<PAGE> 1
PROSPECTUS
[MERRILL LYNCH LOGO]
Merrill Lynch Retirement Reserves Money Fund
of Merrill Lynch Retirement Series Trust
[MERRILL LYNCH ARTWORK]
March 1, 1999
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE
INVESTING, INCLUDING INFORMATION ABOUT RISKS. PLEASE READ
IT BEFORE YOU INVEST AND KEEP IT FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Table of Contents
<TABLE>
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PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
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The Merrill Lynch Retirement Reserves Money Fund at a 3
Glance......................................................
Risk/Return Bar Chart....................................... 4
Fees and Expenses........................................... 5
[DETAILS ABOUT THE FUNDS ICON]
DETAILS ABOUT THE FUND
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How the Fund Invests........................................ 7
Investment Risks............................................ 9
[YOUR ACCOUNT ICON]
YOUR ACCOUNT
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How to Buy, Sell and Transfer Shares........................ 11
How Shares Are Priced....................................... 15
Dividends and Taxes......................................... 15
[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
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Merrill Lynch Asset Management.............................. 16
Financial Highlights........................................ 17
[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
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Shareholder Reports....................................Back Cover
Statement of Additional Information....................Back Cover
</TABLE>
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
<PAGE> 3
Key Facts [KEY FACTS ICON]
IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.
SHORT TERM SECURITIES -- securities with maturities of not 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.
DIRECT U.S. GOVERNMENT OBLIGATIONS -- obligations that are issued or have their
principal and interest guaranteed and backed by the full faith and credit of the
United States.
THE MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
AT A GLANCE
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WHAT ARE THE FUND'S INVESTMENT OBJECTIVES?
The investment objectives of the Fund are to seek current income, preservation
of capital and liquidity available from investing in a diversified portfolio of
short term money market securities.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund tries to achieve its goals by investing in a diversified portfolio of
SHORT TERM SECURITIES. These securities consist primarily of DIRECT U.S.
GOVERNMENT OBLIGATIONS, U.S. Government agency securities, obligations of
domestic and foreign banks, U.S. dollar denominated commercial paper and other
short term debt securities issued by U.S. and foreign entities and repurchase
agreements. Fund management decides which of these securities to buy and sell
based on its assessment of the relative values of different securities and
future interest rates. Fund management seeks to improve the Fund's yield by
taking advantage of yield differentials that regularly occur between securities
of a similar kind. We cannot guarantee that the Fund will achieve its goals.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. In addition, the Fund may
lose money if the other party to a repurchase agreement defaults on its
obligation. Foreign investing involves special risks including higher costs and
the possibility of adverse political, economic and other developments. Although
the Fund seeks to preserve the value of your investment at $1.00 per share, it
is possible to lose money by investing in the Fund.
WHO SHOULD INVEST?
Shares of the Fund are offered to participants in certain retirement plans for
which Merrill Lynch acts as custodian ("Plans") and to participants in certain
independent pension, profit sharing, annuity and other qualified plans.
The Fund may be an appropriate investment for you if you:
- Are looking for current income and liquidity.
- Are looking for preservation of capital.
- Are investing with short term goals in mind, such as for cash reserves.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND 3
<PAGE> 4
[KEY FACTS ICON] Key Facts
YIELD -- the income generated by an investment in the Fund.
RISK/RETURN BAR CHART
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The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class I shares for the past ten calendar years. The table shows the average
annual total returns of the Fund for one, five and ten years. How the Fund
performed in the past is not necessarily an indication of how the Fund will
perform in the future. No information is provided regarding Class II shares
since the Fund began offering Class II shares on October 2, 1998.
[BAR CHART]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.98% 8.02% 6.09% 3.47% 2.85% 3.86% 5.66% 5.13% 5.31% 5.26%
</TABLE>
During the ten year period shown in the bar chart, the highest return for a
quarter was 2.13% (quarter ended March 31, 1989) and the lowest return for a
quarter was 0.69% (quarter ended December 31, 1993).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (AS OF THE
CALENDAR YEAR ENDED PAST PAST PAST
DECEMBER 31, 1998) ONE YEAR FIVE YEARS TEN YEARS
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<S> <C> <C> <C>
Merrill Lynch Retirement
Reserves Money Fund Class I 5.26% 5.05% 5.45%
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</TABLE>
YIELD INFORMATION
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The YIELD on Fund shares normally will fluctuate on a daily basis. Therefore,
yields for any given past periods are not an indication or representation of
future yields. The Fund's yield is affected by changes in interest rates,
average portfolio maturity, the types and quality of portfolio securities held
and operating expenses. Current yield information may not provide the basis for
a comparison with bank deposits or other investments, which pay a fixed yield
over a stated period of time and may not be comparable to the yield on shares of
other money market funds. To obtain the Fund's current 7-day yield, call
1-800-221-7210.
4 MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
<PAGE> 5
UNDERSTANDING
EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.
MANAGEMENT FEE -- a fee paid to the Manager for managing the Fund.
DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants, advertising and promotion.
FEES AND EXPENSES
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The Fund offers two classes of shares to participants in Plans and certain
independent pension, profit sharing, annuity and other qualified plans. Although
your money will be invested the same way no matter which class of shares you
buy, there are differences among the fees and expenses associated with each
class. Not everyone is eligible to buy each class.
This table shows the different fees and expenses that you may pay if you buy and
hold each class of shares of the Fund. Future expenses may be greater or less
than those indicated below.
<TABLE>
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE
DEDUCTED FROM FUND ASSETS) Class I Class II
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Management Fees(a) 0.36% 0.36%
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Distribution (12b-1) Fees(b) None 0.20%
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OTHER EXPENSES (INCLUDING TRANSFER AGENCY FEES)(c) 0.19% 0.16%
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TOTAL ANNUAL FUND OPERATING EXPENSES 0.55% 0.72%
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</TABLE>
(a) The Fund pays the Manager a fee at the annual rate of 0.50% of the average
daily net assets of the Fund 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 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, 1998,
the Manager received a fee equal to 0.36% of the Fund's average daily net
assets.
(b) The Fund is authorized to pay Merrill Lynch distribution fees of 0.20% each
year under a distribution plan with respect to Class II shares that the Fund
has adopted under rule 12b-1. The Fund commenced offering Class II shares on
October 2, 1998. For the fiscal year ended October 31, 1998, $2,493 was paid
to Merrill Lynch pursuant to the distribution plan.
(c) The Fund pays the Transfer Agent $6.50 per shareholder account for the first
one million accounts and $6.00 per shareholder account for each account
thereafter and reimburses the Transfer Agent's out of pocket expenses. The
Fund also pays a $.20 monthly closed account charge, which is assessed on
all accounts that close during the year. This fee begins the month following
the month the account is closed and ends at the end of the calendar year. 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, 1998, the
Fund paid the Transfer Agent fees totaling $16,158,479. The Manager provides
accounting services to the Fund at its cost. For the fiscal year ended
October 31, 1998, the Fund reimbursed the Manager $499,482 for these
services.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND 5
<PAGE> 6
[KEY FACTS ICON] Key Facts
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other money market funds.
This example assumes that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in this example. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
<S> <C> <C> <C> <C>
CLASS I $56 $176 $307 $689
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CLASS II $74 $230 $401 $895
- ---------------------------------------------
</TABLE>
6 MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
<PAGE> 7
Details About the Fund [DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGER
John Ng is a Vice President and the portfolio manager of the Fund. Mr. Ng has
been a Director of Merrill Lynch Asset Management since 1997 and was Vice
President from 1984 to 1997.
ABOUT THE MANAGER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
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The Fund seeks current income, preservation of capital and liquidity. The Fund
tries to achieve its goals by investing in a diversified portfolio of short term
money market securities.
In seeking to achieve the Fund's objective, Fund management varies the kinds of
money market securities in the portfolio and the average maturity. Fund
management decides which securities to buy and sell based on its assessment of
the relative values of different securities and future interest rates. Fund
management seeks to improve the Fund's yield by taking advantage of yield
differentials that regularly occur between securities of a similar kind. For
example, market conditions frequently result in similar securities trading at
different prices. Fund management seeks to improve the Fund's yield by buying
and selling securities based on these yield differences.
Among the money market obligations the Fund may buy are:
UNITED STATES GOVERNMENT SECURITIES -- Debt securities issued by or guaranteed
as to principal and interest by the U.S. Government and supported by the full
faith and credit of the United States.
UNITED STATES GOVERNMENT AGENCY SECURITIES -- Debt securities issued by U.S.
Government 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 the entities.
BANK MONEY INSTRUMENTS -- Obligations of commercial banks, savings banks,
savings and loan associations, or other depository institutions, such as
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 (called Eurodollar obligations) or U.S. branches or subsidiaries of
foreign depository institutions (called Yankeedollar obligations). The Fund may
invest in Eurodollar obligations only if they, 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, funding agreements, and mortgage backed or
asset backed securities) with no more than 397 days (13 months) remaining to
maturity at the date of purchase.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND 7
<PAGE> 8
[DETAILS ABOUT THE FUND ICON] Details About the Fund
FOREIGN BANK MONEY INSTRUMENTS -- U.S. dollar denominated obligations of foreign
depository institutions and their foreign branches and subsidiaries, such as
certificates of deposits, bankers' acceptances, time deposits, bank notes and
deposit notes. Payment on securities of foreign branches and subsidiaries may be
a general obligation of the parent bank or may be an obligation only of the
issuing branch or subsidiary. The Fund will invest in these securities only if
Fund management determines they are of comparable quality to other investments
permissible for the Fund. The Fund will not invest more than 25% of its total
assets (taken at market value at the time of each investment) in these
obligations.
FOREIGN SHORT TERM DEBT INSTRUMENTS -- U.S. dollar denominated commercial paper
and other short term obligations issued by foreign entities. The Fund may
purchase these securities only if Fund management determines they are of
comparable quality to the Fund's U.S. investments.
REPURCHASE AGREEMENTS -- In a repurchase agreement the Fund buys a security from
another party, which agrees to buy it back at an agreed upon time and price. The
Fund may invest in repurchase agreements involving the money market securities
described above or U.S. Government and agency securities with longer maturities.
REVERSE REPURCHASE AGREEMENTS -- In a reverse repurchase agreement the Fund
sells a security to another party and agrees to buy it back at a specific time
and price. The Fund may invest in reverse repurchase agreements involving the
money market securities described above.
FORWARD COMMITMENTS -- The Fund may buy or sell money market securities on a
forward commitment basis. In these transactions, the Fund buys the securities at
an established price with payment and delivery taking place in the future.
Payment and delivery may occur up to 180 days after purchase. The value of the
security on the delivery date may be more or less than its purchase price.
8 MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
<PAGE> 9
INVESTMENT RISKS
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This section contains a summary discussion of general risks of investing in the
Fund. As with any mutual fund, there can be no guarantee that the Fund will meet
its goals or that the Fund's performance will be positive for any period of
time.
SELECTION RISK -- Selection risk is the risk that the securities that Fund
management selects will underperform other funds with similar investment
objectives and investment strategies.
INTEREST RATE RISK -- Interest rate risk is the risk that prices of securities
owned by the Fund generally increase when interest rates go down and decrease
when interest rates go up.
SHARE REDUCTION RISK -- In order to maintain a constant net asset value of $1.00
per share, the Fund may reduce the number of shares held by its shareholders.
REPURCHASE AGREEMENT RISK -- If the other party to a repurchase agreement
defaults on its obligation, the Fund may suffer delays and incur costs or even
lose money in exercising its rights under the agreement.
REVERSE REPURCHASE AGREEMENT RISK -- The Fund may lose money if it must buy
securities back at a higher price than they are worth.
FOREIGN MARKET RISK -- The Fund may invest in U.S. dollar denominated money
market instruments and other short-term debt obligations issued by foreign banks
and similar institutions. Although the Fund will invest in these securities only
if Fund management determines they are of comparable quality to the Fund's U.S.
investments, investing in securities of foreign issuers involves some additional
risks. These risks include the higher costs of foreign investing, and the
possibility of adverse political, economic or other developments.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND 9
<PAGE> 10
[DETAILS ABOUT THE FUND ICON] Details About the Fund
EUROPEAN ECONOMIC AND MONETARY UNION ("EMU") -- A number of European countries
have entered into EMU in an effort to reduce trade barriers between themselves
and eliminate fluctuations in their currencies. EMU has established a single
European currency (the euro), which was introduced on January 1, 1999 and is
expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. Certain securities (beginning with government and
corporate bonds) were redenominated in the euro. These securities trade and make
dividend and other payments only in euros. Like other investment companies and
business organizations, including the companies in which the Fund invests, the
Fund could be adversely affected:
- If the transition to the euro, or EMU as a whole, does not
proceed as planned.
- If a participating country withdraws from EMU.
- If computing, accounting and trading systems used by the Fund's
service providers, or by other entities with which the Fund or
its service providers do business, do not treat the euro as a
distinct currency.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
10 MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
<PAGE> 11
Your Account [YOUR ACCOUNT ICON]
HOW TO BUY, SELL AND TRANSFER SHARES
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The chart below summarizes how to buy, sell, and transfer shares through Merrill
Lynch or other securities dealers. You may also buy shares through the Transfer
Agent. To learn more about buying shares through the Transfer Agent, call
1-800-221-7210. Because the selection of a mutual fund involves many
considerations, your Merrill Lynch Financial Consultant may help you with this
decision.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND 11
<PAGE> 12
[YOUR ACCOUNT ICON] Your Account
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUY SHARES First, determine the share class for Effective October 2, 1998, Class I shares will be offered to:
which you are eligible - Any Plan with an active custodial retirement account as of
September 30, 1998
- Any Plan purchasing shares of the Fund through a Merrill
Lynch fee-based program
- Any pension, profit sharing, annuity or qualified plan
other than a Plan
Class II shares will be offered to any Plan that did not
have an active custodial retirement account as of September
30, 1998 and does not otherwise qualify to purchase any
Class I shares as described above.
Fractional shares of the Fund will not be sold, other than
through dividend reinvestments.
Next, determine the amount of your There is no minimum initial investment for Fund shares.
investment
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Have cash balances from your account If you choose to have your cash balances automatically
automatically invested in shares invested in the Fund, they will be invested as follows:
- Cash balances from a sale of securities that does not
settle on the day the sale is made will be invested in
shares of the Fund on the next business day following
the day on which the sale proceeds are received by the
Plan account.
- Cash balances from (i) a sale of securities that settles
on the same day as the sale or (ii) repayments of
principal on debt securities held in the Plan account will
be invested in shares of the Fund on the next business day
following the day on which the money is received by the
Plan account.
- Cash balances from (i) payment of dividends or interest on
securities held in the Plan account or (ii) a contribution
to the Plan will be invested in shares of the Fund on the
next business day following the day on which the money is
received by the Plan account.
Cash balances equal to less than $1.00 will not be invested
and will earn no return.
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Or have your Merrill Lynch Financial Participants in certain plans may request a Merrill Lynch
Consultant or securities dealer Financial Consultant to place a purchase order for their
submit your purchase order* account.
The price of your shares will be the net asset value next
calculated after your order becomes effective. Share
purchase orders are effective on the date Federal Funds
become available to the Fund. Generally, purchase orders
placed through Merrill Lynch will be effective on the day
following the day the order is placed.
The Fund may reject any order to buy shares and may suspend
the sale of shares at any time.
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* Except for accounts associated with the Merrill Lynch Blueprint(SM) program.
</TABLE>
12 MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
<PAGE> 13
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
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<S> <C> <C>
ADD TO YOUR Purchase additional shares There is no minimum investment for additional purchases for
INVESTMENT all accounts.
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Acquire additional shares through All dividends are automatically reinvested daily in the form
automatic dividend reinvestment of additional shares at net asset value.
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Participate in the automatic You may be able to invest a specific amount on a periodic
investment plan basis through your account.
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TRANSFER SHARES TO Transfer to a participating You may transfer your Fund shares only to another securities
ANOTHER SECURITIES securities dealer dealer that has entered into an agreement with Merrill
DEALER Lynch. All shareholder services will be available for the
transferred shares. You may only purchase additional shares
of funds previously owned before the transfer. All future
trading of these assets must be coordinated by the receiving
firm.
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Transfer to a non-participating You must either:
securities dealer - Transfer your shares to an account with the Transfer
Agent; or
- Sell your shares.
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SELL YOUR SHARES Have your Merrill Lynch Financial The price of your shares will be the net asset value next
Consultant, trustee, sponsor or calculated after your order is placed. For your redemption
securities dealer submit your sales request to be priced at the net asset value on the day of
order your request, you must submit your request to your dealer
prior to the determination of net asset value of the Fund
(generally 4:00 p.m. Eastern time). Any redemption request
placed by a dealer after that time will be priced at the net
asset value at the close of business on the next business
day. Dealers must submit redemption requests to the Fund not
more than thirty minutes after the close of business on the
New York Stock Exchange on the day the request was received.
Participants in Plans should contact their Merrill Lynch
Financial Consultant to effect such redemptions.
Participants in Plans in association with Merrill Lynch
Blueprint(sm) program should contact Merrill Lynch at the
toll free number furnished to them to effect such
redemptions. Redemption requests should not be sent to the
Fund or to its Transfer Agent. If inadvertently sent to the
Fund or the Transfer Agent, redemption requests will be
forwarded to Merrill Lynch.
The Fund may reject an order to sell shares under certain
circumstances.
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Redemption by check You may redeem shares by check in an amount not less than
$500.
You may request checks from the Transfer Agent. These checks
can be made payable to any person, except that they may not
be used to buy securities in transactions with Merrill
Lynch. The person to whom the check is made payable may cash
or deposit it like any check, drawn on any bank. You will
continue to earn daily dividends until the check clears. You
will be subject to the rules and regulations governing such
checking accounts including the right of the Transfer Agent
not to honor checks exceeding the value of your account. The
Fund or the Transfer Agent may modify or terminate the
redemption by check privilege on 30 days' notice.
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</TABLE>
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND 13
<PAGE> 14
[YOUR ACCOUNT ICON] Your Account
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
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<S> <C> <C>
Automatic Redemption The Fund has instituted an automatic redemption procedure
for participants in the Plans who have elected to have cash
balances in their accounts automatically invested in shares
of the Fund. For these participants, unless directed
otherwise, Merrill Lynch will redeem a sufficient number of
shares of the Fund to purchase other securities which the
participant has selected for investment in his account.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14 MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
<PAGE> 15
[YOUR ACCOUNT ICON] Your Account
NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the NET ASSET VALUE (normally $1.00 per share)
without a sales charge. The "penny-rounding" method is used in calculating net
asset value, meaning that the calculation is rounded to the nearest whole cent.
This is the offering price. Shares are also redeemed at their net asset value.
The Fund calculates its net asset value each business day (generally, 4:00 p.m.
Eastern time). The net asset value used in determining your price is the next
one calculated after your purchase or redemption order is placed. Share purchase
orders are effective on the date Federal Funds become available to the Fund. You
will begin accruing dividends on the day following the date your purchase
becomes effective.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS of ordinary income are declared and reinvested daily in the form of
additional shares at net asset value. Shareholders will receive statements
monthly or quarterly as to such reinvestments. Shareholders redeeming their
holdings will receive all dividends declared and reinvested through the date of
redemption. Dividends of capital gains, if any, will be paid to shareholders at
least annually. It is expected that income will comprise most of the Fund's
distributions.
Because of special tax rules applicable to retirement accounts, you will not be
currently taxed on dividends paid by the Fund to your retirement account. In
general, you will be taxed only when you receive a distribution from the
account. If your shares are held in a Roth IRA, you generally will not be taxed
on receipt of distributions from the account. Substantial penalties (for Roth
IRAs and other retirement accounts) and ordinary income tax (on the whole
distribution, for retirement accounts other than Roth IRA accounts and on the
portion representing accumulated earnings on contributions, for Roth IRA
accounts) will be imposed if amounts are withdrawn from the retirement account
prior to age 59 1/2, unless certain exceptions apply. Provided the proceeds stay
in a retirement account, you will not be taxed on redemption or exchange of Fund
shares. You should consult your tax advisor about the tax implications of
investing in different types of retirement accounts and about the tax impact of
making withdrawals from the account.
Different tax consequences apply for investments outside of a retirement account
or if a retirement account in which amounts are invested becomes ineligible for
the special tax treatment discussed above.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND 15
<PAGE> 16
[MANAGEMENT OF THE FUND ICON] Management of the Fund
MERRILL LYNCH ASSET MANAGEMENT
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Merrill Lynch Asset Management, the Fund's Manager, manages the Fund's
investments and its business operations under the overall supervision of the
Fund's Board of Trustees. The Manager has the responsibility for making all
investment decisions for the Fund. The Fund pays the Manager a fee at the annual
rate of 0.50% of the Fund's average daily 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 but not
exceeding $3 billion; 0.375% of the average daily net assets exceeding $3
billion but not exceeding $4 billion; 0.35% of the average daily net assets
exceeding $4 billion but not exceeding $7 billion; 0.325% of the average daily
net assets exceeding $7 billion but not exceeding $10 billion; and 0.30% of the
average daily net assets exceeding $10 billion. For the fiscal year ended
October 31, 1998, the Manager received a fee equal to 0.36% of the Fund's
average daily net assets.
Merrill Lynch Asset Management is part of Merrill Lynch Asset Management Group,
which had approximately $501 billion in investment company and other portfolio
assets under management as of December 1998. This amount includes assets managed
for Merrill Lynch affiliates.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the companies in which the
Fund invests, and this could hurt the Fund's investment returns.
16 MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
<PAGE> 17
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
CLASS I
---------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------
Investment income -- net .0517 .0512 .0509 .0540 .0345
- ---------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .0004 .0001 (.0002) .0015 (.0011)
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations .0521 .0513 .0507 .0555 .0334
- ---------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.0517) (.0512) (.0509) (.0540) (.0345)
Realized gain on investments -- net (.0001) (.0001) (.0001) (.0002) --++
- ---------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.0518) (.0513) (.0510) (.0542) (.0345)
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------
Total Investment Return 5.31% 5.35% 5.19% 5.55% 3.47%
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------
Expenses .55% .54% .56% .59% .59%
- ---------------------------------------------------------------------------------------------------------------
Investment income and realized gain on
investments -- net 5.19% 5.13% 5.07% 5.43% 3.44%
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $13,917,721 $10,690,345 $9,340,229 $8,648,907 $7,403,684
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS II
------------------
FOR THE PERIOD
OCTOBER 2,
1998+
TO OCTOBER 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1998
<S> <C>
PER SHARE OPERATING PERFORMANCE:
- -----------------------------------------------------------
Net asset value, beginning of period $ 1.00
- -----------------------------------------------------------
Investment income -- net .0037
- -----------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .0010
- -----------------------------------------------------------
Total from investment operations .0047
- -----------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.0037)
Realized gain on investments -- net --++
- -----------------------------------------------------------
Total dividends and distributions (.0037)
- -----------------------------------------------------------
Net asset value, end of period $ 1.00
- -----------------------------------------------------------
Total Investment Return 5.16%*
- -----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -----------------------------------------------------------
Expenses .72%*
- -----------------------------------------------------------
Investment income and realized gain on
investments -- net 4.69%*
- -----------------------------------------------------------
SUPPLEMENTAL DATA:
- -----------------------------------------------------------
Net assets, end of period (in
thousands) $56,385
- -----------------------------------------------------------
</TABLE>
* Annualized.
+ Commencement of Operations.
++ Amount is less than $.0001 per share.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND 17
<PAGE> 18
(This page intentionally left blank)
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
<PAGE> 19
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
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 ease 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 amount 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 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.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND 19
<PAGE> 20
- --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.
20 MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
<PAGE> 21
CHECK REQUEST FORM
When completed return this form to:
Financial Data Services, Inc.
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 Financial Data Services, Inc. (the
"Transfer Agent") to honor checks 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 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 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.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND 21
<PAGE> 22
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:
----------------------------------------------
22 MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
<PAGE> 23
[ML POTENTIAL INVESTORS CHART]
<TABLE>
<S> <C>
POTENTIAL
INVESTORS
Open an account (two options).
1 2
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT
or SECURITIES DEALER FINANCIAL DATA SERVICES, INC.
P.O. Box 45290
Advises shareholders on their Fund investments. Jacksonville, Florida 32232-5290
1-800-221-7210
Performs recordkeeping and reporting services.
DISTRIBUTOR
MERRILL LYNCH FUNDS DISTRIBUTOR,
A DIVISION OF PRINCETON FUNDS DISTRIBUTOR, INC.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
COUNSEL THE FUND CUSTODIAN
BROWN & WOOD LLP The Board of Trustees THE BANK OF NEW YORK
One World Trade Center oversees the Fund. 90 Washington Street
New York, New York 10048-0557 12th Floor
New York, New York 10286
Provides legal advice to the Fund.
Holds the Fund's assets for safekeeping.
INDEPENDENT AUDITORS INVESTMENT ADVISER
DELOITTE & TOUCHE LLP MERRILL LYNCH ASSET MANAGEMENT, L.P.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders. MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's day-to-day activities.
</TABLE>
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
<PAGE> 24
For More Information [MORE INFORMATION ICON]
SHAREHOLDER REPORTS
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling
1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch Financial
Consultant or write to the Transfer Agent at its mailing address. Include your
name, address, tax identification number and Merrill Lynch brokerage or mutual
fund account number. If you have any questions, please call your Merrill Lynch
Financial Consultant or the Transfer Agent at 1-800-MER-FUND.
STATEMENT OF ADDITIONAL INFORMATION
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund, at the telephone
number or address indicated above, if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM INFORMATION
CONTAINED IN THIS PROSPECTUS.
Investment Company Act file #811-3310
Code #10093-03-99
(C) Merrill Lynch Asset Management, L.P.
Prospectus
[MERRILL LYNCH LOGO]
Merrill Lynch Retirement
Reserves Money Fund
of Merrill Lynch Retirement
Series Trust
[MERRILL LYNCH ARTWORK]
March 1, 1999
<PAGE> 25
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
OF MERRILL LYNCH RETIREMENT SERIES TRUST
P.O. Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
------------------------
The investment objectives of Merrill Lynch Retirement Reserves Money Fund
(the "Fund") are to seek current income, preservation of capital and liquidity
available from investing in a diversified portfolio of short-term money market
securities. These securities primarily consist of U.S. Government and agency
securities, bank certificates of deposit, bankers' acceptances, commercial paper
and repurchase agreements. For purposes of its investment policies, the 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. Fund management expects that substantially all the assets of the
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 Fund's portfolio will not exceed 90 days.
The Trust is authorized to offer Class I and Class II shares of the Fund to
participants in certain retirement plans for which Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch") acts as custodian (the "Plans"). Shares
of the Fund are also offered to certain independent pension, profit-sharing,
annuity and other qualified plans.
The 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 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 Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund, dated March
1, 1999 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) 637-3863 or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1998 annual report to shareholders. You may request a copy of the annual report
at no charge by calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m.
on any business day.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is March 1, 1999.
<PAGE> 26
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies.......................... 2
Management of the Fund...................................... 7
Trustees and Officers..................................... 7
Compensation of Trustees.................................. 8
Management and Advisory Arrangements...................... 9
Code of Ethics............................................ 11
Purchase of Shares.......................................... 11
Redemption of Shares........................................ 14
Determination of Net Asset Value............................ 15
Yield Information........................................... 16
Portfolio Transactions...................................... 17
Dividends and Taxes......................................... 18
Dividends................................................. 18
Federal Tax............................................... 18
State Tax................................................. 20
General Information......................................... 20
Description of Series and Shares.......................... 21
Independent Auditors...................................... 21
Custodian................................................. 22
Transfer Agent............................................ 22
Legal Counsel............................................. 22
Reports to Shareholders................................... 22
Shareholder Inquiries..................................... 22
Additional Information.................................... 22
Financial Statements........................................ 23
Appendix A.................................................. 24
</TABLE>
<PAGE> 27
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Fund are to seek current income,
preservation of capital and liquidity available from investing in a diversified
portfolio of short-term money market securities. The investment objectives are
fundamental policies of the Fund that may not be changed without the vote of a
majority of the outstanding shares of the Fund.
Investment in the Fund offers several potential benefits. The Fund seeks to
provide as high a yield potential as is available, consistent with the
preservation of capital, from the 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 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 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 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 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 Fund may invest:
United States Government Securities: Debt securities issued by or
guaranteed as to principal and interest by the U.S. Government and supported by
the full faith and credit of the United States.
United States Government Agency Securities: Debt securities issued by U.S.
Government-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
(called Eurodollar obligations) or U.S. branches or subsidiaries of foreign
depository institutions (called Yankeedollar obligations). The Fund may invest
in Eurodollar obligations which by their terms are general obligations of the
U.S. parent bank or may be limited to the issuing branch by the terms of the
specific obligation or by government regulation.
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 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 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
2
<PAGE> 28
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
Fund. The 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 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 below 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 Fund may invest or engage:
Repurchase Agreements: The 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 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.
Such agreements usually cover short periods, such as under a week.
Reverse Repurchase Agreements: The Fund may enter into reverse repurchase
agreements which involve the sale of money market securities held by the 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 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.
Preservation of capital is a prime investment objective of the Fund, and,
while the types of money market securities in which the Fund invests are not
completely risk free, such 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. The 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 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 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 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 Fund
but only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. In addition, 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 transactions, in which event the Fund may suffer
time delays and incur costs or possible losses in connection with such
transactions.
From time to time the 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.
Bank money instruments in which the 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.
3
<PAGE> 29
Obligations of foreign issuers may involve additional investment risks from
the risks of obligations of U.S. issuers. 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
Eurodollar and Yankeedollar 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 requirements than U.S.
banks. U.S. branches or subsidiaries of foreign banks may be subject to the
reserve requirements of the states in which they are located. There may be less
publicly available information about a foreign issuer than about a U.S. issuer,
and foreign issuers may not be subject to the same accounting, auditing and
financial recordkeeping standards and requirements as U.S. issuers. Evidence of
ownership of foreign obligations may be held outside of the United States, and
the Fund may be subject to risks associated with the holding of such property
overseas. Foreign obligations of the Fund held overseas will be held by foreign
branches of the 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").
MLAM will carefully consider the above factors in making investments in
non-U.S. obligations and will not knowingly purchase obligations which, at the
time of purchase, are subject to exchange controls or withholding taxes.
Generally the Fund will limit its foreign investments to obligations of issuers
organized in Canada, France, Germany, Japan, the Netherlands, Switzerland, the
United Kingdom and other industrialized nations.
The 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 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 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., Thomson Bankwatch, Inc., Moody's Investors
Service, Inc. and Standard & Poor's. The 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 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 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 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 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 Fund will be established with its custodian consisting
4
<PAGE> 30
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 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 Fund's portfolio will not exceed 90 days. During the
Fund's fiscal year ended October 31, 1998, the average maturity of its portfolio
ranged from 64 days to 87 days.
European Economic and Monetary Union ("EMU"). For a number of years,
certain European countries have been seeking economic unification that would,
among other things, reduce barriers between countries, increase competition
among companies, reduce government subsidies in certain industries, and reduce
or eliminate currency fluctuations among these European countries. The Treaty on
European Union (the "Maastricht Treaty") set out a framework for the European
Economic and Monetary Union ("EMU") among the countries that comprise the
European Union ("EU"). EMU established a single common European currency (the
"euro") that was introduced on January 1, 1999 and is expected to replace the
existing national currencies of all EMU participants by July 1, 2002. EMU took
effect for the initial EMU participants as of January 1, 1999. Certain
securities issued in participating EU countries (beginning with government and
corporate bonds) were or are in the process of being redenominated in the euro,
and are listed, traded, and make dividend and other payments only in euros.
Because any participating country may opt out of EMU within the first three
years, it is also possible that a significant participant could choose to
abandon EMU, which could diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries, including sharp appreciation or depreciation of
participants' national currencies and a significant increase in exchange rate
volatility, a resurgence in economic protectionism, an undermining of confidence
in the European markets, an undermining of European economic stability, the
collapse or slowdown of the drive toward European economic unity, and/or
reversion of the attempts to lower government debt and inflation rates that were
introduced in anticipation of EMU. Also, withdrawal from EMU by an initial
participant could cause disruption of the financial markets as securities
redenominated in euros are transferred back into that country's national
currency, particularly if the withdrawing country is a major economic power.
Such developments could have an adverse impact on the Fund's investments in
Europe generally or in specific countries participating in EMU. Gains or losses
from euro conversions may be taxable to Fund shareholders under foreign or, in
certain limited circumstances, U.S. tax laws. In addition, computer, accounting,
and trading systems must recognize and treat the euro as a distinct currency. If
they do not do so, this may negatively affect the operations of the companies in
which the Fund invests.
Investment Restrictions. The 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 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 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 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;
5
<PAGE> 31
(4) enter into repurchase agreements or purchase and sale contracts if, as
a result, more than 10% of the 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;
(5) make investments for the purpose of exercising control or management;
(6) underwrite securities issued by other persons;
(7) purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or
reorganization;
(8) 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;
(9) purchase any securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio
securities;
(10) make short sales of securities or maintain a short position or write,
purchase or sell puts, calls, straddles, spreads or combinations
thereof;
(11) make loans to other persons, provided that the 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
(12) below;
(12) 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;
(13) 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 Fund will not borrow to
increase income, but only to meet redemption requests which might
otherwise require untimely dispositions of portfolio securities. The
Fund will not purchase securities while borrowings are outstanding.
Interest paid on such borrowings will reduce net income;
(14) mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (12) above) as security for indebtedness any securities
owned or held by the Fund except as may be necessary in connection
with borrowings referred to in investment restriction (13) above, and
then such mortgaging, pledging or hypothecating may not exceed 10% of
the Fund's net assets, taken at market value;
(15) 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;
(16) 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; and
(17) enter into reverse repurchase agreements if, as a result thereof, the
Fund's obligations with respect to reverse repurchase agreements and
borrowings permitted in (13) 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).
Securities Lending. The Fund may lend securities with a value not
exceeding 33 1/3% of its total assets. In return, the Fund receives collateral
in an amount equal to at least 100% of the current market value of the loaned
securities in cash or securities issued or guaranteed by the U.S. Government.
This limitation is a
6
<PAGE> 32
fundamental policy and it may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act of 1940. Such cash collateral will be invested in
short-term securities, the income from which will increase the Fund's yield. The
Fund receives securities as collateral for the loaned securities and the Fund
and the borrower negotiate a rate for the loan premium to be received by the
Fund for the loaned securities, which also increases the Fund's yield. The Fund
may receive a flat fee for its loans. The loans are terminable at any time and
the borrower, after notice, is required to return borrowed securities within
five business days. The Fund may pay reasonable finder's, administrative and
custodial fees in connection with its loans. In the event that the borrower
defaults on its obligation to return borrowed securities because of insolvency
or for any other reason, the Fund could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent the value of the
collateral falls below the market value of the borrowed securities.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trustees of the Fund consists of six individuals, five of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act (the "non-interested Trustees"). The Trustees are responsible for the
overall supervision of the operations of the Fund and perform the various duties
imposed on the directors of investment companies by the Investment Company Act.
Information about the Trustees, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations for at
least the last five years, is set forth below. Unless otherwise noted, the
address of each Trustee, executive officer and the portfolio manager is P.O. Box
9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66) -- President and Trustee (1)(2) -- Chairman of the
Manager and Fund Asset Management, L.P. ("FAM") (which terms as used herein
include their corporate predecessors) from 1997 to 1999; President of the
Manager and FAM from 1977 to 1997; Chairman of Princeton Services, Inc.
("Princeton Services") since 1997 and Director thereof since 1993; President of
Princeton Services from 1993 to 1997; Executive Vice President of Merrill Lynch
& Co., Inc. ("ML & Co.") since 1990.
JOE GRILLS (63) -- Trustee (2) -- P.O. Box 98, Rapidan, Virginia 22733.
Member of the Committee on 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 IBM Retirement Funds from 1986 until 1993; Member of the Investment
Advisory Committees of the State of New York Common Retirement Fund and the
Howard Hughes Medical Institute since 1997; Director, Duke Management Company
since 1992, elected Vice Chairman in May 1998; Director, LaSalle Street Fund
since 1995; Director, Hotchkis and Wiley Mutual Funds since 1996; Director,
Kimco Realty Corporation since January 1997; Member of the Investment Advisory
Committee of the Virginia Retirement System since 1998; Director, Montpelier
Foundation since December 1998.
WALTER MINTZ (70) -- 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. (62) -- Trustee (2) -- 106 Dolphin Cove Quay,
Stamford, Connecticut 06902. Principal of STI Management (investment adviser)
since 1994; Trustee, The Common Fund since 1980; Chairman and CEO of Salomon
Brothers Asset Management from 1992 until 1995; Chairman of Salomon Brothers
equity mutual funds from 1992 until 1995; Monthly columnist with Forbes magazine
since 1992; Director of Stock Research and U.S. Equity Strategist at Salomon
Brothers from 1975 until 1991.
MELVIN R. SEIDEN (68) -- Trustee (2) -- 780 Third Avenue, Suite 2502, New
York, New York 10017. Director of Silbanc Properties, Ltd. (real estate,
investment and consulting) since 1987; Chairman and President of Seiden & de
Cuevas, Inc. (private investment firm) from 1964 to 1987.
7
<PAGE> 33
STEPHEN B. SWENSRUD (65) -- Trustee (2) -- 24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Chairman of Fernwood Advisors (investment adviser)
since 1996; Principal, Fernwood Associates (financial consultant) since 1975.
TERRY K. GLENN (58) -- Executive Vice President (1)(2) -- Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Princeton Funds
Distributor, Inc. ("PFD") since 1986 and Director thereof since 1991; President
of Princeton Administrators, L.P. since 1988.
JOSEPH T. MONAGLE, JR. (50) -- 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.
KEVIN J. MCKENNA (42) -- Senior Vice President (1)(2) -- First Vice
President of the Manager since 1997; Vice President of the Manager from 1985 to
1997.
JOHN NG (45) -- Portfolio Manager (1)(2) -- Director of the Manager since
1997; Vice President of the Manager from 1984 to 1997.
DONALD C. BURKE (38) -- Vice President and Treasurer (1)(2) -- Senior Vice
President and Treasurer of the Manager and FAM since 1999; First Vice President
of the Manager from 1997 to 1999; Vice President of the Manager from 1990 to
1997; Director of Taxation of the Manager since 1990. Senior Vice President and
Treasurer of Princeton Services; Vice President of PFD.
BARBARA G. FRASER (54) -- Secretary (1)(2) -- First Vice President of the
Manager since 1996; Vice President of the Manager from 1994 until 1996.
- ---------------
(1) Interested Person, as defined in the Investment Company Act, of the Fund.
(2) Such Trustee or officer is a director, trustee or officer of one or more
investment companies for which the Manager, or its affiliate FAM, acts as
investment adviser or manager.
As of February 1, 1999, the Trustees, officers of the Trust and officers of
the Fund as a group (12 persons) owned an aggregate of less than 1% of the
outstanding shares of the Fund. At such date, Mr. Zeikel, a Trustee and officer
of the Fund, and the other officers of the Fund owned an aggregate of less than
1% of the outstanding shares of Common Stock of ML & Co.
COMPENSATION OF TRUSTEES
For the fiscal year ended October 31, 1998, the Fund paid each
non-interested Trustee a fee of $4,000 per year plus $1,000 per meeting
attended. The Fund also compensated members of its Audit Committee (the
"Committee"), which consisted of all the non-interested Trustees, a fee of
$4,000 per year plus a fee of $750 per meeting of the Audit Committee, which is
held on a day on which the Board of Trustees does not meet. Effective January
13, 1999, the Fund pays each non-interested Trustee a fee of $6,000 per year
plus $1,000 per meeting attended. The Fund also compensates members of the
Committee, which consists of all the non-interested Trustees, a fee of $6,000
per year plus a fee of $1,000 per meeting of the Audit Committee. The Fund
reimburses each non-interested Trustee for his out-of-pocket expenses relating
to attendance at Board and Committee meetings.
The following table shows the compensation earned by the non-interested
Trustees for the fiscal year ended October 31, 1998 and also the aggregate
compensation paid to them from all registered investment
8
<PAGE> 34
companies advised by Manager and its affiliate, FAM ("MLAM/FAM-advised funds"),
for the calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR ESTIMATED COMPENSATION FROM
RETIREMENT BENEFITS ANNUAL FUND AND OTHER
POSITION WITH COMPENSATION ACCRUED AS PART OF BENEFITS UPON MLAM/FAM-
NAME FUND FROM FUND FUND EXPENSE RETIREMENT ADVISED FUNDS(1)
- ---- ------------- ------------ ------------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Joe Grills...................... Trustee $ 15,000 None None $186,333
Walter Mintz.................... Trustee $ 15,000 None None $178,583
Robert S. Salomon, Jr........... Trustee $ 15,000 None None $178,583
Melvin R. Seiden................ Trustee $ 15,000 None None $178,583
Stephen B. Swensrud............. Trustee $ 15,000 None None $195,583
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM-advised funds as follows: Joe
Grills (22 registered investment companies consisting of 51 portfolios),
Walter Mintz (21 registered investment companies consisting of 42
portfolios), Robert S. Salomon, Jr. (21 registered investment companies
consisting of 42 portfolios), Melvin R. Seiden (21 registered investment
companies consisting of 42 portfolios), Stephen B. Swensrud (24 registered
investment companies consisting of 57 portfolios).
Trustees of the Fund, members of the Boards of other MLAM-advised
investment companies, ML & Co. and its subsidiaries (the term "subsidiaries,"
when used herein with respect to ML & Co., includes MLAM, FAM and certain other
entities directly or indirectly wholly owned and controlled by ML & Co.) and
their trustees/directors and employees, and any trust, pension, profit-sharing
or other benefit plan for such persons, may purchase shares of the Fund at net
asset value.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Management Services. The Manager provides the Fund with investment
advisory and management services. Subject to the supervision of the Board of
Trustees, the Manager is responsible for the actual management of the Fund's
portfolio and constantly reviews the 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. The Manager performs certain of the other administrative services and
provides all the office space, facilities, equipment and necessary personnel for
management of the Fund.
Securities held by the Fund also may be held by, or be appropriate
investments for, other funds or clients (collectively referred to as "clients")
for which the Manager or FAM acts as an adviser or by investment advisory
clients of the Manager. Because of different objectives or other factors, a
particular security may be bought for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities for
the Fund or other advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. To the extent
that transactions on behalf of more than one client of the Manager or an
affiliate 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.
Management Fee. The Fund has entered into a management agreement with the
Manager (the "Management Agreement"), pursuant to which the Manager receives for
its services to the Fund monthly compensation at the annual rate of 0.50% of the
average daily 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 but not exceeding $3 billion;
0.375% of the average daily net assets exceeding $3 billion but not exceeding $4
billion; 0.35% of the average daily net assets exceeding $4 billion but not
exceeding $7 billion; 0.325% of the average daily net assets exceeding $7
billion but not exceeding $10 billion; and 0.30% of the average daily net assets
exceeding $10 billion. The table below sets forth information about the total
management fees paid by the Fund to the Manager for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, MANAGEMENT FEE
----------------------------- --------------
<S> <C>
1998.............................. $43,135,917
1997.............................. $38,870,409
1996.............................. $34,280,472
</TABLE>
9
<PAGE> 35
Payment of Fund Expenses. The Management Agreement obligates the Manager
to provide management services, to furnish office space and facilities for
management of the affairs of the Trust and the Fund and 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 affiliates. The 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 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 Merrill Lynch Funds Distributor, a division of PFD (the "Distributor") as
described below), charges of the custodian and transfer agent, Commission fees,
insurance, interest, brokerage costs, certain taxes, and other expenses
attributable to a particular Series. Expenses that 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 Agreements
(defined below), 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. Accounting services are provided for the Fund by the Manager and the
Fund reimburses the Manager for its costs in connection with such services. See
"Purchase of Shares -- Class II Distribution Plan."
Organization of the Manager. The Manager is a limited partnership, the
partners of which are ML & Co., a financial services holding company and the
parent of Merrill Lynch, and Princeton Services. ML & Co. and Princeton Services
are "controlling persons" of the Manager as defined under the Investment Company
Act because of their ownership of its voting securities or their power to
exercise a controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement will continue in effect from year to year if approved
annually (a) by the Board of Trustees of the Trust or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Trustees who are not
parties to such contract or interested persons (as defined in the Investment
Company Act) of any such party. Such contracts are not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party or by vote of the shareholders of the Fund.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the 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 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 for
out-of-pocket expenses incurred by the Transfer Agent 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.
10
<PAGE> 36
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act that incorporates the Code of Ethics of the
Manager (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on Fund investment personnel.
The Codes require that all employees of the Manager pre-clear any personal
securities investment (with limited exceptions, such as government securities).
The pre-clearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security that at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell and Transfer Shares" in the
Prospectus.
The Trust currently offers two classes of shares of the Fund to
participants in the Plans and certain independent pension, profit-sharing,
annuity and other qualified plans. There are no minimum initial or subsequent
purchase requirements. Fractional shares of the Fund will not be sold, other
than through dividend reinvestments. The offering of Class II shares commenced
on October 2, 1998. At that time all outstanding shares of the Fund were
redesignated "Class I shares" and the new class was designated "Class II
shares."
Shares of the 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 Fund. If Federal Funds are
available to the Fund prior to the determination of net asset value (generally
4:00 p.m. Eastern 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 Fund or the Distributor.
Each Class I and Class II share of the Fund represents an identical
interest in the investment portfolio of the 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.
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.
Class I shares are offered to:
- Any Plan with an active custodial retirement account as of September 30,
1998
- Any Plan purchasing shares in the Fund through a Merrill Lynch fee-based
program; and
- Any pension, profit-sharing, annuity or qualified plan other than a Plan.
Class II Shares. Class II Shares, like Class I shares, are sold without
any front-end or deferred sales charges; however, Class II shares are subject to
an ongoing distribution fee.
Class II shares are offered to any Plan that did not have an active
custodial retirement account as of September 30, 1998 and does not otherwise
qualify as an offeree of Class I shares as described above.
Most contributions to retirement plans are made through payroll deductions.
In addition to investing in the 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 Fund, the contributions will be invested automatically on the
business day following the date they are received
11
<PAGE> 37
in the account. There will be no minimum initial or subsequent purchase
requirement pursuant to these types of plans. The amount that may be contributed
to a Plan in any one year is subject to certain limitations under the Internal
Revenue Code of 1986, as amended (the "Code"); however, assets already in a Plan
account may be invested without regard to such limitations on contributions. See
"Dividends and Taxes." Cash balances of less than $1.00 will not be invested.
Purchases of Fund shares by pension, profit-sharing and annuity plans are
made by payments by the trustee or sponsor of such plan directly to Merrill
Lynch.
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 Fund (the "Distribution Agreements"). The 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.
Class II Distribution Plan. Distribution fees will be paid by the 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 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 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. Distribution
fees paid during the period October 2, 1998 (commencement of operations) to
October 31, 1998, pursuant to the Class II Distribution Plan aggregated $2,493.
Payments under the Class II Distribution Plan are 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 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 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 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 Fund. The Class II Distribution
Plan cannot be amended to increase materially the amount to be spent by the 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
12
<PAGE> 38
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.
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.
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 Fund to (1) 7.25% of eligible gross
sales of Class II shares (defined to exclude shares issued pursuant to dividend
reinvestments), 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).
Plans. There are ten types of Plans: the traditional individual retirement
account ("IRA"), the Roth individual retirement account ("Roth IRA"), the
individual retirement rollover account ("IRRA(R)"), a simplified employee
pension plan ("SEP"), a simple retirement account ("SRA") 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"), an education individual retirement account
("Education IRA") and the self-directed account of the Merrill Lynch
Blueprint(SM) program ("Blueprint"). Although the amount that may be contributed
to a Plan account in any one year is subject to certain limitations, assets
already in a Plan account may be invested in the 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.
Plan Investments. Investment in shares of the Fund by participants in the
Plans are made as follows:
Participants in the Plans (except for Education IRAs) have two options
concerning cash balances that may arise in their Plan accounts. First,
participants may elect to have such balances automatically invested in shares of
the Fund or, in some cases, another money market mutual fund advised by the
Manager on a daily basis. Second, participants in the Plan (except for RSA
accounts) may elect to have such balances deposited in an FDIC-insured money
market account with a commercial bank designated by Merrill Lynch.
Cash balances of participants who elect to have such funds automatically
invested in the Fund will be invested as follows: Cash balances arising from the
sale of securities held in the 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 Fund on the
business day following the day that proceeds with respect thereto are received
in the Plan account. Proceeds giving rise to cash balances from the sale of
securities held in the 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 Fund on the next business day
following receipt. Cash balances arising from dividends or interest payments on
securities held in the Plan account or from a contribution to the Plan are
invested in shares of the Fund on the business
13
<PAGE> 39
day following the date the payment is received in the Plan account. Cash
balances of less than $1.00 will not be invested and no return will be earned.
A participant in these Plans (except retirement plans in association with
Blueprint) may enter a purchase order through his or her Merrill Lynch Financial
Consultant. Orders to invest either cash balances held in a 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.
All purchases and redemptions of Fund shares and dividend reinvestments are
confirmed to participants in Plans (rounded to the nearest share) in the
statement that is sent monthly or quarterly to all participants in these Plans.
The Fund and the Distributor have received an exemptive order from the
Commission that permits the 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 Fund and redemptions which are
effected automatically to purchase other securities which the participant has
selected for investment in his account.
Participants in Plans in association with Blueprint receive quarterly
statements reflecting all purchases, redemptions and dividend reinvestments of
Fund shares. In addition, these participants receive an individual confirmation
with respect to each redemption of Fund shares and each purchase of such shares
other than purchases that are made automatically through payroll deductions.
Shareholders who are not participants in the Plans receive quarterly statements
reflecting all purchases, redemptions and dividend reinvestments of Fund shares.
In the interest of economy and convenience and because of the operating
procedures of the Fund, certificates representing the Fund's shares will not be
physically issued. Shares are maintained by the 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.
Investors should read materials concerning the 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 Plan and should consult with their attorney or tax adviser to
determine if any of the Plans are suited to their needs and circumstances. The
laws applicable to the Plans, including the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") and 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 tax treatment of the Plans under
applicable state law may vary.
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, and Transfer Shares" in the
Prospectus.
Distributions from certain Plans 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 Fund where
the redemption proceeds remain in the Plan account and are otherwise invested.
Shareholders other than participants in the Plans should consult their tax
advisers concerning tax consequences resulting from redemption of shares of the
Fund.
The 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 Fund will receive upon redemption all dividends declared
and reinvested until the time of redemption.
14
<PAGE> 40
Regular Redemption. Any shareholder may redeem shares of the Fund by
submitting a written notice of redemption to Merrill Lynch. Participants in
Plans should contact their Merrill Lynch Financial Consultant to effect such
redemptions. Participants in 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 Fund or to its
Transfer Agent. If inadvertently sent to the 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 Plan is maintained, signed exactly as
his or her name appears on the Plan adoption agreement.
Redemption by Check. Shareholders may redeem shares by check in an amount
not less than $500. At the shareholder's request, the Transfer Agent will
provide the shareholder with checks drawn on the custody account. These checks
can be made payable to the order of any person in any amount not less than $500;
however, these checks may not be used to purchase securities in transactions
with Merrill Lynch. The payee of the check may cash or deposit it like any check
drawn on a bank. When such a check is presented to the Transfer Agent for
payment, the Transfer Agent will present the check to the Fund as authority to
redeem a sufficient number of full and fractional shares in the shareholder's
account to cover the amount of the check. This enables the shareholder to
continue earning daily dividends until the check is cleared. Canceled checks
will be returned to the shareholder by the Transfer Agent upon request.
Shareholders will be subject to the Transfer Agent's rules and regulations
governing such checking accounts, including the right of the Transfer Agent not
to honor checks in amounts exceeding the value of the shareholder's account at
the time the check is presented for payment. The Fund or the Transfer Agent may
modify or terminate the redemption by check privilege at any time on 30 days'
notice to participating shareholders. In order to be eligible for the redemption
by check privilege, purchasers should check the box under the caption "Check
Redemption Privilege" in the application to purchase shares. The Transfer Agent
will then send checks to the shareholders.
Automatic Redemption. The Trust has instituted an automatic redemption
procedure for participants in the Plans who have elected to have cash balances
in their accounts automatically invested in shares of the Fund. In the case of
such participants, unless directed otherwise, Merrill Lynch will redeem a
sufficient number of shares of the Fund to purchase other securities which the
participant has selected for investment in his or her Plan account.
The right to receive payment with respect to any redemption of 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 Fund of securities owned by it is not reasonably practicable or (b) it is
not reasonably practicable for the Fund fairly to determine the value of its net
assets; or (3) for such other periods as the Commission may by order permit for
the protection of security holders of the Fund. The Commission shall by rules
and regulations determine the conditions under which (i) trading shall be deemed
to be restricted and (ii) an emergency shall be deemed to exist within the
meaning of clause (2) above.
DETERMINATION OF NET ASSET VALUE
The net asset value of the 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., Eastern time) or, on days when the NYSE is closed but New York banks are
open, at 4:00 p.m., Eastern time. As a result of this procedure, the net asset
value is determined each business day except for days on which both the NYSE and
New York banks are closed. Both the NYSE and New York banks are closed on New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value is determined under the "penny-rounding" method by adding the
15
<PAGE> 41
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 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 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 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 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 Fund's price per
share as computed for the purpose of sales and redemptions at $1.00. Deviations
of more than an insignificant amount between the net asset value calculated
using market quotations and that calculated on a "penny-rounded" basis will be
reported to the Trustees by the Manager. In the event the Trustees determine
that a deviation exists which may result in material dilution or other unfair
results to investors or existing shareholders, the Fund will take such
corrective action as it regards as necessary and appropriate, including the
reduction of the number of outstanding shares of the Fund by having each
shareholder proportionately contribute shares to the Fund's capital; the sale of
portfolio instruments prior to maturity to realize capital gains or losses or to
shorten average portfolio maturity; withholding dividends; or establishing a net
asset value per share solely by using available market quotations. If the number
of outstanding shares is reduced in order to maintain a constant "penny-rounded"
net asset value of $1.00 per share, the shareholders will contribute
proportionately to the Fund's capital the number of shares which represents the
difference between the amortized cost valuation and market valuation of the
portfolio. Each shareholder will be deemed to have agreed to such contribution
by his or her investment in the Fund.
Since the net income of the 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 Fund is determined, the net asset
value per share of the 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 Fund, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares of the Fund in his
or her account and any decrease in the value of a shareholder's investment may
be reflected by a decrease in the number of shares in his or her account.
YIELD INFORMATION
The 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 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 Fund's shares normally will fluctuate on a daily basis.
Therefore, the yield for any given past period is not an indication or
representation by the Fund of future yields or rates of return on its shares.
The yield is affected by such factors as changes in interest rates on the Fund's
portfolio securities, average
16
<PAGE> 42
portfolio maturity, the types and quality of portfolio securities held and
operating expenses. The yield on Fund shares for various reasons may not be
comparable to the yield on bank deposits, shares of other money market funds or
other investments. The yield on the Fund's Class I and Class II shares for the
period indicated is shown below.
<TABLE>
<CAPTION>
SEVEN-DAY PERIOD ENDED
OCTOBER 31, 1998
-----------------------
CLASS I CLASS II
------- --------
<S> <C> <C>
Excluding gains and losses..................... 4.76% 4.67%
</TABLE>
On occasion, the 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 91-day Treasury bills on a
rolling basis, assuming quarterly compounding. As with yield quotations, yield
comparisons should not be considered indicative of the Fund's yield or relative
performance for any future period.
PORTFOLIO TRANSACTIONS
The 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 Board of Trustees and officers of the Trust, the Manager is
primarily responsible for the Fund's portfolio decisions and the placing of
portfolio transactions. In placing orders, it is the policy of the Fund to
obtain the best net results taking into account such factors as price (including
the applicable dealer spread), the size, type and difficulty of the transaction
involved, the firm's general execution and operational facilities, and the
firm's risk in positioning the securities involved. While the Manager generally
seeks reasonably competitive spreads or commissions, the Fund will not
necessarily be paying the lowest spread or commission available. The Fund's
policy of investing in securities with short maturities will result in high
portfolio turnover.
The money market securities in which the 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 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 principals for their own accounts. On
occasion, securities may be purchased directly from the issuer. The money market
securities generally are traded on a net basis and normally do not involve
either brokerage commissions or transfer taxes. The cost of executing portfolio
securities transactions of the Fund primarily will consist of dealer spreads and
underwriting commissions. Under the Investment Company Act, persons affiliated
with the Fund are prohibited from dealing with the Fund as principals in the
purchase and sale of securities unless an exemptive order allowing such
transactions is obtained from the Commission. Since OTC transactions are usually
principal transactions, affiliated persons of the Fund, including Merrill Lynch
Government Securities, Inc. ("GSI") and Merrill Lynch, may not serve as the
Fund's dealer in connection with such transactions except pursuant to the
exemptive order described below. However, an affiliated person of the Fund may
serve as its broker in OTC transactions conducted on an agency basis.
The Commission has issued an exemptive order permitting the Fund to conduct
principal transactions with GSI in U.S. Government securities and U.S.
Government agency securities. This order contains a number of conditions,
including conditions designed to ensure that the price to the Fund from GSI is
equal to or better than that available from other sources. GSI has informed the
Fund that it will in no way, at any time, attempt to influence or control the
activities of the Fund or the Manager in placing such principal transactions.
The exemptive order allows GSI or its subsidiary, Merrill Lynch Money Markets,
Inc., to receive a dealer
17
<PAGE> 43
spread on any transaction with the 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 number and dollar volume of transactions engaged in by the Fund
pursuant to the exemptive order are set forth in the following table:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, NUMBER DOLLAR VOLUME
----------------------------- ------ -------------
<S> <C> <C>
1998................................ 41 $2,067,870,566
1997................................ 50 $2,128,655,272
1996................................ 48 $2,409,489,277
</TABLE>
The Trustees of the Trust have considered the possibilities of recapturing
for the benefit of the 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 Fund to the Manager. After considering
all factors deemed relevant, the Board of Trustees made a determination not to
seek such recapture. The Trustees will reconsider this matter from time to time.
The 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 economic data and market forecasts) to the Manager
may receive orders for transactions of the Fund. Information so received will be
in addition to and not in lieu of the services required to be performed by the
Manager under the Management Agreement and the expenses of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information.
DIVIDENDS AND TAXES
DIVIDENDS
Dividends are declared and reinvested daily in the form of additional
shares at net asset value. Shareholders will receive statements monthly or
quarterly as to such reinvestments. Shareholders liquidating their holdings will
receive on 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 Fund is determined, the net asset value per share of the Fund normally
remains constant at $1.00 per share.
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 amortization of premiums and the
estimated expenses of the Fund applicable to that dividend period.
FEDERAL TAX
RICs. The following is a general summary of the treatment of regulated
investment companies ("RICs") and their shareholders under the Code. The Fund
intends to continue to qualify for the special tax treatment afforded RICs under
the Code. If it so qualifies, the Fund will not be subject to Federal income tax
with respect to the net ordinary income and net realized capital gains which it
distributes to Class I and II shareholders. The Fund intends to distribute
substantially all of such income.
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 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,
18
<PAGE> 44
the Fund will be liable for the tax only on the amount by which it does not meet
the foregoing distribution requirements.
Dividends paid by the 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 (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are ordinarily taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares. Any loss
upon the sale or exchange of Fund shares held for six months or less will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the 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 ordinarily constitute capital
gains to such holder (assuming the shares are held as a capital asset). Certain
categories of capital gain are taxable at different rates. Generally not later
than 60 days after the close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amount of any capital gain
dividends, as well as any amounts of capital gain dividends in the different
categories of capital gain referred to above. Dividends are ordinarily taxable
to shareholders even though they are reinvested in additional shares of the
Fund.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Retirement Accounts. Investment in the Fund is limited to participants in
retirement accounts for which Merrill Lynch acts as custodian and certain
independent qualified plans. Accordingly, the general description of the tax
treatment of RICs and their shareholders as set forth above is qualified for
accountholders with respect to the special tax treatment afforded retirement
accounts under the Code. Under the Code, neither ordinary income dividends nor
capital gain dividends represent current income to shareholders holding shares
through a retirement account.
Generally, distributions from a retirement account (other than a Roth IRA)
will be taxable as ordinary income at the rate applicable to the participant at
the time of the distribution. For retirement accounts other than Roth IRAs, such
distributions would include (i) any pre-tax contributions to the retirement
account (including pre-tax contributions that have been rolled over from another
IRA or qualified retirement plan), and (ii) dividends (whether or not such
dividends are classified as ordinary income or capital gain dividends). In
addition to ordinary income tax, participants may be subject to the imposition
of a 10% (or, in the case of certain SRA-IRA distributions, 25%) excise tax on
any amount withdrawn from a retirement account prior to the participant's
attainment of age 59 1/2, unless one of the exceptions discussed below applies.
The exceptions to the 10% (or 25%) penalty include: 1) distributions after
the death of the shareholder; 2) distributions attributable to disability; 3)
distributions used to pay certain medical expenses; 4) distributions that are
part of a scheduled series of substantially equal periodic payments for the life
(or life expectancy) of the shareholder or the joint lives (or joint life and
last survivor expectancy) of the shareholder and the shareholder's beneficiary;
5) withdrawals for medical insurance if the shareholder has received
unemployment compensation for 12 weeks and the distribution is made in the year
such unemployment compensation is received or the following year; 6)
distributions to pay qualified higher education expenses of the shareholder or
certain family members of the shareholder; and 7) distributions used to buy a
first home (subject to a $10,000 lifetime limit).
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 other
retirement accounts, a 10% excise tax applies
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to amounts withdrawn from the Roth IRA prior to reaching age 59 1/2 unless one
of the exceptions applies. Such a withdrawal would also be included in income to
the extent of earnings on contributions, with distributions treated as made
first from contributions and then from earnings.
Under certain limited circumstances (for example, if an individual for
whose benefit a retirement account is established engages in any transaction
prohibited under Section 4975 of the Code with respect to such account), the
retirement account could cease to qualify for the special treatment afforded
certain retirement accounts under the Code as of the first day of such taxable
year that such transaction causing disqualification occurred. If a retirement
account through which a shareholder holds Fund shares becomes ineligible for
special tax treatment, the shareholder will be treated as having received a
distribution on such first day of the taxable year from the retirement account
in an amount equal to the fair market value of all assets in the account. Thus,
a shareholder (except for shareholders in Roth IRAs) 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 the ordinary income and capital gain dividends
paid by the Fund subsequent to the disqualification 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 account disqualification, shareholders
also could be subject to the 10% (or 25%) excise tax described above.
Additionally, retirement account disqualification may subject a nonresident
alien shareholder to a 30% United States withholding tax on ordinary income
dividends paid by a Fund unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law.
In certain circumstances, account holders also may be able to make
nondeductible contributions to their retirement accounts. As described above,
ordinary income dividends and capital gain dividends received with respect to
such contributions will not be taxed currently. Unlike the Roth IRA, described
above, earnings with respect to these amounts will be taxed when distributed.
Interest received by the Fund may give rise to withholding and other taxes
imposed by foreign countries. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes.
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. The tax rules applicable to
retirement plans are complex and may vary depending on the type of plan in which
you are invested. This discussion does not purport to address all issues
applicable to an investment in a retirement plan, nor does it cover the specific
treatment of all of the different types of plans in which one could invest. You
should consult with your tax adviser about the tax implications of investing in
different types of retirement plans and the tax implications of making
withdrawals from the account.
STATE TAX
Ordinary income and capital gain dividends on RIC shares held in a
disqualified retirement account or outside of a retirement account may also 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 account, and commence taxation on
amounts when actually distributed. Such amounts are generally treated as
ordinary income. Shareholders should consult their tax advisers regarding the
state tax treatment of amounts distributed from a Roth IRA.
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GENERAL INFORMATION
DESCRIPTION OF SERIES AND SHARES
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 on October 28, 1981. It
is a no-load, diversified, open-end investment company. 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 of the Trust. At the date of this Statement of Additional
Information, the Fund is the only existing Series of the Trust, and shares of
the Fund are divided into Class I and Class II shares. Class I and Class II
shares represent an interest in the same assets of the 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. See "Purchase of Shares."
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 "How to Buy, Sell and Transfer Shares"
in the Prospectus and "Purchase of Shares" 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.
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 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.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the non-interested Directors of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
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CUSTODIAN
The Bank of New York, 90 Washington Street, 12th Floor, New York, New York
10286 (the "Custodian"), acts as custodian of the Fund's assets. The Custodian
is responsible for safeguarding and controlling the Fund's cash and securities,
handling the receipt and delivery of securities and collecting interest and
dividends on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening,
maintenance and servicing of shareholder accounts. See "How to Buy, Sell and
Transfer Shares" in the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund sends
to its shareholders, at least semi-annually, reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Financial Data Services, Inc.
P.O. Box 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 Financial Data Services,
Inc. at 800-221-7210.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information with respect to
the shares of the Fund do not contain all the information set forth in the
Registration Statement and the exhibits relating thereto, which the Fund has
filed with the Securities and Exchange Commission, Washington, D.C., under the
Securities Act and the Investment Company Act, to which reference is hereby
made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares as of February 1, 1999.
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
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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.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
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APPENDIX A
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 ("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.
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Code #10093-3-99
