<PAGE>
PROSPECTUS
FEBRUARY 27, 1998
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
MERRILL LYNCH RETIREMENT SERIES TRUST
P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800
-------------------------
The investment objectives of the Merrill Lynch Retirement Reserves Money
Fund (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. These securities primarily consist of U.S.
Government and agency securities, bank certificates of deposit and bankers'
acceptances, commercial paper and repurchase agreements. For purposes of its
investment policies, the Money Market Fund defines short-term money market
securities as having a maturity of no more than 762 days (25 months) in the
case of U.S. Government and Government agency securities and no more than 397
days (13 months) in the case of all other securities. THE MONEY MARKET FUND
SEEKS TO MAINTAIN A CONSTANT $1.00 NET ASSET VALUE PER SHARE, ALTHOUGH THIS
CANNOT BE ASSURED. AN INVESTMENT IN THE MONEY MARKET FUND IS NEITHER INSURED
NOR GUARANTEED BY THE U.S. GOVERNMENT. The Money Market Fund is the only
existing series of Merrill Lynch Retirement Series Trust (the "Trust"), which
is a Massachusetts business trust.
Shares of the Money Market Fund are offered to participants in the self-
directed retirement plans for which Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") acts as passive custodian (the "Self-Directed
Plans"). For a description of the Self-Directed Plans, see Appendix A to the
Statement of Additional Information referred to below. The participant in each
Self-Directed Plan is responsible for making investment decisions concerning
the funds contributed to his or her Self-Directed Plan. Participants in the
Self-Directed Plans may elect to have cash balances in their accounts
automatically invested in shares of the Money Market Fund. Shares of the Money
Market Fund are also offered to certain independent pension, profit-sharing,
annuity and other qualified plans.
The Money Market Fund is authorized to offer two classes of shares. Both
Class I and Class II shares are or will be sold at their net asset value
without any sales charge; however, Class II shares will be sold subject to an
ongoing distribution fee. As of the date of this Prospectus, Class II shares
are not yet offered. There is no minimum initial or subsequent purchase
requirement. Shares may be redeemed at any time at net asset value as
described herein. See "Purchase of Shares" and "Redemption of Shares."
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------
This Prospectus is a concise statement of information about the Trust and
the Money Market Fund that is relevant to making an investment in the Money
Market Fund. This Prospectus should be read carefully and retained for future
reference. A statement containing additional information about the Trust and
the Money Market Fund, dated February 27, 1998 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and can be obtained, without charge, by calling or by writing
the Money Market Fund at the above telephone number or address. The Commission
maintains a web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference and other
information regarding the Trust. The Statement of Additional Information is
hereby incorporated by reference into this Prospectus.
-------------------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
<TABLE>
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES CLASS CLASS
(AS A PERCENTAGE OF AVERAGE NET ASSETS): I(A) II(B)
---------- ----------
Management Fees(c)................................. 0.37% 0.37%
12b-1 Fees......................................... None 0.20%(d)
Other Expenses
Shareholder Servicing Fees(e).................. 0.14% 0.14%
Other.......................................... 0.03% 0.03%
---- ----
Total Other Expenses........................... 0.17% 0.17%
---- ----
Total Money Market Fund Operating Expenses(f)...... 0.54% 0.74%
==== ====
</TABLE>
- --------
(a) Information for Class I shares is stated for the fiscal year ended October
31, 1997.
(b) As of the date of this Prospectus, Class II shares are not yet offered.
Class II expenses have been estimated for the fiscal year ending October
31, 1998 assuming Class II shares were outstanding for a full year.
(c) See "Management of the Trust--Management and Advisory Arrangements"--page
9.
(d) See "Purchase of Shares--Class II Shares"-- page 11.
(e) See "Management of the Trust--Transfer Agency Services"--page 10.
(f) The Money Market Fund has no minimum initial or subsequent purchase
requirement. Therefore, there are a large number of Money Market Fund
accounts of relatively small asset size, and as a result, the total
operating expenses of the Money Market Fund may be higher than the
expenses incurred in other money market funds.
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------- ---------- -----------
<S> <C> <C> <C> <C>
An investor would pay the fol-
lowing expenses on a $1,000
investment, assuming the Total
Money Market Fund Operating
Expenses set forth above and a
5% annual return throughout
the periods
Class I....................... $ 6 $ 17 $ 30 $ 68
Class II...................... $ 8 $ 24 $ 41 $ 92
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Money Market Fund will bear
directly or indirectly. The expenses set forth under "Other Expenses" for
Class II shares are based on estimated amounts through the end of the Money
Market Fund's fiscal year ending October 31, 1998 assuming Class II shares
were outstanding for a full year. The Example set forth above assumes
reinvestment of all dividends and distributions and utilizes a 5% annual rate
of return as mandated by Commission regulations. The Example should not be
considered a representation of past or future expenses or annual rate of
return and actual expenses or annual rate of return may be more or less than
those assumed for purposes of the Example.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Money Market Fund by
Deloitte & Touche LLP, independent auditors. Financial statements for the
fiscal year ended October 31, 1997 and the independent auditors' report thereon
are included in the Statement of Additional Information. The following per
share data and ratios have been derived from information provided in the Money
Market Fund's audited financial statements. No information is provided with
respect to Class II shares of the Money Market Fund since no Class B shares
were issued as of October 31, 1997.
Further information about the performance of the Money Market Fund is
contained in the Money Market Fund's most recent annual report to shareholders
which may be obtained, without charge, by calling or writing the Money Market
Fund at the telephone number or address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS I
-----------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
----------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (De-
crease) in Net
Asset Value:
PER SHARE OPERAT-
ING PERFORMANCE:
Net asset value,
beginning of
year............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------- ---------- ---------- ---------- ---------- ---------- ----------
Investment in-
come--net....... .0512 .0509 .0540 .0345 .0279 .0370 .0609
Realized and
unrealized gain
(loss) on in-
vestments--net.. .0001 (.0002) .0015 (.0011) .0004 .0012 .0025
----------- ---------- ---------- ---------- ---------- ---------- ----------
Total from in-
vestment opera-
tions............ .0513 .0507 .0555 .0334 .0283 .0382 .0634
----------- ---------- ---------- ---------- ---------- ---------- ----------
Less dividends
and distribu-
tions:
Investment in-
come--net....... (.0512) (.0509) (.0540) (.0345) (.0279) (.0370) (.0609)
Realized gain on
investments--
net............. (.0001) (.0001) (.0002) -- + (.0003) (.0010) (.0025)*
----------- ---------- ---------- ---------- ---------- ---------- ----------
Total dividends
and distribu-
tions............ (.0513) (.0510) (.0542) (.0345) (.0282) (.0380) (.0634)
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== ========== ========== ========== ========== ========== ==========
Total Investment
Return........... 5.35% 5.19% 5.55% 3.47% 2.85% 4.02% 6.52%
=========== ========== ========== ========== ========== ========== ==========
RATIOS TO AVERAGE
NET ASSETS:
Expenses......... .54% .56% .59% .59% .62% .63% .64%
=========== ========== ========== ========== ========== ========== ==========
Investment income
and realized gain
on investments--
net.............. 5.13% 5.07% 5.43% 3.44% 2.82% 3.88% 6.30%*
=========== ========== ========== ========== ========== ========== ==========
SUPPLEMENTAL DA-
TA:
Net assets, end
of year (in thou-
sands)........... $10,690,345 $9,340,229 $8,648,907 $7,403,684 $7,066,326 $6,474,640 $6,485,985
=========== ========== ========== ========== ========== ========== ==========
1990 1989 1988
------------ ------------ ------------
<S> <C> <C> <C>
Increase (De-
crease) in Net
Asset Value:
PER SHARE OPERAT-
ING PERFORMANCE:
Net asset value,
beginning of
year............. $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------
Investment in-
come--net....... .0775 .0853 .0668
Realized and
unrealized gain
(loss) on in-
vestments--net.. -- .0002 (.0004)
------------ ------------ ------------
Total from in-
vestment opera-
tions............ .0775 .0855 .0664
------------ ------------ ------------
Less dividends
and distribu-
tions:
Investment in-
come--net....... (.0775) (.0853) (.0664)
Realized gain on
investments--
net............. -- (.0002)* --
------------ ------------ ------------
Total dividends
and distribu-
tions............ (.0775) (.0855) (.0664)
------------ ------------ ------------
Net asset value,
end of year...... $ 1.00 $ 1.00 $ 1.00
============ ============ ============
Total Investment
Return........... 8.04% 8.89% 6.79%
============ ============ ============
RATIOS TO AVERAGE
NET ASSETS:
Expenses......... .69% .81% .90%
============ ============ ============
Investment income
and realized gain
on investments--
net.............. 7.75%* 8.55%* 6.62%*
============ ============ ============
SUPPLEMENTAL DA-
TA:
Net assets, end
of year (in thou-
sands)........... $5,597,641 $5,012,328 $3,366,310
============ ============ ============
</TABLE>
- ----
* Includes unrealized gain (loss).
+ Amount is less than $.0001 per share.
3
<PAGE>
YIELD INFORMATION
Set forth below is yield information for the Class I shares for the indicated
seven-day periods, computed to include and exclude realized and unrealized
gains and losses, and information as to the compounded annualized yield,
excluding gains and losses, for the same periods. No information is presented
for the Class II shares because no Class II shares were issued during the
periods covered.
<TABLE>
<CAPTION>
CLASS I
---------------------------------
SEVEN-DAY PERIOD ENDED
---------------------------------
OCTOBER 31, 1997 JANUARY 31, 1998
---------------- ----------------
<S> <C> <C>
Annualized Yield:
Including gains and losses................. 5.26% 5.29%
Excluding gains and losses................. 5.24% 5.26%
Compounded Annualized Yield.................. 5.40% 5.43%
Average maturity of portfolio at end of peri-
od.......................................... 77 days 67 days
</TABLE>
The yield of the Money Market Fund refers to the income generated by an
investment in the Money Market Fund over a stated seven-day period. This income
is then annualized; that is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The compounded annualized yield is
calculated similarly but, when annualized, the income earned by an investment
in the Money Market Fund is assumed to be reinvested. The compounded annualized
yield will be somewhat higher than the yield because of the effect of the
assumed reinvestment.
This yield on Money Market Fund shares normally will fluctuate on a daily
basis. Therefore, the yield for any given past period is not an indication or
representation by the Money Market Fund of future yields or rates on its
shares. The Money Market Fund's yield is affected by changes in interest rates
on money market 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
which pay a fixed yield over a stated period of time.
On occasion, the Money Market Fund may compare its yield to (1) the
Donoghue's Domestic Prime Funds Average, an average compiled by Donoghue's
Money Fund Report, a widely recognized independent publication that monitors
the performance of money market mutual funds, (2) 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, (3) yield data published by Lipper
Analytical Services, Inc., Morningstar Publications, Inc., Money Magazine, U.S.
News & World Report, Business Week, CDA Investment Technology, Inc., Forbes
Magazine and Fortune Magazine, or (4) 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
Money Market Fund's yield or relative performance for any future period.
INVESTMENT OBJECTIVES AND POLICIES
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
4
<PAGE>
investment objectives are fundamental policies of the Money Market Fund that
may not be changed without the vote of a majority of the outstanding shares of
the Money Market Fund.
Investment in the Money Market Fund offers several potential benefits. The
Money Market Fund seeks to provide as high a yield potential as is available,
consistent with the preservation of capital, from short-term money market
securities utilizing professional money market management, block purchases of
securities and yield improvement techniques. It provides high liquidity because
of its redemption features and reduced risk resulting from diversification of
assets. There can be no assurance that the objectives of the Money Market Fund
will be realized. Certain expenses are borne by investors, including management
fees, administrative costs and operational costs and, in the case of Class II
shares, Rule 12b-1 fees.
In managing the Money Market Fund's portfolio, Merrill Lynch Asset
Management, L.P. ("MLAM" or the "Manager") will employ a number of professional
money management techniques, including varying the composition of the Money
Market Fund's investments and the average maturity of the portfolio based on
its assessment of the relative values of the various money market instruments
and future interest rate patterns. The Manager's assessments will respond to
changing economic and money market conditions and to shifts in fiscal and
monetary policy. The Manager will also 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 are frequently differences in the yield 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 the types of money market securities in
which the Money Market Fund may invest:
United States 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.
United States Government Agency Securities: Debt securities issued by U.S.
Government-sponsored enterprises, Federal agencies and instrumentalities and
certain international institutions that are not direct obligations of the
United States but involve U.S. Government sponsorship or guarantees by U.S.
Government agencies or enterprises. The U.S. Government may not be obligated to
provide financial support to these entities.
Bank Money Instruments: Obligations of commercial banks, savings banks,
savings and loan associations, or other depository institutions, such as
certificates of deposit, including variable rate certificates of deposit,
bankers' acceptances, bank notes and time deposits. The savings banks and
savings and loan associations must be organized and operating in the United
States. The obligations of commercial banks may be issued by U.S. depository
institutions, foreign branches or subsidiaries of U.S. depository institutions
("Eurodollar" obligations) or U.S. branches or subsidiaries of foreign
depository institutions ("Yankeedollar" obligations). The Money Market Fund may
invest in Eurodollar obligations which by their terms are general obligations
of the U.S. parent bank.
Commercial Paper and Other Short-term Obligations: Commercial paper
(including variable amount master demand notes and funding agreements), which
refers to short-term, unsecured promissory notes issued by corporations,
partnerships, trusts and 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
5
<PAGE>
at the date of purchase. Short-term obligations also include mortgage-related
or asset-backed debt or debt-like instruments, including pass-through
certificates representing participations in, or bonds and notes backed by,
pools of mortgage, credit card, automobile or other types of receivables.
Foreign Bank Money Instruments: The Money Market Fund may invest in U.S.
dollar-denominated obligations of foreign depository institutions and their
foreign branches and subsidiaries, such as certificates of deposit, bankers'
acceptances, time deposits, bank notes and deposit notes. The obligations of
such foreign branches and subsidiaries may be the general obligation of the
parent bank or may be limited to 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: The Money Market Fund may also invest in
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. Investments in foreign entities in general involve the same
risks as those described in the Money Market Fund Statement of Additional
Information in connection with investments in Eurodollar and Yankeedollar
obligations.
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 repurchase
agreements involving the money market securities described above and repurchase
agreements involving U.S. Government and agency securities with longer
maturities. Under such agreements, the counterparty agrees, upon entering into
the contract, to repurchase the security from the Money Market 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.
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 money market securities having a value equal to the repurchase
price.
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. The Money Market Fund may pay reasonable fees to persons
unaffiliated with the Money Market Fund in connection with the arranging of
such loans. During the period of the loan, the Money Market Fund receives the
income on both the loaned securities and the collateral and thereby increases
its yield.
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 are not completely risk free, such
6
<PAGE>
securities generally are considered to have low principal risk. There is the
risk of the failure of issuers to meet their principal and interest
obligations. 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. With respect to repurchase agreements,
purchase and sale contracts, reverse repurchase agreements and securities
loans, there is also the risk of the failure of parties involved to repurchase
at the agreed upon price or to return the securities involved in such
transaction, in which event the Money Market Fund may suffer time delays and
incur costs or possible losses in connection with such transactions.
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 up to 10% of total assets (taken at market value) may be invested in
certificates of deposit of smaller institutions if such certificates of deposit
are Federally insured.
The Money Market Fund may invest in participations in, or bonds and notes
backed by, pools of mortgage, credit card, automobile or other types of
receivables with remaining maturities of no more than 397 days (13 months).
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 a nationally recognized statistical rating
organization, as described below.
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 Trust (or by the Manager pursuant to
delegated authority). Currently, there are five NRSROs: Duff & Phelps Inc.,
Fitch IBCA Inc., Thompson Bankwatch, Inc., Moody's Investors Service, Inc. and
Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. The Money
Market Fund will determine the remaining maturity of investments in which it
invests in accordance with Commission regulations.
A Commission regulation ordinarily limits investments by the Money Market
Fund in securities issued by any one issuer (other than the U.S. Government,
its agencies or instrumentalities) to not more than 5% of its total assets, or
in the event that such securities do not have the highest rating, and are not
of comparable quality to such securities, not more than 1% of its total assets.
In addition, such regulation requires that not more than 5% of the Money Market
Fund's total assets be invested in securities that do not have the highest
rating or are not of comparable quality to securities with the highest rating
as determined by the Trustees of the Trust (or by the Manager pursuant to
delegated authority).
The Money Market Fund may purchase or sell money market securities on a
forward commitment basis at fixed purchase 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
7
<PAGE>
those obtained in the transaction itself; if yields increase, the value of
securities purchased on a forward commitment basis will generally decrease. A
separate account of the Money Market Fund will be established with its
custodian consisting of cash or liquid high grade money market securities
having a market value at all times at least equal to the amount of the forward
purchase commitment.
For purposes of its investment policies, the Money Market Fund defines short-
term money market securities as securities having a maturity of no more than
762 days (25 months) in the case of U.S. Government and agency securities and
no more than 397 days (13 months) in the case of all other securities. The
dollar-weighted average maturity of the Money Market Fund's portfolio will not
exceed 90 days. During the Money Market Fund's fiscal year ended October 31,
1997, the average maturity of its portfolio ranged from 61 days to 89 days.
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 as defined in the Investment Company Act of 1940, as amended
(the "Investment Company Act"). Among the more significant restrictions, the
Money Market Fund may not: (1) purchase any securities other than (i) money
market and (ii) other securities 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, Government agency securities,
or domestic bank money instruments); (3) purchase the securities of any one
issuer, other than the U.S. Government, its agencies or instrumentalities, if
immediately after such 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 instruments, repurchase agreements and purchase and sale
contracts with any one bank up to 25% of the value of the Money Market Fund's
total assets may be invested without regard to such 5% limitation but shall
instead be subject to a limitation of 15% of the value of its total assets; and
(4) enter into repurchase agreements or purchase and sale contracts if, as a
result, more than 10% of the Money Market Fund's total assets (taken at market
value at the time of each investment) would be subject to repurchase agreements
or purchase and sale contracts maturing in more than seven days.
The Board of Trustees of the Trust, at a meeting held on December 22, 1997,
approved certain changes to the fundamental investment restrictions of the
Money Market Fund. These changes were proposed in response to recent Federal
legislation and changes in the money markets and are designed to provide the
Money Market Fund with as much investment flexibility as possible under the
Investment Company Act, help promote operational efficiencies and facilitate
monitoring of compliance. The investment objective and policies of the Money
Market Fund will be unaffected by the adoption of the proposed investment
restriction amendments.
The full text of the proposed investment restriction amendments is set forth
under "Investment Objectives and Policies -- Proposed Investment Restriction
Amendments" in the Statement of Additional Information. Shareholders of the
Money Market Fund are currently considering whether to approve the proposed
revised investment restrictions. If such shareholder approval is obtained, the
Money Market Fund's current investment restrictions will be amended as
proposed, and the Money Market Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change.
8
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the Investment Company Act. The
Trustees of the Trust are responsible for the overall supervision of the
operations of the Money Market Fund and perform the various duties imposed on
the directors of investment companies by the Investment Company Act.
The Trustees of the Trust are:
Arthur Zeikel*--Chairman of the Manager and its affiliate, Fund Asset
Management, L.P. ("FAM"); and Executive Vice President of Merrill Lynch & Co.,
Inc. ("ML & Co.").
Joe Grills--Member of the Committee of Investment of Employee Benefit Assets
of the Financial Executives Institute ("CIEBA"); Member of CIEBA's Executive
Committee; Member of the Investment Advisory Committees of the State of New
York Common Retirement Fund and the Howard Hughes Medical Institute.
Walter Mintz--Special Limited Partner of Cumberland Associates (investment
partnership).
Robert S. Salomon, Jr.--Principal of STI Management (investment adviser).
Melvin R. Seiden--Director of Silbanc Properties, Ltd. (real estate,
investment and consulting).
Stephen B. Swensrud--Chairman of Fernwood Advisors (investment adviser);
Principal of Fernwood Associates (financial consultant).
- --------
* Interested person, as defined in the Investment Company Act, of the Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager acts as the manager for the Money Market Fund and provides the
Trust and the Money Market Fund with management and investment advisory
services. The Manager is owned and controlled by ML & Co., a financial services
holding company and the parent of Merrill Lynch. The Manager or FAM acts as the
investment adviser for more than 100 registered investment companies and
provides investment advice to individual and institutional accounts. As of
January 31, 1998, the Manager and FAM had a total of $287.0 billion in
investment company and other portfolio assets under management, including
accounts of certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Trustees, the Manager is
responsible for the actual management of the Money Market Fund's portfolio and
constantly reviews the Money Market Fund's 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
Manager, subject to review by the Trustees. The Manager performs certain of the
other administrative services and provides all of the office space, facilities,
equipment and necessary personnel for management of the Money Market Fund.
Pursuant to the Management Agreement, the Manager is entitled to receive
compensation at the annual rate of 0.50% of the Fund's average net assets not
exceeding $1 billion; 0.45% of the average daily net assets exceeding $1
billion but not exceeding $2 billion; 0.40% of the average daily net assets
exceeding $2 billion
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but not exceeding $3 billion; 0.375% of average daily net assets exceeding $3
billion but not exceeding $4 billion; 0.35% of average daily net assets
exceeding $4 billion but not exceeding $7 billion; 0.325% of average daily net
assets exceeding $7 billion but not exceeding $10 billion; and 0.30% of average
daily net assets exceeding $10 billion. For the fiscal year ended October 31,
1997, the total fee paid by the Money Market Fund to the Manager aggregated
$38,870,409 (based on average daily net assets of approximately $10.5 billion)
and the effective fee rate was 0.37%.
The Management Agreement obligates the Money Market Fund to pay certain
expenses incurred in its operations, including, among other things, the
management fee, legal and audit fees, unaffiliated Trustees' fees and expenses,
registration fees, custodian and transfer agency fees, accounting and pricing
costs, and certain of the costs of printing proxies, shareholder reports,
prospectuses and statements of additional information. Accounting services are
provided to the Trust by the Manager, and the Trust reimburses the Manager for
its costs in connection with such services. For the fiscal year ended October
31, 1997, the Trust paid $524,387 to the Manager in connection with accounting
services. For the fiscal year ended October 31, 1997, the ratio of total
expenses to average net assets was 0.54%.
John Ng is the Portfolio Manager of the Fund and is primarily responsible for
the day-to-day management of the Fund's portfolio. Mr. Ng has been Vice
President of the Manager since 1984.
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which is
a subsidiary of ML & Co., acts as the Trust's 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 at the rate of
$6.50 per shareholder account for the first one million accounts and $6.00 per
shareholder account for each account thereafter 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. For the fiscal
year ended October 31, 1997, the total fee paid by the Trust to the Transfer
Agent pursuant to the Transfer Agency Agreement was $14,619,064.
PURCHASE OF SHARES
The Trust currently offers one class of shares of the Money Market Fund to
participants in the Self-Directed Plans (see "Self-Directed Plans" on page 12
herein) and certain independent pension, profit-sharing, annuity and other
qualified plans. There are no minimum initial or subsequent purchase
requirements. Fractional shares of the Money Market Fund will not be sold,
other than through dividend reinvestments.
Shares of the Money Market Fund are offered without a sales charge at a
public offering price equal to the net asset value (normally $1.00 per share)
next determined after a purchase order becomes effective. Share purchase orders
are effective on the date Federal Funds become available to the Money Market
Fund. If
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Federal Funds are available to the Money Market Fund prior to the determination
of net asset value (generally 4:00 p.m. New York time), on any business day,
the order will be effective on that day. Shares purchased will begin accruing
dividends on the day following the date of purchase. Any order may be rejected
by the Money Market Fund or the Distributor.
The Money Market Fund is authorized to offer two classes of shares. It is
anticipated that in the future a second class of shares will be created, at
which point all issued and outstanding shares of the Money Market Fund will be
redesignated "Class I shares" and the new class will be designated "Class II
shares." The Money Market Fund's Prospectus will be supplemented at that time
to indicate redesignation of Class I shares and the commencement of offering of
Class II shares.
Class I Shares. Class I shares will continue to be sold without any front-end
or deferred sales charges and will bear no ongoing distribution fees. After the
commencement of the offering of Class II shares (the "Class II commencement"),
Class I shares will continue to be offered to:
. Money Market Fund shareholders who held Class I shares as of the Class II
commencement;
. Money Market Fund shareholders who did not hold shares of the Money
Market Fund as of the Class II commencement but had at that time
designated the Money Market Fund as the money market fund into which free
cash balances in their Self-Directed Plan would be "swept";
. Corporate cash or deferred ("401(k)") plans;
. Participants in various retirement plans in association with the Merrill
Lynch BlueprintSM Program ("Blueprint"); and
. Participants purchasing shares for their individual retirement accounts
("IRAs") through certain Merrill Lynch fee-based programs.
Most contributions to retirement plans are made through payroll deductions.
In addition to investing in the Money Market Fund, participants in such plans
may invest in other mutual funds associated with the Merrill Lynch organization
or various other types of securities. If participants elect to have their
contributions invested in the Money Market Fund, the contributions will be
invested automatically on the business day following the date they are received
in the account. There will be no minimum initial or subsequent purchase
requirement pursuant to these types of plans. Cash balances of less than $1.00
will not be invested. Additional information about Blueprint can be obtained
from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The BlueprintSM
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Class II Shares. After the Class II commencement, Class II Shares, like Class
I shares, will be sold without any front-end or deferred sales charges;
however, Class II shares will be subject to an ongoing distribution fee. Class
II shares will be offered to:
. All individual investors in Self-Directed Plans who did not hold Class A
shares as of the Class II commencement and did not otherwise qualify to
purchase Class I shares;
. Participants in Self-Directed Plans who had designated the Merrill Lynch
Insured Money Account as the account into which free cash balances in
their Self-Directed Plan would be "swept";
. Educational cash or deferred ("403(b)") plans, self-employed retirement
("Keogh") plans and simplified employee pension plans ("SEPs") established
on or after Class II commencement; and
. Investors purchasing shares through an IRA rollover.
Distribution fees will be paid by the Money Market Fund to Merrill Lynch with
respect to the Class II shares (the "Class II Distribution Plan") under a
distribution plan pursuant to Rule 12b-1 under the
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Investment Company Act. The Class II Distribution Plan provides that such
distribution fee will be accrued daily and paid monthly at the annual rate of
0.20% of the Money Market Fund's average daily net assets attributable to the
Class II shares. This distribution fee will be used to help defray the
expenses associated with marketing activities and services related to the
Class II shares, such as advertising expenditures related to the Class II
shares, the costs of systems enhancements, expenditures for sales and
marketing support and the costs of preparing and distributing promotional
materials relating to the Class II shares. Since the Class II shares have not
commenced operations as of the date of this Prospectus, no distribution fees
were paid during the fiscal year ended October 31, 1997 pursuant to the Class
II Distribution Plan.
Payments under the Class II Distribution Plan will be based on a percentage
of average daily net assets attributable to the Class II shares regardless of
the amount of expenses incurred, and accordingly, distribution-related
revenues from the Class II Distribution Plan may be more or less than
distribution-related expenses. Information with respect to the Class II
distribution-related revenues and expenses will be presented to the Trustees
for their consideration in connection with their deliberations as to the
continuance of the Class II Distribution Plan. This information will be
presented annually as of December 31 of each year on a "fully allocated
accrual" basis and quarterly on a "direct revenue/cash" basis. On the fully
allocated accrual basis, revenues consist of the distribution fees and
expenses consist of branch office and regional operation center selling and
transaction processing expenses, all expenses associated with advertising,
sales promotion and marketing of Class II shares, corporate overhead and
interest expense. On the direct revenue/cash basis, revenues consist of
distribution fees paid to Merrill Lynch.
The Trust will have no obligation with respect to distribution-related
expenses incurred by the Distributor and Merrill Lynch in connection with
Class II shares, and there is no assurance that the Trustees of the Trust will
approve the continuance of the Class II Distribution Plan from year to year.
However, Merrill Lynch intends to seek annual continuation of the Class II
Distribution Plan. In their review of the Class II Distribution Plan, the
Trustees will be asked to take into consideration expenses incurred in
connection with the distribution of each class of shares separately. The
distribution fee received with respect to Class II shares will not be used to
subsidize the sale of Class I shares.
Purchases of Money Market Fund shares by pension, profit-sharing and annuity
plans (other than the Self-Directed Plans) are made by payments by the trustee
or sponsor of such plan directly to Merrill Lynch.
Self-Directed Plans. As described in Appendix A to the Statement of
Additional Information, there are eight types of Self-Directed Plans: the
traditional individual retirement account ("IRA"), the Roth individual
retirement account ("Roth IRA"), the individual retirement rollover account
("IRRA"), a simplified employee pension plan ("SEP Plus (R)"), a Basic SM
(Keogh Plus) profit sharing plan, a Basic SM (Keogh Plus) money purchase
pension plan (together with the profit sharing plan, the "Basic SM Plans"), a
403(b)(7) Retirement Selector Account ("RSA") and the corporate self-directed
account of Blueprint. Although the amount which may be contributed to a Self-
Directed Plan account in any one year is subject to certain limitations,
assets already in a Self-Directed Plan account may be invested in the Money
Market Fund without regard to such limitations.
Shareholders considering transferring a tax-deferred retirement account such
as an IRA from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the retirement account
is to be transferred will not take delivery of shares of the Trust, a
shareholder must either redeem the shares so that the cash proceeds can be
transferred to the account at the new firm, or such shareholder must continue
to maintain a retirement account at Merrill Lynch for those shares.
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Self-Directed Plan Investments. Investment in shares of the Money Market
Fund by participants in the Self-Directed Plans are made as follows:
Participants in these Self-Directed Plans have three options concerning cash
balances which may arise in their IRA, Roth IRA, IRRA, SEP Plus (R), RSA and
Basic SM Plan ("Retirement Plan") accounts. First, participants may elect to
have such balances automatically invested in shares of the Money Market Fund
or, in some cases, another money market mutual fund advised by the Manager on
a daily basis. Second, participants may elect to have such balances deposited
in an FDIC-insured money market account with a commercial bank designated by
Merrill Lynch except for RSA accounts. Third, participants may elect to
maintain the cash balances in their Retirement Plan account, in which case
such amounts will not be invested and no return will be earned until
investment instructions are received by Merrill Lynch from the participant.
Cash balances of participants who elect to have such funds automatically
invested in the Money Market Fund will be invested as follows. Cash balances
arising from the sale of securities held in the Self-Directed Plan account
which do not settle on the day of the transaction (such as most common and
preferred stock transactions) become available to the Trust and will be
invested in shares of the Money Market Fund on the business day following the
day that proceeds with respect thereto are received in the Self-Directed Plan
account. Proceeds giving rise to cash balances from the sale of securities
held in the Self-Directed Plan account settling on a same day basis and from
principal repayments on debt securities held in the account become available
to the Trust and will be invested in shares of the Money Market Fund on the
next business day following receipt. Cash balances arising from dividends or
interest payments on securities held in the Self-Directed Plan account or from
a contribution to the Self-Directed Plan are invested in shares of the Money
Market Fund on the business day following the date the payment is received in
the Self-Directed Plan account. Cash balances of less than $1.00 will not be
invested and no return will be earned.
A participant in these Self-Directed Plans (except retirement plans in
association with Blueprint) who has not elected to have cash balances
automatically invested in shares of the Money Market Fund may enter a purchase
order through his or her Merrill Lynch Financial Consultant. Orders to invest
either cash balances held in a Self-Directed Plan account or funds deposited
in the commercial bank referred to above will become effective on the business
day following the date on which the order is received.
REDEMPTION OF SHARES
Distributions from a Self-Directed Plan to a participant prior to the time
the participant reaches age 59 1/2 may subject the participant to penalty
taxes and income taxes on all or a portion of the distribution. There are,
however, no adverse tax consequences resulting from redemptions of shares of
the Money Market Fund where the redemption proceeds remain in the Self-
Directed Plan account and are otherwise invested. Shareholders other than
participants in the Self-Directed Plans should consult their tax advisers
concerning tax consequences resulting from redemption of shares of the Money
Market Fund.
The Money Market Fund is required to redeem for cash all of its full and
fractional shares. The redemption price is the net asset value per share next
determined after receipt by Merrill Lynch of proper notice of redemption as
described below. If such notice is received by Merrill Lynch prior to the
determination of net asset value on that day, the redemption will be effective
on such day and payment generally will be made on the next business day. If
the notice is received after the determination of net asset value has been
made, the redemption will be effective on the next business day and payment
will be made on the second business day after receipt of the notice.
Shareholders liquidating their holdings in the Money Market Fund will receive
upon redemption all dividends declared and reinvested until the time of
redemption.
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Any shareholder may redeem shares of the Money Market Fund by submitting a
written notice of redemption to Merrill Lynch. Participants in IRA, Roth IRA,
Basic SM, RSA and SEP Plus (R) Self-Directed Plans should contact their
Merrill Lynch Financial Consultant to effect such redemptions. Participants in
Self-Directed Plans in association with Blueprint should contact Merrill Lynch
at the toll-free number furnished to them to effect such redemptions.
Redemption requests should not be sent to the Money Market Fund or to its
Transfer Agent. If inadvertently sent to the Money Market Fund or the Transfer
Agent, redemption requests will be forwarded to Merrill Lynch. The notice must
bear the signature of the person in whose name the Self-Directed Plan is
maintained, signed exactly as his name appears on his Self-Directed Plan
adoption agreement.
The Trust has instituted an automatic redemption procedure for participants
in the Self-Directed Plans who have elected to have cash balances in their
accounts automatically invested in shares of the Money Market Fund. In the
case of such participants, unless directed otherwise, Merrill Lynch will
redeem a sufficient number of shares of the Money Market Fund to purchase
other securities which the participant has selected for investment in his
Self-Directed Plan account.
PORTFOLIO TRANSACTIONS
The money market securities in which the Money Market Fund invests are
traded primarily in the over-the-counter ("OTC") market. Where possible, the
Money Market Fund 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
principal for their own account. On occasion, securities may be purchased
directly from the issuer. Money market securities generally are 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 Money
Market Fund will consist primarily of dealer spreads and underwriting
commissions. Under the Investment Company Act, persons affiliated with the
Trust are prohibited from dealing with the Trust as a principal in the
purchase and sale of securities unless a permissive order allowing such
transactions is obtained from the Commission. Affiliated persons of the Trust
may serve as its broker in OTC transactions conducted on an agency basis. The
Commission has issued an exemptive order permitting the Trust to conduct
certain principal transactions with Merrill Lynch Government Securities Inc.
and Merrill Lynch Money Markets Inc., subject to certain terms and conditions.
For the fiscal year ended October 31, 1997, the Money Market Fund engaged in
2,505 transactions pursuant to such order aggregating approximately $2.1
billion.
ADDITIONAL INFORMATION
DIVIDENDS
Dividends are declared and reinvested daily in the form of additional shares
at net asset value. Shareholders liquidating their holdings will receive upon
redemption all dividends declared and reinvested through 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 Money Market Fund is determined, the net asset value per share of the
Money Market Fund normally remains constant at $1.00 per share. Fluctuations
in value may be reflected in the number of outstanding shares in the
shareholder's account.
Net income (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) plus or minus all realized
gains and losses on portfolio securities, (iii) less the estimated expenses of
the Money Market Fund applicable to that dividend period.
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DETERMINATION OF NET ASSET VALUE
The net asset value of the Money Market Fund is determined by the Manager
once daily, immediately after the daily declaration of dividends, on each day
during which the New York Stock Exchange ("NYSE") or New York banks are open
for business. Such determination is made as of the close of business on the
NYSE (generally, 4:00 p.m., New York time) or, on days when the NYSE is closed
but New York banks are open, at 4:00 p.m., New York time. The net asset value
per share is determined pursuant to the "penny-rounding" method by adding the
fair value of all securities and other assets in the portfolio including
interest accrued but not yet received, deducting the portfolio's liabilities
and dividing by the number of shares outstanding. The result of this
computation will be rounded to the nearest whole cent. Securities with
remaining maturities of greater than 60 days for which market quotations are
readily available will be valued at market value. Securities with a remaining
maturity of 60 days or less are valued on an amortized cost basis. 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. Other
securities held by the Money Market Fund will be valued at the fair value as
determined in good faith by or under direction of the Board of Trustees.
EXCHANGE PRIVILEGE
Class I and Class II shareholders of the Money Market Fund will have an
exchange privilege with Class D shares of certain other mutual funds advised by
the Manager or FAM ("MLAM-advised mutual funds"). Alternatively, shareholders
may exchange Class I or Class II shares of the Money Market Fund for Class A
shares of one of the MLAM-advised mutual funds if the shareholder holds any
Class A shares of that fund in his account in which the exchange is made at the
time of the exchange or is otherwise an eligible Class A investor in such fund.
Class I and Class II shareholders of the Money Market Fund also may exchange
shares of the Money Market Fund into shares of certain MLAM-advised money
market funds specifically designated as available for exchange by holders of
Money Market Fund shares. There is currently no limitation on the number of
times a shareholder may exercise the exchange privilege. The exchange privilege
may be modified or terminated at any time in accordance with the rules of the
Commission. Exercise of the exchange privilege is treated as a sale of the
exchanged shares and a purchase of the acquired shares for Federal income tax
purposes. For further information, see "Exchange Privilege" in the Statement of
Additional Information.
TAXES
Regulated Investment Companies. The following is a general summary of the
treatment of regulated investment companies ("RICs") and their shareholders
under the Internal Revenue Code of 1986, as amended (the "Code"). The Trust
intends to continue to qualify the Money Market Fund for the special tax
treatment afforded RICs under the Code. As long as it so qualifies, the Money
Market Fund will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains that it distributes to
participants' Self-Directed Plan accounts. The Trust intends to cause the Money
Market Fund to distribute substantially all of such income.
Dividends paid by the Money Market Fund from its 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 ordinarily
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 ordinarily taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Money Market
Fund shares. Any loss upon the sale or exchange of Money Market Fund shares
held for six months
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or less, however, will be treated as long-term capital loss to the extent of
any capital gain dividends received by the shareholder. Distributions in excess
of the Money Market 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). Recent legislation creates additional categories of
capital gain taxable at different rates, which RICs generally may pass through
to shareholders. Generally, not later than 60 days after the close of its
taxable year, the Money Market Fund will provide its shareholders with a
written notice designating the amounts of any ordinary income dividends or
capital gain dividends, as well as the amounts of capital gain dividends in the
different categories of capital gain referred to above. Dividends of a RIC are
ordinarily taxable to shareholders even though they are reinvested in
additional shares of the Money Market Fund.
Under certain provisions of the Code, some taxpayers may be subject to a 31%
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, participants in the
Self-Directed Plans subject to backup withholding will be those for whom no
certified taxpayer identification number is on file with the Trust or who, to
the Trust'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.
Self-Directed Retirement Plans. Investment in the Money Market Fund is
limited to participants in the self-directed retirement plans ("retirement
plans") for which Merrill Lynch acts as passive custodian. Accordingly, the
general description of the tax treatment of RICs as set forth above is
qualified with respect to the special tax treatment afforded retirement plans
under the Code. Under the Code, neither ordinary income dividends nor capital
gain dividends represent current income to Class I or Class II shareholders if
such shares are held in a retirement plan. Rather, distributions from a
retirement plan (except a Roth IRA) will be taxable as ordinary income at the
rate applicable to the participant at the time of the distribution.
For all Self-Directed Plans except Roth IRAs, such distributions would
include (i) any pre-tax contributions to the retirement plan (including pre-tax
contributions that have been rolled over from another retirement plan or IRA)
and (ii) dividends (whether or not such dividends are classified as ordinary
income or capital gain dividends). Recent legislation, however, provides that
there is no penalty for early withdrawals from a retirement plan for the
purpose of acquiring one's first home. In addition to ordinary income tax,
participants (except Roth IRA participants) may be subject to the imposition of
excise taxes on any distributed amount, including: (i) a 10% excise tax on any
amount withdrawn from a retirement plan prior to the participant's attainment
of age 59 1/2, unless the shareholder has become disabled, is purchasing a
first new home (subject to the $10,000 lifetime limit) or has died.
For Roth IRA participants, distributions, including accumulated earnings on
contributions, will not be includible in income if such distribution is made
more than five years after the first tax year of contribution and the account
holder is either age 59 1/2 or older, has become disabled, is purchasing a
first new home (subject to the $10,000 lifetime limit) or has died. As with the
other Self-Directed Plans, a 10% excise tax applies to amounts, other than the
$10,000 allowed for a first home purchase, withdrawn from the Roth IRA prior to
reaching age 59 1/2. Such a withdrawal would also be included in income to the
extent of earnings on contributions, with distributions treated as made from
contributions and then from earnings.
Under certain limited circumstances (for example, if an individual for whose
benefit a retirement plan is established engages in any transaction prohibited
under Section 4975 of the Code with respect to such account), the retirement
plan would cease to be qualified for the special treatment afforded certain
retirement plans under the Code as of the first day of such taxable year that
the transaction causing disqualification
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occurred. If a retirement plan through which a participant holds Class I or
Class II shares of the Money Market Fund becomes ineligible for special tax
treatment, such participant will be treated as having received a distribution
on the first day of the taxable year from the retirement plan in an amount
equal to the fair market value of all assets in the account. Thus, a
shareholder (except shareholders in Roth IRAs) then would be taxed currently on
the amount of any pre-tax contributions and previously untaxed dividends held
within the account. A Roth IRA shareholder would be taxed currently on the
distribution to the extent of accumulated earnings on contributions. All
shareholders would be taxed on all ordinary income and capital gain dividends
paid by the Fund subsequent to such event, whether such dividends were received
in cash or reinvested in additional shares. These ordinary income and capital
gain dividends also might be subject to state and local taxes. In the event of
retirement plan disqualification, shareholders also could be subject to the 10%
excise tax described above. Additionally, retirement plan disqualification may
subject a nonresident alien shareholder to a 30% United States withholding tax
on ordinary income dividends paid by the Money Market Fund unless a reduced
rate of withholding or a withholding exemption is provided under applicable
treaty law.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
State. Ordinary income and capital gain dividends on RIC shares held in a
disqualified retirement plan or outside of a retirement plan also may be
subject to state and local taxes. Certain states exempt from state income
taxation dividends paid by RICs which are derived from interest on United
States Government obligations. State law varies as to whether dividend income
attributable to United States Government obligations is exempt from state
income tax. Generally, however, states exempt from state income taxation
dividends on shares held within a qualified retirement plan, and commence
taxation on such amounts when actually distributed from the retirement plan.
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 Fund.
ORGANIZATION OF THE TRUST
The Trust was organized on July 15, 1986 under the laws of the Commonwealth
of Massachusetts as a business trust. The Trust is the successor to a
Massachusetts business trust of the same name organized October 28, 1981. It is
a no-load, diversified, open-end investment company. The Trustees are
authorized to create an unlimited number of Series and, with respect to each
Series, to issue an unlimited number of full and fractional shares of
beneficial interest, $.10 par value per share, of different classes.
Shareholder approval is not required for the authorization of additional Series
or classes of a Series of the Trust. At the date of this Prospectus, the shares
of the Money Market Fund are divided into Class I and Class II shares. Class I
and Class II shares represent interests in the same assets of the Money Market
Fund and are identical in all respects, except that Class II shares bear
certain expenses related to the distribution of such shares and have exclusive
voting rights with respect to matters relating to Class II distribution
expenditures. See "Purchase of Shares." The Trustees of the Trust may classify
and reclassify the shares of the Trust into additional classes at a future
date. All shares have equal voting rights, except that only shares of the
respective Series are entitled to vote on matters concerning only that Series.
Each issued and outstanding share of a Series is entitled to
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one vote and to participate equally in dividends and distributions declared by
such Series and in net assets of such Series upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities except that, as noted
above, Class II shares bear certain additional expenses. In the event a Series
were unable to meet its obligations, the remaining Series would assume the
unsatisfied obligations of that Series. The obligations and liabilities of a
particular Series are restricted to the assets of that Series and do not extend
to the assets of the Trust generally. The shares of each Series, when issued,
will be fully paid and non-assessable by the Trust. At the date of this
Prospectus, the Money Market Fund is the only Series of the Trust.
The Declaration does not require that the Trust hold an annual meeting of
shareholders. However, the Trust 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 the Money Market Fund or the Trust. The Trust
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. The Declaration provides that a
shareholders' meeting may be called for any reason at the request of 10% of the
outstanding shares of the Trust or by a majority of the Trustees. Except as set
forth above, the Trustees shall continue to hold office and appoint successor
Trustees.
The Declaration of Trust establishing the Trust, dated July 15, 1986, a copy
of which, together with all amendments thereto (the "Declaration"), is on file
in the office of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Retirement Series Trust" refers to the Trustees
under the Declaration collectively as Trustees, but not as individuals or
personally; and no Trustee, shareholder, officer, employee or agent of the
Trust 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 said Trust
but the "Trust Property" (as defined in the Declaration) only shall be liable.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45290
Jacksonville, Florida 32232-5290
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch financial consultant or Merrill Lynch Financial
Data Services, Inc. at 800-221-7210.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Money Market Fund at the
address or telephone number set forth on the cover page of this Prospectus.
18
<PAGE>
APPLICATION FOR CHECK WRITING PRIVILEGES FOR
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
If you are either 59 1/2 years or older, permanently disabled or, in the
case of a Merrill Lynch Roth IRA or Merrill Lynch Tax-Deferred Basic (TM)
Retirement Plan, you are eligible for distributions, you may be eligible to
write checks of $500 or more against your balance in the Merrill Lynch
Retirement Reserves Money Fund.
(The Retirement Reserves check writing privilege is not available to
participants in certain employee benefit plans (in association with the
Merrill Lynch Blueprint SM Program) or to a participant in a pension, profit-
sharing or other qualified plan, with the exception of the Merrill Lynch Tax-
Deferred Basic (TM) Retirement Plan.)
To apply for the check writing privilege:
--Read the information on this page to determine if you are eligible.
--If you are eligible, read the terms governing the check writing
privilege.
--Complete the Check Request Form on the back of this page.
WHO IS ELIGIBLE FOR CHECK WRITING
You are eligible for the check writing privilege only if you meet the
following three conditions:
(1) YOU ARE EITHER (I) AGE 59 1/2 OR OLDER, (II) PERMANENTLY DISABLED OR
(III), IN THE CASE OF BASIC PLANS, ARE ELIGIBLE FOR DISTRIBUTIONS.
Distributions from a traditional IRA or SEP before you reach age 59 1/2
are generally subject to an Internal Revenue Service penalty tax equal
to 10% of the amount withdrawn unless you are permanently disabled.
Distributions from certain Basic Plans before you reach age 59 1/2 may
also be subject to penalty taxes.
(2) YOU CHOOSE NOT TO HAVE INCOME TAXES WITHHELD FROM AMOUNTS DISTRIBUTED
FROM YOUR ACCOUNT THROUGH USE OF THE CHECK WRITING PRIVILEGE. All
distributions from your account are taxable income to you and are
subject to Federal Income Tax withholding. However, you may for any
reason choose not to have these taxes withheld. You can participate in
the check writing program only if you choose not to have taxes
withheld, since Merrill Lynch cannot withhold taxes from checks you
write. NOTE: You may be responsible, under IRS regulations, for paying
estimated taxes based on the amounts distributed from your account by
check. Be aware also that when your actual taxes for a year are
determined, you could incur IRS penalties if your estimated tax
payments were not sufficient.
(3)YOU HAVE A MERRILL LYNCH RETIREMENT RESERVES MONEY FUND POSITION.
NOTE: IF YOU ARE A PARTICIPANT IN A BASIC PLAN, YOU MUST BE ELIGIBLE UNDER
THE PLAN TO BEGIN RECEIVING PAYMENTS. CHECK WITH YOUR PLAN
ADMINISTRATOR (USUALLY IT IS YOUR EMPLOYER) TO MAKE SURE YOU ARE
ELIGIBLE. IF YOU ARE, YOUR PLAN ADMINISTRATOR MUST ALSO SIGN THE CHECK
REQUEST FORM.
TERMS GOVERNING CHECK WRITING
The check writing program does not establish a checking account relationship
between you and Merrill Lynch or between you and Merrill Lynch Financial Data
Services, Inc.
Instead, these terms apply to the check writing program:
--Each check must be for at least $500.
--Any check for less than $500 will be returned unpaid.
--There are no charges for checks.
--A transaction advice will confirm any check paid against your account, and
distribution by check will be indicated on your account's monthly statement--
there is no separate "checking statement."
--No check may exceed your balance in the Merrill Lynch Retirement Reserves
Money Fund.
NOTE: DO NOT USE CHECKS TO CLOSE OUT OR TRANSFER YOUR ACCOUNT, TO CORRECT AN
OVERCONTRIBUTION (EXCESS CONTRIBUTION) OR TO WITHDRAW AMOUNTS
CLASSIFIED AS VOLUNTARY CONTRIBUTIONS TO BASIC PLANS. THIS IS BECAUSE
ALL MERRILL LYNCH RETIREMENT RESERVES MONEY FUND CHECK DISTRIBUTIONS
WILL BE REPORTED TO THE IRS AS TAXABLE DISTRIBUTIONS. AS A RESULT YOU
MAY BE SUBJECT TO ADVERSE TAX CONSEQUENCES. INSTEAD, CONTACT YOUR
MERRILL LYNCH FINANCIAL CONSULTANT TO MAKE SUCH TRANSACTIONS.
DISTRIBUTIONS OTHER THAN BY CHECK
If you decide to use the check writing privilege, you may still choose to
take distributions from your Retirement Account by contacting your Financial
Consultant rather than by writing checks.
NOTE: FOR DISTRIBUTIONS OTHER THAN BY CHECK WRITING YOU WILL NEED TO COMPLETE
THE APPROPRIATE DISTRIBUTION AND TAX WITHHOLDING FORM WHICH CAN BE
OBTAINED FROM YOUR MERRILL LYNCH FINANCIAL CONSULTANT.
19
<PAGE>
CHECK REQUEST FORM Merrill Lynch Financial Data Services, Inc.
When completed return this form to: P.O. Box 45290
Jacksonville, Florida 32232-5290
CHECK NAME. Checks are issued only in the name of the owner of the Retirement
Account. Please enter your name exactly as it appears on your Merrill Lynch
Adoption Agreement:
- -----------------------------------------------------------------------------
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
- -----------------------------------------------------------------------------
Last Name First Name Initial
ACCOUNT NUMBER FOR YOUR MERRILL LYNCH IRA, MERRILL LYNCH ROTH IRA, BASIC OR
SEP RETIREMENT ACCOUNT. (If you have more than one account, you must complete
a separate form to request checks for each account on which you want to write
checks.)
- -----------------
| | | | | | | | |
- -----------------
Account Number
---------------
BIRTHDATE | | | | | | | |
---------------
Month-Day-Year
-------------------
SOCIAL SECURITY NUMBER: | | | | | | | | | |
-------------------
-----------------------------------------------------------------------
ADDRESS: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
-----------------------------------------------------------------------
Street Address
-----------------------------------------------------------------------
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
-----------------------------------------------------------------------
City State Zip Code
CHECK REDEMPTION PRIVILEGE (SEE TERMS AND CONDITIONS IN THE PROSPECTUS): By
signing this form, you request and authorize Merrill Lynch Financial Data
Services, Inc. (the "Transfer Agent") to honor checks or automatic clearing
house ("ACH") debits you draw on the Merrill Lynch Retirement Reserves Money
Fund in your Merrill Lynch Retirement Account (IRA, Basic or SEP) in the
amount of $500 or more, subject to acceptance by the Fund. Payment for the
checks will be made by redeeming sufficient Fund shares in your account
without a signature guarantee.
The Transfer Agent and the Fund reserve all their lawful rights for honoring
checks or ACH debits drawn by you and for redeeming Fund shares pursuant to
this check redemption privilege. You acknowledge that this privilege does not
create a checking account or other bank account relationship between you and
the Transfer Agent or the Fund and the relationship between you and the
Transfer Agent is that of a shareholder-transfer agent.
INTERNAL REVENUE SERVICE REPORTING
MERRILL LYNCH IS REQUIRED BY LAW TO REPORT TO THE INTERNAL REVENUE SERVICE
ALL DISTRIBUTIONS MADE DURING THE YEAR FROM YOUR RETIREMENT ACCOUNT.
PLEASE NOTE:-- THE YEAR OF DISTRIBUTION WILL BE DETERMINED BY THE DATE THE
CHECK IS PROCESSED BY MERRILL LYNCH FINANCIAL DATA SERVICES,
INC., NOT THE DATE YOU WRITE THE CHECK OR THE DATE THE CHECK IS
PRESENTED TO A LOCAL BANK FOR PAYMENT.
THEREFORE, IF YOU ARE OVER AGE 70 1/2 AND MUST TAKE A
DISTRIBUTION BY DECEMBER 31 OF A CALENDAR YEAR, YOU MUST ALLOW
SUFFICIENT TIME FOR THE CHECK TO BE PAID BY THE BANK BEFORE
YEAR-END. OTHERWISE, YOUR DISTRIBUTION WILL NOT BE REFLECTED
AND REPORTED TO THE IRS IN THE YEAR FOR WHICH IT WAS INTENDED.
SIGNATURE
By signing this check request form, you confirm that you are either 59 1/2
years of age or older, permanently disabled or, in the case of Basic Plans,
are eligible for distributions, and that you choose not to have income taxes
withheld from distributions made under the check writing program.
Your signature: _____________________________________________ Date: __________
If you are a Basic Plan participant, your Plan Administrator must also sign
to indicate you are eligible to start receiving distributions under the Plan.
Signature of Plan Administrator: ______________________________________________
20
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
The Bank of New York
90 Washington Street
12th Floor
New York, New York 10286
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45290
Jacksonville, Florida 32232-5290
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE TRUST, THE MANAGER, OR THE DISTRIBUTOR. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
----------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Financial Highlights....................................................... 3
Yield Information.......................................................... 4
Investment Objectives and Policies......................................... 4
Management of the Trust.................................................... 9
Trustees.................................................................. 9
Management and Advisory Arrangements...................................... 9
Transfer Agency Services.................................................. 10
Purchase of Shares......................................................... 10
Redemption of Shares....................................................... 13
Portfolio Transactions..................................................... 14
Additional Information..................................................... 14
Dividends................................................................. 14
Determination of Net Asset Value.......................................... 15
Exchange Privilege........................................................ 15
Taxes..................................................................... 15
Organization of the Trust................................................. 17
Shareholder Reports....................................................... 18
Shareholder Inquiries..................................................... 18
Application for Check Writing Privileges................................... 19
</TABLE>
Code # 10093-0298
[LOGO] MERRILL LYNCH
Merrill Lynch Retirement
Reserves Money Fund
Merrill Lynch
Retirement Series Trust
[ART]
Merrill Lynch Retirement Reserves Money
Fund is organized as a Massachusetts
business trust. It is not a bank nor does it offer
fiduciary or trust services. Shares of the Fund
are not equivalent to a bank account. As with
any investment in securities, the value of a
shareholder's investment in the Fund will
fluctuate. The shares of the Fund are not
insured by any Government agency and are
not subject to the protection of the Securities
Investor Protection Corporation. A
shareholder's investment in the Fund is not
insured by any government agency.
PROSPECTUS
February 27, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future references.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
MERRILL LYNCH RETIREMENT SERIES TRUST
P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800
-------------------------
The investment objectives of the Merrill Lynch Retirement Reserves Money Fund
(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. These securities primarily consist of U.S. Government
and agency securities, bank certificates of deposit and bankers' acceptances,
commercial paper and repurchase agreements. For purposes of its investment
policies, the Money Market Fund defines short-term money market securities as
securities having a maturity of no more than 762 days (25 months) in the case
of U.S. Government and agency securities and no more than 397 days (13 months)
in the case of all other securities. Management of the Money Market Fund
expects that substantially all the assets of the Money Market Fund will be
invested in securities maturing in less than one year, but at times some
portion may have longer maturities not exceeding 762 days. The dollar weighted-
average maturity of the Money Market Fund's portfolio will not exceed 90 days.
The Trust is authorized to offer Class I and Class II shares of the Money
Market Fund to participants in the self-directed retirement plans for which
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") acts as
passive custodian (the "Self-Directed Plans"). For a description of the Self-
Directed Plans, see Appendix A to this Statement of Additional Information.
Shares of the Money Market Fund are also offered to certain independent
pension, profit-sharing, annuity and other qualified plans. As of the date of
this Statement of Additional Information, no Class II shares have been issued.
The Money Market Fund is the only existing series of Merrill Lynch Retirement
Series Trust (the "Trust"), a business trust organized under the laws of
Massachusetts. The Trust is a no-load, diversified, open-end investment company
which may be comprised of separate series ("Series"), each of which would be a
separate portfolio offering a separate class or classes of shares to
participants in the retirement plans described herein.
-------------------------
This Statement of Additional Information of the Money Market Fund is not a
prospectus and should be read in conjunction with the prospectus of the Money
Market Fund, dated February 27, 1998 (the "Prospectus"), which has been filed
with the Securities and Exchange Commission (the "Commission") and can be
obtained, without charge, by calling or by writing the Money Market Fund at the
above telephone number or address. This Statement of Additional Information has
been incorporated by reference into the Prospectus. Capitalized terms used but
not defined herein have the same meanings as in the Prospectus.
-------------------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
-------------------------
The date of this Statement of Additional Information is February 27, 1998.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
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. Reference is made
to "Investment Objectives and Policies" in the Prospectus for a discussion of
the investment objectives and policies of the Money Market Fund.
As discussed in the Prospectus, the Money Market Fund may invest in money
market securities pursuant to repurchase agreements involving money market
securities and involving U.S. Government and agency securities with longer
maturities. 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.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
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 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.
Also, as discussed in the Prospectus, the Money Market Fund may invest in
obligations issued by commercial and savings banks and savings and loan
associations. The savings banks and savings and loan associations must be
organized and operating in the United States. The obligations of commercial
banks may be issued by U.S. banks, foreign branches or subsidiaries of U.S.
banks ("Eurodollar" obligations) U.S. branches or subsidiaries of foreign banks
("Yankeedollar" obligations), or foreign branches and subsidiaries of foreign
depository institutions. Eurodollar and Yankeedollar obligations may be general
obligations of the parent bank or may be limited to the issuing branch by the
terms of the specific obligation or by government regulation.
Eurodollar and Yankeedollar obligations may involve additional investment
risks from the risks of obligations of U.S. banks. Such investment risks
include 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 payment of principal and interest. Generally the
issuers of such obligations are subject to fewer U.S. regulatory requirements
than are applicable to U.S. banks. Foreign branches or subsidiaries of U.S.
banks may be subject to less stringent reserve
2
<PAGE>
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 than about a U.S. bank, and such branches or
subsidiaries may not be subject to the same accounting, auditing and financial
recordkeeping standards and requirements as U.S. banks. Evidence of ownership
of Eurodollar obligations may be held outside of the United States, and the
Money Market Fund may be subject to risks associated with the holding of such
property overseas. Eurodollar obligations of the Money Market Fund held
overseas will be held by foreign branches of the Money Market Fund's Custodian
or by foreign branches of other U.S. banks or foreign banks under subcustodian
arrangements complying with the requirements of the Investment Company Act of
1940, as amended (the "Investment Company Act").
Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager") will carefully
consider the above factors in making investments in Eurodollar and Yankeedollar
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.
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 Trust. Currently, there are five NRSROs: Duff
& Phelps Inc., Fitch IBCA Inc., Thompson Bankwatch, Inc., Moody's Investors
Service, Inc. and Standard & Poor's, a Division of The McGraw-Hill Companies,
Inc. The Money Market Fund will determine the remaining maturity of investments
in which it invests in accordance with Commission regulations.
Current Investment Restrictions. In addition to the investment restrictions
set forth in the Prospectus, the Money Market 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 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) make investments for the purpose of exercising
control or management; (2) underwrite securities issued by other persons; (3)
purchase securities of other investment companies, except in connection with a
merger, consolidation, acquisition or reorganization; (4) 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; (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
3
<PAGE>
thereof; (7) make loans to other persons, provided that the Money Market Fund
may purchase money market securities or enter into repurchase agreements or
purchase and sale contracts and lend securities owned or held by it pursuant to
(8) below; (8) lend its portfolio securities other than as provided in the
guidelines set forth below, or in excess of 33 1/3% of its total assets, taken
at market value; (9) 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 borrowings will reduce net
income.; (10) mortgage, pledge, hypothecate or in any manner transfer (except
as provided in (8) 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 (9) above, and then such
mortgaging, pledging or hypothecating may not exceed 10% of the Money Market
Fund's net assets, taken at market value; (11) invest in securities for which
no readily available market exists if more than 10% of its total assets (taken
at market value) would be invested in such securities; (12) invest in
securities with legal or contractual restrictions on resale (except for
repurchase agreements or purchase and sale contracts), or in securities of
issuers (other than 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; (13) enter into reverse
repurchase agreements if, as a result thereof, the Money Market Fund's
obligations with respect to reverse repurchase agreements and borrowings
permitted in (9) above would exceed 33 1/3% of its net assets (defined to be
total assets, taken at market value, less liabilities other than reverse
repurchase agreements).
Lending of Portfolio Securities. Subject to investment restriction (8) above,
the Money Market Fund may from time to time lend securities from its portfolio
to brokers, dealers and financial institutions and receive collateral in cash
or securities issued or guaranteed by the United States 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. 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 the right to regain record ownership of loaned securities to
exercise beneficial rights and may do so when deemed appropriate. The Money
Market Fund may pay reasonable fees to persons unaffiliated with the Money
Market Fund in connection with the arranging of such loans.
Proposed Investment Restriction Amendments. As discussed in the Prospectus
under "Investment Objectives and Policies--Investment Restrictions," the Board
of Trustees of the Trust has approved the replacement of certain of the Money
Market Fund's existing investment restrictions as set forth below. The
investment objectives and policies of the Money Market Fund will be unaffected
by the adoption of the proposed investment restriction amendments.
Shareholders of the Money Market Fund are currently considering whether to
approve the proposed amendments to the investment restrictions. If such
shareholder approval is obtained, the Money Market
4
<PAGE>
Fund's current investment restrictions will be replaced by the proposed
restrictions as noted, and the Money Market Fund's Prospectus and Statement of
Additional Information will be supplemented to reflect such change.
. With respect to investment in other investment companies, current
fundamental investment restriction (3) would be replaced with a non-fundamental
restriction providing that the Money Market Fund may not:
Purchase securities of other investment companies, except to the extent
such purchases are permitted by applicable law. As a matter of policy,
however, the Money Market Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of
the Investment Company Act at any time the Money Market Fund's shares are
owned by another investment company that is part of the same group of
investment companies as the Money Market Fund.
. With respect to investment in real estate, current fundamental investment
restriction (4) would be replaced with two fundamental restrictions providing
that the Money Market Fund may not:
Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Money Market Fund may invest in money market securities
secured by real estate or interests therein or money market securities
issued by companies that invest in real estate or interests therein and may
hold and sell real estate acquired by the Money Market Fund as a result of
the ownership of money market securities.
and
Purchase or sell commodities or contracts on commodities, except to the
extent that the Money Market Fund may do so in accordance with applicable
law and the Money Market Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time, and without
registering as a commodity pool operator under the Commodity Exchange Act.
. With respect to short sales, current fundamental investment restriction (6)
would be replaced with a non-fundamental restriction providing that the Money
Market Fund may not:
Make short sales of securities or maintain a short position except to the
extent permitted by applicable law. The Money Market Fund currently does
not intend to engage in short sales.
. With respect to investments in restricted securities and "unseasoned"
issuers, current fundamental investment restrictions (11) and (12) would be
replaced with a non-fundamental restriction providing that the Money Market
Fund may not:
Invest in securities which cannot be readily resold because of legal or
contractual restrictions, or which cannot otherwise be marketed, redeemed,
put to the issuer or to a third party, if at the time of acquisition more
than 10% of its total assets would be invested in such securities. This
restriction shall not apply to money market securities that mature within
seven days or securities that the Board of Trustees has otherwise
determined to be liquid pursuant to applicable law. Securities purchased in
accordance with Rule 144A under the Securities Act of 1933, as amended, and
determined to be liquid by the Board of Trustees are not subject to the
limitations set forth in this investment restriction.
5
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
Information about the Trustees and executive officers of the Trust, their
ages and their principal occupations for at least the last five years are set
forth below. Unless otherwise noted, the address of each Trustee and executive
officer is Merrill Lynch Asset Management, L.P., P.O. Box 9011, Princeton, New
Jersey 08543-9011.
Arthur Zeikel (65)--President and Trustee (1)(2)--Chairman of MLAM (which
term as used herein includes its corporate predecessors) since 1997; Chairman
of Fund Asset Management, L.P. ("FAM") (which term as used herein includes its
corporate predecessors) since 1997; President of MLAM and FAM from 1977 to
1997; President and Director of Princeton Services, Inc. ("Princeton Services")
from 1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co.") since 1990.
Joe Grills (62)--Trustee (2)--P.O. Box 98, Rapidan, Virginia 22733. Member of
the Committee of Investment of Employee Benefit Assets of the Financial
Executives Institute ("CIEBA") since 1986; member of CIEBA's Executive
Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of
International Business Machines Incorporated ("IBM") and Chief Investment
Officer of the IBM Retirement Funds from 1986 until 1993; Member of the
Investment Advisory Committee of the State of New York Common Retirement Fund;
Member of the Investment Advisory Committee of the Howard Hughes Medical
Institute; Director, Duke Management Company since 1993; Director, LaSalle
Street Fund since 1995; Director, Kimco Realty Corporation since January 1997.
Walter Mintz (69)--Trustee (2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Associates (investment
partnership) since 1982.
Robert S. Salomon, Jr. (61)--Trustee (2)--106 Dolphin Cove Quay, Stamford,
Connecticut 06902. Principal of STI Management (investment adviser); Chairman
and CEO of Salomon Brothers Asset Management from 1992 to 1995; Chairman of
Salomon Brothers equity mutual funds from 1992 to 1995; Director of Stock
Research and U.S. Equity Strategist at Salomon Brothers from 1975 to 1991;
Director, Common Fund.
Melvin R. Seiden (67)--Trustee (2)--780 Third Avenue, Suite 2502, New York,
New York 10017. Director of Silbanc Properties, Ltd. (real estate, investments
and consulting) since 1987; Chairman and President of Seiden & de Cuevas, Inc.
(private investment firm) from 1964 to 1987.
Stephen B. Swensrud (64)--Trustee (2)--24 Federal Street, Suite 400, Boston,
Massachusetts 02110. Chairman of Fernwood Advisors (investment adviser) since
1996; Principal of Fernwood Associates (financial consultant) since 1975.
Terry K. Glenn (57)--Executive Vice President (1)(2)--Executive Vice
President of MLAM and FAM since 1983; President of Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor") since 1986 and Director thereof
since 1991; Executive Vice President and Director of Princeton Services since
1993; President of Princeton Administrators, L.P. since 1988.
Joseph T. Monagle, Jr. (49)--Senior Vice President (1)(2)--Senior Vice
President and Department Head of the Global Fixed Income Division of MLAM and
FAM since 1990; Vice President of MLAM from 1978 to 1990; Senior Vice President
of Princeton Services since 1993.
John Ng (44)--Portfolio Manager (1)(2)--Vice President of the Manager since
1984.
6
<PAGE>
Donald C. Burke (37)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
Gerald M. Richard (48)--Treasurer (1)(2)--Senior Vice President and
Treasurer of MLAM and FAM since 1984; Vice President of the Distributor since
1981 and Treasurer thereof since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993.
Barbara G. Fraser (54)--Secretary (1)(2)--First Vice President of MLAM since
1996; Vice President of MLAM from 1994 to 1996, attorney in private practice
from 1991 to 1994.
- ---------------------
(1) Interested person, as defined in the Investment Company Act of 1940, of
the Trust.
(2) Such Trustee or officer is a director, trustee, officer or member of an
advisory board of certain other investment companies for which the Manager
or FAM acts as investment adviser.
At January 31, 1998, the Trustees and officers of the Trust as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of
beneficial interest of the Trust. At such date, Mr. Zeikel, a Trustee and
Officer of the Trust, and the other Officers of the Trust owned less than 1%
of the outstanding Common Stock of ML & Co.
COMPENSATION OF TRUSTEES
Pursuant to the terms of its management agreement with the Trust (the
"Management Agreement"), the Manager pays all compensation of officers and
employees of the Trust as well as the fees of all Trustees of the Trust who
are affiliated persons of ML & Co. or its subsidiaries. The Trust pays each
unaffiliated Trustee a fee of $4,000 per year plus $1,000 per meeting attended
and all Trustees' actual out-of-pocket expenses relating to attendance at
meetings. The Trust also pays each member of the Audit Committee, which
consists of all of the unaffiliated Trustees, an annual fee of $4,000 plus a
fee of $750 for each meeting of the Audit Committee which is held on a day on
which the Board of Trustees does not meet, together with all out-of-pocket
expenses relating to attendance at such meetings. These fees and expenses
aggregated $75,354 for the fiscal year ended October 31, 1997.
The following table sets forth for the fiscal year ended October 31, 1997,
compensation paid by the Trust to the unaffiliated Trustees and, for the
calendar year ending December 31, 1996, the aggregate compensation paid by all
investment companies (including the Trust) advised by MLAM and its affiliate,
FAM ("MLAM/FAM Advised Funds"), to the unaffiliated Trustees.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
PENSION OR FROM TRUST AND
COMPENSATION RETIREMENT BENEFITS MLAM/FAM ADVISED
NAME OF FROM THE ACCRUED AS PART FUNDS PAID TO
TRUSTEE TRUST OF TRUST EXPENSE TRUSTEES
- ------- ------------ ------------------- ----------------------
<S> <C> <C> <C>
Joe Grills(1) $15,000 None $164,000
Walter Mintz(1) $15,000 None $164,000
Robert S. Salomon,
Jr.(1) $15,000 None $187,167
Melvin R. Seiden(1) $15,000 None $164,000
Stephen B. Swensrud(1) $15,000 None $154,250
</TABLE>
- --------
(1) The Trustees serve on the boards of MLAM/FAM Advised Funds as follows: Joe
Grills (19 registered investment companies consisting of 47 portfolios);
Walter Mintz (18 registered investment companies consisting of 37
portfolios); Robert S. Salomon, Jr. (18 registered investment companies
consisting of 37 portfolios); Melvin R. Seiden (18 registered investment
companies consisting of 37 portfolios); and Stephen B. Swensrud (21
registered investment companies consisting of 52 portfolios).
7
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Money Market Fund.
Subject to the direction of the Trustees, the Manager performs, or arranges
for affiliates to perform, pursuant to the Management Agreement, the management
and administrative services necessary for the operation of the Trust and the
Money Market Fund. The Manager and its affiliates will provide a variety of
administrative and operational services to shareholders of the Money Market
Fund, including processing services related to the purchase and redemption of
shares and the general handling of shareholder relations. The Manager is
responsible for the actual management of the Money Market Fund's portfolio and
constantly reviews the Money Market Fund's 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
Manager, subject to review by the Trustees. The Manager provides the Trust and
the Money Market Fund with office space, equipment and facilities and such
other services as the Manager, subject to supervision and review by the
Trustees, shall from time to time determine to be necessary to perform its
obligations under the Management Agreement.
Securities held by the Money Market Fund may also be held by, or be
appropriate investments for, other funds or clients (collectively referred to
as "clients") for which the Manager or its affiliate, FAM, 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 other clients are selling the security. If purchases or sales of
securities for the Money Market 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 Manager or FAM. To the extent that transactions on behalf of more
than one client of the Manager or FAM 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.
As compensation for its services under the Management Agreement with the
Trust, the Manager is entitled to receive a fee from the Money Market Fund at
the end of each month at the annual rates of 0.50% of average daily net assets
not exceeding $1 billion; 0.45% of average daily net assets exceeding $1
billion but not exceeding $2 billion; 0.40% of average daily net assets
exceeding $2 billion but not exceeding $3 billion; 0.375% of average daily net
assets exceeding $3 billion but not exceeding $4 billion; 0.35% of average
daily net assets exceeding $4 billion but not exceeding $7 billion; 0.325% of
average daily net assets exceeding $7 billion but not exceeding $10 billion;
and 0.30% of average daily net assets exceeding $10 billion. For the fiscal
years ended October 31, 1995, 1996 and 1997 the fees paid by the Money Market
Fund to the Manager were $30,946,227, $34,280,472 and $38,870,409,
respectively.
The Management Agreement obligates the Manager to provide advisory,
administrative and management services, to furnish office space and facilities
for management of the affairs of the Trust and the Money Market Fund, to pay
all compensation of and furnish office space for officers and employees of the
Trust, as well as the fees of all Trustees of the Trust who are affiliated
persons of ML & Co. or any of its subsidiaries. The Money Market Fund pays all
other expenses incurred in its operation, and, if other Series should be added,
a portion of the Trust's general administrative expenses will be allocated on
the basis of the
8
<PAGE>
asset size of the respective Series. Expenses that will be borne directly by
the Series include redemption expenses, expenses of portfolio transactions,
expenses of registering the shares under Federal and state securities laws,
pricing costs (including the daily calculation of net asset value), fees for
legal and auditing services, expenses of printing proxies, shareholder reports,
prospectuses and statements of additional information (except to the extent
paid by the Distributor as described below), charges of the Custodian and
Transfer Agent, Commission fees, interest, certain taxes, and other expenses
attributable to a particular Series. Expenses which will be allocated on the
basis of asset size of the respective Series include fees and expenses of
unaffiliated Trustees, state franchise taxes, expenses related to shareholder
meetings, and other expenses properly payable by the Trust. If additional
Series are added to the Trust, the organizational expenses will be allocated
among the Series in a manner deemed equitable by the Trustees. Depending upon
the nature of a lawsuit, litigation costs may be assessed to the specific
Series to which the lawsuit relates or allocated on the basis of the asset size
of the respective Series. The Trustees have determined that this is an
appropriate method of allocation of expenses. As required by the Distribution
Agreement, the Distributor will pay certain of the expenses of each Series
incurred in connection with the offering of shares of each Series; after the
prospectuses, statements of additional information and periodic reports have
been prepared and set in type, the Distributor will pay for the printing and
distribution of copies thereof used in connection with the offering to
investors. The Distributor will also pay for other supplementary sales
literature.
The Manager is a limited partnership, the partners of which are ML & Co. and
Princeton Services, Inc. ML & Co. and Princeton Services are "controlling
persons" of the Manager (as defined in the Investment Company Act) because of
their ownership of its voting securities or their power to exercise a
controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will continue in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
shares of the Money Market 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 agreement terminates upon
assignment and may be terminated without penalty on 60 days' written notice at
the option of either party thereto or by the vote of the shareholders of the
Money Market Fund.
PURCHASE AND REDEMPTION OF SHARES
Reference is made to "Purchase of Shares" and "Redemption of Shares" in the
Prospectus for certain information as to the purchase and redemption of Money
Market Fund shares.
The Money Market Fund is authorized to issue two classes of shares; however,
as of the date of this Statement of Additional Information, no Class II shares
have been issued. Each Class I and Class II share of the Money Market Fund
represents identical interests in the investment portfolio of the Money Market
Fund and has the same rights, except that Class II shares bear the expenses of
the ongoing Class II distribution fees. Class II shares have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which distribution fees are paid. Each class has
identical exchange privileges. See "Shareholder Services--Exchange Privilege."
The Fund has entered into a separate distribution agreement with the
Distributor in connection with the continuous offering of each class of shares
of the Money Market Fund (the "Distribution Agreements"). The
9
<PAGE>
Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays
for the printing and distribution of copies thereof used in connection with
the offering to dealers and investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Management Agreement described above.
The right to receive payment with respect to any redemption of Money Market
Fund shares may be suspended by the Trust 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 ("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 emergency exists as a result
of which (a) disposal by the Money Market Fund of securities owned by it is
not reasonably practicable or (b) it is not reasonably practicable for the
Money Market 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
security holders of the Money Market 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.
All purchases and redemptions of Money Market Fund shares and dividend
reinvestments are confirmed to participants in the IRA, Roth IRA, Basic SM and
SEP Plus(R) Self-Directed Plans (rounded to the nearest share) in the
statement that is sent monthly to all participants in these Self-Directed
Plans. The Money Market Fund and the Distributor have received an exemptive
order from the Commission which permits the Money Market Fund to omit sending
out more frequent confirmations with respect to certain transactions. These
transactions are purchases resulting from automatic investments in shares of
the Money Market Fund and redemptions which are effected automatically to
purchase other securities which the participant has selected for investment in
his account.
Participants in Self-Directed Plans in association with the Merrill Lynch
Blueprint SM Program receive quarterly statements reflecting all purchases,
redemptions and dividend reinvestments of Money Market Fund shares. In
addition, these participants receive an individual confirmation with respect
to each redemption of Money Market Fund shares and each purchase of such
shares other than purchases which are made automatically through payroll
deductions. Shareholders who are not participants in the Self-Directed Plans
receive quarterly statements reflecting all purchases, redemptions and
dividend reinvestments of Money Market Fund shares.
In the interest of economy and convenience and because of the operating
procedures of the Money Market Fund, certificates representing the Money
Market Fund's shares will not be physically issued. Shares are maintained by
the Money Market Fund on the register maintained by the Transfer Agent, and
the holders thereof will have the same rights of ownership with respect to
such shares as if certificates had been issued.
Class II Distribution Plan. Reference is made to "Purchase of Shares--Class
II Shares" in the Prospectus for certain information with respect to the
distribution plan for Class II shares (the "Class II Distribution Plan") with
respect to the distribution fees paid by the Money Market Fund to Merrill
Lynch with respect to such class.
10
<PAGE>
Payments of the distribution fees are subject to the provisions of Rule 12b-1
under the Investment Company Act. Among other things, the Class II Distribution
Plan provides that Merrill Lynch shall provide and the Trustees shall review
quarterly reports of the disbursement of the distribution fees paid to Merrill
Lynch. In their consideration of the Class II Distribution Plan, the Trustees
must consider all factors they deem relevant, including information as to the
benefits of the Class II Distribution Plan to the Money Market Fund and to the
Class II shareholders. The Class II Distribution Plan further provides that, so
long as the Plan remains in effect, the selection and nomination of Trustees
who are not "interested persons" of the Trust, as defined in the Investment
Company Act (the "Independent Trustees"), shall be committed to the discretion
of the Independent Trustees then in office. In approving the Class II
Distribution Plan in accordance with Rule 12b-1, the Independent Trustees
concluded that there is reasonable likelihood that such Plan will benefit the
Money Market Fund and its Class II shareholders. The Class II 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 Class II voting securities of the Money Market Fund. The Class II
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Money Market Fund without the approval of the Class II
shareholders, and all material amendments are required to be approved by the
vote of the Trustees, including a majority of the Independent Trustees who have
no direct or indirect financial interest in such Distribution Plan, cast in
person at a meeting called for that purpose. Rule 12b-1 further requires that
the Trust preserve copies of the Class II Distribution Plan and any report made
pursuant to such plan for a period of not less than six years from the date of
such Distribution Plan or such report, the first two years in an easily
accessible place.
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Conduct Rules of the National Association of Securities
Dealers, Inc. ("NASD") imposes a limitation on certain asset-based sales
charges such as the distribution fee borne by the Class II shares. As
applicable to the Class II shares, the maximum sales charge rule limits the
aggregate of distribution fee payments payable by the Money Market Fund to (1)
7.25% of eligible gross sales of Class II shares (defined to exclude shares
issued pursuant to dividend reinvestments and exchanges), plus (2) interest on
the unpaid balance for Class II, at the prime rate plus 1% (the unpaid balance
being the maximum amount payable minus amounts received from the payment of the
distribution fee).
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to policy
established by the Trustees and officers of the Trust, the Manager is primarily
responsible for the Money Market Fund's portfolio decisions and the placing of
the Money Market Fund's portfolio transactions. In placing orders, it is the
policy of the Money Market Fund to obtain the best net results taking into
account such factors as price (including the applicable dealer spread), size,
type and difficulty of the transaction involved, the firm's general execution
and operational facilities, and the firm's risk in positioning the securities
involved. While the Manager generally seeks reasonably competitive spreads or
commissions, the Money Market Fund will not necessarily be paying the lowest
spread or commission available. The Money Market Fund's policy of investing in
securities with short maturities will result in high portfolio turnover.
11
<PAGE>
The money market securities in which the Money Market Fund invests are traded
primarily in the over-the-counter ("OTC") market. Bonds and debentures are
usually traded OTC but may be traded on an exchange. Where possible, the Money
Market Fund 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 act as principal for
their own accounts. On occasion, securities may be purchased directly from the
issuer. The money market securities in which the Money Market 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 Money Market Fund will primarily consist of dealer spreads
and underwriting commissions. Under the Investment Company Act, persons
affiliated with the Trust are prohibited from dealing with the Trust as a
principal in the purchase and sale of securities, unless a permissive order
allowing such transactions is obtained from the Commission. Since OTC
transactions are usually principal transactions, affiliated persons of the
Trust, including Merrill Lynch Government Securities Inc. ("GSI") and Merrill
Lynch, may not serve as the Money Market Fund's dealer in connection with such
transactions, except pursuant to the permissive order described below. However,
affiliated persons of the Trust may serve as its broker in OTC transactions
conducted on an agency basis. The Trust may not generally purchase securities
from any underwriting syndicate of which Merrill Lynch is a member. Of the
money market securities in which the Money Market Fund invests, generally only
United States Government agency securities are sold in underwritings.
The Commission has issued an order permitting all Merrill Lynch-sponsored
money market funds, including the Money Market Fund, to conduct principal
transactions with GSI in U.S. Government securities and U.S. Government agency
securities and with Merrill Lynch Money Markets Inc., a subsidiary of GSI
("MMI"), in certificates of deposit and other short-term bank money instruments
and commercial paper. This order contains a number of conditions, including
conditions designed to ensure that the price to the Money Market Fund from GSI
or MMI is equal to or better than that available from other sources. GSI and
MMI have informed the Trust that they will in no way, at any time, attempt to
influence or control the activities of the Money Market Fund or the Manager in
placing such principal transactions. The permissive order allows GSI or MMI to
receive a dealer spread on any transaction with the Money Market Fund no
greater than its customary dealer spread from transactions of the type
involved. Generally such spreads do not exceed 0.25% of the principal amount of
the securities involved.
The Trustees of the Trust have considered the possibilities of recapturing
for the benefit of the Money Market Fund expenses of possible portfolio
transactions, such as dealer spreads and underwriting commissions, by
conducting such portfolio transactions through affiliated entities, including
GSI and Merrill Lynch. For example, dealer spreads received by GSI or its
subsidiary on transactions conducted pursuant to the permissive order described
above could be offset against the management fee payable by the Money Market
Fund to the Manager. 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 Money Market Fund does not expect to use one particular dealer, but,
subject to obtaining the best price and execution, dealers who provide
supplemental investment research (such as information concerning money market
securities, economic data and market forecasts) to the Manager may receive
orders for
12
<PAGE>
transactions by the Money Market Fund. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Manager under its Management Agreement and the expenses of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Money Market Fund is determined by the Manager
once daily, immediately after the daily declaration of dividends, on each
business day during which the NYSE or New York banks are open for business.
Such determination is made as of the close of business on the NYSE (generally
4:00 p.m., New York time) or, on days when the NYSE is closed but the New York
banks are open, at 4:00 p.m., New York time. 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 per share is determined under the "penny-rounding" method by adding the
value of all securities and other assets in the portfolio, deducting the
portfolio's liabilities, dividing by the number of shares outstanding and
rounding the result to the nearest whole cent.
The Money Market Fund values its portfolio securities with remaining
maturities of 60 days or less on an amortized cost basis and values its
securities with remaining maturities of greater than 60 days for which market
quotations are readily available at market value. Other securities held by the
Money Market Fund are valued at their fair value as determined in good faith by
or under the direction of the Board of Trustees.
In accordance with the Commission rule applicable to the valuation of its
portfolio securities, the Money Market Fund 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 Securities and U.S. Government agency securities,
which may have remaining maturities of up to 762 days (twenty-five months). The
Money Market Fund 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, the Money Market Fund's price per share as computed for the purposes
of sales and redemptions at $1.00. Deviations of more than an insignificant
amount between the net asset value per share calculated using market quotations
and that calculated on a "penny-rounded" basis will be reported to the Trustees
by the Manager. In the event the Trustees determine that a deviation exists
which may result in the material dilution or other unfair results to investors
or existing shareholders, the Money Market Fund will take such corrective
action as it regards as necessary and appropriate, including the reduction of
the number of outstanding shares of the Money Market Fund by having each
shareholder proportionately contribute shares to the Money Market 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 "penny rounded" net asset value of $1.00 per
share, the shareholders will contribute proportionately to the Money Market
Fund's capital. Each shareholder will be deemed to have agreed to such
contribution by an investment in the Money Market Fund.
13
<PAGE>
Since the net income of the Money Market Fund (including realized gains and
losses on the portfolio securities) is determined and declared as a dividend
immediately prior to each time the net asset value of the Money Market Fund is
determined, the net asset value per share of the Money Market Fund normally
remains at $1.00 per share immediately after each such dividend declaration.
Any increase in the value of a shareholder's investment in the Money Market
Fund, representing the reinvestment of dividend income, is reflected by an
increase in the number of shares of the Money Market 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."
YIELD INFORMATION
The Money Market 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 reflects
realized and unrealized gains and losses on portfolio securities. In accordance
with regulations adopted by the Commission, the Money Market 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. This compounded yield
calculation also excludes realized and unrealized gains or losses on portfolio
securities.
The yield on the Money Market 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 Money Market Fund of future yields or rates
of return on its shares. The yield is affected by such factors as changes in
interest rates on Treasury securities, average portfolio maturity, the types
and quality of portfolio securities held and operating expenses. The yield on
Money Market Fund shares for various reasons may not be comparable to the yield
on shares of other money market funds or other investments.
TAXES
FEDERAL
Regulated Investment Companies. The following is a general summary of the
treatment of regulated investment companies ("RICs") and their shareholders
under the Code. The Trust intends to continue to qualify the Money Market Fund
for the special tax treatment afforded RICs under the Code. As long as it so
qualifies, the Money Market Fund will not be subject to Federal income tax on
the part of its net ordinary income and net realized capital gains that it
distributes to participants' Self-Directed Plan accounts. The Trust intends to
cause the Money Market Fund to distribute substantially all of its income.
As discussed in the Prospectus, the Trust may establish other series in
addition to the Money Market Fund (together with the Money Market Fund, the
"Series"). Each Series of the Trust will be treated as a
14
<PAGE>
separate corporation for Federal income tax purposes. Each Series, therefore,
will be considered to be a separate entity in determining its treatment under
the rules for RICs described in the Prospectus. Losses in one Series do not
offset gains in another Series, and the requirements (other than certain
organizational requirements) for qualifying for RIC status are determined at
the Series level rather than at the Money Market Fund level.
Dividends paid by the Money Market Fund from its 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 ordinarily
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 ordinarily taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Money Market
Fund shares. Any loss upon the sale or exchange of Money Market Fund shares
held for six months or less, however, will be treated as long-term capital loss
to the extent of any capital gain dividends received by the shareholder.
Distributions in excess of the Money Market 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). Recent legislation
creates additional categories of capital gain taxable at different rate, which
RICs generally may pass through to shareholders. Generally, not later than 60
days after the close of its taxable year, the Money Market Fund will provide
its shareholders with a written notice designating the amounts of any ordinary
income dividends or capital gain dividends, as well as the amounts of capital
gain dividends in the different categories of capital gain referred to above.
Dividends of a RIC are ordinarily taxable to shareholders even though they are
reinvested in additional shares of the Fund.
If the value of assets held by the Money Market Fund declines, the Board of
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 eliminated shares would be added to the
basis of shareholders' remaining Money Market Fund shares. In the event of
retirement plan disqualification or for shares held outside of a retirement
plan, distributions, including distributions reinvested in additional shares of
the Money Market Fund, would be fully taxable, even if the number of shares in
shareholders' accounts had been reduced as described above.
Under certain provisions of the Code, some taxpayers may be subject to a 31%
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, participants in the
Self-Directed Plans subject to backup withholding will be those for whom no
certified taxpayer identification number is on file with the Trust or who, to
the Trust'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. While the Money Market Fund intends to distribute
its 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 the
Fund's taxable income and capital gains will be distributed to avoid entirely
the imposition of the tax. In such event, the Fund will be liable for the tax
only on the amount by which it does not meet the foregoing distribution
requirements.
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Self-Directed Retirement Plans. Investment in the Money Market Fund is
limited to participants in the self-directed retirement plans ("retirement
plans") for which Merrill Lynch acts as custodian. Accordingly, the general
description of the tax treatment of RICs as set forth above is qualified with
respect to the special tax treatment afforded retirement plans under the Code.
Under the Code, neither ordinary income dividends nor capital gain dividends
represent current income to Class I or II shareholders if such shares are held
in a retirement plan.
For all Self-Directed Plans except Roth IRAs, such distributions will be
taxable as ordinary income at the rate applicable to the participant at the
time of the distribution. Such distributions would include (i) any pre-tax
contributions to their self-directed retirement plan (including pre-tax
contributions that have been rolled over from another retirement plan or IRA)
and (ii) dividends (whether or not such dividends are classified as ordinary
income or capital gain dividends). Recent legislation, however, provides that
there is no penalty for early withdrawals from a retirement plan for the
purpose of acquiring one's first home. In addition to ordinary income tax,
participants (except Roth IRA participants) may be subject to the imposition of
a 10% excise tax on any amount withdrawn from a retirement plan prior to the
participant's attainment of age 59 1/2, unless the shareholder has become
disabled, is purchasing a first new home (subject to the $10,000 lifetime
limit) or has died.
For Roth IRA participants, distributions, including accumulated earnings on
contributions, will not be includible in income if such distribution is made
more than five years after the first tax year of contribution and the account
holder is either 59 1/2 or older, has become disabled, is purchasing a first
new home (subject to a $10,000 lifetime limit) or has died. As with the other
Self-Directed Plans, a 10% excise tax applies to amounts, other than the
$10,000 allowed for a first home purchase, withdrawn from the Roth IRA prior to
reaching age 59 1/2. Such a withdrawal would also be included in income to the
extent of earnings on contributions, with distributions treated as made from
contributions and then from earnings.
Under certain limited circumstances (for example, if an individual for whose
benefit a retirement plan is established engages in any transaction prohibited
under Section 4975 of the Code with respect to such account), the retirement
plan would cease to be qualified for the special treatment afforded certain
retirement plans under the Code as of the first day of such taxable year that
the transaction causing disqualification occurred. If a retirement plan through
which a participant holds Class I or Class II shares of the Money Market Fund
becomes ineligible for special tax treatment, such participant will be treated
as having received a distribution on the first day of the taxable year from the
retirement plan in an amount equal to the fair market value of all assets in
the account. A shareholder (except shareholders in Roth IRAs) then would be
taxed currently on the amount of any pre-tax contributions and previously
untaxed dividends held within the account. A Roth IRA shareholder would be
taxed currently on the distribution to the extent of accumulated earnings on
contributions. All shareholders would be taxed on all ordinary income and
capital gain dividends paid by the Money Market Fund subsequent to such event,
whether such dividends were received in cash or reinvested in additional
shares. These ordinary income and capital gain dividends also might be subject
to state and local taxes. In the event of retirement plan disqualification,
shareholders also could be subject to the 10% excise taxes described above.
Additionally, retirement plan disqualification may subject a nonresident alien
shareholder to a 30% United States withholding tax on ordinary income dividends
paid by the Fund unless a reduced rate of withholding or withholding exemption
is provided under applicable treaty law.
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The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
STATE
Ordinary income and capital gain dividends on RIC shares held in a
disqualified retirement plan or outside of a retirement plan also may be
subject to state and local taxes. Certain states exempt from state income
taxation dividends paid by RICs which are derived from interest on United
States Government obligations. State law varies as to whether dividend income
attributable to United States Government obligations is exempt from state
income taxation. Generally, however, states exempt from state income tax
dividends on shares held within a qualified retirement plan, and commence
taxation on such amounts when actually distributed from the retirement plan.
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 Fund.
EXCHANGE PRIVILEGE
Participants in the Self-Directed Plans (except retirement plans in
association with the Merrill Lynch Blueprint SM Program) who are Class I or
Class II shareholders of the Money Market Fund and who have held all or part
of their shares for at least 15 days may exchange their Class I or Class II
shares of the Money Market Fund for Class D shares of certain other mutual
funds advised by the Manager or FAM (collectively referred to as the "MLAM-
advised mutual funds") on the basis described below. Shares with a net asset
value of at least $250 are required to qualify for the exchange privilege.
Alternatively, shareholders may exchange shares of the Money Market Fund for
Class A shares of one of the MLAM-advised non-money market mutual funds if the
shareholder holds any Class A shares of that fund in the account in which the
exchange is made at the time of the exchange or is otherwise eligible to
invest in Class A shares of such fund, otherwise Class D shares will be
automatically purchased. An eligible Class A investor includes the following:
certain employer sponsored retirement or savings plans, including eligible
401(k) plans, provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by MLAM or any of its
affiliates; corporate warranty insurance reserve fund programs provided that
the program has $3 million or more initially invested in MLAM-advised mutual
funds; participants in certain investment programs including TMASM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services and certain purchases made in connection with the Merrill Lynch
Mutual Fund Adviser program; and ML & Co. and its subsidiaries and their
directors and employees and members of the Board of MLAM-advised investment
companies, including the Money Market Fund.
Class I and Class II shareholders of the Money Market Fund also may exchange
shares of the Money Market Fund into shares of Merrill Lynch Ready Assets
Trust, Merrill Lynch U.S.A. Government Reserves and Merrill Lynch U.S.
Treasury Money Fund.
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Under the exchange privilege, each of the funds offers to exchange its
shares ("new shares") for shares ("outstanding shares") of any of the other
funds, on the basis of relative net asset value per share, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding shares and the sales charge payable at the time of the
exchange on the new shares. At the present time, the shares of each of the
funds other than Merrill Lynch U.S.A. Government Reserves are sold with
varying sales charges. With respect to outstanding shares as to which previous
exchanges have taken place, the "sales charge previously paid" shall include
the aggregate of the sales charges paid with respect to such shares in the
initial purchase and any subsequent exchange. Shares issued pursuant to
dividend reinvestment are sold on a no-load basis in each of the funds. For
purposes of the exchange privilege, dividend reinvestment shares shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the shares on which the dividend was paid. Based on this
formula, an exchange of shares of the Money Market Fund, which are sold on a
no-load basis, for shares of the other funds, which are sold with a sales
charge, will generally require the payment of a sales charge.
The exchange privilege available to participants in the Merrill Lynch
Blueprint SM Program may be different from that available to other investors.
Shareholders of the Money Market Fund other than participants in the Self-
Directed Plans should consult with Merrill Lynch as to availability of the
exchange privilege.
Before effecting an exchange, shareholders of the Money Market Fund should
obtain a currently effective prospectus of the fund into which the exchange is
to be made. Exercise of the exchange privilege is treated as a sale of the
exchanged shares and a purchase of the new shares for Federal income tax
purposes and depending on the circumstances, a short or long-term capital gain
or loss may be realized with different long-term capital gains rates
potentially applicable, if gain on the sale is long-term. In addition, an
exchanging shareholder of any of the funds may be subject to backup
withholding unless such shareholder certifies under penalty of perjury that
the taxpayer identification number on file with any such fund is correct, and
that he or she is not otherwise subject to backup withholding. See "Taxes."
To exercise the exchange privilege, shareholders may either contact their
listed securities dealer, who will advise the Money Market Fund of the
exchange. This exchange privilege may be modified or terminated in accordance
with the rules of the Commission. The Money Market Fund reserves the right to
limit the number of times an investor may exercise the exchange privilege.
Certain funds may suspend the continuous offering of their shares to the
general public at any time and may thereafter resume such offering from time
to time. The exchange privilege is available only to U.S. shareholders in
states where the exchange legally may be made.
GENERAL INFORMATION
DESCRIPTION OF SERIES AND SHARES
The Declaration of Trust provides that the Trust shall comprise separate
Series each of which will consist of a separate portfolio that will issue
separate shares. The Trustees are authorized to create an unlimited number of
Series and, with respect to each Series, to issue an unlimited number of full
and fractional shares of beneficial interest, par value $.10 per share, of
different classes and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial
interests in the Series. Shareholder approval is not necessary for the
authorization of additional Series or classes of a Series
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of the Trust. At the date of this Statement of Additional Information, the
Money Market Fund is the only existing Series of the Trust, and shares of the
Money Market Fund are divided into Class I and Class II shares (although no
Class II shares have been issued). Class I and Class II shares represent an
interest in the same assets of the Money Market Fund and are identical in all
respects, except that Class II shares bear certain expenses related to the
distribution of such shares and have exclusive voting rights with respect to
matters relating to such distribution expenditures. The Board of Trustees of
the Trust may classify and reclassify shares of any Series into additional
classes at a future date.
All shares have equal voting rights, except that only shares of the
respective Series are entitled to vote on matters concerning only that Series
and, as noted above, Class II shares will have exclusive voting rights with
respect to matters relating to the distribution expenses borne solely by such
class. Each issued and outstanding share is entitled to one vote for each full
share held and fractional votes on fractional shares in the election of
Trustees (to the extent hereinafter provided) and on other matters submitted to
the vote of shareholders, and to participate equally in dividends and
distributions with respect to that Series and upon liquidation or dissolution
of the Series in the net assets of such Series remaining after satisfaction of
outstanding liabilities.
The obligations and liabilities of a particular Series are restricted to the
assets of that Series and do not extend to the assets of the Trust generally.
The shares of each Series, when issued, will be fully paid and non-assessable,
have no preference, pre-emptive, conversion, exchange or similar rights, and
will be freely transferable. Shareholders of the Trust are entitled to redeem
their shares as set forth under "Redemption of Shares" in the Prospectus and
"Purchase and Redemption of Shares" herein. Shares do not have cumulative
voting rights and the holders of more than 50% of the shares of the Trust
voting for the election of Trustees can elect all of the Trustees of the Trust
if they choose to do so, and in such event the holders of the remaining shares
would not be able to elect any Trustees. No amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust. At the date of this Statement of Additional
Information, the Money Market Fund is the only Series of the Trust.
CUSTODIAN
The Bank of New York (the "Custodian"), 90 Washington Street, 12th Floor, New
York, New York 10286, acts as Custodian of the Money Market Fund's assets. The
Custodian is responsible for safeguarding and controlling the Money Market
Fund's cash and securities, handling the receipt and delivery of securities and
collecting interest and dividends on the Money Market Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., (the "Transfer Agent"), 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484, a subsidiary of
ML & Co., acts as the Money Market Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Trust. The selection of
independent auditors is subject to ratification by the shareholders of the
Trust. The independent auditors are responsible for auditing the annual
financial statements of the Money Market Fund.
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LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of the Money Market Fund ends on October 31 of each year. The
Money Market Fund sends to its shareholders at least semi-annually reports
showing the Money Market Fund's portfolio and other information. An annual
report, containing financial statements audited by independent auditors, is
sent to shareholders each year.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all of the information set forth in the Registration Statement and the exhibits
relating thereto, which the Money Market Fund has filed with the Commission,
Washington, D.C. 20549, under the Securities Act and the Investment Company
Act, to which reference is hereby made.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Trust, no person or entity owned beneficially 5% or
more of the Money Market Fund's shares on January 31, 1998.
----------------
The Declaration of Trust establishing the Trust, dated July 15, 1986, a copy
of which, together with all amendments thereto (the "Declaration"), is on file
in the office of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Retirement Series Trust" refers to the Trustees
under the Declaration collectively as Trustees, but not as individuals or
personally; and no Trustee, shareholder, officer, employee or agent of the
Trust 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 said Trust
but the "Trust Property" (as defined in the Declaration) only shall be liable.
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APPENDIX A
DESCRIPTION OF THE SELF-DIRECTED PLANS
This Appendix describes in summary form the various types of self-directed
retirement plans for which Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") acts as passive custodian (the "Self-Directed Plans"). This
description does not purport to be complete, and it should be read in
conjunction with the materials concerning the Self-Directed Plans, including
copies of the Plans and the forms necessary to establish a plan, which are
available from Merrill Lynch. Investors should read such materials carefully
before establishing a Self-Directed Plan and should consult with their
attorney or tax adviser to determine if any of the Self-Directed Plans are
suited to their needs and circumstances. The laws applicable to the Self-
Directed Plans, including the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") and the Internal Revenue Code of 1986, as amended (the
"Code") are complex and include a variety of transitional rules which may be
applicable to some investors. These laws should be reviewed by investors'
attorneys to determine their applicability. Investors are further advised that
the discussion of taxation contained in this Appendix relates solely to
federal tax laws but generally does not address the numerous transitional
rules and that the tax treatment of the Self-Directed Plans under applicable
state law may vary.
There are eight types of Self-Directed Plans available: the individual
retirement account ("IRA"); the Roth IRA; the individual retirement rollover
account ("IRRA"), the simplified employee pension plan ("SEP Plus (R)"); the
Basic SM (Keogh Plus) profit sharing plan; the Basic SM (Keogh Plus) money
purchase pension plan (together with the profit sharing plan, the "Basic SM
Plans"); the 403(b)(7) Retirement Selector Account ("RSA") and the corporate
self-directed account of the Merrill Lynch Blueprint SM Program. Specific
information with respect to certain requirements and limitations for each
Self-Directed Plan is described in greater detail below. See "Types of Self-
Directed Plans."
ESTABLISHMENT OF A SELF-DIRECTED PLAN ACCOUNT
Self-Directed Plan accounts may be established by qualified individuals and
businesses through Merrill Lynch.
With the exception of Roth IRAs, Self-Directed Plans generally afford
participants whose income is below certain prescribed limits the opportunity
to take a tax deduction, up to the maximum amount permitted under the Code for
the particular Self-Directed Plan, for amounts contributed to the Plan.
Contributions to Roth IRAs are not currently deductible; however, amounts
contributed to Roth IRA accounts can accumulate tax-free and qualified
distributions from the Roth IRA including accumulated earnings will not be
included in income. Each Self-Directed Plan is "self-directed;" that is, each
participant is responsible for making investment decisions concerning the
funds contributed to his Self-Directed Plan.
Merrill Lynch charges an annual custodial fee for each account established
pursuant to the Self-Directed Plans. These fees, which are contained in the
Self-Directed Plan documents, vary according to the type of account. Brokerage
fees will be assessed separately for each transaction to which they apply.
Shares of the Money Market Fund also are offered to participants in various
retirement plans in association with the Merrill Lynch Blueprint SM Program.
Most contributions to such plans are made through payroll deductions. In
addition to investing in the Money Market Fund, participants in such plans may
invest in other mutual funds associated with the Merrill Lynch organization or
various other types of securities. If participants elect to have their
contributions invested in the Money Market Fund, the contributions will be
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invested automatically on the business day following the date they are
received in the account. There will be no minimum initial or subsequent
purchase requirement pursuant to these types of plans. Cash balances of less
than $1.00 will not be invested.
PERMISSIBLE SELF-DIRECTED PLAN INVESTMENTS
The type of investments that may be made depends on the type of Self-
Directed Plan established.
Participants and employers that maintain IRAs, Roth IRAs, IRRAs, Basic SM
Plans, SEP Plus(R) or retirement plans in association with the Merrill Lynch
Blueprint SM Program may invest in securities through Merrill Lynch or its
affiliates, including stocks traded "over-the-counter" or on a recognized
exchange, government or corporate debt obligations, certain mutual funds,
certain limited partnership interests in real estate, and bank money
instruments. Participants and employers may also invest in annuity contracts
issued by a life insurance company (including Merrill Lynch Life Insurance
Company and Merrill Lynch Life Insurance Company of New York), and, in the
case of Basic SM Plan participants only, life insurance contracts.
Participants and employers that maintain RSAs are restricted to investing in
mutual funds. Those participants and employers desiring a diversified
portfolio but not wishing to actively manage the portfolio may elect to invest
all or a portion of their account in certain mutual funds advised by Merrill
Lynch Asset Management, L.P. (the "Manager") or its affiliate. Participants
and employers may vary their investment portfolio as often as they wish.
Cash balances arise in a Self-Directed Plan account from contributions to
the Plan, the sale of securities held in the account and the receipt of
dividends, interest and principal repayments on securities held in the
account. Cash balances for which no other investment directions are given
will, in accordance with the option previously selected by the participant or
employer, be invested in full shares of the Money Market Fund or another money
market fund advised by the Manager, deposited in an Insured Investment
Account, an FDIC insured interest-bearing account with a Merrill Lynch Bank
and Trust Company, or maintained uninvested in the Self-Directed Plan account.
If such amounts are not invested, no return will be earned. All cash balances
will be invested or maintained in accordance with the option selected by the
participant or employer, pending instructions as to further investment.
Based upon performance of money market funds generally over the last several
years, the yield on amounts invested in the Money Market Fund may be greater
at times than the yield on amounts deposited in the interest-bearing account.
There can be no assurance, however, that the yield on an investment in the
Money Market Fund will be or will remain greater than that available on such
interest-bearing account. In addition, the Money Market Fund is not a bank,
and shares of the Money Market Fund are not equivalent to a bank account. As
with any investment in securities, the value of an investment in the Money
Market Fund will fluctuate. Amounts deposited in the interest-bearing account
will be insured as to principal in an amount of up to $100,000 per account by
the Federal Deposit Insurance Corporation. Cash balances maintained in a Self-
Directed Plan account will be insured, up to $100,000, by the Securities
Investor Protection Corporation.
CONTRIBUTIONS AND DISTRIBUTIONS
The amount that may be contributed to a Self-Directed Plan in any one year
is subject to certain limitations under the Code; however, assets already in a
Self-Directed Plan account may be invested without regard to such limitations
on contributions. With the exception of contributions made on behalf of
employees by employers under the Basic SM Plans, employer contributions to a
SEP Plus (R), RSA or 401(k) plan in
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association with the Merrill Lynch Blueprint SM Program (as discussed herein),
and contributions to a Roth IRA, a Self-Directed Plan participant may deduct
from his annual gross income, up to the maximum permitted under the Code,
amounts contributed to his or her Self-Directed Plan. These amounts, plus any
additional income earned on such contributions, will ordinarily not be taxed
until distributed to the participant.
Generally, under the Code, distributions from any Self-Directed Plan may be
made at any time but, as discussed below, distributions made prior to the date
on which the participant reaches age 59 1/2 and, for Roth IRAs, within five
years from the first tax year of contribution, may be subject to a penalty
and, for Self-Directed Plans other than a Roth IRA, the entire distribution
and for Roth IRAs the portion attributable to accumulated earnings may be
subject to mandatory federal income tax withholding at a 20% rate (as
described below). Recent legislation provides that there is no penalty for
early withdrawals from any Self-Directed Plan for the purpose of acquiring
one's first home. Except in the case of Roth IRAs, distributions will be taxed
as ordinary income at the rate applicable to the participant in the year in
which distributed. For Roth IRAs, only the portion of the distribution
attributable to accumulated earnings will be taxable as ordinary income on
distribution.
Excess Contributions. Contributions to an IRA, Roth IRA, IRRA or SEP
Plus (R) in excess of those allowed by law are subject to a 6% excise tax if
not withdrawn, together with additional income attributable to such excess
contributions, prior to the date the participant files his or her income tax
return for the year in which the excess contribution was made. If an excess
amount is contributed in one year and is not eliminated in later years, the
excess amount will be subject to a cumulative six percent excise tax each year
until it is eliminated. Elimination of the excess may be accomplished either
by reducing the contribution (and deduction) for a succeeding year, or by
withdrawal of the excess amount plus the income attributable to it. Such
income will be considered a premature distribution subject to the ten percent
penalty tax on premature distributions discussed below, and, except for Roth
IRAs, for which the distribution would only be taxed to the extent of any
accumulated earnings, will additionally be taxable as ordinary income at the
applicable rate for the year in which it is distributed. Contributions to a
Basic Plan SM, RSA or a 401(k) plan in association with the Merrill Lynch
Blueprint SM Program are not subject to the 6% excise tax, but premature
distributions from these plans under the Code are generally subject to the 10%
penalty.
Timing of Retirement Benefits. Except with respect to Roth IRAs, a
participant, upon reaching age 59 1/2, generally may make such distributions
from his Self-Directed Plan account as he chooses without tax penalties.
Generally, the Code requires that amounts in Self-Directed Plans must commence
to be distributed to a participant on or before April 1 of the calendar year
following the calendar year in which he reaches age 70 1/2, even if the
employee has not retired; with respect to Roth IRAs, however, no mandatory
withdrawals are required during the account holder's life.
Distributions from Self-Directed Plans may be made in a lump sum or
installments over the life of the participant, or the joint lives of the
participant and a designated beneficiary, or over a period not to exceed the
life expectancy (determined, generally, by IRS life expectancy tables) of the
participant or the joint life expectancy of the participant and designated
beneficiary. If the employee dies before his entire interest has been
distributed, the remaining portion of his interest must be distributed at
least as rapidly as the method of distribution in effect prior to his death.
Special rules apply under the Code to spousal beneficiaries.
If the minimum payout required from a Self-Directed Plan for a particular
year is not made, a 50% excise tax will be imposed on the amount representing
the difference between the minimum payout required
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from the Self-Directed Plan, and the amount actually distributed, under
Section 4974 of the Code. Since there are no minimum payouts required for Roth
IRAs during the grantor's lifetime, there are no such penalties until the
minimum payout obligation becomes operative for the grantor's beneficiaries.
Treatment of Lump Sum Distributions and Annuities. The recipient of a "lump
sum distribution" (generally a distribution or payment within one taxable year
to the recipient of the balance to the credit of the employee on account of
the employee's death, attainment of age 59 1/2, disability or separation from
service (except in the case of a self-employed individual)) from a qualified
retirement plan (including Basic SM Plans, RSA and 401(k) plans but not IRAs,
Roth IRAs or SEP Plus (R) accounts) may compute his tax liability using the
five-year averaging tax computation, subject to certain requirements. The
total taxable amount of a lump sum distribution is the part that is the
employer's contribution and income earned on the account. Generally, the part
of the distribution that consists of the employee's contributions (other than
deductible voluntary employee contributions), the actuarial value of any
annuity contract distributed and the net unrealized appreciation in employer's
securities distributed (until such securities are sold or otherwise disposed
of in a taxable transaction), together with the death benefit exclusion, if
applicable, is not taxed. Employee contributions should be reduced by any
amounts previously distributed that were included in gross income because they
were a return of employer contributions. If annuity payments are made from
qualified retirement plans after January 1, 1986, under Section 72(b) of the
Code a portion of the annuity payments received annually by recipients may be
excluded from income as a return of the recipient's investment. This
"exclusion ratio" is the employee's investment in the contract over the
expected return. For annuity starting dates commencing after 1986, this
exclusion ratio is applied to only a limited number of annuity payments, and
the excludable amount is limited to the employee's total investment. If an
annuitant dies before the entire investment has been recovered, the
unrecovered investment is deductible on the individual's final income tax
return. No income averaging methods apply to distributions from IRAs, Roth
IRAs, IRRAs, SEP Plus (R) accounts or RSAs.
Premature Distributions. 1. Excise Tax: Distributions from an IRA, Roth IRA,
IRRA, RSA, SEP Plus (R) or qualified retirement plan (including Basic SM Plans
and 401(k) plans) prior to the time the participant reaches age 59 1/2
generally are subject to penalty unless the participant has died or has become
disabled (within the meaning of Code Section 72(m)(7)) or is purchasing a
first home. The penalty for early distributions is an excise tax equivalent to
10% of the amount so distributed, in addition to the applicable ordinary
income tax payable on such amount for all Self-Directed Plans or on the amount
of the distribution representing accumulated earnings for Roth IRAs for the
year in which it is distributed. The tax will be waived for any distribution
that is part of a scheduled series of substantially level payments under an
annuity for the life or life expectancy of the taxpayer or the joint lives of
the taxpayer and his designated beneficiary. Distributions can also be made,
without penalty, to cover deductible medical expenses, for certain payments in
a divorce settlement, or to an employee who is age 55 or older, has separated
from service, and has satisfied the requirements of the employer's plan for
early retirement (if the plan permits such payments). In certain cases, the
penalty will not be waived if the distribution is from an IRA, Roth IRA or
retirement annuity. A premature distribution of an employee's contribution
from a 401(k) plan or RSA may be permitted without penalty in the event of
hardship, termination of the plan or a sale of the employer's business. The
penalty is also not waived for distributions from a qualified retirement plan,
if the employee is a more than five percent owner or has been a more than
five-percent owner at any time during the five plan years preceding the plan
year ending in the tax year in which the amount is received. A five percent
owner is a person who, in the case
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of a corporate employer, actually or constructively owns more than five percent
of the outstanding stock of the employer or stock possessing more than five
percent of the total combined voting power of all stock of the employer, or
who, in the case of a non-corporate employer, owns more than five percent of
the capital or profits interest in the employer. A rollover will avoid
imposition of the excise tax. However, for distributions prior to 1993, the
Code restricts the rollover of partial distributions to distributions received
on account of an employee's separation from service, death or disability.
2. Mandatory Income Tax Withholding: Generally, any portion of an "eligible
rollover distribution" made from a qualified retirement plan after December 31,
1992 qualifies for tax-free rollover into an eligible retirement plan under
Section 402(c) of the Code. Under Section 402(c), as amended, all distributions
from a qualified retirement plan (including in-service distributions) are
eligible rollover distributions, except for certain periodic payments, required
amounts distributed to a participant who is over age 70 1/2 as described above,
and amounts otherwise not includible in gross income. Rollovers may be made by
the participant in one of two ways: first, by direct transfers from the
qualified retirement plan to an IRA or Roth IRA (including an individual
retirement annuity other than an endowment contract), a qualified defined
contribution plan or an annuity under Section 403(a) of the Code (a "direct
rollover") or, in the case of the RSA plan to another 403(b) plan, a tax
sheltered annuity; or second, by rolling over an eligible rollover distribution
within 60 days of receipt to any of the arrangements described above. In the
event a direct rollover is not chosen by the participant, a mandatory 20% of
the distribution, or the amount of the distribution representing accumulated
earnings in the case of a Roth IRA, is withheld to satisfy any federal tax
liability that may be assessed. The mandatory 20% withholding tax is not
assessed against any distributions that may not be rolled over (including, but
not limited to, distributions to beneficiaries other than a surviving spouse,
or a present or former spouse under a qualified domestic relations order).
Participants should consult with their attorneys or tax advisers in order to
determine the application of the rollover and mandatory withholding
requirements to their own circumstances. Participants also should consult their
attorneys or advisers when considering converting or rolling over to a Roth
IRA.
The foregoing rules are of general applicability to the Self-Directed Plans.
The following section discusses specific considerations applicable to the
different types of Self-Directed Plans.
TYPES OF SELF-DIRECTED PLANS
Traditional Individual Retirement Accounts. As a result of changes made by
the Tax Reform Act of 1986, the allowable deductions for contributions to IRAs
are restricted for certain taxpayers who are (or their spouses are) active
participants in employer-sponsored retirement plans and whose adjusted gross
income exceeds certain levels. An individual will be considered an active
participant in a defined contribution plan if any employer contribution or
forfeiture is added to his account for the year. In the case of a defined
benefit plan, an individual will be considered an active participant if he is
not excluded under the eligibility rules for the year. The determination of
whether an individual is an active participant is made without regard to
whether the individual's rights under a plan are vested. For 1998, for a single
or married individual who is an "active participant" in an employer-sponsored
retirement plan, deductible contributions are permitted subject to a pro rata
phase-out rule where adjusted gross income (before the IRA deduction) is over
$50,000 on a joint return or $30,000 for an unmarried individual. For 1998, the
allowable deduction is completely eliminated for such taxpayers when adjusted
gross income (before the IRA deduction) reaches $60,000 on a joint return or
$40,000 for an unmarried person. For this purpose, an employer-sponsored
retirement plan means a pension, profit-sharing or stock bonus plan qualified
under Code section 401(a) (including a Keogh plan or
25
<PAGE>
401(k) plan), an annuity plan qualified under Section 403(a), a SEP, a tax-
sheltered Code section 403(b) annuity and retirement plans covering federal,
state or local government employees. A minimum deductible contribution of $200
is provided for any taxpayer whose adjusted gross income is not above the
phase-out range even if the phase-out rules would provide for a lower
deduction.
The Taxpayer Relief Act of 1997 eliminates the limits which previously
applied to spouses of active participants in an employer-sponsored retirement
plan. Instead, the maximum deductible IRA contribution for an individual who is
not an active participant but whose spouse is an active participant, is phased
out for the nonactive participant if the couples' combined adjusted gross
income is between $150,000 and $160,000.
Subject to the above limitations, any individual with compensation may
establish an IRA. Generally, the maximum yearly tax deduction that may be taken
for an IRA contribution is the lesser of $2,000 or 100% of the individual's
compensation. If a husband and wife are both employed, they may take a
deduction of up to $4,000 on a joint return. If only one spouse is employed, a
separate IRA, called a "spousal IRA," may be established for the benefit of the
non-working spouse or a spouse that elects to be treated as having no
compensation for the year. The aggregate deduction for the two IRAs for any
year may not exceed the lesser of 100% of the couples' combined income or
$4,000 annually. Allocations may be made between the two accounts in any manner
so long as no more than $4,000 is contributed to either of the accounts. No
deduction for IRA contributions may be made for or after the tax year in which
a participant reaches age 70 1/2. In addition, no deduction will be allowed for
amounts paid to an "inherited IRA" (i.e., an IRA acquired on account of the
death of another individual other than by the surviving spouse of the original
owner).
Active participants in employer-sponsored plans who are not eligible to make
deductible contributions to IRAs (or whose deductions are limited) may make
nondeductible contributions to a separate account or a Roth IRA. The
nondeductible contribution is subject to the same dollar limitations ($2,000
single, $4,000 joint or 100% of compensation) as deductible contributions
described above. Income in the separate account will accumulate tax-free, for
retirement accounts other than a Roth IRA, only the account earnings will be
included in taxable income upon distribution and a qualified distribution will
be entirely tax-free if from a Roth IRA.
The Self-Directed IRA program allows for the establishment of IRAs, which are
"rollover IRAs". Prior to 1993, a rollover IRA could have only been established
with a distribution received from a qualified employer-sponsored pension plan
that was of an amount equal to at least 50% of the balance to the credit of the
employee in the plan; after December 31, 1992, this 50% requirement no longer
applies. This distribution would ordinarily be subject to income tax; however,
tax may be deferred to the extent that all or part of the rollover amount, less
any voluntary contributions made to the employer-sponsored plan, is put into an
IRA within 60 days of receiving the distribution. With respect to a
distribution of less than the entire balance to the credit of the employee in
the plan prior to 1993 (a "partial rollover"), the distribution was eligible
for rollover treatment only if the distribution was made on account of the
employee's death, separation from service or disability and was not one of a
series of periodic payments and the employee elected, in a manner to be
prescribed by regulations, to have rollover treatment apply to such
distribution. However, as described above, effective for rollovers made after
December 31, 1992, the limitations described with respect to partial rollovers
have been eliminated, and new mandatory federal income tax withholding
requirements have been imposed for any rollover that is not a direct rollover.
The amounts in a rollover IRA are taxed only upon
26
<PAGE>
distribution, as with other IRAs, except for Roth IRAs. However, tax-free
rollover treatment will be denied for amounts received from an "inherited IRA."
Roth Individual Retirement Accounts. As of January 1, 1998, qualifying
participants in Self-Directed Plans generally can contribute up to $2,000
annually (with limits based on adjusted gross income, compensation and
contributions to other IRAs) toward retirement. While such contributions are
not tax-deductible, amounts contributed to the account can accumulate tax-free
and qualified distributions from the Roth IRA will not be included in income.
Although the amount which may be contributed to a Roth IRA in any one year is
subject to certain limitations, assets already in a Roth IRA may be invested in
the Money Market Fund without regard to such limitations.
Generally taxpayers whose adjusted gross income ("AGI") falls at or below
$150,000 (for married couples filing jointly) or at or below $95,000 (for
single tax filers) will be able to contribute up to $2,000 of compensation
annually to a Roth IRA. Contributions are phased out for taxpayers whose AGI
falls between $150,000 and $160,000 for joint filing couples and $95,000 and
$110,000 for singles. A taxpayer whose AGI does not exceed $100,000 for the
taxable year is eligible to roll over or convert an IRA into a Roth IRA in such
year (except for any married taxpayer who elects to file a separate federal
income tax return for such year).
While contributions are non-deductible, distributions from a Roth IRA
generally will be tax-free if (a) the account holder has had a Roth IRA for
more than five tax years and (b) is age 59 1/2 or older, has become permanently
disabled, is purchasing a first home (subject to a $10,000 lifetime limit) or
dies. (If a distribution is attributable to a conversion from a traditional
IRA, the five-year period is measured from the year in which the conversion
occurs.) If these factors are not met, participants withdrawing funds from the
Roth IRA will be subject to a 10% early withdrawal penalty and will be subject
to income tax to the extent amounts withdrawn represent earnings on
contributions to the Roth IRA.
Unlike other IRAs, individuals can make contributions to a Roth IRA after age
70 1/2.
Simplified Employee Pension Plans. A SEP is essentially a collection of IRA
accounts established by employers for their employees, and any employer,
whether it is a sole proprietorship, a partnership or a corporation, may set up
a SEP. To qualify as a SEP, certain requirements must be met; in particular,
the plan must cover all current employees age 21 years or older who have worked
for the business in three of the last five calendar years and have received at
least $400 in compensation from the employer. Up to $30,000 or 25% of the
employee's compensation up to $160,000 (effective for plan years beginning
after December 31, 1994), subject to inflation adjustments may be paid by the
employer to the employee's SEP. The same percentage of compensation (determined
under a written formula) must be contributed on behalf of each employee. Such
contributions are deductible by the employer and excluded from the employee's
income. In addition, elective salary deferrals may be made by a participant in
the SEP Plus (R) Plan. The tax-free elective deferral of an employee's income
for a taxable year cannot exceed $7,000, as adjusted for inflation (currently,
$10,000 for 1998). This cap limits all tax-free elective deferrals by an
employee under all cash and deferred arrangements, SEPs and tax sheltered
annuities.
Because the SEP is also an IRA, the employee may, if otherwise eligible under
the rules applicable to IRAs discussed above, make up to a $2,000 contribution
to the SEP or make rollover contributions (see
27
<PAGE>
"Individual Retirement Accounts" above). Amounts contributed to a
participant's SEP account vest immediately. If the participant should cease to
be employed by the business maintaining the SEP, the participant retains full
rights to and investment power over the account. In such case, the account
should be changed to a regular IRA so that the participant may make additional
permissible contributions.
Tax-deductible employer contributions may continue to be made to a SEP
participant's account even after he has reached age 70 1/2.
Basic SM Plans. The Basic SM Plan provides a format under which a profit-
sharing plan or a money purchase pension plan may be established either by a
corporation for its employees or by a self-employed individual or partnership
as a "Keogh" plan. A Keogh plan is a self-employed retirement plan established
by a self-employed individual or other non-corporate employer for the
exclusive benefit of employees and their beneficiaries. For Keogh plan
purposes, "employer" takes on a special meaning. A sole proprietor (i.e., a
self-employed individual who owns the entire interest in an unincorporated
trade or business), an independent contractor, or an individual in business
for himself is self-employed and is his own employer. A partnership is treated
as the employer of each partner who earns income from the performance of
services for the partnership. Silent partners who put up capital but do not
work in the business may not be included in a Keogh plan. Under the money
purchase pension plan, regular, set contributions must be made for each
employee each year. Under the profit-sharing plan, contributions are keyed to
the existence of profits and should be made on a regular basis to ensure that
the Basic SM Plan maintains its qualified status.
Generally, all employees who are at least 21 years of age and have worked
for the employer (whether corporate or non-corporate) for at least two years
must be covered under the terms of the Basic SM Plan. Contributions under a
Basic SM Plan are usually required to be allocated among those who are
participants on the last day of a plan year. For this purpose, the Basic SM
Plan provides several options to define the compensation that will be included
in determining contributions under the Basic SM Plan. Contributions under the
Basic SM Plan are fully vested when made.
Top-Heavy Plan Requirements. The Code imposes special rules with respect to
qualified plans that are considered to be "top-heavy" plans (individual
retirement plans are not subject to the Code's rules relating to "top-heavy"
plans). A defined contribution plan, such as the Basic Plan, is considered to
be "top-heavy" where the account balances of "key employees" exceed 60% of the
account balances of all employees. "Key employees" include all employees who,
at any time during the plan year or the four preceding plan years (1) are
officers having annual compensation of more than $65,000, as adjusted for
inflation, (2) are one of the ten employees with annual compensation of more
than $30,000 that actually or constructively own the largest interests in the
employer, (3) are "5% owners," or (4) own more than a 1% interest in the
employer and have annual compensation in excess of $150,000. The account
balance of an individual that has not received compensation as an employee
during the five preceding plan years is not taken into account.
When a plan favoring key employees is determined to be "top-heavy," its
continued qualification under the Code depends on its compliance with certain
requirements, which (1) limit the amount of a participant's compensation that
may be taken into account, (2) provide stringent vesting schedules, (3)
provide minimum contributions or benefits for non-key employees, and (4)
reduce the aggregate limit on benefits and contributions for certain key
employees who participate in both a defined benefit plan and a defined
contribution plan. Even if a Basic SM Plan were determined to be "top-heavy,"
it would continue to maintain
28
<PAGE>
its qualification under the Code because the provisions of the Plan relating
to the above limitations have been designed to comply with such limitations,
whether or not the Basic SM Plan is found to be "top-heavy."
For a SEP Plus (R) Plan which is top-heavy (either because it was deemed to
be top-heavy as of the adoption of the plan or as determined through annual
testing prescribed by the Code) the employer may preserve the plan's
qualification by making a contribution on behalf of each non-key employee of
the lesser of: (1) 3% of each such non-key employee's compensation, or (2) the
highest contribution percentage rate for any key employee under the plan.
Retirement Plans in Association with the Merrill Lynch Blueprint SM
Program. The Merrill Lynch Blueprint SM Program is available to participants
in a cash or deferred plan (commonly known as a "401(k) plan") and to
participants in IRAs and Roth IRAs in which contributions are made through
payroll deductions.
A 401(k) plan is a cash or deferred arrangement that allows an employee to
choose whether the employer will pay a certain amount directly to the employee
in cash or to a qualified profit-sharing plan or a stock bonus plan on behalf
of such employee. The tax-free elective deferral of an employee's income for a
taxable year cannot exceed $7,000, as adjusted for inflation (currently,
$10,000 for 1998). This cap limits all tax-free elective deferrals by an
employee under all cash and deferred arrangements, SEPs and tax sheltered
annuities. The employer may make "non-elective" contributions directly into
the plan on the employee's behalf. These contributions must meet special non-
discrimination tests. Generally, participants in a 401(k) plan in association
with the Merrill Lynch Blueprint SM Program are treated in the same manner as
participants in other qualified retirement plans.
Participants in IRA plans which are maintained in association with the
Merrill Lynch Blueprint SM Program are generally treated for contribution and
distribution purposes in the same manner as other IRA participants, as
discussed above.
Each of the foregoing Self-Directed Plans is designed to meet differing
needs and has varying financial and tax consequences. An investor should
thoroughly review all of the materials available from Merrill Lynch concerning
the Self-Directed Plans and consult with his attorney or tax adviser in
determining whether any of these Plans is suited to his needs and
circumstances.
29
<PAGE>
APPENDIX B
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 refined 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 regarding timely payment is strong; A-2
indicates that capacity for timely repayment is satisfactory; A-3 indicates
that capacity for timely payment is satisfactory, however, they are more
vulnerable to the adverse changes of circumstances than obligations rated A-1
or A-2.
Moody's Investors Service, Inc. ("Moody's") employs the designations of
Prime-1, Prime-2 and Prime-3 to indicate the relative capacity of the rated
issuers 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. Prime-3 issues have an acceptable capacity for repayment.
Fitch IBCA, Inc. ("Fitch") employs the rating F-1+ to indicate 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+, while the rating F-2 indicates a satisfactory degree of
assurance for timely payment, although the margin of safety is not as great as
indicated by the F-1+ and F-1 categories.
Duff & Phelps Inc. ("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
clearly 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.
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 a 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 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.
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.
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders, Merrill Lynch Retirement Reserves Money
Fund of Merrill Lynch Retirement Series Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Retirement Reserves Money Fund of
Merrill Lynch Retirement Series Trust as of October 31, 1997, the related
statements of operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended. These
financial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Retirement Reserves Money Fund of Merrill Lynch Retirement Series Trust as of
October 31, 1997, the results of its operations, the changes in its net assets,
and the financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 3, 1997
31
<PAGE>
Merrill Lynch Retirement Reserves Money Fund October 31, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
Face Interest Maturity Value
Issue Amount Rate* Date (Note 1a)
================================================================================
Bank Notes--9.3%
================================================================================
Bank of America, $ 40,000 5.93 % 6/24/98 $ 40,009
N.T. & S.A. 60,000 5.46+ 6/30/98 59,968
- --------------------------------------------------------------------------------
BankBoston, N.A. 69,500 5.69 3/16/98 69,474
- --------------------------------------------------------------------------------
Barclays Bank PLC 70,000 5.65+ 4/16/98 69,984
- --------------------------------------------------------------------------------
First Bank N.A., 20,000 5.665+ 3/18/98 20,007
Minneapolis
- --------------------------------------------------------------------------------
First National Bank 45,000 6.02 6/11/98 45,030
of Chicago
- --------------------------------------------------------------------------------
First Tennessee 20,000 6.10 5/15/98 20,018
Bank N.A., Memphis
- --------------------------------------------------------------------------------
KeyBank N.A. 44,000 5.56+ 5/06/98 43,990
40,000 5.56+ 5/19/98 39,990
77,400 5.54+ 8/20/98 77,355
100,000 5.54+ 8/28/98 99,944
85,000 5.90 9/17/98 85,020
- --------------------------------------------------------------------------------
Morgan Guaranty 65,000 5.615+ 2/19/98 64,989
Trust Company of NY
- --------------------------------------------------------------------------------
Northern Trust Co., 25,000 5.96 6/17/98 25,009
Chicago 14,000 5.95 6/24/98 14,005
- --------------------------------------------------------------------------------
PNC Bank N.A. 150,000 5.60+ 10/01/98 149,907
- --------------------------------------------------------------------------------
Royal Bank of 29,000 5.47+ 6/30/98 28,985
Canada
- --------------------------------------------------------------------------------
SunTrust Bank, 25,000 5.80 7/24/98 24,987
Atlanta
- --------------------------------------------------------------------------------
U.S. National Bank 15,000 5.665+ 4/14/98 14,996
of Oregon
- --------------------------------------------------------------------------------
Total Bank Notes
(Cost--$993,526) ........................................ 993,667
================================================================================
Certificates of Deposit--3.6%
================================================================================
Chase Manhattan 55,000 5.87 7/21/98 54,996
Bank
- --------------------------------------------------------------------------------
Morgan Guaranty 30,000 5.94 3/20/98 29,997
Trust Company 150,000 5.80 7/28/98 149,926
of NY 100,000 5.77 10/07/98 99,926
- --------------------------------------------------------------------------------
World Savings Bank, 50,000 5.53 11/17/97 49,999
FSB
- --------------------------------------------------------------------------------
Total Certificates of Deposit
(Cost--$384,935) ........................................ 384,844
================================================================================
Certificates of Deposit--European--1.3%
================================================================================
Abbey National 60,000 5.93 9/17/98 60,029
Treasury Services
PLC, London
- --------------------------------------------------------------------------------
Bank of Scotland 20,000 5.93 9/17/98 20,010
Treasury Services
PLC, London
- --------------------------------------------------------------------------------
Westdeutsche 60,000 5.83 8/03/98 59,976
Landesbank
Girozentrale, London
- --------------------------------------------------------------------------------
Total Certificates of Deposit--European
(Cost--$140,007) ........................................ 140,015
================================================================================
Certificates of Deposit--Yankee--5.2%
================================================================================
ABN-AMRO Bank $ 25,000 5.77 % 7/27/98 $ 24,982
N.V., Chicago 30,000 5.77 7/28/98 29,979
- --------------------------------------------------------------------------------
Barclays Bank 50,000 5.94 6/30/98 50,014
PLC, NY 50,000 5.715 10/09/98 49,930
- --------------------------------------------------------------------------------
Bayerische 100,000 5.87 10/27/98 100,015
Hypotheken-und-
Wechsel Bank, NY
- --------------------------------------------------------------------------------
Canadian Imperial 55,000 5.79 10/06/98 54,959
Bank of
Commerce, NY
- --------------------------------------------------------------------------------
Deutsche Bank, NY 25,000 5.63 2/26/98 24,977
22,000 5.94 10/22/98 22,017
- --------------------------------------------------------------------------------
Landesbank 25,000 5.78 1/27/98 24,990
Hessen-Thuringen 25,000 5.78 1/30/98 24,989
Girozentrale, NY 40,000 6.00 6/09/98 40,019
- --------------------------------------------------------------------------------
Rabobank 15,000 5.50 12/05/97 14,995
Nederland, NY
- --------------------------------------------------------------------------------
Swiss Bank Corp., NY 25,000 5.95 7/02/98 25,009
- --------------------------------------------------------------------------------
Westdeutsche 25,000 5.94 6/29/98 25,006
Landesbank 50,000 5.78 7/31/98 49,969
Girozentrale, NY
- --------------------------------------------------------------------------------
Total Certificates of Deposit--Yankee
(Cost--$561,809) ........................................ 561,850
================================================================================
Commercial Paper--38.2%
================================================================================
Aesop Funding Corp. 5,000 5.60 11/14/97 4,989
20,000 5.60 11/17/97 19,947
28,000 5.53 11/19/97 27,918
40,000 5.55 11/19/97 39,883
- --------------------------------------------------------------------------------
Alpine 32,000 5.53 11/07/97 31,966
Securitization 78,407 5.53 11/10/97 78,287
Corporation 76,069 5.56 11/12/97 75,928
- --------------------------------------------------------------------------------
American Express 25,000 5.51 12/31/97 24,763
Credit Corporation
- --------------------------------------------------------------------------------
American Honda 40,000 5.55 11/04/97 39,975
Finance Corp.
- --------------------------------------------------------------------------------
Apreco, Inc. 20,000 5.53 11/19/97 19,942
- --------------------------------------------------------------------------------
Atlantic Asset 24,000 5.53 11/07/97 23,974
Securitization Corp. 13,881 5.55 11/12/97 13,855
12,119 5.54 11/18/97 12,085
- --------------------------------------------------------------------------------
Bear Stearns 70,000 5.53 12/19/97 69,471
Companies, Inc.
- --------------------------------------------------------------------------------
Countrywide Home 45,000 5.53 11/12/97 44,917
Loans, Inc. 29,500 5.55 11/12/97 29,445
- --------------------------------------------------------------------------------
Dresdner U.S. 125,000 5.52 11/04/97 124,923
Finance Inc.
- --------------------------------------------------------------------------------
Eiger Capital Corp. 14,983 5.52 11/14/97 14,951
- --------------------------------------------------------------------------------
Eureka 75,000 5.53 11/17/97 74,804
Securitization, Inc. 40,000 5.54 11/19/97 39,883
25,000 5.52 11/20/97 24,923
- --------------------------------------------------------------------------------
Finova Capital Corp. 36,500 5.53 11/17/97 36,405
37,000 5.55 11/18/97 36,897
16,400 5.56 3/19/98 16,047
32
<PAGE>
Merrill Lynch Retirement Reserves Money Fund October 31, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Face Interest Maturity Value
Issue Amount Rate* Date (Note 1a)
================================================================================
Commercial Paper (continued)
================================================================================
Finova Capital $ 25,000 5.56 % 3/23/98 $ 24,446
Corp. (concluded) 10,000 5.58 4/06/98 9,757
50,000 5.62 4/27/98 48,623
- --------------------------------------------------------------------------------
Ford Motor Credit 50,000 5.53 12/29/97 49,544
Company 120,000 5.53 12/30/97 118,886
75,000 5.58 12/30/97 74,304
88,000 5.60 3/30/98 85,954
- --------------------------------------------------------------------------------
General Electric 50,000 5.68 11/25/97 49,807
Capital Corp. 100,000 5.68 12/03/97 99,493
68,000 5.545 3/17/98 66,556
75,000 5.55 3/23/98 73,338
27,000 5.55 4/06/98 26,344
- --------------------------------------------------------------------------------
General Electric 200,000 5.52 12/31/97 198,102
Company
- --------------------------------------------------------------------------------
General Motors 19,000 5.82 11/03/97 18,991
Acceptance Corp. 50,000 5.72 11/10/97 49,923
50,000 5.74 11/20/97 49,846
90,000 5.71 12/01/97 89,569
50,000 5.65 12/31/97 49,526
100,000 5.59 3/02/98 98,109
50,000 5.54 3/16/98 48,946
100,000 5.55 3/30/98 97,675
- --------------------------------------------------------------------------------
Goldman Sachs 125,000 5.53 11/20/97 124,616
Group, L.P. 50,000 5.69 2/06/98 49,238
- --------------------------------------------------------------------------------
Greenwich Funding 50,000 5.53 11/12/97 49,908
Corp. 50,000 5.57 11/25/97 49,807
- --------------------------------------------------------------------------------
International Lease 20,000 5.53 12/12/97 19,871
Finance Corp.
- --------------------------------------------------------------------------------
Lehman Brothers 100,000 5.75 11/03/97 99,952
Holdings Inc.
- --------------------------------------------------------------------------------
Lexington Parker 50,000 5.55 11/05/97 49,961
Capital Company, 27,674 5.53 11/20/97 27,589
LLC 55,000 5.55 12/01/97 54,737
41,137 5.53 12/04/97 40,922
- --------------------------------------------------------------------------------
Lloyds Bank PLC 55,000 5.51 12/29/97 54,498
- --------------------------------------------------------------------------------
Mont Blanc Capital 50,000 5.52 11/06/97 49,954
Corp. 67,093 5.52 11/12/97 66,970
50,000 5.53 11/14/97 49,892
- --------------------------------------------------------------------------------
National Australia 50,000 5.51 12/29/97 49,544
Funding (Delaware) 36,455 5.53 3/11/98 35,715
Inc.
- --------------------------------------------------------------------------------
New Center 170,000 5.55 12/31/97 168,387
Asset Trust
- --------------------------------------------------------------------------------
Old Line Funding 14,159 5.55 11/17/97 14,122
Corp. 79,341 5.54 11/18/97 79,121
56,500 5.55 11/18/97 56,343
- --------------------------------------------------------------------------------
Park Avenue 32,036 5.53 11/20/97 31,938
Receivables Corp.
- --------------------------------------------------------------------------------
Three Rivers 75,000 5.53 11/18/97 74,793
Funding Corp.
- --------------------------------------------------------------------------------
Twin Towers Inc. 100,480 5.54 11/20/97 100,171
- --------------------------------------------------------------------------------
WCP Funding Inc. 25,000 5.52 11/17/97 24,935
- --------------------------------------------------------------------------------
Windmill Funding 50,000 5.55 11/10/97 49,923
Corp. 38,083 5.57 11/12/97 38,012
171,019 5.53% 11/13/97 170,677
50,000 5.54 11/14/97 49,892
- --------------------------------------------------------------------------------
Total Commercial Paper
(Cost--$4,085,447) ...................................... 4,085,405
================================================================================
Corporate Notes--10.4%
================================================================================
Abbey National 75,000 5.61+ 2/10/98 74,986
Treasury Services 65,000 5.59+ 2/25/98 64,984
PLC 5,000 5.93+ 3/25/98 5,004
100,000 5.65+ 4/15/98 99,978
175,000 5.54+ 6/09/98 174,929
- --------------------------------------------------------------------------------
Bank of Scotland 20,000 5.95 6/18/98 20,030
Treasury Services PLC
- --------------------------------------------------------------------------------
CIT Group Holdings, 21,500 5.58+ 8/17/98 21,485
Inc. (The) 54,800 5.59 9/30/98 54,756
- --------------------------------------------------------------------------------
Credit Suisse 25,000 5.57+ 4/14/98 25,002
First Boston Inc. 44,000 5.55+ 5/22/98 44,000
- --------------------------------------------------------------------------------
First Bank 29,000 5.605+ 11/19/97 29,000
System, Inc.
- --------------------------------------------------------------------------------
General Motors 20,000 5.69+ 4/17/98 20,006
Acceptance Corp.
- --------------------------------------------------------------------------------
IBM Credit Corp. 25,000 5.665+ 7/31/98 25,000
- --------------------------------------------------------------------------------
International 30,000 5.67 1/28/98 29,994
Business Machines
Corporation
- --------------------------------------------------------------------------------
LABS Trust 92,361 5.656+ 12/29/97 92,361
Series 1996-4,
Senior Notes
- --------------------------------------------------------------------------------
LABS Trust 61,738 5.625+ 10/21/98 61,738
Series 1997-6,
Senior Notes
- --------------------------------------------------------------------------------
LINCS 50,000 5.625+ 1/12/98 50,000
Series 1996-3
- --------------------------------------------------------------------------------
Morgan Stanley 15,000 5.68+ 2/23/98 15,005
Group, Inc.
- --------------------------------------------------------------------------------
Republic Mase 23,000 5.945 6/30/98 23,032
Australia Ltd.
- --------------------------------------------------------------------------------
SMM Trust (1997-Q) 182,000 5.625+ 1/15/98 182,000
- --------------------------------------------------------------------------------
Total Corporate Notes
(Cost--$1,113,213) ...................................... 1,113,290
================================================================================
Funding Agreements--0.5%
================================================================================
Jackson National 50,000 5.686+ 5/01/98 50,000
Life Insurance Co.
- --------------------------------------------------------------------------------
Total Funding Agreements
(Cost--$50,000) ......................................... 50,000
================================================================================
Master Notes--1.5%
================================================================================
Goldman Sachs 125,000 5.656+ 4/28/98 125,000
Group, L.P. 34,000 5.656+ 5/29/98 34,000
- --------------------------------------------------------------------------------
Total Master Notes
(Cost--$159,000) ........................................ 159,000
- --------------------------------------------------------------------------------
33
<PAGE>
Merrill Lynch Retirement Reserves Money Fund October 31, 1997
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
Face Interest Maturity Value
Issue Amount Rate* Date (Note 1a)
================================================================================
US Government, Agency & Instrumentality Obligations--
Discount Notes--1.6%
================================================================================
Federal Farm $ 15,000 5.38 % 8/21/98 $ 14,334
Credit Banks 10,000 5.38 9/01/98 9,540
- --------------------------------------------------------------------------------
Federal Home 25,000 5.32 4/28/98 24,324
Loan Bank 17,500 5.34 7/09/98 16,836
- --------------------------------------------------------------------------------
Federal National 40,000 5.58 11/12/97 39,927
Mortgage 5,000 5.41 10/09/98 4,741
Association 60,000 5.41 10/16/98 56,833
- --------------------------------------------------------------------------------
Total US Government, Agency & Instrumentality
Obligations--Discount Notes (Cost--$166,584) ............ 166,535
================================================================================
US Government, Agency & Instrumentality Obligations--
Non-Discount Notes--20.3%
================================================================================
Federal Farm 40,000 5.63+ 11/25/97 39,999
Credit Banks 50,000 5.65 2/03/98 49,968
- --------------------------------------------------------------------------------
Federal Home 120,000 5.29+ 12/10/97 119,994
Loan Bank 75,000 5.30+ 1/15/98 74,991
25,000 5.99 2/09/98 25,006
40,000 5.90 6/19/98 40,026
108,600 5.57+ 10/20/98 108,569
15,000 6.12 11/19/98 15,002
15,000 6.00 12/17/98 14,999
8,000 6.355 6/11/99 8,030
20,000 6.08 6/30/99 20,064
30,000 5.99 8/11/99 30,011
- --------------------------------------------------------------------------------
Federal Home Loan 35,000 5.58+ 4/15/98 34,992
Mortgage Corp. 6,900 6.02 3/03/99 6,900
5,000 6.205 6/30/99 5,002
10,325 6.10 9/10/99 10,342
- --------------------------------------------------------------------------------
Federal National 75,000 5.47 12/30/97 74,956
Mortgage 25,000 5.19 1/08/98 24,970
Association 150,000 5.51+ 1/15/98 149,985
70,000 5.57+ 3/26/98 69,984
83,000 5.30+ 3/27/98 82,977
65,000 5.59+ 4/21/98 64,988
60,000 5.34+ 4/24/98 59,989
38,000 6.00+ 5/14/98 38,000
20,000 7.85 9/10/98 20,340
101,000 5.57+ 10/20/98 100,957
75,000 5.57+ 11/03/98 74,948
15,000 5.81 12/01/98 14,983
22,150 5.36+ 12/14/98 22,129
21,850 6.375 5/21/99 21,929
26,150 6.16 7/13/99 26,209
60,000 5.29+ 7/14/99 59,829
25,000 5.95 8/05/99 25,000
13,500 5.88 8/10/99 13,486
17,740 5.98 9/23/99 17,749
78,000 5.60+ 10/27/99 77,927
- --------------------------------------------------------------------------------
Student Loan 67,075 5.45+ 1/21/98 67,095
Marketing 85,000 5.305+ 2/05/98 84,990
Association 29,200 5.40+ 2/17/98 29,196
75,000 5.345+ 4/21/98 74,992
25,000 5.60 8/11/98 24,968
100,000 5.35+ 11/06/98 99,971
15,000 6.02+ 11/20/98 15,007
51,425 5.80+ 12/18/98 51,399
- --------------------------------------------------------------------------------
US Treasury Notes 48,000 5.25 12/31/97 47,985
13,000 5.00 1/31/98 12,982
15,000 5.75 9/30/99 15,023
- --------------------------------------------------------------------------------
Total US Government, Agency & Instrumentality
Obligations--Non-Discount Notes
(Cost--$2,168,455) ...................................... 2,168,838
- --------------------------------------------------------------------------------
Face
Amount Issue
================================================================================
Repurchase Agreements**--10.1%
================================================================================
$100,000 Fuji Securities, Inc., purchased
on 10/31/1997 to yield 5.80% to
11/03/1997 100,000
- --------------------------------------------------------------------------------
250,000 HSBC Securities, Inc., purchased
on 10/31/1997 to yield 5.80% to
11/03/1997 250,000
- --------------------------------------------------------------------------------
200,000 J.P. Morgan Securities Inc.,
purchased on 10/31/1997 to yield
5.68% to 11/03/1997 200,000
- --------------------------------------------------------------------------------
250,000 Nomura Securities International,
Inc., purchased on 10/31/1997 to
yield 5.78% to 11/03/1997 250,000
- --------------------------------------------------------------------------------
250,000 PaineWebber Inc., purchased on
10/31/1997 to yield 5.70% to
11/03/1997 250,000
- --------------------------------------------------------------------------------
31,837 UBS Securities, LLC, purchased
on 10/31/1997 to yield 5.72% to
11/03/1997 31,837
- --------------------------------------------------------------------------------
Total Repurchase Agreements
(Cost--$1,081,837) ..................................... 1,081,837
- --------------------------------------------------------------------------------
Total Investments (Cost--$10,904,813)--102.0% .......... 10,905,281
Liabilities in Excess of Other Assets--(2.0%) .......... (214,936)
-----------
Net Assets--100.0% ..................................... $10,690,345
===========
- --------------------------------------------------------------------------------
* Commercial Paper and certain US Government, Agency & Instrumentality
Obligations are traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund. Other
securities bear interest at the rates shown, payable at fixed dates or
upon maturity. Interest rates on variable rate securities are adjusted
periodically based upon appropriate indexes; the interest rates shown are
the rates in effect at October 31, 1997.
** Repurchase Agreements are fully collateralized by US Government
Obligations.
+ Floating Rate Notes.
See Notes to Financial Statements.
34
<PAGE>
Merrill Lynch Retirement Reserves Money Fund October 31, 1997
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
==================================================================================================================
Statement of Assets and Liabilities as of October 31, 1997
==================================================================================================================
<C> <S> <C> <C>
Assets: Investments, at value (identified cost--$10,904,813,468*)
(Note 1a) .................................................. $10,905,281,465
Cash ......................................................... 730,491
Receivables:
Interest ................................................... $ 51,158,346
Beneficial interest sold ................................... 199,696 51,358,042
------------
Prepaid registration fees and other assets (Note 1e) ......... 440,147
---------------
Total assets ................................................. 10,957,810,145
---------------
- ------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Beneficial interest redeemed ............................... 186,208,583
Securities purchased ....................................... 74,947,500
Investment adviser (Note 2) ................................ 3,467,704
Dividends to shareholders (Note 1f) ........................ 3,937 264,627,724
------------
Accrued expenses and other liabilities ....................... 2,837,279
---------------
Total liabilities ............................................ 267,465,003
---------------
- ------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets ................................................... $10,690,345,142
===============
- ------------------------------------------------------------------------------------------------------------------
Net Assets Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized ........................ $ 1,068,987,715
Paid-in capital in excess of par ............................. 9,620,889,430
Unrealized appreciation on investments--net .................. 467,997
---------------
Net assets--Equivalent to $1.00 per share based on
10,689,877,146 shares of beneficial interest outstanding ..... $10,690,345,142
===============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* As of October 31, 1997, net unrealized appreciation for
Federal income tax purposes amounted to $145,063, of which
$1,085,682 related to appreciated securities and $940,619
related to depreciated securities. The aggregate cost of
investments at October 31, 1997 for Federal income tax
purposes was $10,905,136,402.
See Notes to Financial Statements.
35
<PAGE>
Merrill Lynch Retirement Reserves Money Fund October 31, 1997
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
======================================================================================================================
Statement of Operations
======================================================================================================================
For the Year Ended
October 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned .... $ 593,141,521
(Note 1d):
- ----------------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees (Note 2) ........................... $ 38,870,409
Transfer agent fees (Note 2) ................................ 14,619,064
Registration fees (Note 1e) ................................. 1,236,692
Printing and shareholder reports ............................ 669,209
Accounting services (Note 2) ................................ 524,387
Interest expense ............................................ 319,012
Custodian fees .............................................. 299,372
Professional fees ........................................... 83,881
Trustees' fees and expenses ................................. 75,354
Other ....................................................... 91,755
-------------
Total expenses .............................................. 56,789,135
-------------
Investment income--net ...................................... 536,352,386
-------------
- ----------------------------------------------------------------------------------------------------------------------
Realized & Realized gain on investments--net ........................... 581,438
Unrealized Gain Change in unrealized appreciation on investments--net ....... (368,533)
(Loss) on -------------
Investments--Net Net Increase in Net Assets Resulting from Operations ........ $ 536,565,291
(Note 1d): =============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
36
<PAGE>
Merrill Lynch Retirement Reserves Money Fund October 31, 1997
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
======================================================================================================================
Statements of Changes in Net Assets
======================================================================================================================
For the
Year Ended
October 31,
-----------------------------------
Increase (Decrease) in Net Assets: 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Operations: Investment income--net .................................... $ 536,352,386 $ 457,309,800
Realized gain on investments--net ......................... 581,438 471,407
Change in unrealized appreciation on investments--net ..... (368,533) (2,850,451)
---------------- ----------------
Net increase in net assets resulting from operations ...... 536,565,291 454,930,756
---------------- ----------------
- ----------------------------------------------------------------------------------------------------------------------
Dividends & Investment income--net .................................... (536,352,386) (457,309,800)
Distributions to Realized gain on investments--net ......................... (581,438) (471,407)
Shareholders ---------------- ----------------
(Note 1f): Net decrease in net assets resulting from dividends and
distributions to shareholders ............................. (536,933,824) (457,781,207)
---------------- ----------------
- ----------------------------------------------------------------------------------------------------------------------
Beneficial Interest Net proceeds from sale of shares .......................... 35,790,703,282 27,785,847,538
Transactions Net asset value of shares issued to shareholders in
(Notes 1f & 3): reinvestment of dividends and distributions ............... 536,932,268 457,779,630
---------------- ----------------
36,327,635,550 28,243,627,168
Cost of shares redeemed ................................... (34,977,150,947) (27,549,454,162)
---------------- ----------------
Net increase in net assets derived from beneficial interest
transactions .............................................. 1,350,484,603 694,173,006
---------------- ----------------
- ----------------------------------------------------------------------------------------------------------------------
Net Assets: Total increase in net assets .............................. 1,350,116,070 691,322,555
Beginning of year ......................................... 9,340,229,072 8,648,906,517
---------------- ----------------
End of year ............................................... $ 10,690,345,142 $ 9,340,229,072
================ ================
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
37
<PAGE>
Merrill Lynch Retirement Reserves Money Fund October 31, 1997
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
===================================================================================================================================
Financial Highlights
===================================================================================================================================
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended October 31,
----------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Operating ----------- ---------- ---------- ---------- ----------
Performance: Investment income--net .................. .0512 .0509 .0540 .0345 .0279
Realized and unrealized gain (loss) on
investments--net ........................ .0001 (.0002) .0015 (.0011) .0004
----------- ---------- ---------- ---------- ----------
Total from investment operations ........ .0513 .0507 .0555 .0334 .0283
----------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net ................ (.0512) (.0509) (.0540) (.0345) (.0279)
Realized gain on investments--net ..... (.0001) (.0001) (.0002) --+ (.0003)
----------- ---------- ---------- ---------- ----------
Total dividends and distributions ....... (.0513) (.0510) (.0542) (.0345) (.0282)
----------- ---------- ---------- ---------- ----------
Net asset value, end of year ............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== ========== ========== ========== ==========
Total investment return ................. 5.35% 5.19% 5.55% 3.47% 2.85%
=========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ................................ .54% .56% .59% .59% .62%
Net Assets: =========== ========== ========== ========== ==========
Investment income and realized gain
on investments--net ..................... 5.13% 5.07% 5.43% 3.44% 2.82%
=========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) .. $10,690,345 $9,340,229 $8,648,907 $7,403,684 $7,066,326
Data: =========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Amount is less than $.0001 per share.
See Notes to Financial Statements.
38
<PAGE>
Merrill Lynch Retirement Reserves Money Fund October 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Retirement Reserves Money Fund (the "Fund") is a separate Fund
offering a separate class of shares of Merrill Lynch Retirement Series Trust
(the "Trust"). The Trust is registered under the Investment Company Act of 1940
as a diversified, open-end management investment company which will comprise a
series of separate portfolios offering a separate class of shares to
participants in the retirement plans for which Merrill Lynch, Pierce, Fenner &
Smith Inc. ("MLPF&S") acts as passive custodian. At the present time, the Fund
is the only series offered. The following is a summary of significant accounting
policies consistently followed by the Fund.
(a) Valuation of investments--Investments maturing more than sixty days after
the valuation date are valued at the most recent bid price or yield equivalent
as obtained from dealers that make markets in such securities. When securities
are valued with sixty days or less to maturity, the difference between the
valuation existing on the sixty-first day before maturity and maturity value is
amortized on a straight-line basis to maturity. Investments maturing within
sixty days from their date of acquisition are valued at amortized cost, which
approximates market value.
For the purposes of valuations, the maturity of variable rate certificates of
deposit, variable rate commercial paper, short-term corporate bond notes,
variable rate Government agency notes and variable rate corporate notes is
deemed to be the next coupon date on which the interest rate is to be adjusted.
Assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Trustees.
(b) Repurchase agreements--The Fund invests in US Government securities pursuant
to repurchase agreements with a member bank of the Federal Reserve System or a
primary dealer in US Government securities. Under such agreements, the bank or
primary dealer agrees to repurchase the security at a mutually agreed upon time
and price. The Fund takes possession of the underlying securities, marks to
market such securities and, if necessary, receives additional securities daily
to ensure that the contract is fully collateralized.
(c) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no Federal
income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of premium and discount) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(f) Dividends and distributions to shareholders--The Fund declares dividends
daily and reinvests daily such dividends in additional fund shares at net asset
value. Dividends and distributions are declared from the total of net investment
income and net realized gains or losses on investments.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered
into a Distribution Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of
Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel,
39
<PAGE>
Merrill Lynch Retirement Reserves Money Fund October 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
facilities, equipment and certain other services necessary to the operations of
the Fund. For such services, the Fund pays a monthly fee based upon the average
daily value of the Fund's net assets at the following annual rates: 0.50% of the
Fund's average daily net assets not exceeding $1 billion; 0.45% of average daily
net assets in excess of $1 billion but not exceeding $2 billion; 0.40% of
average daily net assets in excess of $2 billion but not exceeding $3 billion;
0.375% of average daily net assets in excess of $3 billion but not exceeding $4
billion; 0.35% of average daily net assets in excess of $4 billion but not
exceeding $7 billion; 0.325% of average daily net assets in excess of $7 billion
but not exceeding $10 billion; and 0.30% of average daily net assets in excess
of $10 billion.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or trustees of the Trust are officers and/or directors of
MLAM, MLFD, MLFDS, PSI, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period corresponds to the
amounts included in the Statements of Changes in Net Assets with respect to net
proceeds from sale of shares and cost of shares redeemed, since shares are
recorded at $1.00 per share.
40
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies......................................... 2
Management of the Trust.................................................... 6
Trustees and Officers..................................................... 6
Compensation of Trustees.................................................. 7
Management and Advisory Arrangements...................................... 8
Purchase and Redemption of Shares.......................................... 9
Portfolio Transactions..................................................... 11
Determination of Net Asset Value........................................... 13
Yield Information.......................................................... 14
Taxes...................................................................... 14
Federal................................................................... 14
State..................................................................... 17
Exchange Privilege......................................................... 17
General Information........................................................ 18
Description of Series and Shares.......................................... 18
Custodian................................................................. 19
Transfer Agent............................................................ 19
Independent Auditors...................................................... 19
Legal Counsel............................................................. 20
Reports to Shareholders................................................... 20
Additional Information.................................................... 20
Security Ownership of Certain Beneficial Owners............................ 20
Appendix A................................................................. 21
Appendix B................................................................. 30
Independent Auditors' Report............................................... 31
Schedule of Investments.................................................... 32
Financial Statements....................................................... 35
</TABLE>
Code #10237-0298
[LOGO] MERRILL LYNCH
Merrill Lynch Retirement
Reserves Money Fund
Merrill Lynch
Retirement Series Trust
[ART]
Merrill Lynch Retirement Reserves Money
Fund is organized as a Massachusetts
business trust. It is not a bank nor does it offer
fiduciary or trust services. Shares of the Fund
are not equivalent to a bank account. As with
any investment in securities, the value of a
shareholder's investment in the Fund will
fluctuate. The shares of the Fund are not
insured by any Government agency and are
not subject to the protection of the Securities
Investor Protection Corporation. A
shareholder's investment in the Fund is not
insured by any government agency.
STATEMENT OF
ADDITIONAL
INFORMATION
February 27, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized Additional Information
market bull
