<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1994
SECURITIES ACT FILE NO. 2-99473
INVESTMENT COMPANY ACT FILE NO. 811-4375
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO.
[_]
POST-EFFECTIVE AMENDMENT NO. 10 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 72 [X]
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH NEW YORK MUNICIPAL
BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
COUNSEL FOR THE TRUST: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD
ONE WORLD TRADE CENTER FUND ASSET MANAGEMENT
BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, N.J. 08543-9011
ATTENTION: THOMAS R. SMITH, JR.,
ESQ.
FRANK P. BRUNO, ESQ.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)
[_] on (date) pursuant to paragraph (a) of rule 485.
----------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS CLASS A AND CLASS B
SHARES OF BENEFICIAL INTEREST UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE
24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH
RULE FOR THE REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON NOVEMBER 16,
1993.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page................... Cover Page
Item 2. Synopsis..................... Fee Table
Item 3. Condensed Financial
Information................. Financial Highlights; Performance
Item 4. General Description of Data
Registrant.................. Cover Page; Investment Objective and
Item 5. Management of the Fund....... Policies; Additional Information
Fee Table; Investment Objective and
Policies; Portfolio Transactions;
Management of the Trust; Inside
Back Cover Page
Item 6. Capital Stock and Other
Securities.................. Cover Page; Additional Information
Item 7. Purchase of Securities Being
Offered..................... Cover Page; Fee Table; Alternative
Sales Arrangements; Purchase of
Shares; Inside Back Cover Page
Item 8. Redemption or Repurchase..... Fee Table; Alternative Sales
Arrangements; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Proceedings.... Not Applicable
PART B
Item 10. Cover Page................... Cover Page
Item 11. Table of Contents............ Back Cover Page
Item 12. General Information and
History..................... Not Applicable
Item 13. Investment Objective and
Policies.................... Investment Objective and Policies;
Description of Municipal Bonds and
Temporary Investments; Investment
Restrictions
Item 14. Management of the Fund....... Management of the Trust
Item 15. Control Persons and Principal
Holders of Securities....... Management of the Trust; Additional
Information
Item 16. Investment Advisory and Other
Services.................... Management of the Trust; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and
Other Practices............. Portfolio Transactions
Item 18. Capital Stock and Other
Securities.................. General Information
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered..................... Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status................... Distributions; Taxes
Item 21. Underwriters................. Purchase of Shares
Item 22. Calculation of Performance
Data........................ Performance Data
Item 23. Financial Statements......... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
JANUARY 28, 1994
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch New York Municipal Bond Fund (the "Fund") is a mutual fund
seeking to provide shareholders with as high a level of income exempt from
Federal, New York State and New York City income taxes as is consistent with
prudent investment management. The Fund invests primarily in a diversified
portfolio of long-term investment grade obligations exempt from Federal, New
York State and New York City income taxes ("New York Municipal Bonds").
Dividends paid by the Fund are exempt from Federal, New York State and New York
City income taxes to the extent they are derived from interest payments on New
York Municipal Bonds. There can be no assurance that the investment objective
of the Fund will be realized.
----------------
The Fund offers two classes of shares which may be purchased at a price equal
to the next determined net asset value per share, plus a sales charge which, at
the election of the purchaser, may be imposed (i) at the time of purchase (the
"Class A shares") or (ii) on a deferred basis (the "Class B shares"). The
deferred charges to which the Class B shares are subject shall consist of a
contingent deferred sales charge which may be imposed on redemptions made
within four years of purchase and ongoing account maintenance and distribution
fees. These alternatives permit an investor to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares and other circumstances. Investors
should understand that the purpose and function of the deferred sales charges
with respect to the Class B shares are the same as those of the initial sales
charge with respect to Class A shares. Investors should also understand that
over time the deferred sales charges related to Class B shares may exceed the
initial sales charge with respect to Class A shares. See "Alternative Sales
Arrangements" on page 3.
Each Class A share and Class B share represents identical interests in the
investment portfolio of the Fund and has the same rights, except that Class B
shares bear the expenses of the account maintenance fee and distribution fee
and certain other costs resulting from the deferred sales charge arrangement
which will cause Class B shares to have a higher expense ratio and to pay lower
dividends than Class A shares and that Class B shares have exclusive voting
rights with respect to the account maintenance fee and distribution fee. The
two classes also have different exchange privileges.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), Box 9011, Princeton, New Jersey 08543-9011 [(609) 282-
2800], or from securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50. Merrill Lynch may charge its
customers a processing fee (presently $4.85) for confirming purchases and
repurchases. Purchases and redemptions directly through the Fund's transfer
agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated January 28, 1994 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
is available, without charge, by calling or by writing Merrill Lynch Multi-
State Municipal Series Trust (the "Trust") at the above telephone number or
address. The Statement of Additional Information is hereby incorporated by
reference into this Prospectus. The Fund is a separate series of the Trust, an
open-end management investment company organized as a Massachusetts business
trust.
----------------
FUND ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A shares and Class B shares follows.
<TABLE>
<CAPTION>
CLASS B
CLASS A SHARES SHARES
INITIAL SALES DEFERRED SALES
CHARGE ALTERNATIVE(A) CHARGE ALTERNATIVE
--------------------- ------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EX-
PENSES:
Maximum Sales Charge Imposed
on Purchases (as a percent-
age of offering price)..... 4.00(b) None
Sales Charge Imposed on Div-
idend Reinvestments........ None None
Deferred Sales Charge (as a None 4.0% during the first
percentage of original pur- year, decreasing 1.0%
chase price or redemption annually to 0.0% after
proceeds, whichever is low- the fourth year(c)
er)........................
Exchange Fee................ None None
ANNUAL FUND OPERATING EX-
PENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Management Fees(d).......... 0.55% 0.55%
Rule 12b-1 Fees............. None 0.50%(c)
Other Expenses:
Custodial Fees............. 0.01% 0.01%
Shareholder Servicing
Costs(f).................. 0.04% 0.04%
Miscellaneous.............. 0.04% 0.04%
---------- ----
TOTAL OTHER EXPENSES......... 0.09% 0.09%
---------- ----
TOTAL FUND OPERATING EX-
PENSES...................... 0.64% 1.14%
========== ====
</TABLE>
- --------
(a) Prior to October 25, 1988, no Class A shares of the Fund were publicly
issued.
(b) Reduced for purchases of $25,000 and over, decreasing to 0.50% for
purchases of $1,000,000 and over. Certain purchasers of Class A shares
investing $1,000,000 or more may, in lieu of a front-end sales load, be
assessed a deferred sales charge on redemptions within the first year of
such investments. See "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares"--page 17.
(c) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"--page 18.
(d) See "Management of the Trust--Management and Advisory Arrangements"--page
14.
(e) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares-
-Distribution Plan" page 19.
(f) See "Management of the Trust--Transfer Agency Services"--page 15.
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR
THE PERIOD OF:
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including, for Class A
shares, the maximum $40 front-end sales
charge and assuming (1) an operating expense
ratio of 0.64% for Class A shares and 1.14%
for Class B shares, (2) a 5% annual return
throughout the periods and (3) redemption at
the end of the period:
Class A...................................... $46.28 $59.67 $74.25 $116.64
Class B...................................... $51.62 $56.22 $62.76 $138.61
An investor would pay the following expenses
on the same $1,000 investment assuming no re-
demption at the end of the period:
Class A...................................... $46.28 $59.67 $74.25 $116.64
Class B...................................... $11.62 $36.22 $62.76 $138.61
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATE OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B shareholders who hold their
shares for an extended period of time may pay more in Rule 12b-1 distribution
fees than the economic equivalent of the maximum front-end sales charge
permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. Merrill Lynch may charge its customers a processing
fee (presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Fund's transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."
2
<PAGE>
ALTERNATIVE SALES ARRANGEMENTS
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase (the "initial
sales charge alternative"), or (ii) on a deferred basis (the "deferred sales
charge alternative").
Class A Shares. An investor who elects the initial sales charge alternative
acquires Class A shares. Although Class A shares incur a sales charge when they
are purchased, they enjoy the benefit of not being subject to any ongoing
account maintenance and distribution fees or any sales charge when they are
redeemed. Certain purchasers of Class A shares qualify for reduced initial
sales charges. See "Purchase of Shares".
Class B Shares. An investor who elects the deferred sales charge alternative
acquires Class B shares. Class B shares do not incur a sales charge when they
are purchased, but they are subject to ongoing account maintenance and
distribution fees and a sales charge if they are redeemed within four years of
purchase. Class B shares enjoy the benefit of permitting all of the investor's
dollars to work from the time the investment is made. The ongoing account
maintenance and distribution fees paid by Class B shares will cause such shares
to have a higher expense ratio and to pay lower dividends than those related to
Class A shares. Payment of the distribution fee is subject to certain limits as
set forth under "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares".
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. Moreover, shares acquired under the initial sales charge
alternative are not subject to ongoing account maintenance and distribution
fees. However, because initial sales charges are deducted at the time of
purchase, such investors would not have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also might elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees may exceed the initial sales charge.
Again, however, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent any
return is realized on the additional funds initially invested under the
deferred alternative. However, there can be no assurance as to the return, if
any, which will be realized on such additional funds. Certain other investors
might determine it to be more advantageous to have all their funds invested
initially, although remaining subject to continued account maintenance and
distribution fees and, for a four-year period of time, a contingent deferred
sales charge.
The distribution expenses incurred by the Distributor and dealers (primarily
Merrill Lynch) in connection with the sale of the shares will be paid, in the
case of the Class A shares, from the proceeds of the initial sales charge. In
the case of the Class B shares, such distribution expenses will be paid from
the proceeds of the ongoing distribution fee and, if applicable, the contingent
deferred sales charge incurred upon redemption within four years of purchase.
Sales personnel may receive different compensation for selling Class A or Class
B shares. Investors should understand that the purpose and function of the
deferred sales charges with respect to the Class B shares are the same as those
of the initial sales charge with respect to the Class A shares.
Dividends paid by a Fund with respect to Class A and Class B shares, to the
extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount,
3
<PAGE>
except that account maintenance and distribution fees and any incremental
transfer agency costs relating to Class B shares will be borne exclusively by
that class. See "Additional Information--Determination of Net Asset Value".
Class A and Class B shareholders of the Fund have an exchange privilege for
Class A and Class B shares, respectively, with certain other mutual funds
sponsored by Merrill Lynch. Class A and Class B shareholders of the Fund also
may exchange their shares for shares of certain money market funds sponsored by
Merrill Lynch.
The Trustees of the Trust have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis,
the Trustees of the Trust, pursuant to their fiduciary duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), and state laws,
will seek to assure that no such conflict arises.
THE ALTERNATIVE SALES ARRANGEMENTS PERMIT AN INVESTOR TO CHOOSE THE METHOD
OF PURCHASING SHARES THAT IS MOST BENEFICIAL GIVEN THE AMOUNT OF THE
PURCHASE, THE LENGTH OF TIME THE INVESTOR EXPECTS TO HOLD THE SHARES AND
OTHER CIRCUMSTANCES. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR
PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES
CHARGE AND NOT BE SUBJECT TO ONGOING CHARGES, OR TO HAVE THE ENTIRE
INITIAL PURCHASE PRICE INVESTED IN THE FUND WITH THE INVESTMENT THEREAFTER
BEING SUBJECT TO ONGOING ACCOUNT MAINTENANCE AND DISTRIBUTION FEES. TO
ASSIST INVESTORS IN MAKING THIS DETERMINATION, THE FEE TABLE ON PAGE 2
SETS FORTH THE CHARGES APPLICABLE TO EACH CLASS OF SHARES, AND A
DISCUSSION OF RELEVANT FACTORS IN MAKING SUCH DETERMINATION IS SET FORTH
UNDER "PURCHASE OF SHARES--ALTERNATIVE SALES ARRANGEMENTS" ON PAGE 16.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche, independent auditors. Financial statements for the year ended September
30, 1993 and the independent auditors' report thereon are included in the
Statement of Additional Information. Further information about the performance
of the Fund is contained in the Fund's most recent annual report to
shareholders which may be obtained, without charge, by calling or by writing
the Fund at the telephone number or address on the front cover of this
Prospectus.
<TABLE>
<CAPTION>
THE FOLLOWING
PER SHARE DATA
AND RATIOS HAVE
BEEN DERIVED
FROM INFORMATION
PROVIDED IN THE
FINANCIAL CLASS A
STATEMENTS: -----------------------------------------
INCREASE
(DECREASE) IN FOR THE YEAR ENDED SEPTEMBER 30,
NET ASSET VALUE: -----------------------------------------
1993 1992 1991 1990 1989+
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of
period......... $ 11.77 $ 11.22 $ 10.56 $10.81 $10.85
------- ------- ------- ------ ------
Investment in-
come--net...... .70 .72 .74 .73 .68
Realized and
unrealized gain
(loss) on in-
vestments--net. .80 .55 .66 (.25) (.04)
------- ------- ------- ------ ------
Total from in-
vestment opera-
tions.......... 1.50 1.27 1.40 .48 .64
------- ------- ------- ------ ------
LESS DIVIDENDS
AND DISTRIBU-
TIONS:
Investment in-
come--net...... (.70) (.72) (.74) (.73) (.68)
Realized gain on
investments--
net............ (.11) -- -- -- --
------- ------- ------- ------ ------
Total dividends
and distribu-
tions.......... (.81) (.72) (.74) (.73) (.68)
------- ------- ------- ------ ------
Net asset value,
end of period.. $ 12.46 $11.77 $11.22 $10.56 $10.81
======= ======= ======= ====== ======
Total Investment
Return:**...... 13.25% 11.77% 13.60% 4.42% 6.28%@
======= ======= ======= ====== ======
RATIOS TO AVER-
AGE NET ASSETS:
Expenses, ex-
cluding distri-
bution fees.... .64% .65% .66% .67% .66%*
======= ======= ======= ====== ======
Expenses........ .64% .65% .66% .67% .66%*
======= ======= ======= ====== ======
Investment in-
come--net...... 5.80% 6.28% 6.72% 6.79% 6.82%*
======= ======= ======= ====== ======
SUPPLEMENTAL DA-
TA:
Net assets, end
of year (in
thousands)..... $31,976 $18,973 $13,727 $8,905 $3,796
======= ======= ======= ====== ======
Portfolio turn-
over........... 38.31% 35.90% 49.78% 53.82% 74.51%
======= ======= ======= ====== ======
<CAPTION>
THE FOLLOWING
PER SHARE DATA
AND RATIOS HAVE
BEEN DERIVED
FROM INFORMATION
PROVIDED IN THE
FINANCIAL CLASS B
STATEMENTS: ----------------------------------------------------------------------------------
INCREASE
(DECREASE) IN FOR THE YEAR ENDED SEPTEMBER 30,
NET ASSET VALUE: ----------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987 1986++
--------- --------- --------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of
period......... $ 11.77 $ 11.23 $ 10.57 $ 10.81 $ 10.66 $ 10.04 $ 11.05 $ 10.00
--------- --------- --------- --------- --------- --------- ---------- -----------
Investment in-
come--net...... .64 .67 .67 .68 .69 .70 .70 .67
Realized and
unrealized gain
(loss) on in-
vestments--net. .80 .54 .66 (.24) .15 .62 (.94) 1.05
--------- --------- --------- --------- --------- --------- ---------- -----------
Total from in-
vestment opera-
tions.......... 1.44 1.21 1.33 .44 .84 1.32 (.24) 1.72
--------- --------- --------- --------- --------- --------- ---------- -----------
LESS DIVIDENDS
AND DISTRIBU-
TIONS:
Investment in-
come--net...... (.64) (.67) (.67) (.68) (.69) (.70) (.70) (.67)
Realized gain on
investments--
net............ (.11) -- -- -- -- -- (.07) --
--------- --------- --------- --------- --------- --------- ---------- -----------
Total dividends
and distribu-
tions.......... (.75) (.67) (.67) (.68) (.69) (.70) (.77) (.67)
--------- --------- --------- --------- --------- --------- ---------- -----------
Net asset value,
end of period.. $ 12.46 $11.77 $11.23 $10.57 $10.81 $10.66 $10.04 $11.05
========= ========= ========= ========= ========= ========= ========== ===========
Total Investment
Return:**...... 12.68% 11.12% 13.03% 4.00% 8.16% 13.35% (2.50)% 17.65%@
========= ========= ========= ========= ========= ========= ========== ===========
RATIOS TO AVER-
AGE NET ASSETS:
Expenses, ex-
cluding distri-
bution fees.... .64% .66% .67% .68% .66% .66% .64% .60%*
========= ========= ========= ========= ========= ========= ========== ===========
Expenses........ 1.14% 1.16% 1.17% 1.18% 1.16% 1.17% 1.14% 1.10%*
========= ========= ========= ========= ========= ========= ========== ===========
Investment in-
come--net...... 5.32% 5.79% 6.23% 6.28% 6.38% 6.62% 6.38% 6.71%*
========= ========= ========= ========= ========= ========= ========== ===========
SUPPLEMENTAL DA-
TA:
Net assets, end
of year (in
thousands)..... $733,981 $616,590 $568,958 $566,095 $635,227 $641,623 $665,547 $487,422
========= ========= ========= ========= ========= ========= ========== ===========
Portfolio turn-
over........... 38.31% 35.90% 49.78% 53.82% 74.51% 99.61% 72.35% 172.39%
========= ========= ========= ========= ========= ========= ========== ===========
</TABLE>
- ------
+Class A shares commenced operations on October 25, 1988.
++Class B shares commenced operations on November 1, 1985.
*Annualized.
**Total investment returns exclude the effects of sales loads.
@Aggregate total investment return.
5
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as high
a level of income exempt from Federal, New York State and New York City income
taxes as is consistent with prudent investment management. The Fund seeks to
achieve its objective by investing primarily in a diversified portfolio of
long-term obligations issued by or on behalf of New York State, its political
subdivisions, agencies and instrumentalities and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands,
and Guam. Obligations exempt from Federal income taxes are referred to herein
as "Municipal Bonds" and obligations exempt from Federal, New York State and
New York City income taxes are referred to as "New York Municipal Bonds."
Unless otherwise indicated, references to Municipal Bonds shall be deemed to
include New York Municipal Bonds. The Fund at all times, except during
temporary defensive periods, will maintain at least 65% of its total assets
invested in New York Municipal Bonds. The investment objective of the Fund as
set forth in the first sentence of this paragraph is a fundamental policy and
may not be changed without shareholder approval. At times, the Fund will seek
to hedge its portfolio through the use of futures transactions to reduce
volatility in the net asset value of Fund shares.
Municipal Bonds may include several types of bonds. See "Description of
Municipal Bonds". The Fund may also invest in variable rate demand obligations
and participations therein, described below, and short-term tax-exempt
municipal obligations such as tax anticipation notes. The interest on Municipal
Bonds may bear a fixed rate or be payable at a variable or floating rate. The
Municipal Bonds purchased by the Fund will be what are commonly referred to as
"investment grade" securities, which are obligations rated at the time of
purchase within the four highest quality ratings as determined by either
Moody's Investors Service, Inc. ("Moody's") (currently Aaa, Aa, A and Baa),
Standard & Poor's Corporation ("Standard & Poor's") (currently AAA, AA, A and
BBB) or Fitch Investors Service, Inc. ("Fitch") (currently AAA, AA, A and BBB).
If Municipal Bonds are unrated, such securities will possess creditworthiness
comparable, in the opinion of the manager of the Fund, Fund Asset Management,
L.P. (the "Manager"), to obligations in which the Fund may invest. Municipal
Bonds rated in the fourth highest rating category, while considered "investment
grade", have certain speculative characteristics and are more likely to be
downgraded to non-investment grade than obligations rated in one of the top
three rating categories. See Appendix II--"Ratings of Municipal Bonds"--in the
Statement of Additional Information for more information regarding ratings of
debt securities. An issue of rated Municipal Bonds may cease to be rated or its
rating may be reduced below "investment grade" subsequent to its purchase by
the Fund. If an obligation is downgraded below investment grade, the Manager
will consider factors such as price, credit risk, market conditions, financial
condition of the issuer and interest rates to determine whether to continue to
hold the obligation in the Fund's portfolio.
The Fund may also invest in variable rate demand obligations ("VRDOs") and
VRDOs in the form of participation interests ("Participating VRDOs") in
variable rate tax-exempt obligations held by a financial institution. The VRDOs
in which the Fund will invest are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional
right of demand on the part of the holder thereof to receive payment of the
unpaid principal balance plus accrued interest on a short notice period not to
exceed seven days. Participating VRDOs provide the Fund with a specified
undivided interest (up to 100%) of the underlying obligation and the right to
demand payment of the unpaid principal balance plus accrued interest on the
Participating VRDOs from the financial institution on a specified number of
days' notice, not to exceed seven days. There is, however, the possibility that
because of default or insolvency, the demand feature of VRDOs or Participating
VRDOs may not be honored. The Fund has been advised by its counsel that the
Fund should be entitled to treat the income received on Participating VRDOs as
interest from tax-exempt obligations.
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VRDOs that contain an unconditional right of demand to receive payment of the
unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed illiquid securities. A VRDO with a demand notice
period exceeding seven days will therefore be subject to the Fund's restriction
on illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and be ultimately responsible for
such determinations.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal, New York State or New York City income taxes. However, to the
extent that suitable New York Municipal Bonds are not available for investment
by the Fund, the Fund may purchase Municipal Bonds issued by other states,
their agencies and instrumentalities, the interest income on which is exempt,
in the opinion of bond counsel, from Federal, but not New York State and New
York City taxation. Under normal circumstances, except when acceptable
securities are unavailable as determined by the Manager, the Fund will invest
at least 65% of its total assets in New York Municipal Bonds. For temporary
periods or to provide liquidity, the Fund has the authority to invest as much
as 35% of its total assets in tax-exempt or taxable money market obligations
with a maturity of one year or less (such short-term obligations being referred
to herein as "Temporary Investments"), except that taxable Temporary
Investments shall not exceed 20% of the Fund's net assets. The Temporary
Investments, VRDOs and Participating VRDOs in which the Fund may invest will be
in the following rating categories at the time of purchase: MIG-1/VMIG-1
through MIG-4/VMIG-4 for notes and VRDOs and Prime-1 through Prime-3 for
commercial paper (as determined by Moody's), SP-1 or SP-2 for notes and A-1
through A-3 for VRDOs and commercial paper (as determined by Standard &
Poor's), or F-1 through F-3 for notes, VRDOs and commercial paper (as
determined by Fitch) or, if unrated, of comparable quality in the opinion of
the Manager. The Fund at all times will have at least 80% of its net assets
invested in securities the interest on which is exempt from Federal taxation.
However, interest received on certain otherwise tax-exempt securities which are
classified as "private activity bonds" (in general, bonds that benefit non-
governmental entities) may be subject to Federal alternative minimum tax. The
percentage of the Fund's total assets invested in "private activity bonds" will
vary during the year. See "Distributions and Taxes". In addition, the Fund
reserves the right to invest temporarily a greater portion of its assets in
Temporary Investments for defensive purposes, when, in the judgment of the
Manager, market conditions warrant. The investment objective of the Fund and
the policies set forth in this paragraph are fundamental policies of the Fund
which may not be changed without a vote of a majority of the outstanding shares
of the Fund. The Fund's hedging strategies, which are described in more detail
under "Financial Futures Transactions and Options", are not fundamental
policies and may be modified by the Trustees of the Trust without the approval
of the Fund's shareholders.
POTENTIAL BENEFITS
Investment in shares of the Fund offers several benefits. The Fund offers
investors the opportunity to receive income exempt from Federal, New York State
and New York City income taxes and to own shares in a professionally managed
portfolio consisting primarily of long-term New York Municipal Bonds. The Fund
also provides liquidity because of its redemption features and relieves the
investor of the burdensome administrative details involved in managing a
portfolio of tax-exempt securities. The benefits of investing in the Fund are
at least partially offset by the expenses involved in operating an investment
company. Such expenses primarily consist of the management fee and operational
costs and, in the case of Class B shares, the account maintenance and
distribution costs.
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DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction and equipping of a wide range of public
facilities (including water, sewer, gas, electricity, solid waste, health care,
transportation, education and housing facilities), refunding of outstanding
obligations and obtaining funds for general operating expenses and loans to
other public institutions and facilities. In addition, certain types of bonds
are issued by or on behalf of public authorities to finance various privately
operated facilities, including certain facilities for the local furnishing of
electric energy or gas, sewage facilities, solid waste disposal facilities and
other specialized facilities. For purposes of this Prospectus, such obligations
are Municipal Bonds if the interest paid thereon is exempt from Federal income
tax, and, in the case of New York Municipal Bonds, exempt from New York
personal income tax, even though such bonds may be "private activity bonds" as
discussed below.
The two principal classifications of Municipal Bonds are "general obligation"
and "revenue" bonds which include industrial development bonds ("IDBs") and,
for bonds issued after August 15, 1986, private activity bonds. General
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. The taxing power of any
governmental entity may be limited, however, by provisions of state
constitutions or laws, and an entity's creditworthiness will depend on many
factors, including potential erosion of its tax base due to population
declines, natural disasters, declines in the state's industrial base or
inability to attract new industries, economic limits on the ability to tax
without eroding the tax base, state legislative proposals or voter initiatives
to limit ad valorem real property taxes, and the extent to which the entity
relies on Federal or state aid, access to capital markets or other factors
beyond the state or entity's control. Accordingly, the capacity of the issuer
of a general obligation bond as to the timely payment of interest and the
repayment of principal when due is affected by the issuer's maintenance of its
tax base.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as from the user of
the facility being financed; accordingly the timely payment of interest and the
repayment of principal in accordance with the terms of the revenue or special
obligation bond is a function of the economic viability of such facility or
such revenue source. The Fund may also invest in "moral obligation" bonds,
which are normally issued by special purpose public authorities. If an issuer
of moral obligation bonds is unable to meet its obligations, the repayment of
such bonds becomes a moral commitment but not a legal obligation of the state
or municipality in question.
The Fund may purchase IDBs and private activity bonds. IDBs and private
activity bonds are tax-exempt securities issued by states, municipalities or
public authorities and are issued to provide funds, usually through a loan or
lease arrangement, to a private entity for the purpose of financing
construction or improvement of a facility to be used by the entity. Such bonds
are secured primarily by revenues derived from loan repayments or lease
payments due from the entity which may or may not be guaranteed by a parent
company or otherwise secured. In view of this, an investor should be aware that
repayment of such bonds depends on the revenues of a private entity and be
aware of the risks that such an investment may entail. Continued ability of an
entity to generate sufficient revenues for the payment of principal and
interest on such bonds will be affected by many factors including the size of
the entity, capital structure, demand for its products or services,
competition, general economic conditions, government regulation and the
entity's dependence on revenues for the operation of the particular facility
being financed.
The Fund may invest in Municipal Bonds the return on which is based on a
particular index of value or interest rates. For example, the Fund may invest
in Municipal Bonds that pay interest based on an index of
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Municipal Bond interest rates or based on the value of gold or some other
commodity. The principal amount payable upon maturity of certain Municipal
Bonds also may be based on the value of the index. Also, the Fund may invest in
so-called "inverse floating obligations" or "residual interest bonds" on which
the interest rates typically decline as market rates increase and increase as
market rates decline. To the extent the Fund invests in these types of
Municipal Bonds, the Fund's return on such Municipal Bonds will be subject to
risk with respect to the value of the particular index. Such securities have
the effect of providing a degree of investment leverage, since they may
increase or decrease in value in response to changes, as an illustration, in
market interest rates at a rate which is a multiple (typically two) of the rate
at which fixed-rate long term tax exempt securities increase or decrease in
response to such changes. As a result, the market values of such securities
will generally be more volatile than the market values of fixed-rate tax exempt
securities. To seek to limit the volatility of these securities, the Fund may
purchase inverse floating obligations with shorter-term maturities or which
contain limitations on the extent to which the interest rate may vary. The
Manager believes that indexed and inverse floating obligations represent a
flexible portfolio management instrument for the Fund which allows the Manager
to vary the degree of investment leverage relatively efficiently under
different market conditions. Certain investments in such obligations may be
illiquid. The Fund may not invest in such illiquid obligations if such
investments, together with other illiquid investments, would exceed 10% of the
Fund's net assets.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called
"lease obligations") relating to such equipment, land or facilities. Although
lease obligations do not constitute general obligations of the issuer for which
the issuer's unlimited taxing power is pledged, a lease obligation is
frequently backed by the issuer's covenant to budget for, appropriate and make
the payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the issuer has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although "non-
appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that has not yet
developed the depth of marketability associated with more conventional
securities. Certain investments in lease obligations may be illiquid. The Fund
may not invest in illiquid lease obligations if such investments, together with
all other illiquid investments would exceed 10% of the Fund's net assets. The
Fund may, however, invest without regard to such limitation in lease
obligations which the Manager, pursuant to guidelines which have been adopted
by the Board of Trustees and subject to the supervision of the Board,
determines to be liquid. The Manager will deem lease obligations to be liquid
if they are publicly offered and have received an investment grade rating of
Baa or better by Moody's, or BBB or better by Standard & Poor's or Fitch.
Unrated lease obligations, or those rated below investment grade, will be
considered liquid if the obligations come to the market through an underwritten
public offering and at least two dealers are willing to give competitive bids.
In reference to the latter, the Manager must, among other things, also review
the creditworthiness of the state or political subdivisions obligated to make
payment under the lease obligation and make certain specified determinations
based on such factors as the existence of a rating or credit enhancement (such
as insurance), the frequency of trades or quotes for the obligation and the
willingness of dealers to make a market in the obligation.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
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CALL RIGHTS
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid.The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 10% of the Fund's net assets.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase or sell Municipal Bonds on a delayed delivery basis or
a when-issued basis at fixed purchase terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund enters
into the commitment and the value of the obligation will thereafter be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery date may be more or less than its purchase price. A
separate account of the Fund will be established with its custodian consisting
of cash, cash equivalents or high grade, liquid Municipal Bonds having a market
value at all times at least equal to the amount of the forward commitment.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL BONDS
The Fund ordinarily will invest at least 65% of its assets in New York
Municipal Bonds, and therefore it is more susceptible to factors adversely
affecting issuers of New York Municipal Bonds than is a municipal bond mutual
fund that is not concentrated in issuers of New York Municipal Bonds to this
degree. During the last seventeen years, New York State, New York City and
other New York public bodies have encountered and are currently encountering
financial difficulties which could have an adverse effect with respect to the
performance of the Fund. On June 6, 1990, Moody's changed its ratings on all
the State's outstanding general obligation bonds from A1 to A. On January 13,
1992, Standard & Poor's lowered its rating on State general obligation bonds to
A- from A. As of December 9, 1993, Moody's rated New York City's fixed rate
general obligation bonds Baa1, Standard & Poor's rated such bonds A- and Fitch
rated such bonds A-. There is no assurance that a particular rating will
continue for any given period of time or that any such rating will not be
revised downward or withdrawn entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. The Manager does
not believe that these developments will have a significant adverse effect on
the Fund's ability to invest in New York Municipal Bonds. See "Economic
Conditions in New York" in the Statement of Additional Information.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
The Fund is authorized to purchase and sell certain exchange traded financial
futures contracts ("financial futures contracts") solely for the purpose of
hedging its investments in Municipal Bonds against declines in value and to
hedge against increases in the cost of securities it intends to purchase.
However, any transactions involving financial futures or options (including
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. A financial futures contract obligates the
seller of a contract to deliver and the purchaser of a contract to take
delivery of the type of financial
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<PAGE>
instrument covered by the contract, or in the case of index-based futures
contracts to make and accept a cash settlement, at a specific future time for a
specified price. A sale of financial futures contracts may provide a hedge
against a decline in the value of portfolio securities because such
depreciation may be offset, in whole or in part, by an increase in the value of
the position in the financial futures contracts. A purchase of financial
futures contracts may provide a hedge against an increase in the cost of
securities intended to be purchased because such appreciation may be offset, in
whole or in part, by an increase in the value of the position in the futures
contracts. Distributions, if any, of net long-term capital gains from certain
transactions in futures or options are taxable at long-term capital gains rates
for Federal income tax purposes, regardless of the length of time the
shareholder has owned Fund shares. See "Distributions and Taxes--Taxes".
The Fund deals in financial futures contracts traded on the Chicago Board of
Trade based on The Bond Buyer Municipal Bond Index, a price-weighted measure of
the market value of 40 large, recently issued tax-exempt bonds. There can be no
assurance, however, that a liquid secondary market will exist to terminate any
particular financial futures contract at any specific time. If it is not
possible to close a financial futures position entered into by the Fund, the
Fund would continue to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such a situation, if the
Fund has insufficient cash, it may have to sell portfolio securities to meet
daily variation margin requirements at a time when it may be disadvantageous to
do so. The inability to close financial futures positions also could have an
adverse impact on the Fund's ability to hedge effectively. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a financial futures contract.
The Fund may purchase and sell financial futures contracts on U.S. Government
securities and write and purchase put and call options on such futures
contracts as a hedge against adverse changes in interest rates as described
more fully in the Statement of Additional Information. With respect to U.S.
Government securities, currently there are financial futures contracts based on
long-term U.S. Treasury bonds, Treasury notes, Government National Mortgage
Association ("GNMA") Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Trustees, the Fund also may engage in
other financial futures contracts transactions and options thereon, such as
financial futures contracts or options on other municipal bond indexes which
may become available, if the Manager of the Fund and the Trustees of the Trust
should determine that there is normally a sufficient correlation between the
prices of such futures contracts and the Municipal Bonds in which the Fund
invests to make such hedging appropriate.
Utilization of futures transactions and options thereon involves the risk of
imperfect correlation in movements in the price of futures contracts and
movements in the price of the security which is the subject of the hedge. If
the price of the futures contract moves more or less than the price of the
security that is the subject of the hedge, the Fund will experience a gain or
loss which will not be completely offset by movements in the price of such
security. There is a risk of imperfect correlation where the securities
underlying futures contracts have different maturities, ratings or geographic
mixes than the security being hedged. In addition, the correlation may be
affected by additions to or deletions from the index which serves as a basis
for a financial futures contract. Finally, in the case of futures contracts on
U.S. Government securities and options on such futures contracts, the
anticipated correlation of price movements between the U.S. Government
securities underlying the futures or options and Municipal Bonds may be
adversely affected by economic, political, legislative or other developments
which have a disparate impact on the respective markets for such securities.
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Under regulations of the Commodity Futures Trading Commission ("CFTC"), the
futures trading activities described herein will not result in the Fund being
deemed to be a "commodity pool", as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon (i) only for bona fide
hedging purposes, and (ii) for non-hedging purposes, if the aggregate initial
margins and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Fund's portfolio
assets after taking into account unrealized profits and unrealized losses on
any such contracts and options. (However, as stated above, the Fund intends to
engage in options and futures transactions only for hedging purposes.) Margin
deposits may consist of cash or securities acceptable to the broker and the
relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or short-term high-grade fixed-income securities in a segregated account
with the Fund's custodian, so that the amount so segregated plus the amount of
initial and variation margin held in the account of its broker equals the
market value of the futures contracts, thereby ensuring that the use of such
futures contract is unleveraged. It is not anticipated that transactions in
futures contracts will have the effect of increasing portfolio turnover.
Although certain risks are involved in options and futures transactions, the
Manager believes that, because the Fund will engage in futures transactions
only for hedging purposes, the futures portfolio strategies of the Fund will
not subject the Fund to certain risks frequently associated with speculation in
futures transactions. The Fund must meet certain Federal income tax
requirements under the Internal Revenue Code of 1986, as amended (the "Code")
in order to qualify for the special tax treatment afforded regulated investment
companies, including a requirement that less than 30% of its gross income be
derived from the sale or other disposition of securities held for less than
three months. Additionally, the Fund is required to meet certain
diversification requirements under the Code.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past moved beyond the
daily limit on a number of consecutive trading days.
The successful use of transactions in futures also depends on the ability of
the Manager to forecast correctly the direction and extent of interest rate
movements within a given time frame. To the extent these rates remain stable
during the period in which a futures contract is held by the Fund or moves in a
direction opposite to that anticipated, the Fund may realize a loss on the
hedging transaction which is not fully or partially offset by an increase in
the value of portfolio securities. As a result, the Fund's total return for
such period may be less than if it had not engaged in the hedging transaction.
Furthermore, the Fund will only engage in hedging transactions from time to
time and may not necessarily be engaging in hedging transactions when movements
in interest rates occur.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts and certain options thereon.
REPURCHASE AGREEMENTS AND PURCHASE AND SALE CONTRACTS
As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements or purchase and sale contracts. Repurchase agreements and
purchase and sale contracts may be entered into
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only with a member bank of the Federal Reserve System or primary dealer in U.S.
Government securities. Under such agreements, the bank or primary dealer
agrees, upon entering into the contract, to repurchase the security at a
mutually agreed upon time and price, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period. In the case of repurchase agreements,
the prices at which the trades are conducted do not reflect accrued interest on
the underlying obligations; whereas, in the case of purchase and sale
contracts, the prices take into account accrued interest. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In the case of a repurchase
agreement, 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; the Fund does not have the right
to seek additional collateral in the case of purchase and sale contracts. 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. A purchase and
sale contract differs from a repurchase agreement in that the contract
arrangements stipulate that the securities are owned by the Fund. In the event
of a default under such a repurchase agreement or under a purchase and sale
contract, instead of the contractual fixed rate of return, the rate of return
to the Fund shall be dependent upon intervening fluctuations of the market
value of such security and the accrued interest on the security. 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. The Fund may not invest more than 10% of its net assets
in repurchase agreements or purchase and sale contracts maturing in more than
seven days.
INVESTMENT RESTRICTIONS
The Trust has adopted a number of restrictions and policies relating to the
investment of the assets of the Fund and its activities, which are fundamental
policies of the Fund and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities, as defined in the
1940 Act. Among the more significant restrictions, the Fund may not 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; and the Fund will not purchase securities
while borrowings are outstanding. Investors are referred to the Statement of
Additional Information for a complete description of such restrictions and
policies.
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
The Trustees are:
Arthur Zeikel*--President and Chief Investment Officer of the Manager and
Merrill Lynch Asset Management, L.P. (doing business as Merrill Lynch Asset
Management) ("MLAM"); President
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and Director of Princeton Services, Inc.; Executive Vice President of
Merrill Lynch & Co., Inc. since 1990; Executive Vice President of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") since 1990 and
a Senior Vice President thereof from 1985 to 1990; Director of the
Distributor.
Kenneth S. Axelson--Former Executive Vice President and Director, J.C.
Penney Company, Inc.
Herbert I. London--Former Dean, Gallatin Division of New York University.
Robert R. Martin--Former Chairman, Kinnard Investments, Inc.
Joseph L. May--Attorney in private practice.
Andre F. Perold--Professor, Harvard Business School.
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*Interested person, as defined in the 1940 Act, of the Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Fund Asset Management, L.P. (the "Manager"), which is an affiliate of MLAM
and is owned and controlled by Merrill Lynch & Co., Inc., acts as the Manager
for the Fund and provides the Fund with management services. The Manager or
MLAM acts as the investment adviser to more than 90 other registered investment
companies. MLAM also offers portfolio management and portfolio analysis
services to individuals and institutions. As of November 30, 1993, the Manager
and MLAM had a total of approximately $159.4 billion in investment company and
other portfolio assets under management, including accounts of certain
affiliates of the Manager.
Subject to the direction of the 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 Trust and the Fund.
Vincent R. Giordano and Kenneth A. Jacob are the Portfolio Managers for the
Fund. Vincent R. Giordano has been a Portfolio Manager of the Manager and MLAM
since 1977 and a Senior Vice President of the Manager and MLAM since 1984.
Kenneth A. Jacob has been a Vice President of the Manager and MLAM since 1984.
Pursuant to the Management Agreement between the Manager and the Trust on
behalf of the Fund (the "Management Agreement"), the Manager is entitled to
receive compensation at the annual rate of 0.55% of the average daily net
assets of the Fund. Effective December 23, 1987, the Manager has voluntarily
agreed to waive the amount of compensation set forth in the Management
Agreement and instead has agreed to receive from the Fund a monthly fee based
upon the average daily net assets of the Fund at the following annual rates:
0.55% of the average daily net assets not exceeding $500 million; 0.525% of the
average daily net assets exceeding $500 million but not exceeding $1.0 billion
and 0.50% of the average daily net assets exceeding $1.0 billion. For the
fiscal year ended September 30, 1993, the fee paid by the Fund to the Manager
was $3,744,878 (based on average net assets of approximately $689.5 million).
The Management Agreement obligates the Trust and the Fund to pay certain
expenses incurred in the Fund's operations, including, among other things, the
management fee, legal and audit fees, unaffiliated Trustees' fees and expenses,
registration fees, custodian and transfer agency fees, accounting and pricing
costs, and certain of the costs of printing proxies, shareholder reports,
prospectuses and statements of additional information. Accounting services are
provided to the Fund by the Manager and the Fund reimburses the
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Manager for its costs in connection with such services. For the fiscal year
ended September 30, 1993, the Fund reimbursed the Manager $65,976 for
accounting services. For the fiscal year ended September 30, 1993, the
annualized ratio of total expenses, net of distribution fees, to average net
assets was 0.64% for the Class A shares and 0.64% for the Class B shares.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of Merrill Lynch & Co., Inc., acts as the Trust's Transfer Agent
pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Fund pays
the Transfer Agent a fee of $10.00 per Class A shareholder account and $12.00
per Class B shareholder account and the Transfer Agent is entitled to
reimbursement from the Fund for out-of-pocket expenses incurred by the Transfer
Agent under the Transfer Agency Agreement. For the fiscal year ended September
30, 1993, the total fee paid by the Fund to the Transfer Agent pursuant to the
Transfer Agency Agreement was $277,001.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
the Manager and an affiliate of Merrill Lynch, acts as the Distributor of the
shares of the Fund. Class A and Class B shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000 and the minimum subsequent purchase is $50.
The Fund is offering its shares at a public offering price equal to the next
determined net asset value per share plus sales charges which, at the option of
the purchaser, may be imposed either at the time of purchase (the "initial
sales charge alternative") or on a deferred basis (the "deferred sales charge
alternative"), as described below. The applicable offering price for purchase
orders is based upon the net asset value of the Fund next determined after
receipt of the purchase order by the Distributor. As to purchase orders
received by securities dealers prior to 4:15 P.M., New York time, which
includes orders received after the determination of net asset value on the
previous day, the applicable offering price will be based on the net asset
value determined as of 4:15 P.M. on the day the order is placed with the
Distributor, provided the order is received by the Distributor prior to 4:30
P.M., New York time, on that day. If the purchase orders are not received by
the Distributor prior to 4:30 P.M., New York time, such orders shall be deemed
received on the next business day. Any order may be rejected by the Distributor
or the Fund. The Fund or the Distributor may suspend the continuous offering of
the Fund's shares to the general public at any time in response to conditions
in the securities markets or otherwise and may thereafter resume such offering
from time to time. Neither the Distributor nor the dealers are permitted to
withhold placing orders to benefit themselves by a price change. Merrill Lynch
may charge its customers a processing fee (presently $4.85) to confirm a sale
of shares to such customers. Purchases directly through the Fund's Transfer
Agent are not subject to the processing fee.
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative and Class B shares are sold to
investors choosing the deferred sales charge alternative.
15
<PAGE>
Each class represents an interest in the same portfolio of investments of the
Fund, has the same rights and is identical to the other class in all respects,
except that Class B shares bear the expenses of the deferred sales
arrangements, any expenses (including incremental transfer agency costs)
resulting from such sales arrangements, and the expenses paid by the account
maintenance fee and have exclusive voting rights with respect to the Rule 12b-1
distribution plan pursuant to which the account maintenance and distribution
fees are paid. The two classes also have different exchange privileges. See
"Shareholder Services--Exchange Privilege". The net income attributable to
Class B shares and the dividends payable on Class B shares will be reduced by
the amount of the account maintenance and distribution fees and incremental
transfer agency costs relating to the Class B shares; accordingly the net asset
value of the Class B shares will be reduced by such amount to the extent the
Fund has undistributed net income. Sales personnel may receive different
compensation for selling Class A or Class B shares. Investors are advised that
only Class A shares may be available for purchase through securities dealers,
other than Merrill Lynch, which are eligible to sell shares.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the Fund permit investors to choose the
method of purchasing shares that is most beneficial given the amount of their
purchase, the length of time the investor expects to hold his shares and other
relevant circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge and not be subject to ongoing charges, as discussed below, or to have
the entire initial purchase price invested in the Fund with the investment
thereafter being subject to ongoing charges.
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Moreover, shares acquired under the
initial sales charge alternative would not be subject to an ongoing account
maintenance and distribution fees as described below. However, because initial
sales charges are deducted at the time of purchase, such investors would not
have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also might elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees may exceed the initial sales charge.
Again, however, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent any
return is realized on the additional funds initially invested under the
deferred alternative. Another factor that may be applicable under certain
circumstances is that the payment of the Class B distribution fee and
contingent deferred sales charge ("CDSC") is subject to certain limits as set
forth below under "Deferred Sales Charge Alternative--Class B Shares."
Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continued
account maintenance and distribution fees and, for a four-year period of time,
a CDSC as described below. For example, an investor subject to the 4.0% initial
sales charge will have to hold his investment at least eight years for the
0.25% account maintenance fee and 0.25% distribution fee to exceed the initial
sales charge of Class A shares. This example does not take into account the
time value of money which further reduces the impact of the ongoing account
maintenance and distribution fees on the investment, fluctuations in the net
asset value, the effect of the return on the investment over this period of
time or the effect of any limits that may be imposed upon the payment of the
distribution fee and the CDSC.
16
<PAGE>
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A shares for purchasers choosing the
initial sales charge alternative is the next determined net asset value plus
varying sales charges (i.e., sales load), as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE AS DISCOUNT TO
SALES CHARGE AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED THE OFFERING PRICE
------------------ --------------- --------------- ------------------
<S> <C> <C> <C>
Less than $25,000........ 4.00% 4.17% 3.75%
$25,000 but less than
$50,000................. 3.75 3.90 3.50
$50,000 but less than
$100,000................ 3.25 3.36 3.00
$100,000 but less than
$250,000................ 2.50 2.56 2.25
$250,000 but less than
$1,000,000.............. 1.50 1.52 1.25
$1,000,000 and over**.... .50 .50 .40
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** A purchase of $1 million or more in a single transaction by an investor
(other than a tax qualified retirement plan under Section 401 of the Code
or a deferred compensation plan under Section 403(b) and Section 457 of the
Code), or any purchase by a TMASM Managed Trust, of Class A shares of the
Fund may not be subject to an initial sales charge. Purchases for which the
initial sales charge is waived will be subject instead to a CDSC of up to
1% of the dollar amount of the purchase if the shares are redeemed within
one year after purchase.
Initial sales charges may be waived for shareholders purchasing $1 million
or more in a single transaction (other than a tax qualified retirement plan
under Section 401 of the Code or a deferred compensation plan under Section
403(b) and Section 457 of the Code), or a purchase by a TMASM Managed Trust,
of Class A shares of the Fund. In addition, purchases of Class A shares of the
Fund made in connection with a single investment of $1 million or more under
the Merrill Lynch Mutual Fund Adviser Program will not be subject to an
initial sales charge. Purchases described in this paragraph will be subject
instead to a CDSC if the shares are redeemed within one year after purchase at
the following rates:
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE
OF DOLLAR AMOUNT OF
AMOUNT OF PURCHASE PURCHASE
------------------ --------------------
<S> <C>
$1 million up to $2.5 million .......................... 0.75%
Over $2.5 million up to $3.5 million.................... 0.40%
Over $3.5 million up to $5 million...................... 0.25%
Over $5 million......................................... 0.20%
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A shares
of the Fund will receive a concession equal to most of the sales charge, they
may be deemed to be underwriters under the Securities Act of 1933, as amended.
Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares are offered with
reduced sales charges and, in certain circumstances, at net asset value, to
participants in the Merrill Lynch Blueprint SM Program. Class A shares of the
Fund are offered at net asset value to Trustees of the Fund, to directors or
trustees of certain other Merrill Lynch-sponsored investment companies, to an
investor who has a business relationship with a financial consultant who
joined
17
<PAGE>
Merrill Lynch from another investment firm within six months prior to the date
of purchase if certain conditions set forth in the Statement of Additional
Information are met, to directors of Merrill Lynch & Co., Inc. and to employees
of Merrill Lynch & Co., Inc. and its subsidiaries. Also, Class A shares may be
offered at net asset value in connection with the acquisition of assets of
other investment companies. No initial sales charges are imposed upon Class A
shares issued as a result of the automatic reinvestment of dividends or capital
gains distributions. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value plus a reduced sales charge. Class A shares of the Fund also
are offered at net asset value to shareholders of certain closed-end funds
advised by MLAM or the Manager who wish to reinvest the net proceeds from a
sale of their closed-end fund shares of common stock in shares of the Fund,
provided certain conditions are met. Thus, for example, Class A shares of the
Fund are offered at net asset value to shareholders of Merrill Lynch Senior
Floating Rate Fund (formerly known as Merrill Lynch Prime Fund, Inc.) ("Senior
Floating Rate Fund") who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock of Senior Floating Rate Fund in shares
of the Fund. In order to exercise this investment option, Senior Floating Rate
Fund shareholders must sell their Senior Floating Rate Fund shares to the
Senior Floating Rate Fund in connection with a tender offer conducted by the
Senior Floating Rate Fund and reinvest the proceeds immediately in the Fund.
This investment option is available only with respect to the proceeds of Senior
Floating Rate Fund shares as to which no Early Withdrawal Charge (as defined in
the Senior Floating Rate Fund prospectus) is applicable. Purchase orders from
Senior Floating Rate Fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related Senior Floating Rate
Fund tender offer terminates and will be effected at the net asset value of the
Fund at such day. Class A shares of the Fund may be purchased at net asset
value, without a sales charge, by programs associated with professional
athletic players' associations which have invested in the aggregate more than
$10 million in Merrill Lynch-sponsored investment companies. Additional
information concerning these reduced initial sales charges is set forth in the
Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge at
the time of purchase. The Class B shares are being sold without an initial
sales charge so that the Fund will receive the full amount of the investor's
purchase payment. Merrill Lynch compensates its financial consultants for
selling Class B shares at the time of purchase from its own funds. The proceeds
of the CDSC and the ongoing distribution fee discussed below are used to defray
Merrill Lynch's distribution expenses, including compensating its financial
consultants. The proceeds from the ongoing account maintenance fee are used to
compensate Merrill Lynch for providing continuing account maintenance
activities.
Proceeds from the CDSC are paid to the Distributor and are used in whole or
in part by the Distributor to defray the expenses of dealers (including Merrill
Lynch) related to providing distribution-related services to the Fund in
connection with the sale of the Class B shares, such as the payment of
compensation to financial consultants for selling Class B shares. Payments by
the Fund to the Distributor of the distribution fee under the distribution plan
described below also may be used in whole or in part by the Distributor for
this purpose. The combination of the CDSC and the ongoing distribution fee
facilitates the ability of the Fund to sell the Class B shares without a sales
charge being deducted at the time of purchase. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services--
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the deferred sales charge schedule relating to the
Class B shares acquired as a result of the exchange.
18
<PAGE>
CDSC. Class B shares which are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. The charge will be assessed on an amount equal
to the lesser of the current market value or the cost of the shares being
redeemed. Accordingly, no sales charge will be imposed on increases in net
asset value above the initial purchase price. In addition, no charge will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions.
The following table sets forth the rates of the CDSC:
<TABLE>
<CAPTION>
CDSC AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHANGE
------------ -----------------
<S> <C>
0-1....................................................... 4.0%
1-2....................................................... 3.0%
2-3....................................................... 2.0%
3-4....................................................... 1.0%
4 and thereafter.......................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest applicable rate
being charged. Therefore, it will be assumed that the redemption is first of
shares until such time as the CDSC is no longer applicable or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the four-year period. The charge will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor
makes his first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase). The CDSC is waived on
redemptions of shares following the death or disability (as defined in the
Code) of a shareholder.
The CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans and in connection with certain group plans placing
orders through the Merrill Lynch BlueprintSM Program. Additional information
concerning the waiver of the CDSC is set forth in the Statement of Additional
Information.
Distribution Plan. Pursuant to a distribution plan adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Distribution Plan"), the Fund pays the
Distributor ongoing account maintenance and distribution fees which are accrued
daily and paid monthly, at the annual rates of 0.25% and 0.25%, respectively,
of the average daily net assets of the Class B shares of the Fund. Pursuant to
a sub-agreement with the Distributor, Merrill Lynch also provides account
maintenance and distribution service to the Fund. The ongoing account
maintenance fee compensates the Distributor and Merrill Lynch for providing
account maintenance services to Class B shareholders. The ongoing distribution
fee compensates the Distributor and
19
<PAGE>
Merrill Lynch for providing distribution services and bearing certain
distribution-related expenses of the Fund, including payments to financial
consultants for selling Class B shares of the Fund. For the fiscal year ended
September 30, 1993, the Fund paid the Distributor $3,320,440 pursuant to the
Distribution Plan, all of which was paid to Merrill Lynch.
The Distribution Plan is designed to permit an investor to purchase Class B
shares through dealers without the assessment of a front-end sales charge and
at the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B shares. In this regard, the purpose and
function of the distribution fee and the CDSC are the same as those of the
initial sales charge with respect to the Class A shares of the Fund in that the
deferred sales charges provide for the financing of the distribution of the
Fund's Class B shares.
The payments under the Distribution Plan are based on a percentage of average
daily net assets of Class B shares regardless of the amount of expenses
incurred and, accordingly, distribution-related revenues may be more or less
than distribution-related expenses. Information with respect to the
distribution-related revenues and expenses is presented to the Trustees for
their consideration in connection with their deliberations as to the
continuance of the Distribution Plan. This information is presented annually as
of December 31 of each year on a "fully allocated accrual" basis and quarterly
on a "direct expense and revenue/cash" basis. On the fully allocated accrual
basis, revenues consist of the account maintenance fees, distribution fees, the
CDSCs and certain other related revenues, and expenses consist of financial
consultant compensation, branch office and regional operation center selling
and transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees,
distribution fees and CDSCs and the expenses consist of financial consultant
compensation. As of December 31, 1992, the last date for which fully allocated
accrual data is available, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch exceeded fully allocated accrual revenues for
such period by approximately $8,670,000 (1.38% of Class B net assets at that
date). As of December 31, 1992, direct cash revenues for the period since the
commencement of operations exceeded direct cash expenses by $11,536,663 (1.8%
of Class B net assets at that date). As of September 30, 1993, direct cash
revenues for the period since the commencement of operations exceeded direct
cash expenses by $12,783,140 (1.7% of Class B net assets at that date).
The Fund had no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch in connection with the Class B
shares, respectively, and there is no assurance that the Trustees of the Trust
will approve the continuance of the Distribution Plan from year to year.
However, the Distributor intends to seek annual continuation of the
Distribution Plan. In their review of the Distribution Plan, the Trustees will
not be asked to take into consideration expenses incurred in connection with
the distribution of Class A shares or of shares of other funds for which the
Distributor acts as distributor. The distribution fee and the CDSCs in the case
of Class B shares will not be used to subsidize the sale of Class A shares.
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. imposes a limitation on certain asset-based sales
charges such as the Fund's distribution fee and the CDSC but not the account
maintenance fee. As applicable to the Fund, the maximum sales charge rule
limits the aggregate of distribution fee payments and CDSCs payable by the Fund
to (1) 6.25% of eligible gross sales of Class B shares (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges) plus (2)
interest on the unpaid balance at the prime rate plus 1% (the unpaid balance
being the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). The Distributor has voluntarily agreed to waive
20
<PAGE>
interest charges on the unpaid balance in excess of 0.50% of eligible gross
sales. Consequently, the maximum amount payable to the Distributor (referred to
as the "voluntary maximum") is 6.75% of eligible gross sales. The Distributor
retains the right to stop waiving the interest charges at any time. To the
extent payments would exceed the voluntary maximum, the Fund will not make
further payments of the distribution fee and any CDSCs will be paid to the Fund
rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payments in excess of the amount
payable under the NASD formula will not be made.
The following table sets forth comparative information as of September 30,
1993, with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule
and the Distributor's voluntary maximum for the fiscal period ended September
30, 1993.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF SEPTEMBER 30, 1993
-------------------------------------------------------------------------------------------
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
ELIGIBLE GROSS SALES UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------------- ----------- ----------- ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $1,264,994,309 $79,062,144 $43,667,695 $122,729,839 $23,683,034 $99,046,805 $1,834,952
Under Distributor's Vol-
untary Waiver.......... $1,264,994,309 $79,062,144 $ 6,324,972 $ 85,387,116 $23,683,034 $61,704,082 $1,834,952
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since November 1, 1985
(commencement of operations) other than shares acquired through dividend
reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to July 6, 1993 under the Prior Plan
at the .50% rate, .25% of average daily net assets has been treated as a
distribution fee and .25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.
REDEMPTION OF SHARES
The Trust is required to redeem for cash all full and fractional shares of
the Fund upon receipt of a written request in proper form. The redemption price
is the net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any CDSC which may be applicable to
Class B shares, there will be no charge for redemption if the redemption
request is sent directly to the Transfer Agent. Shareholders liquidating their
holdings will receive upon redemption all dividends reinvested through the date
of redemption. The value of shares at the time of redemption may be more or
less than the shareholder's cost, depending on the market value of the
securities held by the Fund at such time.
21
<PAGE>
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Financial Data Services, Inc., Transfer Agency
Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of
redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. Redemption requests should not be sent to the Fund.
The notice in either event requires the signature(s) of all persons in whose
name(s) the shares are registered, signed exactly as such name(s) appear(s) on
the Transfer Agent's register. The signature(s) on the redemption request must
be guaranteed by an "eligible guarantor institution" as such is defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended, the existence
and validity of which may be verified by the Transfer Agent through the use of
industry publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents such as, but not
limited to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payments will be mailed within
seven days of receipt of a proper notice of redemption.
At various times the Trust may be requested to redeem Fund shares for which
it has not yet received good payment (e.g., cash, Federal funds or certified
check drawn on a United States bank). The Trust may delay or cause to be
delayed the mailing of a redemption check until such time as it has assured
itself that good payment has been collected for the purchase of such Fund
shares, which may take up to 10 days.
REPURCHASE
The Trust also will repurchase Fund shares through a shareholder's listed
securities dealer. The Trust normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after receipt of the order by the dealer, provided that the
request for repurchase is received by the dealer prior to the regular close of
business on the New York Stock Exchange on the day received and is received by
the Fund from such dealer not later than 4:30 P.M., New York time, on the same
day. Dealers have the responsibility of submitting such repurchase requests to
the Trust not later than 4:30 P.M., New York time, in order to obtain that
day's closing price.
These repurchase arrangements are for the convenience of shareholders and do
not involve a charge by the Trust (other than any applicable CDSC in the case
of Class B shares); securities firms which do not have selected dealer
agreements with the Distributor, however, may impose a charge on the
shareholder for transmitting the notice of repurchase to the Trust. Merrill
Lynch may charge its customers a processing fee (presently $4.85) to confirm a
repurchase of shares to such customers. Redemptions directly through the Fund's
Transfer Agent are not subject to the processing fee. The Trust reserves the
right to reject any order for repurchase, which right of rejection might
adversely affect shareholders seeking redemption through the repurchase
procedure. However, a shareholder whose order for repurchase is rejected by the
Trust may redeem Fund shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A SHARES
Shareholders who have redeemed their Class A shares have a one-time privilege
to reinstate their accounts by purchasing Class A shares of the Fund at net
asset value without a sales charge up to the dollar
22
<PAGE>
amount redeemed. The reinstatement privilege may be exercised by sending a
notice of exercise along with a check for the amount to be reinstated to the
Transfer Agent within 30 days after the date the request for redemption was
accepted by the Transfer Agent or the Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds. The reinstatement privilege is a one-time privilege and may be
exercised by the Class A shareholder only the first time such shareholder makes
a redemption.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to
each of such services and instructions as to how to participate in the various
services or plans, or to change options with respect thereto, can be obtained
from the Trust by calling the telephone number on the cover page hereof or from
the Distributor or Merrill Lynch. Included in such services are the following:
Investment Account. Each shareholder whose account (an "Investment Account")
is maintained at the Transfer Agent has an Investment Account and will receive
monthly statements from the Transfer Agent showing any reinvestments of
dividends and capital gains distributions, and any other activity in the
account since the preceding statement. Shareholders also will receive separate
confirmations for each purchase or sale transaction other than reinvestments of
dividends and capital gains distributions. Shareholders may make additions to
their Investment Accounts at any time by mailing a check directly to the
Transfer Agent. Shareholders may also maintain their accounts through Merrill
Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage account, an
Investment Account in the transferring shareholder's name may be opened at the
Transfer Agent. Shareholders considering transferring their Class A shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A shares are to be transferred will
not take delivery of shares of the Fund, a shareholder either must redeem the
Class A shares so that the cash proceeds can be transferred to the account at
the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A shares. Shareholders interested in transferring their
Class B shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he be issued certificates for his shares, and then must turn
the certificates over to the new firm for re-registration as described in the
preceding sentence.
Exchange Privilege. Shareholders of the Fund each have an exchange privilege
with certain other mutual funds sponsored by Merrill Lynch. There is currently
no limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Securities and Exchange Commission (the "Commission").
Class A shareholders of the Fund may exchange their shares ("outstanding Class
A shares") for Class A shares of another fund ("new Class A shares") on the
basis of relative net asset value per Class A share, plus an amount equal to
the difference, if any, between the sales charge previously paid on the
outstanding Class A shares and the sales charge payable at the time of the
exchange on the new Class A shares. However, the Fund's exchange privilege is
modified with respect to purchases of Class A shares under the Merrill Lynch
Mutual
23
<PAGE>
Fund Adviser program. First, the initial allocation of assets is made under the
program. Then, any subsequent exchange under the program of Class A shares of a
fund for Class A shares of the Fund will be made solely on the basis of the
relative net asset values of the shares being exchanged. Therefore, there will
not be a charge for any difference between the sales charge previously paid on
the shares of the other fund and the sales charge payable on the shares of the
Fund being acquired in the exchange under this program.
Class B shareholders of the Fund may exchange their shares ("outstanding
Class B shares") for Class B shares of another fund ("new Class B shares") on
the basis of relative net asset value per share, without the payment of any
CDSC that might otherwise be due on redemption of the outstanding Class B
shares. Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the deferred sales charge schedule relating to the new Class B shares. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the deferred sales charge schedule relating to the Class B shares
of the fund from which the exchange has been made. For purposes of computing
the CDSC that may be payable upon a disposition of the new Class B shares, the
holding period for the outstanding Class B shares is "tacked" to the holding
period of the new Class B shares. Class A and Class B shareholders of the Fund
may also exchange their shares for shares of certain money market funds, but in
the case of an exchange from Class B shares the period of time that shares are
held in a money market fund will not count toward satisfaction of the holding
period requirement for purposes of reducing the CDSC. Exercise of the exchange
privilege is treated as a sale for Federal income tax purposes. The exchange
privilege is available only in states where the exchange legally may be made.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without a sales charge, at the net asset
value per share at the close of business on the monthly payment date for such
dividends and distributions. A shareholder may at any time, by written
notification or by telephone (1-800-MER-FUND) to the Transfer Agent, elect to
have subsequent dividends or both dividends and capital gains distributions
paid in cash, rather than reinvested, in which event payment will be mailed
monthly. No deferred sales charge will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
Systematic Withdrawal and Automatic Investment Plans. A Class A shareholder
may elect to receive systematic withdrawal payments from his Investment Account
through automatic payment by check or through automatic payment by direct
deposit to his bank account on either a monthly or quarterly basis. A Class A
shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account
may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the Systematic Redemption Program, subject
to certain conditions. Regular additions of both Class A and Class B shares may
be made to an investor's Investment Account by pre-arranged charges of $50 or
more to his regular bank account. The Fund's Automatic Investment Program is
not available to shareholders whose shares are held in a brokerage account with
Merrill Lynch. Alternatively, investors who maintain CMA(R) accounts may
arrange to have periodic investments made in the Fund in their CMA(R) accounts
or in certain related accounts in amounts of $100 or more through the CMA(R)
Automatic Investment Program.
24
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to the policies established by the Trustees or the Trust, the Manager
is primarily responsible for the execution of the Fund's portfolio
transactions. Municipal Bonds and other securities in which the Fund invests
are traded primarily in the over-the-counter market. Where possible, the Trust
deals directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. It is the policy of the Trust to obtain the best results in
conducting portfolio transactions for the Fund, taking into account such
factors as price (including the applicable dealer spread or commission), the
size, type and difficulty of the transaction involved, the firm's general
execution and operations facilities, and the firm's risk in positioning the
securities involved and the provision of supplemental investment research by
the firm. While reasonable competitive spreads or commissions are sought, the
Fund will not necessarily be paying the lowest spread or commission available.
The sale of shares of the Fund may be taken into consideration as a factor in
the selection of brokers or dealers to execute portfolio transactions for the
Fund. The portfolio securities of the Fund generally are traded on a principal
basis and normally do not involve either brokerage commissions or transfer
taxes. The cost of portfolio securities transactions of the Fund primarily
consists of dealer or underwriter spreads. Under the 1940 Act, persons
affiliated with the Trust, including Merrill Lynch, are prohibited from dealing
with the Trust as a principal in the purchase and sale of securities unless
such trading is permitted by an exemptive order issued by the Commission. The
Trust has obtained an exemptive order permitting it to engage in certain
principal transactions with Merrill Lynch involving high quality short-term
Municipal Bonds subject to certain conditions. During the year ended September
30, 1992, the Trust engaged in no such transactions. In addition, the Trust may
not purchase securities, including Municipal Bonds, for the Fund during the
existence of any underwriting syndicate of which Merrill Lynch is a member
except pursuant to procedures approved by the Trustees of the Trust which
comply with rules adopted by the Commission. An affiliated person of the Trust
may serve as its broker in over-the-counter transactions conducted by the Fund
on an agency basis only.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends following the
normal close of trading on the New York Stock Exchange (currently 4:00 P.M.)
prior to the determination of the net asset value on that day. The net
investment income of the Fund for dividend purposes consists of interest earned
on portfolio securities, less expenses, in each case computed since the most
recent determination of net asset value. Expenses of the Fund, including the
management fees and Class B account maintenance and distribution fees, are
accrued daily. Dividends of net investment income are declared daily and
reinvested monthly in the form of additional full and fractional shares of the
Fund at net asset value unless the shareholder elects to receive such dividends
in cash. Shares will accrue dividends as long as they are issued and
outstanding. Shares are issued and outstanding from the settlement date of a
purchase order to the day prior to the settlement date of a redemption order.
All net realized long- or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders at least annually. Capital gains
distributions will be reinvested automatically in shares of the Fund unless the
shareholder elects to receive such distributions in cash.
The per share dividends and distributions on Class B shares will be lower
than per share dividends and distributions on Class A shares as a result of the
account maintenance, distribution and transfer agency fees
25
<PAGE>
applicable with respect to the Class B shares. See "Additional Information--
Determination of Net Asset Value".
See "Shareholder Services" for information as to how to elect either dividend
reinvestment or cash payments. Portions of dividends and distributions which
are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of the Fund or received in cash.
TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income, the Fund (but not its shareholders) will not
be subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Trust intends to cause
the Fund to distribute substantially all of such income.
To the extent that the dividends distributed to Class A and Class B
shareholders (together, the "shareholders") are derived from interest income
exempt from Federal income tax under Code section 103(a) and are properly
designated as "exempt-interest dividends" by the Trust, they will be excludable
from a shareholder's gross income for Federal income tax purposes. Exempt-
interest dividends are included, however, in determining what portion, if any,
of a person's social security and railroad retirement benefits is subject to
Federal income taxes. The portion of such exempt-interest dividends paid from
interest received by the Fund from New York Municipal Bonds also will be exempt
from New York State and New York City personal income taxes. Shareholders
subject to income taxation by states other than New York will realize a lower
after-tax rate of return than New York shareholders since the dividends
distributed by the Fund generally will not be exempt, to any significant
degree, from income taxation by such other states. The Trust will inform
shareholders annually as to the portion of the Fund's distributions which
constitutes exempt-interest dividends and the portion which is exempt from New
York State and New York City personal income taxes. Interest on indebtedness
incurred or continued to purchase or carry Fund shares is not deductible for
Federal income tax purposes or for New York personal income tax purposes to the
extent attributable to exempt-interest dividends. Exempt-interest dividends
paid to a corporate shareholder will be subject to New York State corporation
franchise tax and New York City general corporation tax. Persons who may be
"substantial users" (or "related persons" of substantial users) of facilities
financed by industrial development bonds or private activity bonds held by the
Fund should consult their tax advisors before purchasing Fund shares.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal and New York State and New York City
income tax purposes. Such distributions are not eligible for the dividends
received deduction for corporations. Distributions, if any, of net long-term
capital gains from the sale of securities or from certain transactions in
futures or options ("capital gain dividends") are taxable as long-term capital
gains for Federal income tax purposes, regardless of the length of time the
shareholder has owned Fund shares. Under the Revenue Reconciliation Act of
1993, all or a portion of the Fund's gain from the sale or redemption of tax-
exempt obligations purchased at a market discount will be treated as ordinary
income rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders. 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
26
<PAGE>
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. In addition, such loss will be disallowed to the
extent of any exempt-interest dividends received by the shareholder. If the
Fund pays a dividend in January which was declared in the previous October,
November or December to shareholders of record on a specified date in one of
such months, then such dividend or distribution will be treated for tax
purposes as being paid by the Fund and received by its shareholders on December
31 of the year in which such dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference", which could subject investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund will purchase
such "private activity bonds" and the Trust will report to shareholders within
60 days after the Fund's taxable year-end the portion of the Fund's dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that corporations
are subject to an alternative minimum tax based, in part, on certain
differences between taxable income as adjusted for other tax preferences and
the corporation's "adjusted current earnings" (which more closely reflects a
corporation's economic income). Because an exempt-interest dividend paid by the
Fund will be included in adjusted current earnings, a corporate shareholder may
be required to pay alternative minimum tax on exempt-interest dividends paid by
the Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax brackets of
36% and 39.6% for individuals and has created a graduated structure of 26% and
28% for the alternative minimum tax applicable to individual taxpayers. These
rate increases may affect an individual investor's after-tax return from an
investment in the Fund as compared with such investor's return from taxable
investments.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge such shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class
A shares.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends, capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom a certified
taxpayer identification number is not on file with the Trust or who, to the
Trust's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include on such return the amount of exempt-interest dividends received from
all sources (including the Fund) during the taxable year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and New York tax laws presently in
effect. For the complete provisions, reference should be made
27
<PAGE>
to the pertinent Code sections, the Treasury regulations promulgated
thereunder, and New York tax laws. The Code and the Treasury regulations, as
well as the New York tax laws, are subject to change by legislative or
administrative action either prospectively or retroactively.
Shareholders are urged to consult their tax advisors regarding the
availability of any exemptions from state or local taxes (other than those
imposed by New York) and with specific questions as to Federal, foreign, state
or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return, yield
and tax equivalent yield for various specified time periods in advertisements
or information furnished to present or prospective shareholders. Average annual
total return, yield and tax equivalent yield are computed in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A shares and the CDSC that would be applicable to a complete redemption
of the investment at the end of the specified period in the case of Class B
shares. Dividends paid by the Fund with respect to Class A and Class B shares,
to the extent any dividends are paid, will be calculated in the same manner at
the same time on the same day and will be in the same amount, except that
account maintenance and distribution charges and any incremental transfer
agency costs relating to Class B shares will be borne exclusively by that
class. The Fund will include performance data for both Class A and Class B
shares of the Fund in any advertisement or information including performance
data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time. In advertisements distributed to investors whose
purchases are subject to reduced sales loads in the case of Class A shares or
waiver of the CDSC in the case of Class B shares (such as investors in certain
retirement plans) the performance data may take into account the reduced, and
not the maximum, sales charge or may not take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or waiver of the CDSC, a lower amount of expenses is deducted. See
"Purchase of Shares". The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
28
<PAGE>
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period. Tax equivalent yield quotations will be
computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b)
one minus a stated tax rate and (c) adding the result to that part, if any, of
the Fund's yield that is not tax-exempt. The yield for the 30-day period ending
September 30, 1993 was 4.18% for Class A shares and 3.85% for Class B shares
and the tax-equivalent yield for the same period (based on a Federal income tax
rate of 28%) was 5.81% for Class A shares and 5.35% for Class B shares.
Total return, yield and tax-equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance. The
Fund's total return, yield and tax-equivalent yield will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and the amount of realized and unrealized net capital gains
or losses during the period. The value of an investment in the Fund will
fluctuate and an investor's shares, when redeemed, may be worth more or less
than their original cost.
On occasion, the Fund may compare its performance to performance data
published by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar"), and CDA Investment Technology, Inc., or to data contained in
publications such as Money Magazine, U.S. News & World Report, Business Week,
Forbes Magazine and Fortune Magazine. From time to time, the Fund may include
the Fund's Morningstar risk-adjusted performance ratings in advertisements or
supplemental sales literature. As with other performance data, performance
comparisons should not be considered representative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Manager once daily as of
4:15 P.M., New York City time, on each day during which the New York Stock
Exchange is open for trading. The net asset value per share is computed by
dividing the sum of the value of the securities held by the Fund plus any cash
or other assets minus all liabilities by the total number of shares outstanding
at such time, rounded to the nearest cent. Expenses, including the fees payable
to the Manager and the Distributor, are accrued daily.
The net asset value per share of the Class A shares and the net asset value
per share of the Class B shares are expected to be equivalent. Under certain
circumstances, however, the per share net asset value of the Class B shares may
be lower than the per share net asset value of the Class A shares reflecting
the daily expense accruals of the deferred charges (and incremental transfer
agency costs) applicable with respect to the Class B shares. Even under those
circumstances, the per share net asset value of the two classes eventually will
tend to converge immediately after the payment of dividends, which will differ
by approximately the amount of the expense accrual differential between the
classes.
ORGANIZATION OF THE TRUST
The Trust is an unincorporated business trust organized on August 2, 1985
under the laws of Massachusetts. On October 1, 1987, the Trust changed its name
from "Merrill Lynch Multi-State Tax-Exempt Series Trust" to "Merrill Lynch
Multi-State Municipal Bond Series Trust" and on December 22,
29
<PAGE>
1987 the Trust changed its name to "Merrill Lynch Multi-State Municipal Series
Trust". The Trust is an open-end management investment company comprised of
separate series ("Series"), each of which is a separate portfolio offering
shares to selected groups of purchasers. Each of the Series is to be managed
independently in order to provide to shareholders who are residents of the
state to which such Series relates as high a level of income exempt from
Federal, state and local income taxes as is consistent with prudent investment
management. 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 of $.10 par value of different
classes. Shareholder approval is not required for the authorization of
additional Series or classes of a Series of the Trust. At the date of this
Prospectus, the shares of the Fund are divided into Class A shares and Class B
shares. Both Class A and Class B shares represent an interest in the same
assets of the Fund and have identical voting, dividend, liquidation and other
rights and the same terms and conditions except that expenses related to the
account maintenance and distribution of the Class B shares are borne solely by
such class and Class B shares have exclusive voting rights with respect to
matters relating to such expenditures. See "Purchase of Shares". The Trust has
received an order from the Commission permitting the issuance and sale of two
classes of shares.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to the
extent hereinafter provided) and on other matters submitted to the vote of
shareholders. All shares of the Trust 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, only Class B shares of a Series will have
exclusive voting rights with respect to matters relating to the account
maintenance and distribution expenses being borne solely by such class. There
normally will be no meeting of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time the Trustees
then in office will call a shareholders' meeting for the election of Trustees.
Shareholders may, in accordance with the terms of the Declaration of Trust,
cause a meeting of shareholders to be held for the purpose of voting on the
removal of Trustees. Also, the Trust will be required to call a special meeting
of shareholders of a Series in accordance with the requirements of the 1940 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 a Series. Except as set forth above, the Trustees
shall continue to hold office and appoint successor Trustees. Each issued and
outstanding share is entitled to participate equally in dividends and
distributions declared by the respective Series and in net assets of such
Series upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities except that, as noted above, expenses related to the
distribution of the shares of the Class B of a Series will be borne solely by
such class. The obligations and liabilities of a particular Series are
restricted to the assets of that Series and do not extend to the assets of the
Trust generally. The shares of each Series, when issued, will be fully-paid and
non-assessable by the Trust.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
copies of each report and communication for each of the shareholder's related
accounts the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: Document Evaluation Unit
P.O. Box 45290
Jacksonville, Florida 32232-5290
30
<PAGE>
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 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
The Declaration of Trust establishing the Trust, dated August 2, 1985, a copy
of which together with all amendments thereto (the "Declaration"), is on file
in the office of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal 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 the Trust,
but the "Trust Property" only shall be liable.
31
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
32
<PAGE>
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT SM PROGRAM
APPLICATION BY CALLING (800) 637-3766.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase .......... Class A shares or
.......... Class B shares (choose one) of Merrill Lynch New York Municipal
Bond Fund and establish an Investment Account as described in the Prospectus.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Financial Data
Services, Inc., as an initial investment (minimum $1,000) (subsequent
investments $50 or more). I understand that this purchase will be executed
at the applicable offering price next to be determined after this
Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information:
1. .................................... 4. ...................................
2. .................................... 5. ...................................
3. .................................... 6. ...................................
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with
respect to dividends and distributions are elected:
Distribution Elect [_] reinvest dividends Elect [_] reinvest capital gains
Options One [_] pay dividends in One [_] pay capital gains in
cash cash
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
(Please Print)
Name ............................................. [_][_][_][_][_][_][_][_][_]
First Name Initial Last Name Social Security
No. or Taxpayer
Identification No.
Name of Co-Owner (if any) ..............................
First Name Initial Last Name
Address ...................................... ............... , 19...
Date
..............................................
(Zip Code)
Occupation ..............
Name and Address..................................
of Employer.......................................
.......................................
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I
am not subject to backup withholding (as discussed under "Distribution and
Taxes--Taxes" in the Prospectus) either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am
no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING,
AND IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED.
SIGNATURE OF OWNER ................ SIGNATURE OF CO-OWNER (IF ANY) ...........
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- -------------------------------------------------------------------------------
2. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
.............., 19...
Date of initial
purchase
Gentlemen:
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch New York Municipal Bond Fund or any other investment company with an
initial sales charge or deferred sales charge for which the Merrill Lynch
Funds Distributor, Inc. acts as a distributor over the next 13-month period
which will equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Fund prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch New York Municipal Bond Fund held as security.
By .................................. ......................................
Signature of Owner Signature (If registered in joint
names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name ............................ (2) Name .............................
33
<PAGE>
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
3.SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of shares in Merrill Lynch New York Municipal Bond Fund at cost or
current offering price.
Begin systematic withdrawal on . . . . . . . . . , 19. .
[date]
Withdrawals to be made either (check
one) [_] Monthly [_] Quarterly. Quarterly
withdrawals are made on the 24th day of March, June,
September and December.
Specify withdrawal amount (check one): [_] $ . . . . . . . or [_] . . . . .%
of the current value of Class A shares in the account
Specify withdrawal method: [_] check or [_] direct deposit to bank account
(CHECK ONE AND COMPLETE PART (A) OR (B) BELOW):
(B) I HEREBY AUTHORIZE PAYMENT BY
(A) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT and
CHECK (if necessary) debit entries and
adjustments for any credit entries
made in error to my account
Draw checks payable
(check one) Specify type of account (check
[_] as indicated in item 1. one): [_] checking [_] savings
[_] to the order of ................ I agree that this authorization will
remain in effect until I provide
written notification to Financial
Data Services, Inc. amending or
terminating this service.
Name on your Account .................
Bank .................................
Mail to (check one) Bank # .......... Account # ........
[_] the address indicated in item 1.
[_] Name (Please Print) ............
Address .............................. Bank Address .........................
Signature of Depositor..... Date .....
Signature of Owner....................
Signature of Depositor (if joint
Signature of Co-Owner (if any)........ account) .............................
NOTE: IF AUTOMATIC DIRECT DEPOSIT IS
ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM
YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY
THIS APPLICATION.
- -------------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase . . . . . Class A shares or . . . . . Class B
shares of Merrill Lynch New York Municipal Bond Fund subject to the terms set
forth below.
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS OR ACH
DEBITS DRAWN BY FINANCIAL DATA
SERVICES, INC.
You are hereby authorized to draw a
check or an ACH debit each month on
my bank account for investment in
Merrill Lynch New York Municipal Bond
Fund as indicated below:
To ...............................Bank
(Investor's Bank)
Bank Address .........................
Amount of each check or ACH debit $....
Account No. ....................
Please date and invest checks City ........ State .... Zip Code.....
or draw ACH debits on the 20th As a convenience to me, I hereby re-
of each month beginning ......... quest and authorize you to pay and
(Month) charge to my account checks or ACH
or as soon thereafter as debits drawn on my account by and
possible. payable to Financial Data Services,
Inc. I agree that your rights in re-
spect to each such check or debit
I agree that you are preparing these shall be the same as if it were a
checks or drawing these debits volun- check drawn on you and signed person-
tarily at my request and that you ally by me. This authority is to re-
shall not be liable for any loss main in effect until revoked person-
arising from any delay in preparing ally by me in writing. Until you re-
or failure to prepare any such check ceive such notice, you shall be fully
or debit. If I change banks or desire protected in honoring any such check
to terminate or suspend this program, or debit. I further agree that if any
I agree to notify you promptly in such check or debit be dishonored,
writing. whether with or without cause and
I further agree that if a check or whether intentionally or inadvertent-
debit is not honored upon ly, you shall be under no liability.
presentation, Financial Data
Services, Inc. is authorized to ........... ........................
discontinue immediately the Automatic Date Signature of Depositor
Investment Plan and to liquidate ........... ........................
sufficient shares held in my account Bank Signature of Depositor
to offset the purchase made with the Account (If joint account, both
returned check or dishonored debit. Number must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS
........... ........................ ELECTED, YOUR BLANK, UNSIGNED CHECK
Date Signature of Depositor MARKED "VOID" SHOULD ACCOMPANY THIS
........................ APPLICATION.
Signature of Depositor
(If joint account, both
must sign)
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch Funds
- - Distributor, Inc. to act as our agent in
connection with transactions under this
authorization form and agree to notify
the Distributor of any purchases made
under a Letter of Intention or System-
atic Withdrawal Plan. We guarantee the
Shareholder's Signature.
- -
This form when completed should
be mailed to:
Merrill Lynch New York
Municipal Bond Fund
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund .........................................
Operations Dealer Name and Address
P.O. Box 45289
Jacksonville, FL 32232-5289 By ......................................
Authorized Signature of Dealer
[_][_][_] [_][_][_][_] .................
Branch- F/C F/C Last Name
Code No.
[_][_][_] [_][_][_][_][_]
Dealer's Customer A/C No.
34
<PAGE>
Manager
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
Custodian
National Westminster Bank NJ
Exchange Place Centre
10 Exchange Place
Jersey City, New Jersey 07302
Transfer Agent
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Independent Auditors
Deloitte & Touche
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Alternative Sales Arrangements............................................. 3
Financial Highlights....................................................... 5
Investment Objective and Policies.......................................... 6
Management of the Trust.................................................... 13
Trustees.................................................................. 13
Management and Advisory
Arrangements............................................................. 14
Transfer Agency Services.................................................. 15
Purchase of Shares......................................................... 15
Alternative Sales Arrangements............................................ 16
Initial Sales Charge Alternative--Class A Shares.......................... 17
Deferred Sales Charge Alternative--
Class B Shares........................................................... 18
Redemption of Shares....................................................... 21
Redemption................................................................ 22
Repurchase................................................................ 22
Reinstatement Privilege--Class A Shares................................... 22
Shareholder Services....................................................... 23
Portfolio Transactions..................................................... 25
Distributions and Taxes.................................................... 25
Distributions............................................................. 25
Taxes..................................................................... 26
Performance Data........................................................... 28
Additional Information..................................................... 29
Determination of Net Asset Value.......................................... 29
Organization of the Trust................................................. 29
Shareholder Reports....................................................... 30
Shareholder Inquiries..................................................... 31
Authorization Form......................................................... 33
</TABLE>
Code # 10342
Prospectus
ART
- -------------------------------------------------------------------------------
MERRILL LYNCH
NEW YORK
MUNICIPAL BOND
FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
January 28, 1994
Distributor:
Merrill Lynch Funds
Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch New York Municipal Bond Fund (the "Fund") is a series of
Merrill Lynch Multi-State Municipal Series Trust (the "Trust"), an open-end
management investment company organized as a Massachusetts business trust. The
investment objective of the Fund is to provide shareholders with as high a
level of income exempt from Federal, New York State and New York City income
taxes as is consistent with prudent investment management. The Fund seeks to
achieve its objective, while providing investors with the opportunity to invest
primarily in a diversified portfolio of long-term obligations issued by or on
behalf of New York State, its political subdivisions, agencies and
instrumentalities. There can be no assurance that the investment objective of
the Fund will be realized.
The Fund offers two classes of shares which may be purchased at a price equal
to the next determined net asset value per share, plus a sales charge which, at
the election of the purchaser, may be imposed (i) at the time of the purchase
(the "Class A shares"), or (ii) on a deferred basis (the "Class B shares").
These alternatives permit an investor to choose the method of purchasing shares
that is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. Investors
should understand that the purpose and function of the deferred sales charges
with respect to the Class B shares are the same as those of the initial sales
charge with respect to the Class A shares. Each Class A and Class B share
represents an identical interest in the investment portfolio of the Fund and
has the same rights, except that Class B shares bear the expenses of the
account maintenance and distribution fees and certain other costs resulting
from the deferred sales charge arrangement and have exclusive voting rights
with respect to the account maintenance and distribution fees. The two classes
also have different exchange privileges.
----------------
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 January
28, 1994 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
----------------
FUND ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
----------------
The date of this Statement of Additional Information is January 28, 1994.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as high
a level of income exempt from Federal, New York State and New York City income
taxes as is consistent with prudent investment management. The Fund seeks to
achieve its objective by investing primarily in a diversified portfolio of
long-term obligations issued by or on behalf of New York State, its political
subdivisions, agencies and instrumentalities and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam, which pay interest exempt, in the opinion of bond counsel to the
issuer, from Federal, New York State and New York City income taxes.
Obligations exempt from Federal income taxes are referred to herein as
"Municipal Bonds" and obligations exempt from Federal, New York State and New
York City income taxes are referred to as "New York Municipal Bonds". Unless
otherwise indicated references to Municipal Bonds shall be deemed to include
New York Municipal Bonds. The Fund anticipates that at all times, except during
temporary defensive periods, it will maintain at least 65% of the Fund's total
assets invested in New York Municipal Bonds. At times, the Fund will seek to
hedge its portfolio through the use of futures transactions to reduce
volatility in the net asset value of Fund shares. Reference is made to
"Investment Objective and Policies" in the Prospectus for a discussion of the
investment objective and policies of the Fund.
Municipal Bonds may include general obligation bonds of the State and its
political subdivisions, revenue bonds of utility systems, highways, bridges,
port and airport facilities, colleges, hospitals, housing facilities, etc., and
industrial development bonds or private activity bonds. The interest on such
obligations may bear a fixed rate or be payable at a variable or floating rate.
The Municipal Bonds purchased by the Fund will be primarily what are commonly
referred to as "investment grade" securities, which are obligations rated at
the time of purchase within the four highest quality ratings as determined by
either Moody's Investors Service, Inc. ("Moody's") (currently Aaa, Aa, A and
Baa), Standard & Poor's Corporation ("Standard & Poor's") (currently AAA, AA, A
and BBB) or Fitch Investors Service, Inc. ("Fitch") (currently AAA, AA, A and
BBB). If unrated, such securities will possess creditworthiness comparable, in
the opinion of the Manager of the Fund, Fund Asset Management, L.P. (the
"Manager"), to other obligations in which the Fund may invest.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal, New York State or New York City income taxes. However, to the
extent that suitable New York Municipal Bonds are not available for investment
by the Fund, the Fund may purchase Municipal Bonds issued by other states,
their agencies and instrumentalities, the interest income on which is exempt,
in the opinion of bond counsel, from Federal, but not New York State and New
York City, taxation.
Except when acceptable securities are unavailable as determined by the
Manager, the Fund will invest at least 65% of its total assets in New York
Municipal Bonds. For temporary periods or to provide liquidity, the Fund has
the authority to invest as much as 35% of its total assets in tax-exempt or
taxable money market obligations with a maturity of one year or less (such
short-term obligations being referred to herein as "Temporary Investments"),
except that taxable Temporary Investments shall not exceed 20% of the Fund's
net assets. Accordingly, the Fund at all times will have at least 80% of its
net assets invested in securities exempt from Federal income taxation. However,
interest received on certain otherwise tax-exempt securities which are
classified as "private activity bonds" (in general, bonds that benefit non-
governmental entities) may be subject to an alternative minimum tax. The Fund
may purchase such private activity bonds. See "Distributions and Taxes". In
addition, the Fund reserves the right to invest temporarily a greater portion
of
2
<PAGE>
its assets in Temporary Investments for defensive purposes, when, in the
judgment of the Manager, market conditions warrant. The investment objective of
the Fund and the policies set forth in this paragraph are fundamental policies
of the Fund which may not be changed without a vote of a majority of the
outstanding shares of the Fund. The Fund's hedging strategies are not
fundamental policies and may be modified by the Trustees of the Trust without
the approval of the Fund's shareholders.
Municipal Bonds may at times be purchased or sold on a delayed delivery basis
or a when-issued basis. These transactions arise when securities are purchased
or sold by the Fund with payment and delivery taking place in the future, often
a month or more after the purchase. The payment obligation and the interest
rate are each fixed at the time the buyer enters into the commitment. The Fund
will make only commitments to purchase such securities with the intention of
actually acquiring the securities, but the Fund may sell these securities prior
to the settlement date if it is deemed advisable. Purchasing Municipal Bonds on
a when-issued basis involves the risk that the yields available in the market
when the delivery takes place may actually be higher than those obtained in the
transaction itself; if yields so increase, the value of the when-issued
obligation generally will decrease. The Fund will maintain a separate account
at its custodian bank consisting of cash, cash equivalents or high-grade,
liquid Municipal Bonds or Temporary Investments (valued on a daily basis) equal
at all times to the amount of the when-issued commitment.
The Fund may invest in Municipal Bonds the return on which is based on a
particular index of value or interest rates. For example, the Fund may invest
in Municipal Bonds that pay interest based on an index of Municipal Bond
interest rates or based on the value of gold or some other commodity. The
principal amount payable upon maturity of certain Municipal Bonds also may be
based on the value of an index. Also, the Fund may invest in so-called "inverse
floating obligations" or "residual interest bonds" on which the interest rates
typically decline as market rates increase and increase as market rates
decline. For example, to the extent the Fund invests in these types of
Municipal Bonds, the Fund's return on such Municipal Bonds will be subject to
risk with respect to the value of the particular index. Such securities have
the effect of providing a degree of investment leverage, since they may
increase or decrease in value in response to changes, as an illustration, in
market interest rates at a rate which is a multiple (typically two) of the rate
at which fixed-rate long-term tax exempt securities increase or decrease in
response to such changes. As a result, the market values of such securities
will generally be more volatile than the market values of fixed-rate tax exempt
securities. To seek to limit the volatility of these securities, the Fund may
purchase inverse floating obligations with shorter term maturities or which
contain limitations on the extent to which the interest rate may vary. The
Manager believes that indexed and inverse floating obligations represent a
flexible portfolio management instrument for the Fund which allows the Manager
to vary the degree of investment leverage relatively efficiently under
different market conditions. Certain investments in such obligations may be
illiquid. The Fund may not invest in such illiquid obligations if such
investments, together with other illiquid investments, would exceed 10% of the
Fund's net assets.
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to maturity of the
related Municipal Bond will expire without value. The economic effect to
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 10% of the Fund's net assets.
3
<PAGE>
DESCRIPTION OF MUNICIPAL BONDS AND TEMPORARY INVESTMENTS
Set forth below is a detailed description of the Municipal Bonds and
Temporary Investments in which the Fund may invest. Information with respect to
ratings assigned to tax-exempt obligations which the Fund may purchase is set
forth in an Appendix to this Statement of Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of bonds are issued by or on behalf of
public authorities to finance various privately owned or operated facilities,
including certain facilities for the local furnishing of electric energy or
gas, sewage facilities, solid waste disposal facilities and other specialized
facilities. Such obligations are included within the term New York Municipal
Bonds if the interest paid thereon is, in the opinion of bond counsel, excluded
from gross income for Federal income tax purposes and exempt from New York
State and City personal income taxes. Other types of industrial development
bonds or private activity bonds, the proceeds of which are used for the
construction, equipment or improvement of privately operated industrial or
commercial facilities, may constitute Municipal Bonds, although the current
Federal tax laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Bonds are "general obligation"
bonds, and "revenue" bonds which include industrial development bonds and, for
bonds issued after August 15, 1986, private activity bonds. General obligation
bonds are secured by the issuer's pledge of faith, credit and taxing power for
the payment of principal and interest. Revenue bonds are payable only from the
revenues derived from a particular facility or class of facilities, or in some
cases, from the proceeds of a special excise tax or other specific revenue
source such as payments from the user of the facility being financed.
Industrial development bonds or private activity bonds are in most cases
revenue bonds and generally do not constitute the pledge of the credit or
taxing power of the issuer of such bonds. Generally, the payment of the
principal of and interest on such revenue bonds depends solely on the ability
of the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed
as security for such payment, unless a line of credit, bond insurance or other
security is furnished.
The Fund also may invest in "moral obligation" bonds, which are normally
issued by special purpose public authorities. If an issuer of moral obligation
bonds is unable to meet its obligations, the repayment of such bonds becomes a
moral commitment but not a legal obligation of the state or municipality in
question.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called
"lease obligations") relating to such equipment, land or facilities. Although
lease obligations do not constitute general obligations of the issuer for which
the issuer's unlimited taxing power is pledged, a lease obligation is
frequently backed by the issuer's covenant to budget for, appropriate and make
the payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the issuer has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although "non-
appropriation" lease obligations are secured by the leased property,
disposition of the property in the
4
<PAGE>
event of foreclosure might prove difficult. These securities represent a
relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional securities. Certain investments
in lease obligations may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with all other illiquid investments,
would exceed 10% of the Fund's net assets. The Fund may, however, invest
without regard to such limitation in lease obligations which the Manager,
pursuant to guidelines which have been adopted by the Board of Trustees and
subject to the supervision of the Board, determines to be liquid. The Manager
will deem lease obligations to be liquid if they are publicly offered and have
received an investment grade rating of Baa or better by Moody's, or BBB or
better by Standard & Poor's or Fitch. Unrated lease obligations, or those rated
below investment grade, will be considered liquid if the obligations come to
the market through an underwritten public offering and at least two dealers are
willing to give competitive bids. In reference to the latter, the Manager must,
among other things, also review the creditworthiness of the municipality
obligated to make payment under the lease obligation and make certain specified
determinations based on such factors as the existence of a rating or credit
enhancement such as insurance, the frequency of trades or quotes for the
obligation and the willingness of dealers to make a market in the obligation.
Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the financial condition of the issuer, the
general conditions of the Municipal Bond market, the maturity of the
obligation, and the rating of the issue. The ability of the Fund to achieve its
investment objective is also dependent on the continuing ability of the issuers
of the bonds in which the Fund invests to meet their obligations for the
payment of interest and principal when due. There are variations in the risks
involved in holding Municipal Bonds, both within a particular classification
and between classifications, depending on numerous factors. Furthermore, the
rights of owners of Municipal Bonds and the obligations of the issuer of such
Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar
laws and court decisions affecting the rights of creditors generally.
DESCRIPTION OF TEMPORARY INVESTMENTS
The Fund may invest in short-term tax-free and taxable securities subject to
the limitations set forth under "Investment Objective and Policies". The tax-
exempt money market securities may include municipal notes, municipal
commercial paper, municipal bonds with a remaining maturity of less than one
year, variable rate demand notes and participations therein. Municipal notes
include tax anticipation notes, bond anticipation notes and grant anticipation
notes. Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales, government grants or revenue receipts. Municipal
commercial paper refers to short-term unsecured promissory notes generally
issued to finance short-term credit needs. The taxable money market securities
in which the Fund may invest as Temporary Investments consist of U.S.
Government securities, U.S. Government agency securities, domestic bank or
savings institution certificates of deposit and bankers' acceptances, short-
term corporate debt securities such as commercial paper and repurchase
agreements. These Temporary Investments must have a stated maturity not in
excess of one year from the date of purchase.
Variable rate demand obligations ("VRDOs") are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility that
because of default or insolvency the demand
5
<PAGE>
feature of VRDOs and Participating VRDOs, described below, may not be honored.
The interest rates are adjustable at intervals (ranging from daily to up to one
year) to some prevailing market rate for similar investments, such adjustment
formula being calculated to maintain the market value of the VRDO at
approximately the par value of the VRDOs on the adjustment date. The
adjustments typically are based upon the prime rate of a bank or some other
appropriate interest rate adjustment index. The Fund may invest in all types of
tax-exempt instruments currently outstanding or to be issued in the future
which satisfy the short-term maturity and quality standards of the Fund.
The Fund also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank. Participating VRDOs provide
the Fund with a specified undivided interest (up to 100%) of the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the Participating VRDOs from the financial institution upon
a specified number of days notice, not to exceed seven days. In addition, the
Participating VRDO is backed by an irrevocable letter of credit or guaranty of
the financial institution. The Fund would have an undivided interest in the
underlying obligation and thus participate on the same basis as the financial
institution in such obligation except that the financial institution typically
retains fees out of the interest paid on the obligation for servicing the
obligation, providing the letter of credit and issuing the repurchase
commitment. The Fund has been advised by its counsel that the Fund should be
entitled to treat the income received on Participating VRDOs as interest from
tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of the
unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed to be illiquid securities. A VRDO with a demand notice
period exceeding seven days will therefore be subject to the Fund's restriction
on illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and will be ultimately responsible
for such determinations.
The Trust has established the following standards with respect to money
market securities and VRDOs in which the Fund invests. Commercial paper
investments at the time of purchase must be rated A-1 through A-3 by Standard &
Poor's, Prime-1 through Prime-3 by Moody's, F-1 through F-3 by Fitch or, if not
rated, issued by companies having an outstanding debt issue rated at least A by
Standard & Poor's, Fitch or Moody's. Investments in corporate bonds and
debentures (which must have maturities at the date of purchase of one year or
less) must be rated at the time of purchase at least A by Standard & Poor's,
Fitch or Moody's. Notes and VRDOs at the time of purchase must be rated SP-1/A-
1 through SP-2/A-3 by Standard & Poor's, MIG-1/VMIG-1 through MIG-4/VMIG-4 by
Moody's or F-1 through F-3 by Fitch. Temporary Investments, if not rated, must
be of comparable quality to securities rated in the above rating categories in
the opinion of the Manager. The Fund may not invest in any security issued by a
commercial bank or a savings institution unless the bank or institution is
organized and operating in the United States, has total assets of at least one
billion dollars and is a member of the Federal Deposit Insurance Corporation
("FDIC"), except that up to 10% of total assets may be invested in certificates
of deposit of smaller institutions if such certificates are fully insured by
the FDIC.
REPURCHASE AGREEMENTS AND PURCHASE AND SALE CONTRACTS
The Fund may invest in securities pursuant to repurchase agreements or
purchase and sale contracts. Repurchase agreements and purchase and sale
contracts may be entered into only with a member bank of
6
<PAGE>
the Federal Reserve System or primary dealer in U.S. Government securities.
Under such agreements, the bank or primary dealer agrees, upon entering into
the contract, to repurchase the security at a mutually agreed upon time and
price, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during
such period. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect accrued interest on the underlying
obligations; whereas, in the case of purchase and sale contracts, the prices
take into account accrued interest. Such agreements usually cover short
periods, such as under one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase agreement, 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; the Fund does not have the right to seek additional
collateral in the case of purchase and sale contracts. 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. A purchase and sale contract
differs from a repurchase agreement in that the contract arrangements stipulate
that the securities are owned by the Fund. In the event of a default under such
a repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. 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. The Fund may not invest more than 10% of its net assets in repurchase
agreements or purchase and sale contracts maturing in more than seven days.
While the substance of purchase and sale contracts is similar to repurchase
agreements, because of the different treatment with respect to accrued interest
and additional collateral, management believes that purchase and sale contracts
are not repurchase agreements as such term is understood in the banking and
brokerage community.
In general, for federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold". Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest. The treatment of purchase and sale contracts is less certain.
However, it is likely that income from such arrangements also will not be
considered tax-exempt interest.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
Reference is made to the discussion concerning futures transactions under
"Investment Objective and Policies" in the Prospectus. Set forth below is
additional information concerning these transactions.
As described in the Prospectus, the Fund may purchase and sell exchange
traded financial futures contracts ("financial futures contracts") to hedge its
portfolio of Municipal Bonds against declines in the value of such securities
and to hedge against increases in the cost of securities the Fund intends to
purchase. However, any transactions involving financial futures or options (or
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. See "Investment Objective and Policies--
Investment Restrictions" in the Prospectus. To hedge its portfolio, the Fund
may take an investment position in a futures contract which will move in the
opposite direction from the portfolio position being hedged. While the Fund's
use of hedging strategies is intended to moderate capital changes in portfolio
holdings and thereby reduce the volatility of the net asset value of Fund
shares, the Fund anticipates that its net asset value will fluctuate. Set forth
below is information concerning futures transactions.
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Description of Futures Contracts. A futures contract is an agreement between
two parties to buy and sell a security or, in the case of an index-based
futures contract, to make and accept a cash settlement for a set price on a
future date. A majority of transactions in futures contracts, however, do not
result in the actual delivery of the underlying instrument or cash settlement,
but are settled through liquidation, i.e., by entering into an offsetting
transaction. Futures contracts have been designed by boards of trade which have
been designated "contracts markets" by the Commodity Futures Trading Commission
("CFTC").
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the
purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin", are required to be made on a daily
basis as the price of the futures contract fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"mark to the market". At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
The Fund deals in financial futures contracts based on a long-term municipal
bond index developed by the Chicago Board of Trade ("CBT") and The Bond Buyer
(the "Municipal Bond Index"). The Municipal Bond Index is comprised of 40 tax-
exempt municipal revenue and general obligation bonds. Each bond included in
the Municipal Bond Index must be rated A or higher by Moody's or Standard &
Poor's and must have a remaining maturity of 19 years or more. Twice a month
new issues satisfying the eligibility requirements are added to, and an equal
number of old issues are deleted from, the Municipal Bond Index. The value of
the Municipal Bond Index is computed daily according to a formula based on the
price of each bond in the Municipal Bond Index, as evaluated by six dealer-to-
dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the
exchange membership which is also responsible for handling daily accounting of
deposits or withdrawals of margin.
As described in the Prospectus, the Fund may purchase and sell financial
futures contracts on U.S. Government securities as a hedge against adverse
changes in interest rates as described below. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-term
U.S. Treasury bonds, Treasury notes, Government National Mortgage Association
("GNMA") Certificates and three-month U.S. Treasury bills. The Fund may
purchase and write call and put options on futures contracts on U.S. Government
securities in connection with its hedging strategies.
Subject to policies adopted by the Trustees, the Fund also may engage in
other futures contracts transactions such as futures contracts on other
municipal bond indexes which may become available if the Manager and the
Trustees of the Trust should determine that there is normally a sufficient
correlation between the prices of such futures contracts and the Municipal
Bonds in which the Fund invests to make such hedging appropriate.
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<PAGE>
Futures Strategies. The Fund may sell a financial futures contract (i.e.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This strategy,
however, entails increased transaction costs in the form of dealer spreads and
typically would reduce the average yield of the Fund's portfolio securities as
a result of the shortening of maturities. The sale of futures contracts
provides an alternative means of hedging against declines in the value of its
investments in Municipal Bonds. As such values decline, the value of the Fund's
positions in the futures contracts will tend to increase, thus offsetting all
or a portion of the depreciation in the market value of the Fund's Municipal
Bond investments which are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions, commissions on futures
transactions are lower than transaction costs incurred in the purchase and sale
of Municipal Bonds. In addition, the ability of the Fund to trade in the
standardized contracts available in the futures markets may offer a more
effective defensive position than a program to reduce the average maturity of
the portfolio securities due to the unique and varied credit and technical
characteristics of the municipal debt instruments available to the Fund.
Employing futures as a hedge also may permit the Fund to assume a defensive
posture without reducing the yield on its investments beyond any amounts
required to engage in futures trading.
When the Fund intends to purchase Municipal Bonds, the Fund may purchase
futures contracts as a hedge against any increase in the cost of such Municipal
Bonds, resulting from an increase in interest rates or otherwise, that may
occur before such purchases can be effected. Subject to the degree of
correlation between the Municipal Bonds and the futures contracts, subsequent
increases in the cost of Municipal Bonds should be reflected in the value of
the futures held by the Fund. As such purchases are made, an equivalent amount
of futures contracts will be closed out. Due to changing market conditions and
interest rate forecasts, however, a futures position may be terminated without
a corresponding purchase of portfolio securities.
Call Options on Futures Contracts. The Fund may also purchase and sell
exchange traded call and put options on financial futures contracts on U.S.
Government securities. The purchase of a call option on a futures contract is
analogous to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the futures contract upon which
it is based, or upon the price of the underlying debt securities, it may or may
not be less risky than ownership of the futures contract or underlying debt
securities. Like the purchase of a futures contract, the Fund will purchase a
call option on a futures contract to hedge against a market advance when the
Fund is not fully invested.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is below
the exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any decline that may have occurred in
the Fund's portfolio holdings.
Put Options on Futures Contracts. The purchase of options on a futures
contract is analogous to the purchase of protective put options on portfolio
securities. The Fund will purchase a put option on a futures contract to hedge
the Fund's portfolio against the risk of rising interest rates.
The writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the securities which are deliverable upon exercise
of the futures contract. If the futures price at expiration is higher than the
exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any increase in the price of Municipal
Bonds which the Fund intends to purchase.
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<PAGE>
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option will be
included in initial margin. The writing of an option on a futures contract
involves risks similar to those relating to futures contracts.
----------------
The Trust has received an order from the Securities and Exchange Commission
(the "Commission") exempting it from the provisions of Section 17(f) and
Section 18(f) of the Investment Company Act of 1940, as amended (the "1940
Act"), in connection with its strategy of investing in futures contracts.
Section 17(f) relates to the custody of securities and other assets of an
investment company and may be deemed to prohibit certain arrangements between
the Fund and commodities brokers with respect to initial and variation margin.
Section 18(f) of the 1940 Act prohibits an open-end investment company such as
the Trust from issuing a "senior security" other than a borrowing from a bank.
The staff of the Commission has in the past indicated that a futures contract
may be a "senior security" under the 1940 Act.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio assets after taking into
account unrealized profits and unrealized losses on any such contracts and
options. (However, the Fund intends to engage in options and futures
transactions only for hedging purposes.) Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When the Fund purchases futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or short-term high-grade fixed income securities will be deposited
in a segregated account with the Fund's custodian so that the amount so
segregated, plus the amount of initial and variation margin held in the account
of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures is unleveraged.
Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged security,
the Fund will experience either a loss or gain on the futures contract which is
not completely offset by movements in the price of the hedged securities. To
compensate for imperfect correlations, the Fund may purchase or sell futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
futures contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts.
The particular municipal bonds comprising the index underlying the Municipal
Bond Index financial futures contract may vary from the bonds held by the Fund.
As a result, the Fund's ability to hedge effectively all or a portion of the
value of its Municipal Bonds through the use of such financial futures
contracts will depend in part on the degree to which price movements in the
index underlying the financial futures contract
10
<PAGE>
correlate with the price movements of the Municipal Bonds held by the Fund. The
correlation may be affected by disparities in the average maturity, ratings,
geographical mix or structure of the Fund's investments as compared to those
comprising the Municipal Bond Index, and general economic or political factors.
In addition, the correlation between movements in the value of the Municipal
Bond Index may be subject to change over time as additions to and deletions
from the Municipal Bond Index alter its structure. The correlation between
futures contracts on U.S. Government securities and the Municipal Bonds held by
the Fund may be adversely affected by similar factors and the risk of imperfect
correlation between movements in the prices of such futures contracts and the
prices of Municipal Bonds held by the Fund may be greater.
The Fund expects to liquidate a majority of the futures contracts it enters
into through offsetting transactions on the applicable contract market. There
can be no assurance, however, that a liquid secondary market will exist for any
particular futures contract at any specific time. Thus, it may not be possible
to close out a futures position. In the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may be
required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability
to close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments in Municipal Bonds. The Fund will
enter into a futures position only if, in the judgment of the Manager, there
appears to be an actively traded secondary market for such futures contracts.
The successful use of transactions in futures and related options also
depends on the ability of the Manager to forecast correctly the direction and
extent of interest rate movements within a given time frame. To the extent
interest rates remain stable during the period in which a futures contract or
option is held by the Fund or such rates move in a direction opposite to that
anticipated, the Fund may realize a loss on the hedging transaction which is
not fully or partially offset by an increase in the value of portfolio
securities. As a result, the Fund's total return for such period may be less
than if it had not engaged in the hedging transaction.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contracts can result in
substantial unrealized gains or losses. Because the Fund will engage in the
purchase and sale of futures contracts solely for hedging purposes, however,
any losses incurred in connection therewith should, if the hedging strategy is
successful, be offset in whole or in part by increases in the value of
securities held by the Fund or decreases in the price of securities the Fund
intends to acquire.
The amount of risk the Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option on
a futures contract also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased.
Municipal Bond Index futures contracts recently have been approved for
trading and therefore have little trading history. It is possible that trading
in such futures contracts will be less liquid than trading in other futures
contracts. The trading of futures contracts also is subject to certain market
risks, such as inadequate trading activity, which could at times make it
difficult or impossible to liquidate existing positions.
11
<PAGE>
INVESTMENT RESTRICTIONS
The Trust has adopted a number of restrictions and policies relating to the
investment of its assets and its activities which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the 1940
Act means the lesser of (i) 67% of the Fund's shares present at a meeting at
which more than 50% of the outstanding shares of the Fund are represented or
(ii) more than 50% of the Fund's outstanding shares). The Fund may not: (1)
purchase any securities other than securities referred to under "Investment
Objective and Policies" herein and in the Prospectus and under "Description of
Municipal Bonds and Temporary Investments" herein; (2) invest more than 5% of
its total assets (taken at market value at the time of each investment) in the
securities of any one issuer, except that such restriction shall not apply to
securities backed by the United States Government or its agencies or
instrumentalities [For purposes of this restriction, the Trust will regard each
state and each political subdivision, agency or instrumentality of such state
and each multi-state agency of which such state is a member and each public
authority which issues securities on behalf of a private entity as a separate
issuer, except that if the security is backed only by the assets and revenues
of a non-government entity, then the entity with the ultimate responsibility
for the payment of interest and principal may be regarded as the sole issuer];
(3) invest more than 5% of its total assets (taken at market value at the time
of each investment) in industrial revenue bonds where the entity supplying the
revenues from which the issue is to be paid, including predecessors, has a
record of less than three years of continuous operation; (4) make investments
for the purpose of exercising control or management; (5) purchase securities of
other investment companies, except in connection with a merger, consolidation,
acquisition or reorganization; (6) purchase or sell real estate (provided that
such restriction shall not apply to securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein), commodities or commodity contracts (except that the Fund
may purchase and sell financial futures contracts), interests in oil, gas or
other mineral exploration or development programs; (7) purchase any securities
on margin, except for use of short-term credit necessary for clearance of
purchases and sales of portfolio securities (the deposit or payment by the Fund
of initial or variation margin in connection with financial futures contracts
is not considered the purchase of a security on margin); (8) make short sales
of securities or maintain a short position or invest in put, call, straddle or
spread options (this restriction does not apply to options on financial futures
contracts); (9) make loans to other persons, provided that the Fund may
purchase a portion of an issue of tax-exempt securities (the acquisition of a
portion of an issue of tax-exempt securities or bonds, debentures or other debt
securities which are not publicly distributed is considered to be the making of
a loan under the 1940 Act); (10) borrow amounts in excess of 20% of its total
assets taken at value (including the amount borrowed), and then only from banks
as a temporary measure for extraordinary or emergency purposes [Usually only
"leveraged" investment companies may borrow in excess of 5% of their assets;
however, the 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.];
(11) mortgage, pledge, hypothecate or in any manner transfer as security for
indebtedness any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in (10) above, and then such
mortgaging, pledging or hypothecating may not exceed 10% of its net assets,
taken at market value, or except as may be necessary in connection with
transactions in financial futures contracts; (12) invest in securities with
legal or contractual restrictions on resale or for which no readily available
market exists, including repurchase agreements and purchase and sale contracts
maturing in more than seven days, if, regarding all such securities, more than
10% of its net assets (taken at market value), would be invested in such
securities; and (13) act as an underwriter of securities, except to the extent
that the Fund may technically be deemed an underwriter when
12
<PAGE>
engaged in the activities described in (9) above or insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933, as amended, in selling
portfolio securities.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Trust, the Trust is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the 1940 Act involving only usual
and customary commissions or transactions pursuant to an exemptive order under
the 1940 Act. Included among such restricted transactions will be purchases
from or sales to Merrill Lynch of securities in transactions in which it acts
as principal. See "Portfolio Transactions". An exemptive order has been
obtained which permits the Trust to effect principal transactions with Merrill
Lynch in high quality, short-term, tax-exempt securities subject to conditions
set forth in such order.
13
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each Trustee and executive officer is Box 9011,
Princeton, New Jersey 08543-9011.
Arthur Zeikel -- President and Trustee(1)(2) -- President and Chief
Investment Officer of the Manager since 1977; President of Merrill Lynch Asset
Management, L.P. ("MLAM") since 1977 and Chief Investment Officer thereof since
1976; President and Director of Princeton Services, Inc. ("Princeton Services")
since 1993; Executive Vice President of Merrill Lynch & Co., Inc. since 1990;
Executive Vice President of Merrill Lynch since 1990 and a Senior Vice
President thereof from 1985 to 1990; Director of Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor").
Kenneth A. Axelson -- Trustee(2) -- 75 Jameson Point Road, Rockland, Maine
04841. Executive Vice President and Director, J.C. Penney Company, Inc. until
1982; Director, Grumman Corporation, UNUM Corporation, Protection Mutual
Insurance Company, Zurn Industries, Inc., and, until 1992, Central Maine Power
Company and Key Trust Company of Maine; Trustee, The Chicago Dock and Canal
Trust.
Herbert I. London -- Trustee(2) -- New York University -- Gallatin Division,
113-115 University Place, New York, New York 10003. Dean, Gallatin Division of
New York University from 1978 to 1993 and Director from 1975 to 1976;
Professor, New York University since 1973; Distinguished Fellow, Herman Kahn
Chair, Hudson Institute from 1984 to 1985; Director, Damon Corporation since
1991; Overseer, Center for Naval Analyses.
Robert R. Martin -- Trustee(2) -- 513 Grand Hill, St. Paul, Minnesota 55102.
Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990 to
1993; Executive Vice President, Dain Bosworth from 1974 to 1989; Director,
Carnegie Capital Management from 1977 to 1985 and Chairman thereof in 1979;
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Trustee, Northland College since
1992.
Joseph L. May -- Trustee(2) -- 424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983;
Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
Andre F. Perold -- Trustee(2) -- Morgan Hall, Soldiers Field, Boston,
Massachusetts 02136. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Investment Technology (a private United Kingdom company).
Terry K. Glenn -- Executive Vice President(1)(2) -- Executive Vice President
of the Manager and MLAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of MLFD since 1986 and Director
thereof since 1991.
Vincent R. Giordano -- Vice President and Portfolio Manager(1)(2) --
Portfolio Manager of the Manager and MLAM since 1977 and Senior Vice President
of the Manager and MLAM since 1984; Vice President of MLAM from 1980 to 1984;
Senior Vice President of Princeton Services since 1993.
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<PAGE>
Kenneth A. Jacob -- Vice President and Portfolio Manager(1)(2) -- Vice
President of the Manager and MLAM since 1984.
Donald C. Burke -- Vice President(1)(2) -- Vice President and Director of
Taxation of MLAM since 1990; Employee of Deloitte & Touche from 1982 to 1990.
Gerald M. Richard -- Treasurer(1)(2) -- Senior Vice President and Treasurer
of the Manager and MLAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Treasurer of the Distributor since 1984 and Vice
President since 1981.
Jerry Weiss -- Secretary(1)(2) -- Vice President of MLAM since 1990; Attorney
in private practice from 1982 to 1990.
- --------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At January 1, 1994, the Trustees and officers of the Trust as a group (12
persons) owned an aggregate of less than 1/4 of 1% of the outstanding shares of
Common Stock of Merrill Lynch & Co., Inc. and owned an aggregate of less than
1% of the outstanding shares of the Fund.
The Trust pays each Trustee not affiliated with the Manager a fee of $10,000
per year plus $1,000 per meeting attended, together with such Trustee's actual
out-of-pocket expenses relating to attendance at meetings. The Trust also
compensates members of its audit committee, which consists of all the non-
affiliated Trustees. For the year ended September 30, 1993, fees and expenses
paid to the non-affiliated Trustees aggregated $32,527.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Trust.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Manager or MLAM.
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 funds for
which they act as manager or for their advisory clients arise for consideration
at or about the same time, transactions in such securities will be made,
insofar as feasible, for the respective funds and clients in a manner deemed
equitable to all. To the extent that transactions on behalf of more than one
client of the Manager or MLAM during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there
may be an adverse effect on price.
The Trust has entered into a Management Agreement on behalf of the Fund (the
"Management Agreement") with the Manager pursuant to which the Manager receives
for its services to the Fund monthly compensation at the annual rate of 0.55%
of the average daily net assets of the Fund. As discussed in the Prospectus,
effective December 23, 1987, the Manager has voluntarily agreed to waive the
amount of compensation set forth in the Management Agreement and instead has
agreed to receive from the Fund a
15
<PAGE>
monthly fee based upon the average daily net assets of the Fund at the
following annual rates: 0.55% of the average daily net assets not exceeding
$500 million; 0.525% of the average daily net assets exceeding $500 million but
not exceeding $1.0 billion and 0.50% of the average daily net assets exceeding
$1.0 billion. For the years ended September 30, 1991, 1992 and 1993, the total
advisory fees paid by the Fund to the Manager aggregated $3,097,708, $3,270,467
and $3,744,878, respectively.
The State of California imposes limitations on the expenses of the Fund. At
the date of this Statement of Additional Information, these annual expense
limitations require that the Manager reimburse the Fund in an amount necessary
to prevent the aggregate ordinary operating expenses (excluding taxes,
brokerage fees and commissions, distribution fees and extraordinary charges
such as litigation costs) from exceeding in any fiscal year 2.5% of the Fund's
first $30,000,000 of average daily net assets, 2.0% of the next $70,000,000 of
average daily net assets and 1.5% of the remaining average daily net assets.
The Manager's obligation to reimburse the Fund is limited to the amount of the
management fee. Expenses not covered by this limitation are interest, taxes,
brokerage commissions and other items such as extraordinary legal expenses. No
fee payment will be made to the Manager during any fiscal year which will cause
such expenses to exceed expense limitations at the time of such payment. No fee
reimbursements were made during the years ended September 30, 1991, 1992 and
1993 pursuant to these operating expense limitations.
The Management Agreement obligates the Manager to provide investment advisory
services and to pay all compensation of and furnish office space for officers
and employees of the Trust connected with investment and economic research,
trading and investment management of the Trust, as well as the fees of all
Trustees of the Trust who are affiliated persons of Merrill Lynch & Co., Inc.
or any of its subsidiaries. The Fund pays all other expenses incurred in its
operation and a portion of the Trust's general administrative expenses
allocated on the basis of the asset size of the respective series of the Trust
("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), expenses of printing
shareholder reports, prospectuses and statements of additional information
(except to the extent paid by the Distributor as described below), fees for
legal and auditing services, Commission fees, interest, certain taxes, and
other expenses attributable to a particular Series. Expenses which will be
allocated on the basis of asset size of the respective Series include fees and
expenses of unaffiliated Trustees, state franchise taxes, costs of printing
proxies and other expenses relating to shareholder meetings, and other expenses
properly payable by the Trust. The organizational expenses of the Trust were
paid by the Trust, and 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. Accounting services are provided to the Trust by the
Manager and the Trust reimburses the Manager for its costs in connection with
such services. For the fiscal year ended September 30, 1993, the Trust paid the
Manager $65,976 for such services. 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. Certain expenses in connection with the account maintenance and
distribution of Class B shares will be financed by the Trust pursuant to the
Distribution Plan in compliance with Rule 12b-1 under the 1940 Act. See
"Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares--
Distribution Plan".
The Manager is a limited partnership, the partners of which are Merrill Lynch
& Co., Inc., Fund Asset Management, Inc. and Princeton Services, Inc.
16
<PAGE>
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Trustees who are not parties to
such contract or interested persons (as defined in the 1940 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 thereto or by vote of
the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represents an interest in the same portfolio of investments of the
Fund, has the same rights and is identical in all respects, except that Class B
shares bear the expenses of the deferred sales charge arrangements and any
expenses (including incremental transfer agency costs) resulting from such
sales arrangements, and the expenses paid by the account maintenance fee. The
two classes also have different exchange privileges. See "Shareholder Services-
- -Exchange Privilege".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of Class A and Class B
shares of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of the Class A and Class B 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.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The gross sales charges for the sale of Class A shares for the fiscal year
ended September 30, 1991 were $75,510, of which the Distributor received $6,991
and Merrill Lynch received $68,519. The gross sales charges for the sale of
Class A shares for the fiscal year ended September 30, 1992 were $67,674, of
which the Distributor received $5,267 and Merrill Lynch received $62,407. The
gross sales charges for the sale of Class A shares for the fiscal year ended
September 30, 1993 were $152,014, of which the Distributor received $15,617 and
Merrill Lynch received $136,397.
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A shares of
the Fund, refers to a single purchase by an individual, or to concurrent
purchases, which in the aggregate are at least equal to the prescribed amounts,
by an individual, his spouse and their children under the age of 21 years
purchasing shares for his or their own account and to single purchases by a
trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary
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account although more than one beneficiary is involved. The term "purchase"
also includes purchases by any "company", as that term is defined in the 1940
Act, but does not include purchases by any such company which has not been in
existence for at least six months or which has no purpose other than the
purchase of shares of the Fund or shares of other registered investment
companies at a discount; provided, however, that it shall not include purchases
by any group of individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser.
REDUCED INITIAL SALES CHARGES--CLASS A SHARES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase Class
A shares of the Fund at the offering price applicable to the total of (a) the
dollar amount then being purchased plus (b) an amount equal to the then current
net asset value or cost, whichever is higher, of the purchaser's combined
holdings of the Class A shares and Class B shares of the Fund and of any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A shares of the Fund or any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor made within a thirteen-month
period starting with the first purchase pursuant to a Letter of Intention in
the form provided in the Prospectus. The Letter of Intention is available only
to investors whose accounts are maintained at the Fund's Transfer Agent. The
Letter of Intention is not available to employee benefit plans for which
Merrill Lynch provides plan participant record-keeping services. The Letter of
Intention is not a binding obligation to purchase any amount of Class A shares;
however, its execution will result in the purchaser paying a lower sales charge
at the appropriate quantity purchase level. A purchase not originally made
pursuant to a Letter of Intention may be included under a subsequent Letter of
Intention executed within 90 days of such purchase if the Distributor is
informed in writing of this intent within such 90-day period. The value of
Class A shares of the Fund and of other investment companies with an initial
sales charge or a deferred sales charge for which the Distributor acts as the
distributor presently held, at cost or maximum offering price (whichever is
higher), on the date of the first purchase under the Letter of Intention, may
be included as a credit toward the completion of such Letter, but the reduced
sales charge applicable to the amount covered by such Letter will be applied
only to new purchases. If the total amount of shares does not equal the amount
stated in the Letter of Intention (minimum of $25,000), the investor will be
notified and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the Class A shares purchased at the
reduced rate and the sales charge applicable to the shares actually purchased
through the Letter. Class A shares equal to at least five percent of the
intended amount will be held in escrow during the thirteen-month period (while
remaining registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intention must be at least five percent of the
dollar amount of such Letter. If during the term of such Letter, a purchase
brings the total amount invested to an amount equal to or in excess of the
amount indicated in the Letter, the purchaser will be entitled on that purchase
and subsequent purchases to the reduced percentage sales charge which would be
applicable to a single purchase equal to the total dollar value of the
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Class A shares then being purchased under such Letter, but there will be no
retroactive reduction of the sales charge on any previous purchase. The value
of any shares redeemed or otherwise disposed of by the purchaser prior to
termination or completion of the Letter of Intention will be deducted from the
total purchases made under such Letter. An exchange from Merrill Lynch Ready
Assets Trust, Merrill Lynch Retirement Reserves Money Fund, Merrill Lynch U.S.
Treasury Money Fund, or Merrill Lynch U.S.A. Government Reserves into the Fund
that creates a sales charge will count toward completing a new or existing
Letter of Intention from the Fund.
Merrill Lynch BlueprintSM Program. Class A shares of the Fund are offered to
participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). Blueprint
is directed to small investors, group IRAs and participants in certain
affinity groups such as credit unions, trade associations and benefit plans.
Investors placing orders to purchase Class A shares of the Fund through
Blueprint will acquire the Class A shares at net asset value plus a sales
charge calculated in accordance with the Blueprint sales charge schedule
(i.e., up to $5,000 at 3.5% and $5,000.01 or more at the standard sales charge
rates disclosed in the Prospectus). Class A shares of the Fund are offered at
net asset value plus a sales charge of 1/2 of 1% for corporate or group IRA
programs placing orders to purchase their Class A shares through Blueprint.
Services, including the exchange privilege, available to Class A investors
through Blueprint, however, may differ from those available to other investors
in Class A shares. Orders for purchases and redemptions of Class A shares of
the Fund may be grouped for execution purposes which, in some circumstances,
may involve the execution of such orders two business days following the day
such orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants who are part of
an automatic investment plan. Additional information concerning purchases
through Blueprint, including any annual fees and transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Purchase Privilege of Certain Persons. Trustees of the Trust, directors and
trustees of certain other Merrill Lynch-sponsored investment companies,
directors of Merrill Lynch & Co., Inc., employees of Merrill Lynch & Co., Inc.
and its subsidiaries, and any trust, pension, profit-sharing or other benefit
plan for such persons, may purchase Class A shares of the Fund at net asset
value. Under such programs, the Fund realizes economies of scale and reduction
of sales related expenses by virtue of familiarity with the Fund.
Class A shares of the Fund will be offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must purchase Class A shares of
the Fund with proceeds from a redemption of shares of a mutual fund that was
sponsored by the financial consultant's previous firm and imposed a sales
charge either at the time of purchase or on a deferred basis. Second, such
redemption must have been made within 60 days prior to the investment in the
Fund, and the proceeds from the redemption must have been maintained in the
interim in cash or a money market fund.
Closed-End Fund Option. Class A shares of the Fund and certain other mutual
funds advised by the Manager or MLAM (the "Eligible Class A shares") are
offered at net asset value to shareholders of certain closed-end funds advised
by the Manager or MLAM who wish to reinvest the net proceeds of a sale of
their closed-end fund shares of common stock in Eligible Class A shares, if
the conditions set forth below are satisfied. First, the sale of closed-end
fund shares must be made through Merrill Lynch, and the net proceeds
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therefrom must be immediately reinvested in Eligible Class A shares. Second,
the closed-end fund shares must have either been acquired in the initial public
offering or be shares representing dividends from shares of common stock
acquired in such offering. Third, the closed-end fund shares must have been
continuously maintained in a Merrill Lynch securities account. Fourth, there
must be a minimum purchase of $250 to be eligible for the investment option.
Class A shares of the Fund are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund (formerly known as Merrill Lynch Prime
Fund, Inc.) ("Senior Floating Rate Fund") who wish to reinvest the net proceeds
from a sale of certain of their shares of common stock of Senior Floating Rate
Fund in shares of the Fund. In order to exercise this investment option, Senior
Floating Rate Fund shareholders must sell their Senior Floating Rate Fund
shares to the Senior Floating Rate Fund in connection with a tender offer
conducted by the Senior Floating Rate Fund and reinvest the proceeds
immediately in the Fund. This investment option is available only with respect
to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing
to exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund at such day.
Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund which might result from an acquisition of assets having net unrealized
appreciation which is disproportionately higher at the time of acquisition than
the realized or unrealized appreciation of the Fund.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Distribution Plan. Reference is made to "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares--Distribution Plan" in the Prospectus for
certain information with respect to the Distribution Plan of the Fund.
The payment of the distribution fee with respect to Class B shares is subject
to the provisions of Rule 12b-1 under the 1940 Act. Among other things, the
Distribution Plan provides that the Distributor shall provide and the Trustees
shall review quarterly reports of the disbursement of the distribution fees
paid to the Distributor. In their consideration of the Distribution Plan, the
Trustees must consider all factors they deem relevant, including information as
to the benefits of the Distribution Plan to the Fund and its Class B
shareholders. The Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of Trustees
who are not "interested persons" of the Fund, as defined in the 1940 Act (the
"Independent Trustees"), shall be committed to the discretion of the
Independent Trustees then in office. In approving the Distribution Plan in
accordance with Rule 12b-1, the Independent Trustees concluded that there is
reasonable likelihood that the Distribution Plan will benefit the Fund and its
Class B shareholders. The 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 B voting
securities of the Fund. The Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without Class B shareholder
approval, and all material amendments are required to be approved by the vote
of Trustees, including a majority of the Independent Trustees who have no
direct or
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indirect financial interest in the Distribution Plan, cast in person at a
meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of the Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of the Distribution
Plan or such report, the first two years in an easily accessible place.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the
New York Stock Exchange is restricted as determined by the Commission or such
Exchange is closed (other than customary weekend and holiday closings), for
any period during which an emergency exists as defined by the Commission as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Alternative Sales
Arrangements--Deferred Sales Charge Alternative--Class B Shares", while Class
B shares redeemed within four years of purchase are subject to a contingent
deferred sales charge under most circumstances, the charge is waived on
redemptions of Class B shares following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies are any partial or
complete redemption following the death or disability (as defined in the
Internal Revenue Code of 1986, as amended (the "Code")) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with
his or her spouse), provided the redemption is requested within one year of
the death or initial determination of disability. For the years ended
September 30, 1991, 1992 and 1993, the Distributor received contingent
deferred sales charges of $731,994, $561,826 and $622,557, respectively, all
of which was paid to Merrill Lynch.
Merrill Lynch BlueprintSM Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group
IRAs and participants in certain affinity groups such as trade associations
and credit unions. Class B shares of the Fund are offered through Blueprint
only to members of certain affinity groups. The contingent deferred sales
charge is waived in connection with purchase orders placed through Blueprint.
Services, including the exchange privilege, available to Class B investors
through Blueprint, however, may differ from those available to other investors
in Class B shares. Orders for purchases and redemptions of Class B shares of
the Fund will be grouped for execution purposes which, in some circumstances,
may involve the execution of such orders two business days following the day
such orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There is no minimum
initial or subsequent purchase requirement for investors who are part of the
Blueprint automatic investment plan. Additional information concerning these
Blueprint programs, including any annual fees or transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
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PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies--Other Investment
Policies and Practices" in the Prospectus.
Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Fund as a principal in the purchase and sale of securities
unless such trading is permitted by an exemptive order issued by the
Commission. Since over-the-counter transactions are usually principal
transactions, affiliated persons of the Fund, including Merrill Lynch, may not
serve as dealer in connection with transactions with the Fund, absent an
exemptive order from the Commission. The Trust has obtained an exemptive order
permitting it to engage in certain principal transactions with Merrill Lynch
involving high quality short-term Municipal Bonds subject to certain
conditions. During the year ended September 30, 1991, the Fund engaged in 13
transactions pursuant to such order aggregating approximately $29 million.
During the year ended September 30, 1992, the Fund engaged in no transactions
pursuant to such order. During the year ended September 30, 1993, the Fund
engaged in 9 transactions pursuant to such order aggregating approximately
$22,182,764. An affiliated person of the Fund may serve as its broker in over-
the-counter transactions conducted on an agency basis. Certain court decisions
have raised questions as to the extent to which investment companies should
seek exemptions under the 1940 Act in order to seek to recapture underwriting
and dealer spreads from affiliated entities. The Trustees have considered all
factors deemed relevant, and have made a determination not to seek such
recapture at this time. The Trustees will reconsider this matter from time to
time.
Under the 1940 Act, the Fund may not purchase securities from any
underwriting syndicate of which Merrill Lynch is a member except pursuant to an
exemptive order or rules adopted by the Commission. Rule 10f-3 under the 1940
Act sets forth conditions under which the Fund may purchase municipal bonds in
such transactions. The rule sets forth requirements relating to, among other
things, the terms of an issue of municipal bonds purchased by the Fund, the
amount of municipal bonds which may be purchased in any one issue and the
assets of the Fund which may be invested in a particular issue.
The Fund does not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who
provide supplemental investment research (such as information concerning tax-
exempt securities, economic data and market forecasts) to the Manager may
receive orders for transactions by 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 its Management Agreement and the expense of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information.
The Trust has no obligation to deal with any broker in the execution of
transactions for the Fund's portfolio securities. In addition, consistent with
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. and policies established by the Trustees of the Trust, the Manager may
consider sales of shares of the Fund as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Fund.
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to its Manager. While it is not possible to predict turnover rates
with any certainty, at present it is anticipated that the Fund's annual
portfolio turnover rate, under normal circumstances after the Fund's portfolio
is invested in accordance with its investment objective, will be less than
100%. (The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by
the monthly average of the value of the portfolio securities owned by the Fund
during
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the particular fiscal year. For purposes of determining this rate, all
securities whose maturities at the time of acquisition are one year or less are
excluded.) The portfolio turnover for the fiscal years ended September 30,
1991, 1992 and 1993 were 49.78%, 35.90% and 38.31%, respectively.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Manager once daily,
Monday through Friday, as of 4:15 P.M., New York time, on each day during which
the New York Stock Exchange is open for trading. The New York Stock Exchange is
not open on New Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Net asset
value per share is computed by dividing the sum of the value of the securities
held by the Fund plus any cash or other assets minus all liabilities by the
total number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the fees payable to the Manager and Distributor, are
accrued daily. The net asset value per share of the Class A and Class B shares
are expected to be equivalent. Under certain circumstances, however, the per
share net asset value of the Class B shares may be lower than the per share net
asset value of the Class A shares reflecting the daily expense accruals of the
distribution and transfer agency fees applicable with respect to the Class B
shares. Even under those circumstances, the per share net asset value of the
two classes eventually will tend to converge immediately after the payment of
dividends, which will differ by approximately the amount of the expense accrual
differential between the classes.
The Municipal Bonds and other portfolio securities in which the Fund invests
are traded primarily in over-the-counter municipal bond and money markets and
are valued at the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers that make
markets in the securities. One bond is the "yield equivalent" of another bond
when, taking into account market price, maturity, coupon rate, credit rating
and ultimate return of principal, both bonds will theoretically produce an
equivalent return to the bondholder. Financial futures contracts and options
thereon, which are traded on exchanges, are valued at their settlement prices
as of the close of such exchanges. Short-term investments with a remaining
maturity of 60 days or less are valued on an amortized cost basis, which
approximates market value. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Trustees of the Trust, including valuations
furnished by a pricing service retained by the Trust, which may utilize a
matrix system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Trust under the general
supervision of the Trustees.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Fund. Full details as to
each of such services can be obtained from the Trust, the Distributor or
Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive monthly statements from the Transfer Agent
showing any reinvestment of dividends and capital gains distributions activity
in the account since the previous statement. Shareholders considering
transferring
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<PAGE>
their Class A shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the Class A shares are
to be transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A shares so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A shares.
Shareholders interested in transferring their Class B shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares, and then must turn the certificates over to the
new firm for re-registration as described in the preceding sentence.
Shareholders may make additions to their Investment Account at any time by
mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the specific
request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
AUTOMATIC INVESTMENT PLAN
A shareholder may make additions to an Investment Account at any time by
purchasing Class A or Class B shares at the applicable public offering price
either through the shareholder's securities dealer, or by mail directly to the
Transfer Agent, acting as agent for such securities dealer. Voluntary
accumulation also can be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks of
$50 or more to charge the regular bank account of the shareholder on a regular
basis to provide systematic additions to the Investment Account of such
shareholder. Alternatively, investors who maintain CMA(R) accounts may arrange
to have periodic investments made in the Fund, in their CMA(R) accounts or in
certain related accounts in amounts of $100 or more through the CMA(R)
Automatic Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of
business on the monthly payment date for such dividends and distributions.
Shareholders may elect in writing to receive either their income dividends or
capital gains distributions, or both, in cash, in which event payment will be
mailed on or about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or capital gains distributions reinvested in shares of the Fund or vice
versa and, commencing ten days after the receipt by the Transfer Agent of such
notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A SHARES
A Class A shareholder may elect to make systematic withdrawals from an
Investment Account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired Class A
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals for shareholders with Class A shares
with such a value of $10,000 or more.
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At the time of each withdrawal payment, sufficient Class A shares are
redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A shares.
Redemptions will be made at net asset value as determined at the normal close
of business on the New York Stock Exchange on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
Exchange is not open for business on such date, the Class A shares will be
redeemed at the close of business on the following business day. The check for
the withdrawal payment will be mailed, or the direct deposit for the withdrawal
payment will be made, on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on
all Class A shares in the Investment Account are reinvested automatically in
the Fund's Class A shares. A shareholder's Systematic Withdrawal Plan may be
terminated at any time, without charge or penalty, by the shareholder, the
Fund, the Transfer Agent or the Distributor. Withdrawal payments should not be
considered as dividends, yield or income. Each withdrawal is a taxable event.
If periodic withdrawals continuously exceed reinvested dividends, the
shareholder's original investment may be reduced correspondingly. Purchases of
additional Class A shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax
liabilities. The Fund will not knowingly accept purchase orders for Class A
shares of the Fund from investors who maintain a Systematic Withdrawal Plan
unless such purchase is equal to at least one year's scheduled withdrawals or
$1,200, whichever is greater. Periodic investments may not be made into an
Investment Account in which the shareholder has elected to make systematic
withdrawals.
A Class A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $25. The proceeds of
systematic redemptions will be posted to the shareholder's account five
business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions
are made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Company shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
EXCHANGE PRIVILEGE
Class A and Class B shareholders of the Fund may exchange their Class A or
Class B shares of the Fund for shares of the same class of Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch
Arizona Municipal Bond Fund, Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Bond Fund, Merrill Lynch California Insured Municipal Bond Fund,
Merrill Lynch California Limited Maturity Municipal Bond Fund, Merrill Lynch
Capital Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc. (shares of which are deemed Class A
shares for purposes of the exchange privilege), Merrill Lynch Colorado
Municipal Bond Fund, Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund,
Merrill Lynch Federal Securities Trust, Merrill Lynch Florida Limited Maturity
Municipal Bond Fund, Merrill Lynch Florida Municipal Bond Fund, Merrill Lynch
Fund For Tomorrow, Inc., Merrill Lynch Fundamental
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Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Holdings (residents of Arizona
must meet investor suitability standards), Merrill Lynch Global Utility Fund,
Inc., Merrill Lynch Growth Fund for Investment and Retirement, Merrill Lynch
Healthcare Fund, Inc. (residents of Wisconsin must meet investor suitability
standards), Merrill Lynch International Equity Fund, Merrill Lynch Latin
America Fund, Inc., Merrill Lynch Maryland Municipal Bond Fund, Merrill Lynch
Massachusetts Limited Maturity Municipal Bond Fund, Merrill Lynch Massachusetts
Municipal Bond Fund, Merrill Lynch Michigan Limited Maturity Municipal Bond
Fund, Merrill Lynch Michigan Municipal Bond Fund, Merrill Lynch Minnesota
Municipal Bond Fund, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Municipal Intermediate Term Fund, Merrill Lynch Natural Resources Trust,
Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund, Merrill Lynch
New Jersey Municipal Bond Fund, Merrill Lynch New York Limited Maturity
Municipal Bond Fund, Merrill Lynch North Carolina Municipal Bond Fund, Merrill
Lynch Ohio Municipal Bond Fund, Merrill Lynch Oregon Municipal Bond Fund,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Pennsylvania Limited Maturity
Municipal Bond Fund, Merrill Lynch Pennsylvania Municipal Bond Fund, Merrill
Lynch Phoenix Fund, Inc., Merrill Lynch Short-Term Global Income Fund Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch Texas Municipal Bond Fund,
Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch World Income Fund,
Inc., on the basis described below. In addition, Class A shareholders of the
Fund may exchange their Class A shares for shares of Merrill Lynch U.S.A.
Government Reserves, Merrill Lynch U.S. Treasury Money Fund and Merrill Lynch
Ready Assets Trust (or Merrill Lynch Retirement Reserves Money Fund if the
exchange occurs within certain retirement plans) (together the "Class A money
market funds") and Class B shareholders of the Fund may exchange their Class B
shares for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional
Fund, Merrill Lynch Treasury Fund and Merrill Lynch Institutional Tax-Exempt
Fund (together the "Class B money market funds") on the basis described below.
Shares with a net asset value of at least $250 are required to qualify for the
exchange privilege and any shares utilized in an exchange must have been held
by the shareholder for 15 days. Certain funds into which exchanges may be made
may impose a redemption fee (not in excess of 2.00% of the amount redeemed) on
shares purchased through the exchange privilege when such shares are
subsequently redeemed, including redemption through subsequent exchanges. Such
redemption fee would be in addition to any contingent deferred sales charge
otherwise applicable to a redemption of Class B shares. It is contemplated that
the exchange privilege may be applicable to other new mutual funds whose shares
may be distributed by the Distributor. The exchange privilege available to
participants in the Merrill Lynch BlueprintSM Program may be different from
that available to other investors.
Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on the
basis of relative net asset value per Class A share, plus an amount equal to
the difference, if any, between the sales charge previously paid on the
outstanding Class A shares and the sales charge payable at the time of the
exchange on the new Class A shares. With respect to outstanding Class A shares
as to which previous exchanges have taken place, the "sales charge previously
paid" shall include the aggregate of the sales charges paid with respect to
such Class A shares in the initial purchase and any subsequent exchange. Class
A shares issued pursuant to dividend reinvestment are sold on a no-load basis
in each of the funds offering Class A shares. For purposes of the exchange
privilege, Class A shares acquired through dividend reinvestment will be
exchanged into the Class A shares of the other funds or into shares of the
Class A money market funds without a sales charge.
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In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share, without the payment of any
contingent deferred sales load that might otherwise be due on redemption of the
outstanding shares. Class B shareholders of the Fund exercising the exchange
privilege will continue to be subject to the Fund's contingent deferred sales
charge schedule if such schedule is higher than the deferred sales charge
schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through
use of the exchange privilege will be subject to the Fund's contingent deferred
sales charge schedule if such schedule is higher than the deferred sales charge
schedule relating to the Class B shares of the fund from which the exchange has
been made. For purposes of computing the sales load that may be payable on a
disposition of the new Class B shares, the holding period for the outstanding
Class B shares is "tacked" to the holding period of the new Class B shares. For
example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Natural Resources Trust after having held the Fund's Class B
shares for two and a half years. The 2% sales charge that generally would apply
to a redemption would not apply to the exchange. Three years later the investor
may decide to redeem the Class B shares of Merrill Lynch Natural Resources
Trust and receive cash. There will be no contingent deferred sales load due on
this redemption, since by "tacking" the two and a half year holding period of
Fund Class B shares to the three year holding period for the Merrill Lynch
Natural Resources Trust Class B shares, the investor will be deemed to have
held the new Class B shares for more than five years.
Shareholders also may exchange Class A shares and Class B shares from any of
the funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that Class B shares are held
in a Class B money market fund will not count towards satisfaction of the
holding period requirement for purposes of reducing the contingent deferred
sales load. However, shares of a Class B money market fund which were acquired
as a result of an exchange for Class B shares of a fund may, in turn, be
exchanged back into Class B shares of any fund offering such shares, in which
event the holding period for Class B shares of the fund will be aggregated with
previous holding periods for purposes of reducing the contingent deferred sales
load. Thus, for example, an investor may exchange Class B shares of the Fund
for shares of Merrill Lynch Institutional Fund, after having held the Fund
Class B shares for two and a half years and three years later decide to redeem
the shares of Merrill Lynch Institutional Fund for cash. At the time of this
redemption, the 2% contingent deferred sales load that would have been due had
the Class B shares of the Fund been redeemed for cash rather than exchanged for
shares of Merrill Lynch Institutional Fund will be payable. If, instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continues to hold for an additional two and a half years,
any subsequent redemption will not incur a contingent deferred sales load.
The investment objectives of the other funds into which exchanges can be made
are as follows:
Merrill Lynch Adjustable Rate
Securities Fund, Inc. ..............
High current income consistent with a
policy of limiting the degree of
fluctuation in net asset value by
investing primarily in a portfolio of
adjustable rate securities, consisting
principally of mortgage-backed and
asset-backed securities.
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<PAGE>
Merrill Lynch Americas Income Fund,
Inc. ..........................
A high level of current income,
consistent with prudent investment
risk, by investing primarily in debt
securities denominated in a currency
of a country located in the Western
Hemisphere (i.e., North and South
America and the surrounding waters).
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund...
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and Arizona income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-
term investment grade Arizona
Municipal Bonds.
Merrill Lynch Arizona Municipal Bond
Fund................................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide
investors with as high a level of
income exempt from Federal and Arizona
income taxes as is consistent with
prudent investment management.
Merrill Lynch Balanced Fund for
Investment and Retirement ..........
As high a level of total investment
return as is consistent with
reasonable risk by investing in common
stock and other types of securities,
including fixed income securities and
convertible securities.
Merrill Lynch Basic Value Fund,
Inc................................. Capital appreciation and, secondarily,
income through investments in
securities, primarily equities, that
are undervalued and therefore
represent basic investment value.
Merrill Lynch California Municipal
Bond Fund...........................
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide
investors as high a level of income
exempt from Federal and California
income taxes as is consistent with
prudent investment management.
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Merrill Lynch California Insured
Municipal Bond Fund............
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide
shareholders with as high a level of
income exempt from Federal and
California income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of insured
California Municipal Bonds.
Merrill Lynch California Limited
Maturity Municipal Bond Fund...
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide shareholders
with as high a level of income exempt
from Federal and California income
taxes as is consistent with prudent
investment management through
investment in a portfolio primarily of
intermediate-term investment grade
California Municipal Bonds.
Merrill Lynch Capital Fund, Inc...... The highest total investment return
consistent with prudent risk through a
fully managed investment policy
utilizing equity, debt and convertible
securities.
Merrill Lynch Colorado Municipal
Bond Fund......................
A portfolio of Merrill Lynch Multi-
State Municipal Series, a series fund,
whose objective is as high a level of
income exempt from Federal and
Colorado income taxes as is consistent
with prudent investment management.
Merrill Lynch Corporate Bond Fund, Current income from three separate
Inc................................. diversified portfolios of fixed income
securities.
Merrill Lynch Developing Capital
Markets Fund, Inc. ............
Long-term appreciation through
investment in securities, principally
equities, of issuers in countries
having smaller capital markets.
Merrill Lynch Dragon Fund, Inc.......
Capital appreciation primarily through
investment in equity and debt
securities of issuers domiciled in
developing countries located in Asia
and the Pacific Basin, other than
Japan, Australia and New Zealand.
Merrill Lynch EuroFund............... Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
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<PAGE>
Merrill Lynch Federal Securities High current return through investments
Trust............................... in U.S. Government and Government
agency securities, including GNMA
mortgage-backed certificates and other
mortgage-backed Government securities.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund...
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal income taxes as is
consistent with prudent investment
management while serving to offer
shareholders the opportunity to own
securities exempt from Florida
intangible personal property taxes
through investment in a portfolio
primarily of intermediate-term
investment grade Florida Municipal
Bonds.
Merrill Lynch Florida Municipal Bond
Fund................................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
income taxes as is consistent with
prudent investment management while
seeking to offer shareholders the
opportunity to own securities exempt
from Florida intangible personal
property taxes.
Merrill Lynch Fund For Tomorrow, Long-term growth through investment in
Inc................................. a portfolio of good quality
securities, primarily common stock,
potentially positioned to benefit from
demographic and cultural changes as
they affect consumer markets.
Merrill Lynch Fundamental Growth
Fund, Inc...........................
Long-term growth through investment in
a diversified portfolio of equity
securities placing particular emphasis
on companies that have exhibited an
above-average growth rate in earnings.
Merrill Lynch Global Allocation
Fund, Inc...........................
High total return, consistent with
prudent risk, through a fully managed
investment policy utilizing United
States and foreign equity, debt and
money market securities, the
combination of which will be varied
from time to time both with respect to
the types of securities and markets in
response to changing market and
economic trends.
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<PAGE>
Merrill Lynch Global Bond Fund for
Investment and Retirement ..........
High total investment return from
investment in a global portfolio of
debt instruments denominated in
various currencies and multi-national
currency units.
Merrill Lynch Global Convertible
Fund, Inc...........................
High total return from investment
primarily in an internationally
diversified portfolio of convertible
debt securities, convertible preferred
stock and "synthetic" convertible
securities consisting of a combination
of debt securities or preferred stock
and warrants or options.
Merrill Lynch Global Holdings
(residents of Arizona must meet
investor suitability standards).....
The highest total investment return
consistent with prudent risk through
worldwide investment in an
internationally diversified portfolio
of securities
Merrill Lynch Global Utility Fund, Capital appreciation and current income
Inc................................. through investment of at least 65% of
its total assets in equity and debt
securities issued by domestic and
foreign companies which are primarily
engaged in the ownership or operation
of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
Merrill Lynch Government Fund........
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in securities issued or guaranteed by
the U.S. Government, its agencies and
instrumentalities and in repurchase
agreements secured by such
obligations.
Merrill Lynch Growth Fund for
Investment and Retirement...........
Growth of capital and, secondarily,
income from investment in a
diversified portfolio of equity
securities placing principal emphasis
on those securities which management
of the fund believes to be
undervalued.
Merrill Lynch Healthcare Fund, Inc.
(residents of Wisconsin must meet
investor suitability standards).....
Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sale from products and services
in healthcare.
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<PAGE>
Merrill Lynch Institutional Fund..... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide maximum
current income consistent with
liquidity and the maintenance of a
high quality portfolio of money market
securities.
Merrill Lynch Institutional Tax-
Exempt Fund.........................
Current income exempt from Federal
income taxes, preservation of capital
and liquidity available from investing
in a diversified portfolio of short-
term, high quality municipal bonds.
Merrill Lynch International Equity
Fund...........................
Capital appreciation and, secondarily,
income by investing in a diversified
portfolio of equity securities of
issuers located in countries other
than the United States.
Merrill Lynch Latin America Fund,
Inc. ..........................
Capital appreciation by investing
primarily in Latin American equity and
debt securities.
Merrill Lynch Maryland Municipal
Bond Fund......................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Maryland income taxes as is
consistent with prudent investment
management.
Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund...
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Massachusetts
income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Massachusetts Municipal Bonds.
Merrill Lynch Massachusetts
Municipal Bond Fund ................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide
investors with as high a level of
income exempt from Federal and
Massachusetts income taxes as is
consistent with prudent investment
management.
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<PAGE>
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund...
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is a high level of income
exempt from Federal and Michigan
income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Michigan Municipal Bonds.
Merrill Lynch Michigan Municipal
Bond Fund......................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Michigan income taxes as is
consistent with prudent investment
management.
Merrill Lynch Minnesota Municipal
Bond Fund...........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Minnesota income taxes as is
consistent with prudent investment
management.
Merrill Lynch Municipal Bond Fund, Tax-exempt income from three separate
Inc................................. diversified portfolios of municipal
bonds.
Merrill Lynch Municipal Intermediate
Term Fund...................... Currently the only portfolio of Merrill
Lynch Municipal Series Trust, a series
fund, whose objective is to provide as
high a level as possible of income
exempt from Federal income taxes by
investing in investment grade
obligations with a dollar weighted
average maturity of five to twelve
years.
Merrill Lynch Natural Resources Long-term growth and protection of
Trust............................... capital from investment in securities
of domestic and foreign companies that
possess substantial natural resource
assets.
Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund...
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and New Jersey
income taxes as is consistent with
prudent investment management through
a portfolio primarily of intermediate-
term investment grade New Jersey
Municipal Bonds.
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<PAGE>
Merrill Lynch New Jersey Municipal
Bond Fund...........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and New Jersey income taxes as is
consistent with prudent investment
management.
Merrill Lynch New York Limited
Maturity Municipal Bond Fund...
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal, New York State
and New York City income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-
term grade New York Municipal Bonds.
Merrill Lynch North Carolina
Municipal Bond Fund ................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and North Carolina income taxes as is
consistent with prudent investment
management.
Merrill Lynch Ohio Municipal Bond
Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide
investors with as high a level of
income exempt from Federal and Ohio
income taxes as is consistent with
prudent investment management.
Merrill Lynch Oregon Municipal Bond
Fund...........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Oregon income tax as is consistent
with prudent investment management.
Merrill Lynch Pacific Fund, Inc...... Capital appreciation by investing in
equity securities of corporations
domiciled in Far Eastern and Western
Pacific countries, including Japan,
Australia, Hong Kong and Singapore.
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<PAGE>
Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund...
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a
portfolio of intermediate-term
investment grade Pennsylvania
Municipal Bonds.
Merrill Lynch Pennsylvania Municipal
Bond Fund...........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Pennsylvania income taxes as is
consistent with prudent investment
management.
Long-term growth of capital by
Merrill Lynch Phoenix Fund, Inc. .... investing in equity and fixed income
securities, including tax-exempt
securities, of issuers in weak
financial condition or experiencing
poor operating results believed to be
undervalued relative to the current or
prospective condition of such issuer.
Merrill Lynch Ready Assets Trust..... Preservation of capital, liquidity and
the highest possible current income
consistent with the foregoing
objectives from the short-term money
market securities in which the Trust
invests.
Merrill Lynch Retirement Reserves
Money Fund (available only if the
exchange occurs within certain
retirement plans)...................
Currently the only portfolio of Merrill
Lynch Retirement Series Trust, a
series fund, whose objectives are
current income, preservation of
capital and liquidity available from
investing in a diversified portfolio
of short-term money market securities.
Merrill Lynch Short-Term Global
Income Fund, Inc. .............
As high a level of current income as is
consistent with prudent investment
management from a global portfolio of
high quality debt securities
denominated in various currencies and
multinational currency units and
having remaining maturities not
exceeding three years.
Merrill Lynch Special Value Fund, Long-term growth of capital from
Inc................................. investments in securities, primarily
common stocks, or relatively small
companies believed to have special
investment value and emerging growth
companies regardless of size.
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<PAGE>
Merrill Lynch Strategic Dividend Long-term total return from investment
Fund................................ in dividend paying common stocks which
yield more than Standard & Poor's 500
Composite Stock Price Index.
Merrill Lynch Technology Fund, Inc... Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and services
in technology.
Merrill Lynch Texas Municipal Bond
Fund ...............................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
income taxes as is consistent with
prudent investment management by
investing primarily in a portfolio of
long-term, investment grade
obligations issued by the State of
Texas, its political subdivisions,
agencies and instrumentalities.
Merrill Lynch Treasury Fund.......... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in direct obligations of the U.S.
Treasury and up to 10% of its total
assets in repurchase agreements
secured by such obligations.
Merrill Lynch U.S.A. Government
Reserves............................
Preservation of capital, current income
and liquidity available from investing
in direct obligations of the U.S.
Government and repurchase agreements
relating to such securities.
Merrill Lynch U.S. Treasury Money Preservation of capital, liquidity and
Fund................................ current income through investment
exclusively in a diversified portfolio
of short-term marketable securities
which are direct obligations of the
U.S. Treasury.
Merrill Lynch Utility Income Fund, High current income through investment
Inc............................ in equity and debt securities issued
by companies which are primarily
engaged in the ownership or operation
of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
Merrill Lynch World Income Fund, High current income by investing in a
Inc................................. global portfolio of fixed income
securities denominated in various
currencies, including multinational
currencies.
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Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes and, depending on the circumstances, a short- or long-term
capital gain or loss may be realized. In addition, a shareholder exchanging
shares of any of the funds may be subject to a backup withholding tax unless
such shareholder certifies under penalty of perjury that the taxpayer
identification number on file with any such fund is correct and that such
investor is not otherwise subject to backup withholding. See "Distributions and
Taxes" below.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange, or, if
the exchange does not involve a money market fund, the shareholder may write to
the Transfer Agent requesting that the exchange be effected. Such letter must
be signed exactly as the account is registered with signatures guaranteed by an
"eligible guarantor institution" as such is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. Shareholders of the Fund, and shareholders of the other funds
described above with shares for which certificates have not been issued, may
exercise the exchange privilege by wire through their securities dealers. The
Fund reserves the right to require a properly completed Exchange Application.
This exchange privilege may be modified or terminated in accordance with the
rules of the Commission. The Fund reserves the right to limit the number of
times an investor may exercise the exchange privilege. Certain funds may
suspend the continuous offering of their shares to the general public at any
time and may thereafter resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where the exchange
legally may be made.
DISTRIBUTIONS AND TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income, the Fund (but not its shareholders) will not
be subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Trust intends to cause
the Fund to distribute substantially all of such income.
As discussed in the Fund's Prospectus, the Trust has established other series
in addition to the Fund (together with the Fund, the "Series"). Each Series of
the Trust is treated as a separate corporation for Federal income tax purposes.
Each Series, therefore, is considered to be a separate entity in determining
its treatment under the rules for RICs described in the Prospectus. Losses in
one Series do not offset gains in another Series, and the requirements (other
than certain organizational requirements) for qualifying for RIC status will be
determined at the Series level rather than at the Trust level.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends. The Trust anticipates that it will make sufficient
timely distributions of taxable income of the Fund so as to avoid the
imposition of the excise tax on the Fund.
The Trust intends to continue to qualify the Fund to pay "exempt-interest
dividends" as defined in Section 852(b)(5) of the Code. Under such section if,
at the close of each quarter of the Fund's taxable year,
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at least 50% of the value of the Fund's total assets consists of obligations
exempt from Federal income tax ("tax-exempt obligations") under Section 103(a)
of the Code (relating generally to obligations of a state or local governmental
unit), the Fund shall be qualified to pay exempt-interest dividends to its
Class A and Class B shareholders (together, the "shareholders"). Exempt-
interest dividends are dividends or any part thereof paid by the Fund which are
attributable to interest on tax-exempt obligations and designated by the Trust
as exempt-interest dividends in a written notice mailed to the Fund's
shareholders within 60 days after the close of the Fund's taxable year. For
this purpose, the Fund will allocate interest from tax-exempt obligations
between the Class A and Class B shareholders according to a method (which it
believes is consistent with the Securities and Exchange Commission's exemptive
order permitting the issuance and sale of two classes of shares) that is based
upon the gross income that is allocable to the Class A and Class B shareholders
during the taxable year, or such other method as the Internal Revenue Service
may prescribe. To the extent that the dividends distributed to the Fund's
shareholder's are derived from interest income exempt from Federal income tax
under Code Section 103(a), and are properly designated as exempt-interest
dividends, they will be excludable from a shareholder's gross income for
Federal income tax purposes. Exempt-interest dividends are included, however,
in determining what portion, if any, of a person's social security and railroad
retirement benefits is subject to Federal income taxes. Shareholders are
advised to consult their tax advisors with respect to whether exempt-interest
dividends retain the exclusion under Code Section 103(a) if a shareholder would
be treated as a "substantial user" or "related person" under Code Section
147(a) with respect to property financed with the proceeds of an issue of
"industrial development bonds" or "private activity bonds," if any, held by the
Fund.
The portion of the Fund's exempt-interest dividends paid from interest
received by the Fund from New York Municipal Bonds also will be exempt from New
York State and New York City personal income taxes. Shareholders subject to
income taxation by states other than New York will realize a lower after-tax
rate of return than New York shareholders since the dividends distributed by
the Fund generally will not be exempt, to any significant degree, from income
taxation by such other states. The Trust will inform shareholders annually
regarding the portion of the Fund's distributions which constitutes exempt-
interest dividends and which portion is exempt from New York State and New York
City personal income taxes. The Trust will allocate exempt-interest dividends
between Class A and Class B shareholders for New York State and New York City
income tax purposes based on a method similar to that described above for
Federal income tax purposes. Interest on indebtedness incurred or continued to
purchase or carry shares of a RIC paying exempt-interest dividends, such as the
Fund, will not be deductible by the investor for Federal income tax purposes or
for New York State and New York City personal income tax purposes to the extent
attributable to exempt-interest dividends.
Distributions from investment income and capital gains, including exempt-
interest dividends, will be subject to New York State corporation franchise
tax, New York City general corporation tax and may also be subject to state
taxes in states other than New York and to local taxes in cities other than
those in New York State. Accordingly, investors in the Fund including, in
particular, corporate investors which may be subject to either New York State
corporation franchise tax or New York City general corporation tax, should
consult their tax advisors with respect to the application of such taxes to an
investment in the Fund, to the receipt of Fund dividends and as to their New
York tax situation in general.
To the extent the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal and New York State and New York City
income tax purposes. Such distributions are not eligible for the dividends-
received deduction for corporations. Distributions, if any, of net long-term
capital gains from the sale of securities or from certain transactions in
38
<PAGE>
futures or options ("capital gain dividends") are taxable as long-term capital
gains for Federal income tax purposes, regardless of the length of time the
shareholder has owned Fund shares. Under the Revenue Reconciliation Act of
1993, all or a portion of the Fund's gain from the sale or redemption of tax-
exempt obligations purchased at a market discount will be treated as ordinary
income rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders. 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
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be treated as long-term capital loss to the extent of any
capital gain dividends received by the shareholder. In addition, such loss will
be disallowed to the extent of the amount of such exempt-interest dividends. If
the Fund pays a dividend in January which was declared in the previous October,
November or December to shareholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Fund and received by its shareholders on December 31 of the year in
which such dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference," which could subject investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund will purchase
such "private activity bonds," and the Trust will report to shareholders within
60 days after the Fund's taxable year-end the portion of the Fund's dividends
declared during the year which constitute an item of tax preference for
alternative minimum tax purposes. The Fund will allocate dividends which are a
tax preference item between the Class A and Class B shareholders based on a
method similar to that described above for the allocation of tax-exempt
interest. The Code further provides that corporations are subject to an
alternative minimum tax based, in part, on certain differences between taxable
income as adjusted for other tax preferences and the corporation's "adjusted
current earnings" (which more closely reflects a corporation's economic
income). Because an exempt-interest dividend paid by the Fund will be included
in adjusted current earnings, a corporate shareholder may be required to pay
alternative minimum tax on exempt-interest dividends paid by the Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax brackets of
36% and 39.6% for individuals and has created a graduated structure of 26% and
28% for the alternative minimum tax applicable to individual taxpayers. These
rate increases may affect an individual investor's after-tax return from an
investment in the Fund as compared with such investor's return from taxable
investments.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge such shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class
A shares.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends, capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom a certified
taxpayer identification number is not on file with the Trust or who, to the
Trust's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such shareholder is not otherwise subject to backup
withholding.
39
<PAGE>
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisors concerning the applicability of the
United States withholding tax.
ENVIRONMENTAL TAX
The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed without
regard to the alternative tax net operating loss deduction and the deduction
for the Environmental Tax) at a rate of $12 per $10,000 (0.12%) of alternative
minimum taxable income in excess of $2,000,000. The Environmental Tax is
imposed for taxable years beginning after December 31, 1986 and before January
1, 1996. The Environmental Tax is imposed even if the corporation is not
required to pay an alternative minimum tax because the corporation's regular
income tax liability exceeds its minimum tax liability. The Code provides,
however, that a RIC, such as the Fund, is not subject to the Environmental Tax.
However, exempt-interest dividends paid by the Fund that create alternative
minimum tax preferences for corporate shareholders under the Code (as described
above) may subject corporate shareholders of the Fund to the Environmental Tax.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase and sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). The Fund may also purchase and write call and put options
on such financial futures contracts. In general, unless an election is
available to the Fund or an exception applies, such options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, i.e., each such
options or financial futures contract will be treated as sold for its fair
market value on the last day of the taxable year, and any gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. Application of these rules to Section 1256 contracts held
by the Fund may alter the timing and character of distributions to
shareholders.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in financial futures contracts and related
options. Under Section 1092, the Fund may be required to postpone recognition
for tax purposes of losses incurred in certain closing transactions in options
and financial futures contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income must be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an options or financial futures contract.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and New York tax laws presently in
effect. For the complete provisions, reference should be made to the pertinent
Code sections, the Treasury regulations promulgated thereunder and New York tax
laws. The Code and the Treasury regulations, as well as the New York tax laws,
are subject to change by legislative or administrative action either
prospectively or retroactively.
Shareholders are urged to consult their tax advisors regarding the
availability of any exceptions from state or local taxes (other than those
imposed by New York) and with specific questions as to Federal, state, local or
foreign taxes.
40
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield and tax equivalent yield, in
advertisements or information furnished to present or prospective shareholders.
From time to time, the Fund may include the Fund's Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales literature. Total
return, yield and tax equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return, yield and tax equivalent yield are determined
separately for Class A and Class B shares in accordance with formulas specified
by the Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A shares and the contingent deferred sales charge that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
41
<PAGE>
Set forth below is total return, yield and tax-equivalent yield information
for the Class A and Class B shares of the Fund for the periods indicated:
<TABLE>
<CAPTION>
CLASS A SHARES* CLASS B SHARES
-------------------------------- -------------------------
REDEEMABLE
VALUE OF A
EXPRESSED AS EXPRESSED AS HYPOTHETICAL
A PERCENTAGE REDEEMABLE VALUE A PERCENTAGE $1,000
BASED ON A OF A HYPOTHETICAL BASED ON A INVESTMENT
HYPOTHETICAL $1,000 INVESTMENT HYPOTHETICAL AT THE END
$1,000 AT THE END OF $1,000 OF THE
PERIOD INVESTMENT THE PERIOD INVESTMENT PERIOD
------ ------------ ------------------ ------------ ------------
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended September
30, 1993............... 8.72% $1,087.20 8.68 % $1,086.80
Five Years Ended Septem-
ber 30, 1993........... 9.75 % $1,592.00
Inception (November 1,
1985) to September 30,
1993................... 9.62 % $2,069.90
October 25, 1988 to Sep-
tember 30, 1993........ 9.03% $1,532.10
YEAR
ENDED Annual Total Return
SEPTEMBER 30, (excluding maximum applicable sales charges)
- -------------
1993................... 13.25% $1,132.50 12.68 % $1,126.80
1992................... 11.77% $1,117.70 11.12 % $1,111.20
1991................... 13.60% $1,136.10 13.03 % $1,130.30
1990................... 4.42% $1,044.20 4.00 % $1,040.00
1989................... 8.16 % $1,081.60
1988................... 13.35 % $1,133.50
1987................... (2.50)% $ 975.00
Inception (November 1,
1985) to September 30,
1986 .................. 17.65 % $1,176.50
October 25, 1988 to Sep-
tember 30, 1989........ 6.28% $1,062.80
Aggregate Total Return
(including maximum applicable sales charges)
Inception (November 1,
1985) to
September 30, 1993..... 106.99 % $2,069.90
October 25, 1988 to Sep-
tember 30, 1992........ 53.21% $1,532.10
30 days ended on Septem-
ber 30, 1993........... 4.18% Yield 3.85 %
30 days ended on Septem-
ber 30, 1993........... 5.81% Tax-equivalent Yield 5.35 %
</TABLE>
- --------
* Information as to Class A shares is presented only for the period October 25,
1988 to September 30, 1993. Prior to October 25, 1988, no Class A shares were
publicly issued.
In order to reflect the reduced sales charges in the case of Class A shares
or the waiver of the contingent deferred sales charge in the case of Class B
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares", respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may take into account the waiver
of the contingent deferred sales charge and therefore may reflect greater total
return since, due to the reduced sales charges or the waiver of sales charges,
a lower amount of expenses is deducted.
42
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SERIES AND SHARES
The Declaration of Trust provides that the Trust shall be comprised of
separate Series ("Series") each of which will consist of a separate portfolio
which will issue separate shares. The Trust is presently comprised of the Fund,
Merrill Lynch Arizona Municipal Bond Fund, Merrill Lynch Colorado Municipal
Bond Fund, Merrill Lynch Florida Municipal Bond Fund, Merrill Lynch Maryland
Municipal Bond Fund, Merrill Lynch Massachusetts Municipal Bond Fund, Merrill
Lynch Michigan Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond
Fund, Merrill Lynch New Jersey Municipal Bond Fund, Merrill Lynch North
Carolina Municipal Bond Fund, Merrill Lynch Oregon Municipal Bond Fund, Merrill
Lynch Pennsylvania Municipal Bond Fund and Merrill Lynch Texas Municipal Bond
Fund. 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 shares of the Fund are
divided into Class A shares and Class B shares. Both Class A and Class B shares
represent an interest in the same assets of the Fund and have identical voting,
dividend, liquidation and other rights and the same terms and conditions except
that expenses related to the account maintenance and distribution of the Class
B shares are borne solely by such class and the Class B shares have exclusive
voting rights with respect to matters relating to such expenditures. See
"Purchase of Shares." The Trust has received an order from the Commission
permitting the issuance and sale of two classes of shares, and the issuance and
sale of any additional classes by any Series will require an additional order
from the Commission. There is no assurance that such an additional order will
be granted.
All shares of the Trust 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, a class of shares of a Series will have exclusive
voting rights with respect to matters relating to the distribution expenses
being borne solely by such class. Each issued and outstanding share is entitled
to one vote and to participate equally in dividends and distributions declared
by the respective Series and in net assets of such Series upon liquidation or
dissolution remaining after satisfaction of outstanding liabilities except
that, as noted above, expenses related to the distribution of the shares of a
class of a Series will be borne solely by such class. There normally will be no
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders may, in
accordance with the terms of the Declaration of Trust, cause a meeting of
shareholders to be held for the purpose of voting on the removal of Trustees.
Also, the Trust will be required to call a special meeting of shareholders in
accordance with the requirements of the 1940 Act to seek approval of new
management and advisory arrangements, of a material increase in distribution
fees or a change in the fundamental policies, objectives or restrictions of a
Series.
The obligations and liabilities of a particular Series are restricted to the
assets of that Series and do not extend to the assets of the Trust generally.
The shares of each Series, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange or similar rights, and are
freely transferable. Holders of shares of any Series are entitled to redeem
their shares as set forth elsewhere herein and in the Prospectus. Shares do not
have cumulative voting rights and the holders of more than 50% of the
43
<PAGE>
shares of the Trust voting for the election of Trustees can elect all of the
Trustees 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 amendments may be made to
the Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A and
Class B shares of the Fund based on the Fund's net assets on September 30,
1993, and its shares outstanding on that date is as follows:
TABLE
<TABLE>
<CAPTION>
CLASS A CLASS B
----------- ------------
<S> <C> <C>
Net Assets ..................................... $31,975,571 $733,980,912
=========== ============
Number of Shares Outstanding.................... 2,566,477 58,901,665
=========== ============
Net Asset Value Per Share (net assets divided by
number of shares outstanding) ................. $ 12.46 $ 12.46
Sales Charge (for Class A shares: 4.00% of of-
fering price (4.17% of net asset value per
share))*....................................... $ 0.52 $ -- **
----------- ------------
Offering Price.................................. $ 12.98 $ 12.46
=========== ============
</TABLE>
--------
* Rounded to the nearest one-hundredth percent; assumes
maximum sales charge is applicable.
** Class B shares are not subject to an initial sales charge
but may be subject to a contingent deferred sales charge on
redemption of shares within four years of purchase. See
"Purchase of Shares--Deferred Sales Charge Alternative--
Class B Shares" herein and in the Prospectus.
INDEPENDENT AUDITORS
Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540-6400, has
been selected as the independent auditors of the Trust. The selection of
independent auditors is subject to ratification by the shareholders of the
Fund. In addition, the employment of such auditors may be terminated without
any penalty by vote of a majority of the outstanding shares of the Trust at a
meeting called for the purpose of terminating such employment. The independent
auditors are responsible for auditing the annual financial statements of the
Fund.
CUSTODIAN
National Westminster Bank NJ, Exchange Place Centre, 10 Exchange Place,
Jersey City, New Jersey 07303, acts as the 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 on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive, Jacksonville, Florida
32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "Management of
the Trust--Transfer Agency Services" in the Prospectus.
44
<PAGE>
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on September 30 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.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act of 1940, to which reference is hereby made.
----------------
The Declaration of Trust establishing the Trust dated August 2, 1985, a copy
of which, together with all amendments thereto (the "Declaration") is on file
in the office of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal 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 the Trust,
but the "Trust Property" only shall be liable.
To the knowledge of the Trust, no person or entity owned beneficially 5% or
more of the Fund's shares on December 31, 1993.
45
<PAGE>
APPENDIX I
ECONOMIC CONDITIONS IN NEW YORK
The information set forth below is derived from the official statements
prepared in connection with the issuance of New York Municipal Bonds and other
sources that are generally available to investors. The following information is
provided as general information intended to give a recent historical
description and is not intended to indicate future or continuing trends in the
financial or other conditions of New York City (the "City") or New York State
(the "State"). The Fund has not independently verified this information.
NEW YORK CITY
The national economic downturn which began in July 1990 adversely affected
the local economy, which had been declining since late 1989. As a result, the
City experienced job losses in 1990 and 1991 and real Gross City Product
("GCP") fell in those two years. Beginning in 1992, the improvement in the
national economy helped stabilize conditions in the City. Employment losses
moderated toward year-end and real GCP increased, boosted by strong wage gains.
The City now projects, and its current four-year financial plan assumes that
the City's economy will continue to improve during calendar year 1993 and that
a modest employment recovery will begin by the end of calendar year 1993.
For each of the 1981 through 1993 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"), and the City's 1994 fiscal year results are projected to
be balanced in accordance with GAAP. The City was required to close substantial
budget gaps in recent years in order to maintain balanced operating results.
There can be no assurance that the City will continue to maintain a balanced
budget, or that it can maintain a balanced budget without additional tax or
other revenue increases or reductions in City services, which could adversely
affect the City's economic base.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. As a result of the
national and regional economic recession, the State's projections of tax
revenues for its 1991 and 1992 fiscal years were substantially reduced. The
State completed its 1993 fiscal year with a cash-basis positive balance of $671
million in the State's General Fund (the major operating fund of the State).
The State's 1994 fiscal year budget, as enacted, projects a balanced General
Fund. There can be no assurance that there will not be reductions in State aid
to the City from amounts previously projected or that State budgets in future
fiscal years will be adopted by the April 1 statutory deadline and that such
reductions or delays will not have adverse effects on the City's cash flow or
result in additional City expenditures.
The Mayor is responsible for preparing the City's four-year financial plan,
including the City's current financial plan for the 1994 through 1997 fiscal
years (the "1994-1997 Financial Plan" or "Financial Plan"). The City's
projections set forth in the Financial Plan are based on various assumptions
and contingencies which are uncertain and which may not materialize. Changes in
major assumptions could significantly affect the City's ability to balance its
budget as required by State law and to meet its annual cash flow and financing
requirements. Such assumptions and contingencies include the timing of any
regional and local economic recovery, the impact on real estate tax revenues of
the current downturn in the real estate market, wage increases for City
employees consistent with those assumed in the Financial Plan, employment
growth, provision of State and Federal aid and mandate relief and the impact on
the New York City region of the tax increases contained in President Clinton's
economic plan.
46
<PAGE>
Implementation of the Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets. The
City's financing program for fiscal years 1994 through 1997 contemplates the
issuance of $11.7 billion of general obligation bonds primarily to reconstruct
and rehabilitate the City's infrastructure and physical assets and to make
capital investments. In addition, the City issues revenue and tax anticipation
notes to finance its seasonal working capital requirements. The success of
projected public sales of City bonds and notes will be subject to prevailing
market conditions, and no assurance can be given that such sales will be
completed. If the City were unable to sell its general obligation bonds and
notes, it would be prevented from meeting its planned operating and capital
expenditures.
The City Comptroller and other agencies and public officials have issued
reports and made public statements which, among other things, state that
projected revenues may be less and future expenditures may be greater than
those forecast in the Financial Plan. In addition, the Control Board staff and
others have questioned whether the City has the capacity to generate sufficient
revenues in the future to provide the level of services included in the
Financial Plan. It is reasonable to expect that such reports and statements
will continue to be issued and to engender public comment.
1994-1997 FINANCIAL PLAN
The 1994-1997 Financial Plan projects revenues and expenditures for the 1994
fiscal year balanced in accordance with GAAP. The 1994-1997 Financial Plan sets
forth actions to close a previously projected gap of approximately $2.0 billion
in the 1994 fiscal year. The gap-closing actions for the 1994 fiscal year
included agency actions including productivity savings and savings from
restructuring the delivery of City services; service reductions; the sale of
delinquent real property tax receivables; discretionary transfers from the 1993
fiscal year; reduced debt service costs resulting from refinancings and other
actions; proposed increased Federal assistance; a continuation of the personal
income tax surcharge proposed increased State aid, which is subject to approval
by the Governor; and various revenue actions.
The Financial Plan also sets forth projections for the 1995 through 1997
fiscal years and outlines a proposed gap-closing program to close projected
budget gaps of $1.7 billion, $2.5 billion and $2.7 billion for the 1995 through
1997 fiscal years, respectively. These projections take into account expected
increases in Federal and State assistance.
Various actions proposed in the Financial Plan, including the proposed
continuation of the personal income tax surcharge beyond December 31, 1995 and
the proposed increase in State aid, are subject to approval by the Governor and
State Legislature, and the proposed increase in Federal aid is subject to
approval by Congress and the President. The State Legislature has in previous
legislative sessions failed to approve proposals for the State assumption of
certain Medicaid costs, mandate relief and reallocation of State education aid,
thereby increasing the uncertainty as to the receipt of the State assistance
included in the Financial Plan. If these actions cannot be implemented, the
City will be required to take other actions to decrease expenditures or
increase revenues to maintain a balanced financial plan. The Financial Plan has
been the subject of extensive public comment and criticism particularly
regarding the sale of delinquent property tax receivables, the amount of State
and Federal aid included in the Financial Plan and the inclusion of non-
recurring actions.
The Financial Plan reflects certain cost and expenditure increases including
increases in salaries and benefits paid to City employees pursuant to certain
collective bargaining agreements. In the event of a collective bargaining
impasse, the terms of wage settlements could be determined through the impasse
procedure in the New York City Collective Bargaining Law, which can impose a
binding settlement.
47
<PAGE>
LITIGATION
The City is a defendant in a significant number of lawsuits. Such litigation
includes, but is not limited to routine litigation incidental to the
performance of its governmental and other functions, actions commenced and
claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contract, other violations of
law and condemnation proceedings and other tax and miscellaneous actions. While
the ultimate outcome and fiscal impact, if any, on the City of the proceedings
and claims are not currently predictable, adverse determinations in certain of
them might have a material adverse effect upon the City's ability to carry out
the Financial Plan. The City has estimated that its potential future liability
on account of outstanding claims against it as of June 30, 1993 amounted to
approximately $2.2 billion.
RATINGS
As of December 9, 1993, Moody's Investors Service, Inc. ("Moody's") rated the
City's fixed rate general obligation bonds Baa1, Standard & Poor's Corporation
("Standard & Poor's") rated such bonds A- and Fitch Investors Service, Inc.
("Fitch") has rated such bonds A-. There is no assurance that such ratings will
continue for any given period of time or that they will be revised downward or
withdrawn entirely. Any such downward revision or withdrawal could have an
adverse effect on the market prices of City bonds.
In 1975, Standard & Poor's suspended its A rating of City bonds. This
suspension remained in effect until March 1981, at which time the City received
an investment grade rating of BBB from Standard & Poor's. On July 2, 1985,
Standard & Poor's revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On July 2, 1993 Standard & Poor's reconfirmed its A-
rating of City bonds, continued its negative rating outlook assessment and
stated that maintenance of such rating depended upon the City's making further
progress toward reducing budget gaps in the outlying years. Moody's ratings of
City bonds were revised in November 1981 from B (in effect since 1977) to Ba1,
in November 1983 to Baa, in December 1985 to Baa1, in May 1988 to A and again
in February 1991 to Baa1. Since July 15, 1993, Fitch has rated City bonds A-.
OUTSTANDING NET INDEBTEDNESS
As of September 30, 1993, the City and MAC had, respectively, $19.977 billion
and $4.542 billion of outstanding net long-term debt.
NEW YORK STATE
Recent Developments. The State has faced serious financial difficulties in
recent years. The recession has been more severe in the State than in other
parts of the nation, owing to a significant retrenchment in the financial
services industry, cutbacks in defense spending, and an overbuilt real estate
market.
The Revised 1993-94 State Financial Plan is based on an economic projection
that the State will perform more poorly than the nation as a whole. Real gross
domestic product grew modestly during calendar year 1992 and is expected to
show increased growth in calendar year 1993. The State's economy, as measured
by employment, is expected to commence growth late in the 1993 calendar year.
Many uncertainties exist in forecasts of both the national and State economies,
including consumer attitudes toward spending. Federal financial and monetary
policies, the availability of credit and the condition of the world economy,
which could have an adverse effect on the State. There can be no assurance that
the State economy will not experience worse-than-predicted results in the 1993-
94 fiscal year, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
48
<PAGE>
1993-94 Fiscal Year
The Governor released the recommended Executive Budget for the 1993-94 fiscal
year on January 19, 1993 and amended it on February 18, 1993. The recommended
1993-94 State Financial Plan projected a balanced General Fund. General Fund
receipts and transfers from other funds were projected at $31.556 billion,
including $184 million expected to be carried over from the 1992-93 fiscal
year. Disbursements and transfers to other funds were projected at $31.489
billion, not including $67 million repayment to the State's Tax Stabilization
Reserve Fund.
The 1993-94 State Financial Plan issued on April 16, 1993, projected General
Fund receipts and transfers from other funds at $32.367 billion and
disbursements and transfers to other funds at $32.300 billion. Excess receipts
of $67 million will be used for a required repayment to the State's Tax
Stabilization Reserve Fund. In comparison to the recommended 1993-94 Executive
Budget, the 1993-94 State budget, as enacted, reflected increases in both
receipts and disbursements in the General Fund of $811 million.
The $811-million increase in projected receipts reflected (i) improving
economic conditions and higher-than-expected tax collections, (ii) an increase
in projected receipts, the improved 1992-93 results and the expectation of an
improving economy and the balance from improved auditing and enforcement
measures and other miscellaneous items, (iii) additional payments from the
Federal government to reimburse the State for the cost of providing indigent
medical care, and (iv) the payment of personal income tax refunds in the 1992-
93 fiscal year which would otherwise have been paid in fiscal year 1993-94;
offset by (v) revenue-raising recommendations in the Executive Budget that were
not enacted and thus are not included in the 1993-94 State Financial Plan.
The $811-million increase in projected disbursements reflected (i) an
increase in projected school-aid payments, after applying projected receipts
from the State Lottery allocated to school aid, (ii) an increase in projected
payments for Medicaid assistance and other social service programs, (iii)
additional spending on the judiciary and criminal justice, (iv) a net increase
in projected disbursements for all other programs and purposes, including
mental hygiene and capital projects, after reflecting certain re-estimates in
spending, and (v) the establishment of a contingency reserve, which is to be
used primarily for litigation settlements.
There can be no assurance that the State will not face substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues projected from a lower recurring receipts base and the spending
required to maintain state programs at current levels. To address any potential
budgetary imbalance, the State may need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
COMPOSITION OF STATE CASH RECEIPTS AND DISBURSEMENTS
Substantially all State non-pension financial operations are accounted for in
the State's governmental funds group. Governmental funds include the General
Fund, which receives all income not required by law to be deposited in another
fund and which for the State's 1993-94 fiscal year comprises approximately 52%
of total projected governmental fund receipts; Special Revenue Funds, which
receive the preponderance of moneys received by the State from the Federal
government and other income the use of which is legally restricted to certain
purposes and which comprises approximately 39% of total projected governmental
funds receipts in the 1993-94 fiscal year; Capital Projects Funds, used to
finance the acquisition and construction of major capital facilities by the
State and to aid in certain of such projects conducted by local governments or
public authorities; and Debt Service Funds, which are used for the accumulation
of moneys for the payment of principal of and interest on long-term debt and to
meet lease-purchase and other contractual-obligation
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commitments. Receipts in Capital Projects and Debt Services Funds comprise an
aggregate of approximately 9% of total projected governmental funds receipts in
the 1993-94 fiscal year.
A legislative change implemented in August 1990 affects the way in which a
portion of the State's sales and use tax collections are recorded as receipts
in the General Fund. Pursuant to the legislation creating the New York Local
Government Assistance Corporation ("LGAC"), the Comptroller is required to
credit the equivalent of one percentage point of the four percent sales and use
tax collections to the Local Government Assistance Tax Fund (the "Tax Fund"),
which is a Debt Service Fund, for purposes of making payments to LGAC to
provide for the payment of debt service on its bonds and notes. To the extent
that these moneys are not necessary for payment to LGAC, they are transferred
from the Tax Fund to the General Fund and are reported in the General Fund as a
transfer from other funds, rather than as sales and use tax receipts. During
the State's 1991-92 and 1992-93 fiscal years $1.435 billion and $1.504 billion,
respectively, in sales and use tax receipts were credited to the Tax Fund, and
$1.509 billion is estimated to be credited to the Tax Fund during the State's
1993-94 fiscal year. For the 1991-92 fiscal year, the amount transferred to the
General Fund from the Tax Fund was $1.316 billion, after providing for the
payment of $119 million to LGAC for the purpose of meeting debt service on its
bonds and its other cash requirements. For the 1992-93 fiscal year, $1.280
billion was transferred to the General Fund from the Tax Fund after providing
for payment of $224 million to LGAC for debt service and other cash
requirements, while $1.262 billion is estimated to be transferred in 1993-94,
after payment of $247 million to LGAC for debt service and other cash
requirements.
The enacted 1993-94 Executive Budget includes several changes in the manner
in which General Fund tax receipts are recorded. Receipts from user taxes and
fees are reduced by approximately $434 million to reflect receipts that are
dedicated for highway and bridge capital purposes, which are to be deposited in
the Capital Projects Funds. Also, business taxes are reduced by approximately
$176 million to reflect tax receipts that are dedicated for transportation
purposes and which will be deposited in the Special Revenue and Capital
Projects Fund.
LITIGATION
As a result of the United States Supreme Court decision in the case of State
of Delaware v. State of New York, the State may be required to make certain
significant payments during the 1993-94 fiscal year or thereafter. On November
16, 1993, the Court of Appeals, the State's highest court, affirmed the
decision of the Appellate Division (Third Department) of the State's Supreme
Court in three actions (McDermott, et al. v. Regan, et al.; Puma, et al. v.
Regan, et al.; and Guzdek, et al. v. Regan, et al.) declaring unconstitutional
certain legislation enacted in 1990. That legislation mandated a change in the
actuarial funding method for determining contributions by the State and its
local governments to the State and local retirement systems from the aggregate
cost (AC) method, previously used by the Comptroller, to the projected unit
credit (PUC) method, and it required the application of the surplus reported
under the PUC method as a credit to employer contributions. As a result,
contributions to the retirement systems have been significantly reduced since
the State's 1990-91 fiscal year. The Court of Appeals held, among other things,
that the State Constitution, which prohibits the benefits of membership in the
retirement systems from being impaired or diminished, was violated because the
PUC legislation impaired "the means designed to assure benefits to public
employees by depriving the Comptroller of his personal responsibility to
maintain "the security and sources of benefits' of the pension fund." As a
result of this decision, the Comptroller has developed a plan to return to the
AC method and to restore prior funding levels of the retirement systems. The
Comptroller expects to achieve this
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objective in a manner that, consistent with his fiduciary responsibilities,
will neither require the State to make additional contributions in its 1993-94
fiscal year nor materially and adversely affect the financial condition of the
State thereafter. The Comptroller's plan calls for a return to the AC method,
using a four-year phase-in in the New York State and Local Employees'
Retirement System (ERS), with State AC contributions capped at a percentage of
payroll that increases each year during the phase-in. Although State
contributions to ERS under the plan are expected to be lower during the phase-
in period than they would have been if the AC method were reinstated
immediately, they are expected to exceed PUC levels by $30 million in fiscal
1994-95, $63 million in fiscal 1995-96, $116 million in fiscal 1996-97, and
$193 million in fiscal 1997-98. The excess over PUC levels is expected to peak
at $241 million in fiscal 1998-99, when State contributions under the
Comptroller's plan are first projected to exceed levels that would have been
required by an immediate return to the AC method. The excess over PUC levels is
projected to decline after fiscal 1998-99, and, beginning in fiscal 2001-02,
State contributions required under the Comptroller's plan are projected to be
less than PUC requirements would have been. The State is a defendant in
numerous legal proceedings pertaining to matters incidental to the performance
of routine governmental operations. Such litigation includes, but is not
limited to, claims asserted against the State arising from alleged torts,
alleged breaches of contracts, condemnation proceedings and other alleged
violations of State and Federal laws.
Included in the State's outstanding litigation are a number of cases
challenging the constitutionality or the adequacy and effectiveness of a
variety of significant social welfare programs primarily involving the State's
mental hygiene programs. Adverse judgments in these matters generally could
result in injunctive relief coupled with prospective changes in patient care
which could require substantial increased financing of the litigated programs
in the future. Because of the prospective nature of these matters, no provision
for this potential exposure has been made in the State's audited financial
statements for the 1991-92 fiscal year.
Adverse developments in any of these proceedings or the initiation of new
proceedings could affect the ability of the State to maintain a balanced State
Plan. In its audited financial statements for the 1992-93 fiscal year, the
State reported its estimated liability for awarded and anticipated unfavorable
judgments as $721 million.
GENERAL OBLIGATION DEBT
As of September 30, 1993, the State had approximately $5.134 billion in
general obligation bonds, excluding refunding bonds, and $224 million in bond
anticipation notes outstanding. On May 4, 1993 the State issued $850 million in
tax and revenue anticipation notes, all of which mature on December 31, 1993.
Principal and interest due on general obligation bonds and interest due on bond
anticipation notes and on tax and revenue anticipation notes were $890 million
and $818.8 million for the 1991-92 and 1992-93 fiscal years, respectively, and
are estimated to be $785.1 million for the State's 1993-94 fiscal year, not
including interest on refunding bonds to the extent that such interest is to be
paid from escrowed funds.
AUTHORITIES
The fiscal stability of the State is related to the fiscal stability of its
Authorities, which generally have responsibility for financing, constructing
and operating revenue-producing public benefit facilities. Authorities are not
subject to the constitutional restrictions on the incurrence of debt which
apply to the State itself, and may issue bonds and notes within the amounts of,
and as otherwise restricted by, their legislative authorization. As of
September 30, 1992, the latest data available, there were 18 Authorities that
had outstanding debt of $100 million or more. The aggregate outstanding debt,
including refunding bonds, of
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these 18 Authorities was $62.2 billion as of September 30, 1992, of which
approximately $8.2 billion was moral obligation debt and approximately $17.1
billion was financed under lease-purchase or contractual-obligation financing
arrangements.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls and
rentals for dormitory rooms and housing. In recent years, however, the State
has provided financial assistance through appropriations, in some cases of a
recurring nature, to certain of the 18 Authorities for operating and other
expenses and, in fulfillment of its commitments on moral obligations
indebtedness or otherwise, for debt service. The operating assistance is
expected to continue to be required in future years.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The Housing
Finance Agency ("HFA") and the Urban Development Corporation ("UDC") have in
the past required substantial amounts of assistance from the State to meet debt
service costs or to pay operating expenses. Further assistance, possibly in
increasing amounts, may be required for these, or other Authorities in the
future. In addition, certain statutory arrangements provide for State local
assistance payments otherwise payable to localities to be made under certain
circumstances to certain Authorities. The State has no obligation to provide
additional assistance to localities whose local assistance payments have been
paid to Authorities under these arrangements. However, in the event that such
local assistance payments are so diverted, the affected localities could seek
additional State funds.
OTHER LOCALITIES
Certain localities in addition to the City could have financial problems
leading to requests for additional State assistance during the State's 1993-94
fiscal year and thereafter. The potential impact on the State of such requests
by localities is not included in the projections of the State's receipts and
disbursements in the State's 1993-94 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for the City of Yonkers (the
"Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the State Legislature to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.
RATINGS
On June 6, 1990, Moody's changed its ratings on all the State's outstanding
general obligation bonds from A1 to A. On March 26, 1990, S&P changed its
ratings of all of the State's outstanding general obligation bonds from AA- to
A. On January 13, 1992, S&P changed its ratings of all the State's outstanding
general obligation bonds from A to A-. Ratings reflect only the respective
views of such organizations and an explanation of the significance of such
ratings must be obtained from the rating agency furnishing the same. There is
no assurance that a particular rating will continue for any given period of
time or that any such rating will not be revised downward or withdrawn entirely
if, in the judgment of the agency originally establishing the rating,
circumstances so warrant. A downward revision or withdrawal of such ratings, or
either of them, may have an effect on the market price of the Bonds.
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APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
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Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG1, MIG 2/VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes "best
quality . . . strong protection by established cash flows"; MIG 2/VMIG2 denotes
"high quality" with ample margins of protection; MIG 3/VMIG3 notes are of
"favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades"; MIG 4/VMIG4 notes are of "adequate quality . . .
[p]rotection commonly regarded as required of an investment security is present
. . . there is specific risk."
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa--judged
to be the best quality, carry the smallest degree of investment risk; Aa--
judged to be of high quality by all standards; A--possess many favorable
investment attributes and are to be considered as upper medium grade
obligations; Baa--considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATIONS'S ("STANDARD & POOR'S") MUNICIPAL
DEBT RATINGS
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
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The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only
in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for debt in higher rated categories.
BB
B Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on
CCC balance, as predominately speculative with respect to capacity
CC to pay interest and repay principal in accordance with the
terms of the obligations. "BB" indicates the lowest degree of
C speculation and "C" the highest degree of speculation. While
such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties
or major exposures to adverse conditions.
CI The rating "CI" is reserved for income bonds on which no
interest is being paid.
D Debt rated "D" is in payment default. The "D" rating category
is used when interest payments of principal payments are not
made on the date due even if the applicable grace period has
not expired, unless Standard & Poor's believes that such
payments will be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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DESCRIPTION OF STANDARD & POOR'S CORPORATE BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong. Debt rated "AA" has a
very strong capacity to pay interest and to repay principal and differs from
the highest rated issues only in small degree. Debt rated "A" has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt of a higher rated category. Debt rated "BBB" is regarded
as having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
The ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-1"
for the highest quality obligations to "D" for the lowest. These categories are
as follows:
A-1
This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2
Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3
Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
B
Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D
Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
A Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a long-
term debt rating. The following criteria will be used in making that
assessment.
--Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
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--Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given a
"+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
Standard & Poor's may continue to rate note issues with a maturity greater
than three years in accordance with the same rating scale currently employed
for municipal bond ratings.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuers belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date information to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
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Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
insurers is generally rated "F-1+".
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more
likely to have adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than
for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
CREDIT TREND INDICATOR: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
Improving (UP ARROW)
Stable (LEFT/RIGHT ARROW)
Declining (DOWN ARROW)
Uncertain (UP/DOWN ARROW)
Credit trend indicators are not predictions that any rating change will occur,
and have a longer-term time frame than issues placed on FitchAlert.
NR indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
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WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be raised or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor
in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD, DD and D Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents the
lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD", "DD", or "D" categories.
59
<PAGE>
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+".
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a
letter of credit issued by a commercial bank.
INS The symbol "INS" indicates that the rating is based on an
insurance policy or financial guaranty issued by an insurance
company.
60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch New York Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch New York Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust as of September 30, 1993, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
September 30, 1993 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch New
York Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust as
of September 30, 1993, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche
Princeton, New Jersey
October 29, 1993
61
<PAGE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch New York
Municipal Bond Fund's portfolio holdings in the Schedule of
Investments, we have abbreviated the names of many of the
securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
TRAN Tax Revenue Anticipation Notes
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<C> <C> <C> <S> <C>
New York--100.1%
BBB+ Baa1 $ 2,955 Babylon, New York, IDA, Resource Recovery Revenue Bonds (Ogden Martin Systems),
Series C, 8.50% due 1/01/2019 $ 3,452
NR Baa1 14,750 Babylon, New York, IDA, Waste Facilities Revenue Bonds (Babylon Community Waste
Management), Series A, 7.875% due 7/01/1999 (d) 17,790
Buffalo, New York, Sewer Authority Revenue Bonds:
AAA Aaa 2,000 Series C, 8.375% due 7/01/1996 (a)(d) 2,315
AAA Aaa 2,000 Series C, 8.50% due 7/01/1996 (a)(d) 2,322
AAA Aaa 2,250 Series E, 7.75% due 7/01/1997 (a)(d) 2,600
AAA Aaa 4,000 Series F, 6% due 7/01/2013 (b) 4,471
AAA Aaa 10,885 Erie County, New York, Water Authority, Water Revenue Refunding Bonds (Fourth
Resolution), 7.30% due 12/01/2017 (a)(g) 1,933
Grand Central District Management Association Inc., New York, Business Improvement
District, Capital Improvement Revenue Bonds:
A A1 2,170 6.50% due 1/01/2010 2,392
A A1 6,500 6.50% due 1/01/2022 7,109
NR Aa1 6,200 Hornell, New York, IDA, IDR (Crowley Foods, Inc.), 7.75% due 12/01/2016 6,927
AAA Aaa 6,110 Islip, New York, Resources Recovery Agency, Resource Recovery Revenue Bonds,
Series A, 8.50% due 9/01/2007 (a) 6,818
Metropolitan Transportation Authority, New York, Capital Appreciation Revenue Bonds
(Transportation Facilities), Series N (b)(g):
AAA Aaa 20,525 5.35% due 7/01/2012 7,633
AAA Aaa 830 5.35% due 7/01/2013 293
AAA Aaa 1,210 5.35% due 7/01/2014 405
AAA Aaa 3,105 Metropolitan Transportation Authority, New York, Commuter Facilities Revenue
Refunding Bonds, Series A, 5.50% due 7/01/2017 (c) 3,163
Metropolitan Transportation Authority, New York, Service Contract Revenue Bonds
(Commuter Facilities):
BBB Baa1 8,475 Refunding, Series 5, 7% due 7/01/2012 9,592
BBB Baa1 4,370 Series O, 5.75% due 7/01/2013 4,549
BBB Baa1 2,000 Series O, 5.50% due 7/01/2017 2,002
BBB Baa1 1,195 Series 3, 9.25% due 7/01/1999 1,476
BBB Baa1 1,300 Series 3, 9.25% due 7/01/2000 1,647
</TABLE>
62
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note la)
<C> <C> <C> <S> <C>
New York (continued)
Metropolitan Transportation Authority, New York, Service Contract Revenue Bonds
(Transit Facilities):
BBB Baa1 $ 1,845 Series O, 5.75% due 7/01/2013 $ 1,918
BBB Baa1 1,000 Series O, 5.50% due 7/01/2017 1,001
BBB Baa1 4,350 Series 3, 9.25% due 7/01/1999 5,394
BBB Baa1 4,755 Series 3, 9.25% due 7/01/2000 6,025
AAA Aaa 3,000 Metropolitan Transportation Authority, New York, Transportation Facilities
Revenue Bonds (Various Facilities), Series G, 8.50% due 7/01/1996 (d) 3,451
AAA Aaa 6,000 Metropolitan Transportation Authority, New York, Transportation Facilities Revenue
Refunding Bonds, Series M, 5.50% due 7/01/2011 (b) 6,196
AAA Aaa 2,950 Monroe County, New York, Airport Authority Revenue Bonds (Greater Rochester
International), AMT, 7.25% due 1/01/2009 (c) 3,432
Monroe County, New York, COP:
BBB+ Baa 825 7.375% due 1/01/1996 893
BBB+ Baa 9,770 8.05% due 1/01/2011 11,438
NR A 6,125 Monroe County, New York, IDA, Civic Facilities Revenue Bonds (Genesee Hospital),
Series A, 7% due 11/01/2018 6,818
New York City, New York, GO:
A- Aaa 1,700 Series A, 8.50% due 11/01/1997 (d) 2,027
A- Baa1 3,500 Series B, 7.75% due 2/01/1998 (d) 4,089
A- Baa1 15,400 Series D, 9.50% due 8/01/2002 20,001
A- Baa1 1,000 Series H, 7.20% due 2/01/2014 1,141
A- Baa1 5,000 Series I, 7.75% due 8/15/2018 5,768
A1+ VMG1 500 VRDN, Series E, 3.25% due 9/01/1995 (e) 500
New York City, New York, Health and Hospital Authority, Local Government Revenue
Refunding Bonds:
BBB Baa 6,000 Series A, 6.30% due 2/15/2020 6,293
AAA Aaa 10,845 Series A, 5.75% due 2/15/2022 (a) 11,333
AA Aa 8,475 New York City, New York, Housing Development Corporation, M/F Housing,
Series B, 5.70% due 11/01/2013 (f) 8,626
New York City, New York, IDA, Civic Facilities Revenue Bonds:
A1+ NR 700 (National Audubon Society), VRDN, 3.50% due 12/01/2014 (e) 700
BBB NR 2,000 (New York Blood Center), 7.20% due 5/01/2012 2,326
BBB NR 3,250 (New York Blood Center), 7.25% due 5/01/2022 3,785
AAA Aaa 4,000 (Rockefeller Foundation Project), 5.375% due 7/01/2023 4,103
BB+ Baa2 2,030 New York City, New York, IDA, Special Facilities Revenue Bonds (American Airlines),
7.75% due 7/01/2019 2,226
New York City, New York, Municipal Water Finance Authority, Water and Sewer System
Revenue Bonds:
A- A 9,000 Series A, 6.75% due 6/15/2017 10,070
A- Aaa 12,500 Series C, 7.75% due 6/15/2020 15,551
A1+ VMG1 500 VRDN, Series C, 3.30% due 6/15/2022 (b)(e) 500
BBB Baa 3,000 New York City, New York, Solid Waste Management Authority, Revenue Refunding Bonds
(Oneida-Herkimer), 6.75% due 4/01/2014 3,266
</TABLE>
63
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<C> <C> <C> <S> <C>
New York (continued)
New York City, New York, Trust for Cultural Resources Revenue Bonds (American
Museum of Natural History):
AAA Aaa $ 3,750 Series A, 6.90% due 4/01/2021 (c) $ 4,304
A1+ VMG1 3,000 (Soloman R. Guggenheim), VRDN, Series B, 3.50% due 12/01/2015 (e) 3,000
New York State Dormitory Authority Revenue Bonds:
BBB Baa1 3,500 (City University System), Series A, 9.25% due 7/01/2000 4,435
BBB Baa1 7,030 (City University System), Series C, 9.25% due 7/01/2000 8,908
AAA Aaa 1,000 (Colgate University System), 5.625% due 7/01/2023 (b) 1,045
A NR 1,120 (Community Memorial Hospital, Hamilton), 9% due 7/01/2005 1,238
BBB Baa1 2,870 (Consolidated City University System), Series A, 5.75% due 7/01/2018 2,927
BBB Baa1 11,885 Refunding (City University System), Series B, 6% due 7/01/2014 12,583
BBB Baa1 3,800 Refunding (City University System), Series U, 6.375% due 7/01/2008 4,150
BBB+ Baa1 9,410 Refunding (State University Educational Facilities), Series B, 7.50%
due 5/15/2011 11,669
BBB+ Baa1 15,905 Refunding (State University Educational Facilities), Series B, 5.25%
due 5/15/2013 15,374
BBB+ Baa1 8,250 Refunding (State University Educational Facilities), Series B, 5.25%
due 5/15/2019 7,848
AA Aa 3,130 (Rochester General Hospital), 8.75% due 2/01/2025 (f) 3,457
BBB- Baa1 2,000 (State University Athletic Facility), 7.25% due 7/01/2021 2,305
New York State Energy Research and Development Authority, Electric
Facilities Revenue Bonds (Consolidated Edison Co.), AMT:
AA- Aa2 10,000 Series A, 7.75% due 1/01/2024 11,327
AA- Aa2 2,595 Series B, 9.25% due 9/15/2022 3,185
AA- Aa2 5,000 Series B, 7.375% due 7/01/2024 5,612
AA- Aa2 7,815 Series C, 7.25% due 11/01/2024 8,780
New York State Energy Research and Development Authority, Electric Facilities
Revenue Bonds (Long Island Lighting Co.), AMT:
BBB- Baa3 2,000 Series A, 7.15% due 9/01/2019 2,243
BBB- Baa3 4,000 Series A, 7.15% due 12/01/2020 4,486
BBB- Baa3 3,000 Series A, 7.15% due 2/01/2022 3,365
BBB- Baa3 5,000 Series C, 6.90% due 8/01/2022 5,557
New York State Energy Research and Development Authority, Gas Facilities
Revenue Bonds (Brooklyn Union Gas Co. Project):
A A1 2,630 8.75% due 7/01/2015 2,916
A A1 915 Series A, 9% due 5/15/2015 1,012
A A1 18,400 Series II, 7% due 12/01/2020 20,415
New York State Energy Research and Development Authority, PCR:
NR NR 1,200 (Niagara Mohawk Corporation), VRDN, Series A, 3.50% due 3/01/2027 (e) 1,200
A1+ NR 1,200 (Niagara Power Corporation Project), AMT, VRDN, Series B, 3.40%
due 7/01/2027 (e) 1,200
A+ A3 3,170 (Orange and Rockland Utilities Project), 9% due 8/01/2015 3,533
New York State Environmental Facilities Corporation, PCR (Water-Revolving Fund):
A Aa 2,450 Series A, 7.25% due 6/15/2010 2,853
A Aa 1,250 Series A, 7% due 6/15/2012 1,437
A Aa 16,350 Series E, 6.875% due 6/15/2010 18,648
New York State Environmental Facilities Corporation, Special Obligation Bonds
(Riverbank State Park):
BBB NR 1,485 7.25% due 4/01/2007 1,707
BBB NR 3,000 7.25% due 4/01/2012 3,448
BBB NR 8,400 7.375% due 4/01/2022 9,720
</TABLE>
64
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<C> <C> <C> <S> <C>
New York (continued)
New York State HFA, Service Contract Obligation Revenue Bonds:
BBB Baa1 $ 3,500 Refunding, Series C, 5.875% due 9/15/2014 $ 3,580
BBB Baa1 6,500 Refunding, Series C, 6.125% due 3/15/2020 6,714
BBB Baa1 18,585 Series A, 5.50% due 9/15/2022 18,112
BBB Baa1 3,000 Series C, 6.30% due 9/15/2012 3,175
BBB Baa1 3,000 Series C, 6.30% due 3/15/2022 3,175
NR VMG1 1,400 New York State Job Development Authority Revenue Bonds, Special Purpose,
Series A-1--A-25, VRDN, 3.25% due 3/01/2007 (e) 1,400
New York State Local Government Assistance Corporation Revenue Bonds:
A A 23,375 Refunding, Series C, 5% due 4/01/2021 21,948
A A 1,600 Series A, 7.125% due 4/01/2011 1,867
A A 10,500 Series A, 6.875% due 4/01/2019 12,043
New York State Medical Care Facilities Finance Agency Revenue Bonds
AA NR 1,000 (Catholic Medical Center), Series A, 8.30% due 2/15/2022 (f) 1,143
AAA Aaa 6,820 (Health Insurance Plan of Greater New York), 1985 Series B, 8.50%
due 12/01/1997 (a)(d) 7,730
AA Aa 2,700 (Long Island College Hospital), Series B, 8.10% due 2/15/2022 (f) 3,064
AAA Aaa 4,000 (Long Term Health Care Capital Guaranty Insured), Series D, 6.50%
due 11/01/2015 4,548
BBB+ Baa1 5,900 (Mental Health Services), Series B, 6% due 2/15/2011 6,019
BBB+ Baa1 1,470 (Mental Health Services), Series B, 7.625% due 8/15/2017 1,749
BBB+ Baa1 4,315 (Mental Health Services), Series C, 7.30% due 2/15/2021 5,040
BBB+ Baa1 2,710 (Mental Health Services), Series D, 7.40% due 2/15/2018 3,182
AAA Aaa 30,550 (Mt. Sinai Hospital), Series C, 8.875% due 1/15/1996 (d)(f) 34,803
AAA Aaa 6,850 (Saint Francis Hospital Project), Series A, 7.625% due 11/01/2021 (b) 8,008
AAA Aa 4,695 (Saint Lukes-Roosevelt Hospital), Series A, 5.70% due 2/15/2029 4,784
BBB Baa 7,750 (Security Hospital), Series A, 7.40% due 8/15/2021 9,009
New York State Mortgage Agency, Homeowner Mortgage Revenue Bonds:
NR Aa 2,020 AMT, Series GG, 8.125% due 4/01/2020 2,187
NR Aa 14,875 Series BB-2, 7.95% due 10/01/2015 16,234
NR Aa 1,750 Series EE-3, 7.75% due 4/01/2016 1,963
NR Aa 2,375 Series FF, 7.95% due 10/01/2014 2,593
NR Aa 9,135 Series 29-C-1, 5.65% due 4/01/2015 9,230
NR Aa 790 10th Series A, 8.10% due 4/01/2014 873
New York State Power Authority, General Purpose and Revenue Bonds:
AA- Aa 9,000 Refunding, Series CC, 5% due 1/01/2014 8,775
AA- Aa 11,750 Refunding, Series Z, 6.50% due 1/01/2019 13,273
AA- Aa 4,000 Series AA, 6.375% due 1/01/2012 4,441
AA- Aa 10,000 Series Y, 6.75% due 1/01/2018 11,343
New York State Thruway Authority, Service Contract Revenue Bonds (Local Highway
and Bridge):
BBB Baa1 9,000 6% due 1/01/2011 9,243
BBB Baa1 10,400 5.25% due 4/01/2013 10,049
New York State TRAN:
SP1+ MIG1++ 400 2.50% due 12/31/1993 400
SP1+ MIG1++ 600 2.75% due 12/31/1993 600
</TABLE>
65
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<C> <C> <C> <S> <C>
New York (concluded)
New York State Urban Development Corporation Revenue Bonds:
BBB Baa1 $ 1,500 (Alfred Technology Resource Income Project), 7.875% due 1/01/2020 $ 1,740
BBB Baa1 7,500 (Correctional Capital Facilities), Series 1, 7.75% due 1/01/2014 8,648
BBB Baa1 10,000 (Correctional Capital Facilities), Series 2, 6.50% due 1/01/2021 10,633
BBB Baa1 5,000 (Correctional Capital Facilities), Series G, 6% due 1/01/2019 5,080
Port Authority of New York and New Jersey, Consolidated Refunding Bonds,
Eighty-Seventh Series:
AA- A1 4,120 5.25% due 7/15/2015 4,130
AA- A1 5,175 5.25% due 7/15/2016 5,179
A1+ VMG1 4,900 Syracuse, New York, IDA, Civic Facilities Revenue Bonds
(Syracuse University Project), VRDN, 3.50% due 3/01/2023 (e) 4,900
Triborough Bridge and Tunnel Authority, New York, Revenue Bonds:
A+ Aa 14,055 (General Purpose), Series X, 6.625% due 1/01/2012 16,748
A+ Aa 5,000 Refunding (General Purpose), Series A, 5% due 1/01/2012 4,877
A+ Aa 3,930 Refunding (General Purpose), Series Q, 6.75% due 1/01/2009 4,681
AAA Aaa 11,450 Refunding (Special Obligation), 5.50% due 1/01/2017(a) 11,735
BBB Baa 2,750 Ulster County, New York, Resource Recovery Agency Revenue Bonds
(Solid Waste Systems), 6% due 3/01/2014 2,830
Puerto Rico--1.0%
A1+ VMG1 1,100 Puerto Rico Commonwealth Government Development Refunding Bonds, VRDN, 2.75%
due 12/01/2015 (e) 1,100
AAA Aaa 3,000 Puerto Rico Commonwealth Highway Authority, Highway Revenue Bonds, Series P, 8.125%
due 7/01/1998 (d) 3,614
AA- Aa3 2,500 Puerto Rico, Industrial, Medical and Environmental Pollution Control Facilities,
Financing Authority Revenue Bonds (Motorola Inc. Project),
Series A, 6.75% due 1/01/2014 2,878
Total Investments (Cost--$699,958)--101.1% 774,717
Liabilities in Excess of Other Assets--(1.1%) (8,761)
--------
Net Assets--100.0% $765,956
========
<FN>
(a)AMBAC Insured.
(b)FGIC Insured.
(c)MBIA Insured.
(d)Prerefunded.
(e)The interest rate is subject to change periodically based upon the
prevailing market rate. The interest rates shown are the rates in effect
at September 30, 1993.
(f)FHA Insured.
(g)Represents the yield to maturity on this zero coupon issue.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche.
See Notes to Financial Statements.
</TABLE>
66
<PAGE>
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of September 30, 1993
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$699,957,636) (Note 1a) $774,717,376
Cash 96,105
Receivables:
Interest $ 12,233,140
Securities sold 8,759,433
Beneficial interest sold 1,869,387 22,861,960
------------
Deferred organization expenses (Note 1e) 712
Prepaid registration fees and other assets (Note 1e) 77,975
------------
Total assets 797,754,128
------------
Liabilities: Payables:
Securities purchased 28,532,499
Beneficial interest redeemed 1,421,803
Dividends to shareholders (Note 1f) 1,060,744
Investment adviser (Note 2) 338,301
Distributor (Note 2) 299,490 31,652,837
----------
Accrued expenses and other liabilities 144,808
------------
Total liabilities 31,797,645
------------
Net Assets: Net assets $765,956,483
============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized $ 256,647
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 5,890,166
Paid-in capital in excess of par 672,130,424
Undistributed realized capital gains--net 12,919,506
Unrealized appreciation on investments--net 74,759,740
------------
Net assets $765,956,483
============
Net Asset Value: Class A--Based on net assets of $31,975,571 and 2,566,477 shares of
beneficial interest outstanding $ 12.46
============
Class B--Based on net assets of $733,980,912 and 58,901,665 shares of
beneficial interest outstanding $ 12.46
============
See Notes to Financial Statements.
</TABLE>
67
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations for the Year Ended September 30, 1993
<S> <S> <C>
Investment Income Interest and amortization of premium and discount earned $ 44,544,836
(Note 1d):
Expenses: Investment advisory fees (Note 2) 3,744,878
Distribution fees--Class B (Note 2) 3,320,440
Transfer agent fees--Class B (Note 2) 268,169
Printing and shareholder reports 96,920
Registration fees (Note 1e) 69,562
Accounting services (Note 2) 65,976
Professional fees 49,803
Custodian fees 46,190
Trustees' fees and expenses 32,527
Pricing fees 15,944
Transfer agent fees--Class A (Note 2) 8,832
Amortization of organization expenses (Note 1e) 8,370
Other 22,175
------------
Total expenses 7,749,786
------------
Investment income--net 36,795,050
------------
Realized & Realized gain on investments--net 15,506,899
Unrealized Gain Change in unrealized appreciation on investments--net 30,754,959
on Investments-- ------------
Net (Notes 1d & 3): Net Increase in Net Assets Resulting from Operations $ 83,056,908
============
See Notes to Financial Statements.
</TABLE>
68
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended
September 30,
Increase (Decrease) in Net Assets: 1993 1992
<S> <S> <C> <C>
Operations: Investment income--net $ 36,795,050 $ 34,874,676
Realized gain on investments--net 15,506,899 9,882,022
Change in unrealized appreciation on investments--net 30,754,959 18,567,618
------------ ------------
Net increase in net assets resulting from operations 83,056,908 63,324,316
------------ ------------
Dividends & Investment income--net:
Distributions Class A (1,475,206) (939,087)
to Shareholders Class B (35,319,844) (33,935,589)
(Note 1f): Realized gain on investments--net:
Class A (194,989) --
Class B (5,828,788) --
------------ ------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (42,818,827) (34,874,676)
Beneficial Interest Net increase in net assets derived from beneficial
Transactions interest transactions 90,154,954 24,429,272
(Note 4): ------------ ------------
Net Assets: Total increase in net assets 130,393,035 52,878,912
Beginning of year 635,563,448 582,684,536
------------ ------------
End of year $765,956,483 $635,563,448
============ ============
See Notes to Financial Statements
</TABLE>
69
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A
For the
Period
Oct. 25,
The following per share data and ratios have been derived from 1988++to
information provided in the financial statements. For the Year Ended September 30, Sept. 30,
Increase (Decrease) in Net Asset Value: 1993 1992 1991 1990 1989
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.77 $ 11.22 $ 10.56 $ 10.81 $ 10.85
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .70 .72 .74 .73 .68
Realized and unrealized gain (loss) on
investments--net .80 .55 .66 (.25) (.04)
-------- -------- -------- -------- --------
Total from investment operations 1.50 1.27 1.40 .48 .64
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.70) (.72) (.74) (.73) (.68)
Realized gain on investments--net (.11) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.81) (.72) (.74) (.73) (.68)
-------- -------- -------- -------- --------
Net asset value, end of period $ 12.46 $ 11.77 $ 11.22 $ 10.56 $ 10.81
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 13.25% 11.77% 13.60% 4.42% 6.28%+++
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses .64% .65% .66% .67% .66%*
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.80% 6.28% 6.72% 6.79% 6.82%*
======== ======== ======== ======== ========
Supplemental Data: Net assets, end of period (in thousands) $31,976 $18,973 $13,727 $8,905 $3,796
======== ======== ======== ======== ========
Portfolio turnover 38.31% 35.90% 49.78% 53.82% 74.51%
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
70
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
The following per share data and ratios have been derived from Class B
information provided in the financial statements. For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 1993 1992 1991 1990 1989
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 11.77 $ 11.23 $ 10.57 $ 10.81 $ 10.66
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .64 .67 .67 .68 .69
Realized and unrealized gain (loss) on
investments--net .80 .54 .66 (.24) .15
-------- -------- -------- -------- --------
Total from investment operations 1.44 1.21 1.33 .44 .84
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.64) (.67) (.67) (.68) (.69)
Realized gain on investments--net (.11) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.75) (.67) (.67) (.68) (.69)
-------- -------- -------- -------- --------
Net asset value, end of year $ 12.46 $ 11.77 $ 11.23 $ 10.57 $ 10.81
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 12.68% 11.12% 13.03% 4.00% 8.16%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses, excluding distribution fees .64% .66% .67% .68% .66%
Net Assets: ======== ======== ======== ======== ========
Expenses 1.14% 1.16% 1.17% 1.18% 1.16%
======== ======== ======== ======== ========
Investment income--net 5.32% 5.79% 6.23% 6.28% 6.38%
======== ======== ======== ======== ========
Supplemental Data: Net assets, end of year (in thousands) $733,981 $616,590 $568,958 $566,095 $635,227
======== ======== ======== ======== ========
Portfolio turnover 38.31% 35.90% 49.78% 53.82% 74.51%
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
71
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch New York Municipal Bond Fund (the "Fund") is part
of the Merrill Lynch Multi-State Municipal Series Trust (the
"Trust"). The Fund is registered under the Investment Company Act
of 1940 as a diversified, open-end investment management company.
The Fund offers both Class A and Class B Shares. Class A Shares
are sold with a front-end sales charge. Class B Shares may be
subject to a contingent deferred sales charge. Both classes of
shares have identical voting, dividend, liquidation and other
rights and the same terms and conditions, except that Class B
Shares bear certain expenses related to the distribution of such
shares and have exclusive voting rights with respect to matters
relating to such distribution expenditures. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds and other portfolio
securities are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid
price or yield equivalents as obtained by the Fund's pricing
service from one or more dealers that make markets in such
securities. Financial futures contracts, which are traded on
exchanges, are valued at their last sale price as of the close of
such exchanges. Options, which are traded on exchanges, are
valued at their last sale price as of the close of such exchanges
or, lacking any sales, at the last available bid price. Short-
term investments with a remaining maturity of 60 days or less are
valued on an amortized cost basis, which approximates market
value. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good
faith by or under the direction of the Board of Trustees of the
Trust.
(b) Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
portfolio holdings or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of
securities at a specific future date and at a specific price or
yield. Upon entering into a contract, the Fund deposits and
maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When
the contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income
tax provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are
entered into (the trade dates). Interest income is recognized on
the accrual basis. Original issue discounts and market premiums
are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost
basis.
(e) Deferred organization expenses and prepaid registration
fees--Deferred organization expenses are charged to expense on a
straight-line basis over a five-year period. Costs related to the
organization of the second class of shares are charged to expense
over a period not exceeding five years. Prepaid registration fees
are charged to expense as the related shares are issued.
(f) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of
capital gains are recorded on the ex-dividend dates.
(g) Non-income producing investments--Written and purchased
options are non-income producing investments.
72
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
2. Investment Advisory Agreement and Transactions with
Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Fund Asset Management, Inc. ("FAMI"), a wholly-owned subsidiary
of Merrill Lynch Investment Management, Inc. ("MLIM"), which is
an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc.
and a Distribution Agreement and a Distribution Plan with Merrill
Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of MLIM.
FAMI is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund.
For such services, the Fund pays a monthly fee based upon the
average daily value of the Fund's net assets at the following
annual rates: 0.55% of the Fund's average daily net assets not
exceeding $500 million; 0.525% of average daily net assets in
excess of $500 million but not exceeding $1 billion; and 0.50% of
average daily net assets in excess of $1 billion. The Investment
Advisory Agreement obligates FAMI to reimburse the Fund to the
extent the Fund's expenses (excluding interest, taxes,
distribution fees, brokerage fees and commissions, and
extraordinary items) exceed 2.5% of the Fund's first $30 million
of average daily net assets, 2.0% of the next $70 million of
average daily net assets, and 1.5% of the average daily net
assets in excess thereof. FAMI's obligation to reimburse the Fund
is limited to the amount of the management fee. No fee payment
will be made to FAMI during any fiscal year which will cause such
expenses to exceed the expense limitation at the time of such
payment.
The Fund has adopted a Plan of Distribution (the "Plan") pursuant
to Rule 12b-1 under the Investment Company Act of 1940. Under the
plan, MLFD receives a fee from the Fund for the sale of Class B
Shares at the end of each month at the annual rate of 0.50% of
the average daily net assets of the Fund's Class B Shares
to compensate the Distributor for services provided and
the expenses borne by it under the Plan. As authorized by the
Plan, the Distributor has entered into an agreement with Merrill
Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), an affiliate of
MLIM, which provides for the compensation of MLPF&S for providing
distribution-related services to the Fund. For the year ended
September 30, 1993, MLFD earned underwriting discounts of
$15,617, and MLPF&S earned dealer concessions of $136,397 on
sales of the Fund's Class A Shares.
MLPF&S also received contingent deferred sales charges of
$622,557 for the sale of the Fund's Class B Shares during the
year.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary
of Merrill Lynch & Co., Inc., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAMI at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAMI, MLIM, MLFD, FDS, MLPF&S, and/or Merrill Lynch
& Co., Inc.
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the year ended September 30, 1993 were
$360,529,074 and $253,481,979, respectively.
Net realized and unrealized gains (losses) as of September 30,
1993 were as follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains Gains
(Losses) (Losses)
<S> <C> <C>
Long-term investments $ 16,360,864 $ 74,760,049
Short-term investments (3,731) (309)
Options purchased (850,234) --
------------ ------------
Total $ 15,506,899 $ 74,759,740
============ ============
</TABLE>
73
<PAGE>
As of September 30, 1993, net unrealized appreciation for Federal
income tax purposes aggregated $74,759,740, of which $74,760,597
related to appreciated securities and $857 related to depreciated
securities. The aggregate cost of investments at September 30,
1993 for Federal income tax purposes was $699,957,636.
Transactions in put options purchased for the year ended
September 30, 1993 were as follows:
<TABLE>
<CAPTION>
Par Value/Shares
Covered by
Purchased Premiums
Options Paid
<S> <C> <C>
Outstanding options at
beginning of year -- --
Options purchased $ 1,000 $ 850,234
Options expired (1,000) (850,234)
----------- ------------
Outstanding options
at end of year -- --
============ ============
</TABLE>
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest
transactions was $90,154,954 and $24,429,272 for the years ended
September 30, 1993 and September 30, 1992, respectively.
Transactions in shares of beneficial interest for Class A and
Class B Shares were as follows:
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended September 30, 1993 Shares Amount
<S> <C> <C>
Shares sold 1,289,097 $ 15,472,813
Shares issued to share- ------------ ------------
holders in reinvestment
of dividends and distributions 88,322 1,058,599
------------ ------------
Total issued 1,377,419 16,531,412
Shares redeemed (422,810) (5,082,345)
------------ ------------
Net increase 954,609 $ 11,449,067
============ ============
Class A Shares for the Year Dollar
Ended September 30, 1992 Shares Amount
Shares sold 767,239 $ 8,785,231
Shares issued to share-
holders in reinvestment
of dividends 49,986 574,421
------------ ------------
Total issued 817,225 9,359,652
Shares redeemed (428,444) (4,852,108)
------------ ------------
Net increase 388,781 $ 4,507,544
============ ============
Class B Shares for the Year Dollar
Ended September 30, 1993 Shares Amount
Shares sold 10,654,614 $128,316,771
Shares issued to share
holders in reinvestment
of dividends and
distributions 1,620,494 19,382,347
Total issued 12,275,108 147,699,118
Shares redeemed (5,746,964) (68,993,231)
------------ ------------
Net increase 6,528,144 $ 78,705,887
============ ============
Class B Shares for the Year
Ended September 30, 1992 Dollar
Shares Amount
Shares sold 9,679,990 $111,047,304
Shares issued to share-
holders in reinvestment
of dividends 1,269,811 14,564,799
------------ ------------
Total issued 10,949,801 125,612,103
Shares redeemed (9,261,996) (105,690,375)
------------ ------------
Net increase 1,687,805 $ 19,921,728
============ ============
</TABLE>
74
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
75
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies ......................................... 2
Description of Municipal Bonds and Temporary Investments................... 4
Investment Restrictions.................................................... 12
Management of the Trust.................................................... 14
Trustees and Officers..................................................... 14
Management and Advisory Arrangements...................................... 15
Purchase of Shares......................................................... 17
Redemption of Shares....................................................... 21
Portfolio Transactions..................................................... 22
Determination of Net Asset Value........................................... 23
Shareholder Services....................................................... 23
Distributions and Taxes.................................................... 37
Performance Data........................................................... 41
General Information........................................................ 43
Description of Series and Shares.......................................... 43
Computation of Offering Price Per Share................................... 44
Independent Auditors...................................................... 44
Custodian................................................................. 44
Transfer Agent............................................................ 44
Legal Counsel............................................................. 45
Reports to Shareholders................................................... 45
Additional Information.................................................... 45
Appendix I
Economic Conditions in New York........................................... 46
Appendix II
Ratings of Municipal Bonds................................................ 53
Independent Auditors' Report............................................... 61
Financial Statements....................................................... 62
</TABLE>
Code #10343
Statement of
Additional Information
(ART)
- -------------------------------------------------------------------------------
MERRILL LYNCH
NEW YORK
MUNICIPAL BOND
FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
January 28, 1994
Distributor:
Merrill Lynch Funds
Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the years in the seven-year period
ended September 30, 1993 and for the period November 1, 1985
(commencement of operations) to September 30, 1992.
Contained in Part B:
Schedule of Investments, September 30, 1993.
Statement of Assets and Liabilities, September 30, 1993.
Statement of Operations for the year ended September 30, 1993.
Statements of Changes in Net Assets for the years ended September
30, 1993 and September 30, 1992.
Financial Highlights for each of the years in the five-year period
ended September 30, 1993.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Declaration of Trust of the Registrant, dated August 2, 1985.(a)
(b) --Instrument establishing Merrill Lynch New York Municipal Bond Fund
(the "Fund") as a series of the Registrant.(b)
(c) --Amendment to Declaration of Trust, dated October 3, 1988.(d)
(d) --Instrument establishing Class A shares and Class B shares of the
Fund.(d)
2 --By-Laws of the Registrant.(a)
3 --None.
4 --Portions of the Declaration of Trust, Establishment and
Designation and By-Laws of the Registrant defining the rights of
holders of the Fund as a series of the Registrant(f).
5 --Management Agreement between Registrant and Fund Asset Management,
Inc.(b)
6(a) --Class B Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(b)
(b) --Class A Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(d)
(c) --Letter Agreement between the Fund and Merrill Lynch Funds
Distributor, Inc., dated September 15, 1993, in connection with the
Merrill Lynch Mutual Fund Adviser program.
7 --None.
8 --Custody Agreement between Registrant and First Jersey National
Bank (now known as National Westminster Bank).(c)
9 --Transfer Agency Agreement between Registrant and Merrill Lynch
Financial Data Service, Inc. (now known as Financial Data Services,
Inc.).(d)
10 --None.
11 --Consent of Deloitte & Touche, independent auditors for the
Registrant.
12 --None.
13 --Certificate of Fund Asset Management, Inc.(b)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
14 --None.
15(a) --Form of Distribution Plan of the Registrant.(b)
(b) --Amended and Restated Class B Distribution Plan of the Registrant and
Amended and Restated Class B Shares Distribution Plan Sub-Agreement.
16(a) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 (relating to Class
A shares).(e)
(b) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 (relating to Class
B shares).(d)
</TABLE>
- --------
(a) Filed on August 6, 1985 as an Exhibit to the Registrant's Registration
Statement under the Securities Act of 1933.
(b) Filed on September 25, 1985 as an Exhibit to Pre-Effective Amendment No. 1
to the Registrant's Registration Statement under the Securities Act of
1933.
(c) Filed on March 18, 1986 as an Exhibit to Post-Effective Amendment No. 1 to
the Registrant's Registration Statement under the Securities Act of 1933.
(d) Filed on October 11, 1988 as an Exhibit to Post-Effective Amendment No. 4
to the Registrant's Registration Statement under the Securities Act of
1933.
(e) Filed on January 29, 1990 as an Exhibit to Post-Effective Amendment No. 6
to the Registrant's Registration Statement under the Securities Act of
1933.
(f) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's Declaration of Trust, previously filed as
Exhibit 1(a) to the Registration Statement referred to in paragraph (a)
above; to the Certificates of Establishment and Designation establishing
the Fund as a series of the Registrant and establishing Class A and Class B
shares of beneficial interest of the Fund, which were filed as Exhibits
1(b) and 1(d), respectively, to the Registration Statement; and to Articles
I, V and VI of the Registrant's By-Laws, previously filed as Exhibit 2 to
the Registration Statement referred to in paragraph (a) above.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS AT
TITLE OF CLASS DECEMBER 31, 1993
-------------- -----------------
<S> <C>
Class A shares of beneficial interest, par value $0.10
per share............................................ 45
Class B shares of beneficial interest, par value $0.10
per share............................................ 1,631
</TABLE>
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees and
agents (including persons who serve at its request as directors, officers
or trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as
fines and penalties and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened, while in
C-2
<PAGE>
office or thereafter, by reason of his being or having been such a trustee,
officer, employee or agent, except with respect to any matter as to which
he shall have been adjudicated to have acted in bad faith, willful
misfeasance, gross negligence or reckless disregard of his duties;
provided, however, that as to any matter disposed of by a compromise
payment by such person, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other expenses shall be
provided unless the Trust shall have received a written opinion from
independent legal counsel approved by the Trustees to the effect that if
either the matter of willful misfeasance, gross negligence or reckless
disregard of duty, or the matter of good faith and reasonable belief as to
the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person
under these provisions shall not exclude any other right to which he may be
lawfully entitled; provided that no person may satisfy any right in
indemnity or reimbursement granted herein or in Section 5.1 or to which he
may be otherwise entitled except out of the property of the Trust, and no
Shareholder shall be personally liable to any Person with respect to any
claim for indemnity or reimbursement or otherwise. The Trustee may make
advance payments in connection with indemnification under this Section 5.3,
provided that the indemnified person shall have given a written undertaking
to reimburse the Trust in the event it is subsequently determined that he
is not entitled to such indemnification."
Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended, may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount to which it is ultimately determined that he
is entitled to receive from the Registrant by reason of indemnification; and
(iii)(a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested, non-
party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that the recipient
of the advance ultimately will be found entitled to indemnification.
In Section 9 of the Distribution Agreements relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933, as amended (the "1933 Act"), against certain types of
civil liabilities arising in connection with the Registration Statement or
Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jursidiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
C-3
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Manager") acts as the investment adviser
for the following registered investment companies: Apex Municipal Fund, Inc.,
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Financial
Institutions Series Trust, Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill
Lynch California Municipal Series Trust, Merrill Lynch Corporate Bond Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Institutional Tax-Exempt Fund, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World
Income Fund, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund,
Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc.,
MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield
Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield New York Insured Fund III,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income
Portfolio II, Inc., Taurus MuniCalifornia Holdings, Inc. and Taurus MuniNewYork
Holdings, Inc. Merrill Lynch Investment Management, Inc., doing business as
Merrill Lynch Asset Management ("MLAM"), an affiliate of the Investment
Adviser, acts as the investment adviser for the following companies:
Convertible Holdings, Inc., Merrill Lynch Adjustable Rate Securities Fund,
Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Balanced Fund for
Investment and Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund,
Inc., Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch International Holdings, Inc., Merrill Lynch Latin America Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Natural Resources
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Prime Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc., and Merrill Lynch Variable
Series Funds, Inc. The address of each of these investment companies is Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series, Merrill Lynch Institutional Intermediate
Fund and Merrill Lynch Institutional Tax-Exempt Fund is One Financial Center,
15th Floor, Boston, Massachusetts 02111-2646. The address of the Manager and
MLAM is also Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch
& Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey
Street, New York, New York 10281.
C-4
<PAGE>
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
December 31, 1991 for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the preceding paragraph and also hold the
same positions with substantially all of the investment companies advised by
MLAM as they do with those advised by the Manager. Messrs. Durnin, Giordano,
Harvey, Hewitt and Monagle are directors or officers of one or more of such
companies.
Officers and Partners of FAM are set forth as follows:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION WITH THE PROFESSION, VOCATION OR
NAME MANAGER EMPLOYMENT
---- ----------------- ---------------------------
<C> <C> <S>
ML & Co................... Limited Partner Financial Services Holding
Company
Fund Asset Management, Limited Partner Investment Advisory Services
Inc.
Princeton Services, Inc.
("Princeton Services")... General Partner General Partner of MLAM
Arthur Zeikel............. President President of MLAM; President
and Director of Princeton
Services; Director of the
Merrill Lynch Funds
Distributor Inc. ("MLFD");
Executive Vice President of
ML & Co.; Executive Vice
President of Merrill Lynch
Terry K. Glenn............ Executive Vice Executive Vice President of
President MLAM; Executive Vice
President and Director of
Princeton Services;
President and Director of
MLFD; President of
Princeton Administrators
Bernard J. Durnin......... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Vincent R. Giordano....... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Elizabeth Griffin......... Senior Vice President Senior Vice President of
MLAM
Norman R. Harvey.......... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
N. John Hewitt............ Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Philip L. Kirstein........ Senior Vice Senior Vice President,
President, General General Counsel and
Counsel and Secretary of MLAM; Senior
Secretary Vice President, General
Counsel, Director and
Secretary of Princeton
Services; Director of MLFD
Ronald M. Kloss........... Senior Vice President Senior Vice President and
and Controller Controller of MLAM; Senior
Vice President and
Controller of Princeton
Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION WITH THE PROFESSION, VOCATION OR
NAME MANAGER EMPLOYMENT
---- ----------------- ---------------------------
<C> <C> <S>
Joseph T. Monagle, Jr..... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Gerald M. Richard......... Senior Vice President Senior Vice President and
and Treasurer Treasurer of MLAM; Senior
Vice President and
Treasurer of Princeton
Services; Vice President
and Treasurer of MLFD
Richard L. Rufener........ Senior Vice President Senior Vice President of
MLAM; Vice President of
MLFD; Senior Vice President
of Princeton Services
Ronald L. Welburn......... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Anthony Wiseman........... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first paragraph of Item 28
except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund
Accumulation Program, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund,
Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund Inc., MuniVest New York Insured Fund,
Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund, Inc., MuniYield
Arizona Fund, II, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II,
Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Taurus
MuniCalifornia Holdings, Inc. and Taurus MuniNewYork Holdings, Inc.
C-6
<PAGE>
(b) Set forth below is information concerning each director and officer of
the Distributor. The principal business address of each such person is Box
9011, Princeton, New Jersey 08543-9011, except that the address of Messrs.
Crook, Aldrich, Breen, Graczyk, Fatseas and Wasel is One Financial Center, 15th
Floor, Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH MLFD WITH REGISTRANT
- ---- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn............ President and Director Executive Vice President
Arthur Zeikel............. Director President and Trustee
Philip L. Kirstein........ Director None
William E. Aldrich........ Senior Vice President None
Robert W. Crook........... Senior Vice President None
Michael J. Brady.......... Vice President None
William M. Breen.......... Vice President None
Sharon Creveling.......... Vice President and Assistant None
Treasurer
Mark A. DeSario .......... Vice President None
James T. Fatseas.......... Vice President None
Stanley Graczyk........... Vice President None
Debra W. Landsman-Yaros... Vice President None
Michelle T. Lau........... Vice President None
Gerald M. Richard......... Vice President and Treasurer Treasurer
Richard L. Rufener........ Vice President None
Salvatore Venezia......... Vice President None
William Wasel............. Vice President None
Robert Harris............. Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder will be maintained at the offices of the Registrant and Financial
Data Services, Inc.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Trust--
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Trust--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
management related service contract.
ITEM 32. UNDERTAKINGS.
Not applicable.
C-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO RULE
485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND STATE OF NEW JERSEY, ON THE 27TH
DAY OF JANUARY, 1994.
Merrill Lynch Multi-State Municipal
Series Trust
(Registrant)
/s/ Arthur Zeikel
By __________________________________
(Arthur Zeikel, President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Arthur Zeikel
- ------------------------------------
(Arthur Zeikel) President and Trustee
(Principal Executive
Officer) January 27, 1994
/s/ Gerald M. Richard
- ------------------------------------
(Gerald M. Richard) Treasurer (Principal
Financial and Accounting
Officer) January 27, 1994
Kenneth S. Axelson*
- ------------------------------------
(Kenneth S. Axelson) Trustee
Herbert I. London*
- ------------------------------------
(Herbert I. London) Trustee
Robert R. Martin*
- ------------------------------------
(Robert R. Martin) Trustee
Joseph L. May*
- ------------------------------------
(Joseph L. May) Trustee
Andre F. Perold*
- ------------------------------------
(Andre F. Perold) Trustee
*By /s/ Arthur Zeikel
- ------------------------------------
(Arthur Zeikel, Attorney-in-Fact) January 27, 1994
</TABLE>
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
------- ------
<C> <S> <C>
6(c) --Letter Agreement between the Fund and Merrill Lynch Funds
Distributor, Inc., dated September 15, 1993, in connection
with the Merrill Lynch Mutual Fund Adviser program.
11 --Consent of Deloitte & Touche, independent auditors for the
Registrant.
15(b) --Amended and Restated Class B Distribution Plan of the
Registrant and Amended and Restated Class B Shares
Distribution Plan Sub-Agreement.
</TABLE>
<PAGE>
GRAPHICS APPENDIX LIST
<TABLE>
<CAPTION>
PAGE WHERE
GRAPHIC DESCRIPTION OF GRAPHIC OR CROSS-REFERENCE
APPEARS
- ------------ -------------------------------------------
<C> <S>
PROSPECTUS
BACK COVER SCENE OF OFFICE BUILDINGS IN LOWER MANHATTAN
STATEMENT OF
ADDITIONAL SCENE OF OFFICE BUILDINGS IN LOWER MANHATTAN
INFORMATION
</TABLE>
<PAGE>
EXHIBIT 99.6(c)
September 15, 1993
Merrill Lynch Funds Distributor, Inc.
Post Office Box 9011
Princeton, New Jersey 08543-9011
Each of the undersigned open-end investment companies (the "Funds") has
entered into a Distribution Agreement with Merrill Lynch Funds Distributor, Inc.
(the "Distributor"). Under the terms of such agreements, the Distributor is
authorized to offer shares of each Fund and to purchase, as principal, such
number of shares from each of the Funds as are needed to fill unconditional
orders for shares of such Fund placed with the Distributor by investors or by
securities dealers.
This letter confirms the agreement by each Fund with the Distributor that,
in connection with the Merrill Lynch Mutual Fund Adviser program, the
Distributor and its affiliate, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, are also authorized
<PAGE>
to offer and sell shares of such Fund, as agent for the Fund, to participants in
such program. This letter further confirms that the terms of the Distribution
Agreement between each Fund and the Distributor shall apply to such sales,
including terms as to the offering price of shares, the proceeds to be paid to
each Fund, the duties of the Distributor, the payment of expenses and
indemnification obligations of each Fund and the Distributor.
If the foregoing is consistent with your understanding of our agreement,
please sign and return one copy of the enclosed agreement.
Very truly yours,
The Investment Companies listed
on Schedule A hereto
By: /s/ Terry K. Glenn
---------------------------
Authorized Signatory
Accepted as of the date
set forth above
Merrill Lynch Funds Distributor, Inc.
By: /s/ Gerald M. Richard
--------------------------------
Authorized Signatory
2
<PAGE>
The Declaration of Trust establishing each investment company listed on
Schedule A hereto which has been organized as a Massachusetts trust (each, a
"Fund"), a copy of which, together with all amendments thereto, is on file in
the office of the Secretary of the Commonwealth of Massachusetts, provides that
the name of the Fund 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 Fund shall be held to any personal liability,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim or otherwise in connection with the affairs of the Fund, but
the Fund estate only shall be liable.
3
<PAGE>
SCHEDULE A
----------
EQUITY FUNDS:
Merrill Lynch Balanced Fund for Investment and Retirement
Merrill Lynch Basic Value Fund, Inc.
Merrill Lynch Capital Fund, Inc.
Merrill Lynch Developing Capital Markets Fund, Inc.
Merrill Lynch Dragon Fund, Inc.
Merrill Lynch EuroFund
Merrill Lynch Fundamental Growth Fund, Inc.
Merrill Lynch Fund for Tomorrow, Inc.
Merrill Lynch Global Allocation Fund, Inc.
Merrill Lynch Global Utility Fund, Inc.
Merrill Lynch Growth Fund for Investment and Retirement
Merrill Lynch Healthcare Fund, Inc.
Merrill Lynch International Equity Fund
Merrill Lynch International Holdings, Inc.
Merrill Lynch Latin America Fund, Inc.
Merrill Lynch Natural Resources Trust
Merrill Lynch Pacific Fund, Inc.
Merrill Lynch Phoenix Fund, Inc.
Merrill Lynch Special Value Fund, Inc.
Merrill Lynch Strategic Dividend Fund
Merrill Lynch Technology Fund, Inc.
Merrill Lynch Utility Income Fund, Inc.
FIXED INCOME FUNDS:
Merrill Lynch Adjustable Rate Securities Fund, Inc.
Merrill Lynch Americas Income Fund, Inc.
Merrill Lynch Corporate Bond Fund, Inc.
Merrill Lynch Federal Securities Trust
Merrill Lynch Global Bond Fund for Investment and Retirement
Merrill Lynch Global Convertible Fund, Inc.
Merrill Lynch Short-Term Global Income Fund, Inc.
Merrill Lynch World Income Fund, Inc.
TAX-EXEMPT FIXED INCOME FUNDS:
Merrill Lynch Arizona Municipal Bond Fund
Merrill Lynch California Municipal Bond Fund
Merrill Lynch California Insured Municipal Bond Fund
Merrill Lynch Florida Municipal Bond Fund
Merrill Lynch Massachusetts Municipal Bond Fund
Merrill Lynch Michigan Municipal Bond Fund
Merrill Lynch Minnesota Municipal Bond Fund
Merrill Lynch Municipal Bond Fund, Inc.
A-1
<PAGE>
Merrill Lynch Municipal Income Fund
Merrill Lynch New Jersey Municipal Bond Fund
Merrill Lynch New York Municipal Bond Fund
Merrill Lynch North Carolina Municipal Bond Fund
Merrill Lynch Ohio Municipal Bond Fund
Merrill Lynch Pennsylvania Municipal Bond Fund
Merrill Lynch Texas Municipal Bond Fund
INSTITUTIONAL MONEY MARKET FUNDS:
Merrill Lynch Institutional Fund
Merrill Lynch Government Fund
Merrill Lynch Treasury Fund
Merrill Lynch Institutional Tax-Exempt Fund
A-2
<PAGE>
Exhibit 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch New York Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We consent to the use in Post-Effective Amendment No. 10 to Registration
Statement No. 2-99473 of our report dated October 29, 1993 appearing in the
statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ Deloitte & Touche
Princeton, New Jersey
January 25, 1994
<PAGE>
EXHIBIT 99.15(B)
AMENDED AND RESTATED
CLASS B DISTRIBUTION PLAN
OF
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 20th day of September, 1985, and amended
and restated as of September 18, 1992, by and between Merrill Lynch
Multi-State Municipal Series Trust, a Massachusetts business trust (the
"Trust"), and Merrill Lynch Funds Distributor, Inc., a Delaware
corporation ("MLFD").
W I T N E S S E T H :
--------------------
WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended
(the "Investment Company Act"); and
WHEREAS, the Trust is authorized to establish separate series ("Series")
each of which will offer separate classes of shares of beneficial
interest par value $0.10 per share (the "Shares") to selected groups of
purchasers; and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through
other securities dealers; and
WHEREAS, the Trust has entered into a Class B Shares Distribution
Agreement with MLFD, pursuant to which MLFD acts as the exclusive
distributor and representative of the Trust in the offer and sale of
Class B shares of beneficial interest, par value $0.10 per share (the
"Class B shares"), of the Merrill Lynch New York Municipal Bond Fund (the
"Fund") series of the Trust to the public; and
WHEREAS, the Trust has entered into a Class B Distribution
Plan (the "Prior Plan") on behalf of the Fund pursuant to Rule
12b-1 under the Investment Company Act; and
WHEREAS, the Trust desires to adopt this Amended and
Restated Class B Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act, pursuant to which the
<PAGE>
Trust will pay an account maintenance fee and a distribution fee
to MLFD with respect to the Fund's Class B shares; and
WHEREAS, the Trustees of the Trust have determined that
there is a reasonable likelihood that adoption of the Plan will
benefit the Fund and its Class B shareholders;
NOW, THEREFORE, the Trust hereby adopts, and MLFD hereby
agrees to the terms of, the Plan in accordance with Rule 12b-1
under the Investment Company Act on the following terms and
conditions:
1. The Trust shall pay MLFD an account maintenance fee
under the Plan at the end of each month at the annual rate of
0.25% of average daily net assets of the Fund relating to Class B
shares to compensate MLFD and securities firms with which MLFD
enters into related agreements pursuant to Paragraph 3 hereof
("Sub-Agreements") for account maintenance activities with
respect to Class B shareholders of the Fund.
2. The Trust shall pay MLFD a distribution fee under the
Plan at the end of each month at the annual rate of 0.25% of the
Fund's average daily net assets relating to Class B shares of the
Fund to compensate MLFD and securities firms with which MLFD
enters into related Sub-Agreements for providing sales and
promotional activities and services. Such activities and
services will relate to the sale, promotion and marketing of the
Class B shares of the Fund. Such expenditures may consist of
sales commissions to financial consultants for selling Class B
shares of the Fund, compensation, sales incentives and payments
to sales and marketing personnel, and the payment of expenses
incurred in its sales and promotional activities, including
advertising expenditures related to the Fund and the costs of
preparing and distributing promotional materials. The
distribution fee may also be used to pay the financing costs of
carrying the unreimbursed expenditures described in this
Paragraph 2. Payment of the distribution fee described in this
Paragraph 2 shall be subject to any limitations set forth in any
applicable regulation of the National Association of Securities
Dealers, Inc.
3. The Trust hereby authorizes MLFD to enter into Sub-
Agreements with certain securities firms ("Securities Firms"),
including Merrill Lynch, Pierce, Fenner & Smith Incorporated, to
provide compensation to such Securities Firms for activities and
services of the type referred to in Paragraphs 1 and 2 hereof.
MLFD may reallocate all or a portion of its account maintenance
fee or distribution fee to such Securities Firms as compensation
for the above-mentioned activities and services. Such
compensation will be in an amount as set forth in the individual
2
<PAGE>
Sub-Agreements. Such Sub-Agreement shall provide that the
Securities Firms shall provide MLFD with such information as is
reasonably necessary to permit MLFD to comply with the reporting
requirements set forth in Paragraph 4 hereof.
4. MLFD shall provide the Trust for review by the Board of
Trustees, and the Trustees shall review, at least quarterly, a
written report complying with the requirements of Rule 12b-1
regarding the disbursement of the account maintenance fee and the
distribution fee during such period. This report shall include
an itemization of the distribution expenditures incurred on
behalf of the Fund and its Class B shareholders, the purpose of
such distribution expenditures and a description of the benefits
derived by the Fund and its Class B shareholders therefrom.
s. The Prior Plan has been approved by a vote of at least
a majority, as defined in the Investment Company Act, of the
outstanding Class B voting securities of the Fund. The Plan has
not been submitted to the Class B shareholders because the
amendments do not materially increase the rate of payments by the
Fund provided for in the Prior Plan.
6. The Plan shall not take effect until it has been
approved, together with any related agreements, by (a) the
Trustees of the Trust and (b) those Trustees of the Trust who are
not "interested persons" of the Trust, as defined in the
Investment Company Act, and have no direct or indirect financial
interest in the operation of this Plan or any agreements related
to it (the "Rule 12b-1 Trustees"), cast in person at a meeting or
meetings called for the purpose of voting on the Plan and such
related agreements.
7. The Plan shall continue in effect for so long as such
continuance is specifically approved at least annually in the
manner provided for approval of the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a
majority of the Rule 12b-1 Trustees, or by vote of a majority of
the outstanding Class B voting securities of the Fund.
9. The Plan may not be amended to increase materially the
rate of payments by the Fund provided for herein unless such
amendment is approved by at least a majority, as defined in the
Investment Company Act, of the outstanding Class B voting
securities of the Fund, and by the Trustees of the Fund in the
manner provided for in Paragraph 6 hereof, and no material
amendment to the Plan shall be made unless approved in the manner
provided for approval and annual renewal in Paragraph 6 hereof.
~
3
<PAGE>
10. While the Plan is in effect, the selection and
nomination of Trustees who are not interested persons, as defined
in the Investment Company Act, of the Trust shall be committed to
the discretion of the Trustees who are not interested persons.
11. The Trust shall preserve copies of the Plan and any
related agreements and all reports made pursuant to Paragraph 4
hereof, for a period of not less than six years from the date of
this Plan, or the agreements or such report, as the case may be,
the first two years in an easily accessible place.
12. The Declaration of Trust establishing the Trust, dated
August 2, 1985, a copy of which, together with all amendments
thereto (the "Declaration"), is on file in the office of the
Secretary of the Commonwealth of Massachusetts, provides that the
name "Merrill Lynch Multi-State Municipal 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 the
Trust but the "Trust Property" only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this
Plan as of the date first above written.
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
By /s/ Jerry Weiss
____________________________________________
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ Mark A. DeSario
----------------------------------------------
4
<PAGE>
AMENDED AND RESTATED
CLASS B SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 20th day of September, 1985, and
amended and restated as of September 18, 1992, by and between
Merrill Lynch Funds Distributor, Inc. ("MLFD"), and Merrill
Lynch, Pierce, Fenner & Smith Incorporated (the "Securities
Firm").
W I T N E S S E T H :
--------------------
WHEREAS, MLFD has entered into an agreement with Merrill
Lynch Multi-State Municipal Series Trust, a Massachusetts
business trust (the "Trust"), pursuant to which it acts as the
exclusive distributor for the sale of Class B shares of
beneficial interest, par value $0.10 per share (the "Class B
shares"), of the Merrill Lynch New York Municipal Bond Fund (the
"Fund") series of the Trust; and
WHEREAS, MLFD and the Trust have entered into an Amended and
Restated Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940 (the "Act") pursuant to
which MLFD receives an account maintenance fee from the Fund at
the annual rate of 0.25% of average daily net assets of the Fund
relating to Class B shares for account maintenance activities
related to Class B shares of the Fund and a distribution fee from
the Fund at the annual rate of 0.25% of average daily net assets
of the Fund relating to Class B shares for providing sales and
promotional activities and services related to the distribution
of Class B shares of the Fund; and
WHEREAS, MLFD desires the Securities Firm to perform certain
account maintenance activities and sales and promotional
activities and services for the Fund's Class B shareholders and
the Securities Firm is willing to perform such activities and
services;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance
activities with respect to the Class B shares of the Fund of the
types referred to in Paragraph 1 of the Plan.
2. The Securities Firm shall provide sales and promotional
activities and services with respect to the sale of the Class B
shares of the Fund, and incur distribution expenditures, of the
types referred to in Paragraph 2 of the Plan.
<PAGE>
3. As compensation for its activities and services
performed under this Sub-Agreement, MLFD shall pay the Securities
Firm an account maintenance fee and a distribution fee at the end
of each calendar month in an amount agreed upon by the parties
hereto.
4. The Securities Firm shall provide MLFD, at least
quarterly, such information as reasonably requested by MLFD to
enable MLFD to comply with the reporting requirements of Rule
12b-1 regarding the disbursement of the account maintenance fee
and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Sub-Agreement shall not take effect until it has
been approved by votes of a majority of both (a) the Trustees of
the Trust and (b) those Trustees of the Trust who are not
"interested persons" of the Trust, as defined in the Act, and
have no direct or indirect financial interest in the operation of
the Plan, this Agreement or any agreements related to the Plan or
this Agreement (the "Rule 12b-1 Trustees"), cast in person at a
meeting or meetings called for the purpose of voting on this
Agreement.
6. This Agreement shall continue in effect for as long as
such continuance is specifically approved at least annually in
the manner provided for approval of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the
event of its assignment or in the event of the termination of the
Plan or any amendment to the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ Mark A. De Sario
---------------------------------------
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By /s/ David Conine
---------------------------------------
2
