executive
President Vice President and Director of Princeton
Services; President of Princeton Funds
Distributor, Inc. since 1986 and Director
thereof since 1991; Director of FDS;
President of Princeton Administrators, L.P.
Donald C. Burke......... Senior Vice Senior Vice President, Treasurer and
President and Director of Taxation of MLAM; Senior Vice
Treasurer President and Treasurer of Princeton
Services; Vice President of PFD; First Vice
President of MLAM from 1997 to 1999; Vice
President of MLAM from 1990 to 1997
Michael G. Clark........ Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services; Treasurer
and Director of PFD; First Vice President
of MLAM from 1997 to 1999; Vice President
of MLAM from 1996 to 1997
Mark A. Desario......... Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services
Linda L. Federici....... Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services
Vincent R. Giordano..... Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services
Michael J. Hennewinkel.. Senior Vice Senior Vice President, General Counsel and
President, General Secretary of MLAM; Senior Vice President of
Counsel and Princeton Services
Secretary
Philip L. Kirstein...... Senior Vice Senior Vice President of MLAM; Senior Vice
President President, Director and Secretary of
Princeton Services
Ronald M. Kloss......... Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services
Debra W. Landsman-
Yaros.................. Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services; Senior
Vice President of PFD
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Position(s) with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- ---- -------------------- ----------------------------------
<S> <C> <C>
Joseph T. Monagle, Jr... Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services
Brian A. Murdock........ Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services; Director
of PFD
Gregory D. Upah......... Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services
</TABLE>
Item 27. Principal Underwriters.
(a) Merrill Lynch acts as the principal underwriter for the Registrant.
Merrill Lynch also acts as the principal underwriter for each of the following
open-end investment companies referred to in the first paragraph of Item 26:
CBA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund,
CMA Treasury Fund, CMA Money Fund, The Corporate Fund Accumulation Program,
Inc. and The Municipal Fund Accumulation Program, Inc., and also acts as the
principal underwriter for each of the closed-end investment companies referred
to in the first paragraph of Item 26, and as the depositor of the following
unit investment trusts: The Corporate Income Fund, Municipal Investment Trust
Fund, The ML Trust for Government Guaranteed Securities and The Government
Securities Income Fund.
(b) Set forth below is information concerning each director and executive
officer of Merrill Lynch. The principal business address of each such person
is North Tower, World Financial Center, 250 Vesey Street, New York, New York
10281.
<TABLE>
<CAPTION>
Position(s) and
Office(s) Position(s) and Office(s)
Name with Merrill Lynch with Registrant
---- ------------------ -------------------------
<C> <S> <C>
Director, President and
Herbert M. Allison, Jr. .. Chief Executive Officer None
Vice Chairman and
John L. Steffens.......... Director None
Thomas W. Davis........... Executive Vice President None
Barry S. Friedberg........ Executive Vice President None
Edward L. Goldberg........ Executive Vice President None
Jerome P. Kenney.......... Executive Vice President None
E. Stanley O'Neal......... Executive Vice President None
Thomas H. Patrick......... Executive Vice President None
Winthrop H. Smith, Jr. ... Executive Vice President None
Roger M. Vasey............ Executive Vice President None
George A. Schierren....... General Counsel, Senior
Vice President and
Director None
John C. Stomber........... Treasurer None
Andrea L. Dulberg......... Secretary None
</TABLE>
(c) Not applicable.
Item 28. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act, and the rules thereunder will be maintained at the
offices of the Registrant, 800 Scudders Mill Road, Plainsboro, New Jersey
08536, and its transfer agent, FDS, 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484.
Item 29. Management Services.
Other than as set forth under the caption "Management of the Funds -- Fund
Asset Management" in the Prospectus constituting Part A of the Registration
Statement and under "Management of the Funds -- Investment Advisory
Arrangements" in the Statement of Additional Information constituting Part B
of the Registration Statement, the Registrant is not a party to any
management-related services contract.
Item 30. Undertakings.
Not applicable.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the Township of Plainsboro and State of New
Jersey, on the 28th day of May, 1999.
CMA Government Securities Fund
(Registrant)
/s/ Terry K. Glenn
By: __________________________________
(Terry K. Glenn, President)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below by the following persons in the capacity and on the date
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Terry K. Glenn President (Principal May 28, 1999
______________________________________ Executive Officer) and
(Terry K. Glenn) Trustee
Donald C. Burke* Treasurer (Principal
______________________________________ Financial and Accounting
(Donald C. Burke) Officer)
Ronald W. Forbes* Trustee
______________________________________
(Ronald W. Forbes)
Cynthia A. Montgomery* Trustee
______________________________________
(Cynthia A. Montgomery)
Charles C. Reilly* Trustee
______________________________________
(Charles C. Reilly)
Kevin A. Ryan* Trustee
______________________________________
(Kevin A. Ryan)
Richard R. West* Trustee
______________________________________
(Richard R. West)
Arthur Zeikel* Trustee
______________________________________
(Arthur Zeikel)
/s/ Terry K. Glenn May 28, 1999
*By: _________________________________
(Terry K. Glenn, Attorney-in-Fact)
</TABLE>
C-6
<PAGE>
POWER OF ATTORNEY
The undersigned Directors/Trustees and officers of each of the registered
investment companies listed below hereby authorize Terry K. Glenn, Donald C.
Burke and Joseph T. Monagle, Jr., or any of them, as attorney-in-fact, to sign
on his or her behalf in the capacities indicated any Registration Statement or
amendment thereto (including post-effective amendments) for each of the
following registered investment companies and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission: CBA Money Fund,
CMA Government Securities Fund, CMA Money Fund, CMA Tax-Exempt Fund, CMA
Treasury Fund, CMA Multi-State Municipal Series Trust, Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield Fund,
Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Bond Fund, Inc., Merrill
Lynch Municipal Intermediate Term Fund of Merrill Lynch Municipal Series
Trust, Merrill Lynch Strategic Dividend Fund, Merrill Lynch Municipal Strategy
Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc., Merrill Lynch
Senior Floating Rate Fund II, Inc., Merrill Lynch Utility Income Fund, Inc.,
MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings Insured
Fund, Inc., MuniHoldings California Insured Fund, Inc., MuniHoldings
California Insured Fund III, Inc., MuniHoldings California Insured Fund IV,
Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund II,
MuniHoldings Florida Insured Fund IV, MuniHoldings New Jersey Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New Jersey
Insured Fund III, Inc., MuniHoldings New York Insured Fund, Inc., MuniVest
Fund, Inc., MuniVest Fund II, Inc., Senior High Income Portfolio, Inc., The
Corporate Fund Accumulation Program, Inc., and The Municipal Fund Accumulation
Program, Inc.
Dated: March 30, 1999
/s/ Terry K. Glenn
___________________________________________
Terry K. Glenn
(President/Principal Executive
Officer/Director/Trustee)
/s/ Ronald W. Forbes
___________________________________________
Ronald W. Forbes
(Director/Trustee)
/s/ Cynthia A. Montgomery
___________________________________________
Cynthia A. Montgomery
(Director/Trustee)
/s/ Charles C. Reilly
___________________________________________
Charles C. Reilly
(Director/Trustee)
/s/ Kevin A. Ryan
___________________________________________
Kevin A. Ryan
(Director/Trustee)
/s/ Richard R. West
___________________________________________
Richard R. West
(Director/Trustee)
/s/ Arthur Zeikel
___________________________________________
Arthur Zeikel
(Director/Trustee)
/s/ Donald C. Burke
____________________________________________
Donald C. Burke
(Vice President/Treasurer/Principal
Financial Officer)
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
--Consent of Deloitte & Touche LLP, independent auditors for the
10 Registrant.
14 --Financial Data Schedule for the fiscal year ended March 31, 1999.
</TABLE>
<PAGE>
EXHIBIT 10
INDEPENDENT AUDITORS' CONSENT
CMA Government Securities Fund:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 20 to Registration Statement No. 2-72724 of our report dated May 11, 1999
appearing in the annual report to shareholders of CMA Government Securities Fund
for the year ended March 31, 1999, and to the reference to us under the caption
"Financial Highlights" in the Prospectus, which is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
May 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000353480
<NAME> CMA GOVERNMENT SECURITIES FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 3692363612
<INVESTMENTS-AT-VALUE> 3692944981
<RECEIVABLES> 17999712
<ASSETS-OTHER> 334790
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3711279483
<PAYABLE-FOR-SECURITIES> 15208633
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2884803
<TOTAL-LIABILITIES> 18093436
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3692604678
<SHARES-COMMON-STOCK> 3692604678
<SHARES-COMMON-PRIOR> 3539787550
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 581369
<NET-ASSETS> 3693186047
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 186731066
<OTHER-INCOME> 0
<EXPENSES-NET> (20163878)
<NET-INVESTMENT-INCOME> 166567188
<REALIZED-GAINS-CURRENT> 419102
<APPREC-INCREASE-CURRENT> 329288
<NET-CHANGE-FROM-OPS> 167315578
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (166567188)
<DISTRIBUTIONS-OF-GAINS> (419102)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13270135148
<NUMBER-OF-SHARES-REDEEMED> (13284151025)
<SHARES-REINVESTED> 166833005
<NET-CHANGE-IN-ASSETS> 153146415
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 20163878
<AVERAGE-NET-ASSETS> 3565599489
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .57
</TABLE>
