<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 1995
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. 12 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 101 [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
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICE)
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: P.O. 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 FUND ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 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)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES 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 22, 1994.
----------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT OF PROPOSED MAXIMUM PROPOSED
TITLE OF SECURITIES SHARES BEING OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial In-
terest
(par value $.10 per
share) 10,206,616 $10.95 $290,000 $100
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
*(1) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during
Registrant's previous fiscal year was 10,180,132 shares.
(3) None of the shares described in (2) above have been used for reduction
pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company
Act of 1940 in previous filings during Registrant's current fiscal year.
(4) All of the shares redeemed during Registrant's previous fiscal year are
being used for the reduction of the registration fee in this amendment to
the Registration Statement.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND OF
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
Item 4. General Description of
Registrant................... Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund........ Fee Table; Management of the Trust;
Inside Back Cover Page
Item 5A. Management's Discussion of
Fund Performance............. Not Applicable
Item 6. Capital Stock and Other
Securities................... Cover Page; Additional Information
Item 7. Purchase of Securities Being
Offered...................... Cover Page; Fee Table; Merrill Lynch
Select PricingSM System; Purchase
of Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase...... Fee Table; Merrill Lynch Select
Pricing SM System; 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;
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
Item 17. Brokerage Allocation and Other Shares; General Information
Practices.................... Portfolio Transactions
Item 18. Capital Stock and Other
Securities................... General Information--Description of
Item 19. Purchase, Redemption and Series and Shares
Pricing of Securities Being
Offered...................... Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status.................... Distributions and 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 31, 1995
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. 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 the interest on which, in
the opinion of bond counsel to the issuer, is 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. The Fund may invest in certain tax-exempt securities
classified as "private activity bonds" that may subject certain investors in
the Fund to an alternative minimum tax. At times, the Fund may seek to hedge
its portfolio through the use of futures transactions and options. There can
be no assurance that the investment objective of the Fund will be realized.
----------------
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. 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 SECURI-
TIES 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 31, 1995 (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 shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ------------------------------ --------------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 4.00%(c) None None 4.00%(c)
Sales Charge Imposed
on Dividend Reinvest-
ments................. None None None None
Deferred Sales Charge
(as a percentage of
original purchase None(d) 4.0% during the first year, 1% for one year None(d)
price or redemption decreasing 1.0% annually
proceeds, whichever thereafter to 0.0% after the
is lower)............. fourth year
Exchange Fee........... None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS)(E):
Management Fees(f)..... 0.55% 0.55% 0.55% 0.55%
12b-1 Fees(g):
Account Maintenance
Fees................ None 0.25% 0.25% 0.10%
Distribution Fees.... None 0.25% 0.35% None
(Class B shares convert to
Class D shares automatically
after approximately ten years,
cease being subject to
distribution fees and are
subject to lower account
maintenance fees)
Other Expenses:
Custodial Fees....... .01% .01% .01% .01%
Shareholder Servicing
Costs(h)............ .03% .04% .04% .03%
Miscellaneous........ .04% .04% .04% .04%
----- ----- ----- -----
Total Other Ex-
penses............ .08% .09% .09% .08%
----- ----- ----- -----
Total Fund Operating
Expenses.............. .63% 1.14% 1.24% .73%
===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain investment programs. See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares"--
page 22.
(b) Class B shares convert to Class D shares automatically approximately 10
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 24.
(c) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 22.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge may instead be subject to a CDSC if
redeemed within the first year of purchase.
(e) Information for Class A and Class B shares is stated for the fiscal year
ended September 30, 1994. Information under "Other Expenses" for Class C
and Class D shares is estimated for the fiscal year ending September 30,
1995.
(f) See "Management of the Trust--Management and Advisory Arrangements"--page
19.
(g) See "Purchase of Shares--Distribution Plans"--page 27.
(h) See "Management of the Trust--Transfer Agency Services"--page 20.
2
<PAGE>
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 the maximum
$40 initial sales charge (Class A and Class D
shares only) and assuming (1) the Total Fund
Operating Expenses for each class set forth
above; (2) a 5% annual return throughout the
periods and (3) redemption at the end of the
period:
Class A...................................... $46 $59 $74 $115
Class B...................................... $52 $56 $63 $139
Class C...................................... $23 $39 $68 $150
Class D...................................... $47 $63 $80 $128
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 $59 $74 $115
Class B...................................... $12 $36 $63 $139
Class C...................................... $13 $39 $68 $150
Class D...................................... $47 $63 $80 $128
</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 (the "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 and Class C
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. ("NASD"). 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".
MERRILL LYNCH SELECT PRICING SM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing SM System is used
by more than 50 mutual funds advised by Merrill Lynch Asset Management, L.P.
("MLAM") or its affiliate, Fund Asset Management, L.P. ("FAM" or the
"Manager"). Funds advised by MLAM or FAM are referred to herein as "MLAM-
advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses
3
<PAGE>
of the ongoing distribution fees and the additional incremental transfer agency
costs resulting from the deferred sales charge arrangements. The deferred sales
charges and account maintenance fees that are imposed on Class B and Class C
shares, as well as the account maintenance fees that are imposed on the Class D
shares, are imposed directly against those classes and not against all assets
of the Fund and, accordingly, such charges will not affect the net asset value
of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The distribution-
related revenues paid with respect to a class will not be used to finance the
distribution expenditures of another class. Sales personnel may receive
different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements for
each class of shares under the Merrill Lynch Select Pricing SM System, followed
by a more detailed description of each class and a discussion of the factors
that investors should consider in determining the method of purchasing shares
under the Merrill Lynch Select Pricing SM System that the investor believes is
most beneficial under his particular circumstances. More detailed information
as to each class of shares is set forth under "Purchase of Shares".
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(/2/)(/3/)
- --------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, at 0.25% 0.25% B shares convert to D
a rate of shares
4.0% during the first year, automatically after
decreasing approximately
1.0% annually to 0.0% ten years(/4/)
- --------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.35% No
- --------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales 0.10% No No
charge(/3/)
</TABLE>
- -------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a CDSC if redeemed within one year.
See "Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares is modified. Also,
Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made have an eight year conversion period. If Class B
shares of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the shares
exchanged will be tacked on to the holding period for the shares acquired.
4
<PAGE>
Class A:
Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares in a shareholder account
are entitled to purchase additional Class A shares in that account. In
addition, Class A shares will be offered to Merrill Lynch & Co., Inc.
("ML & Co.") and its subsidiaries (the term "subsidiaries", when used
herein with respect to ML & Co., includes MLAM, the Manager and certain
other entities directly or indirectly wholly-owned and controlled by ML
& Co.) and their directors and employees and to members of the Boards
of MLAM-advised mutual funds. The maximum initial sales charge is
4.00%, which is reduced for purchases of $25,000 and over. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but if
the initial sales charge is waived such purchases may be subject to a
1% CDSC if the shares are redeemed within one year after purchase.
Sales charges also are reduced under a right of accumulation which
takes into account the investor's holdings of all classes of all MLAM-
advised mutual funds. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.25%, of the Fund's average net
assets attributable to Class B shares and a CDSC if they are redeemed
within four years of purchase. Approximately ten years after issuance,
Class B shares will convert automatically into Class D shares of the
Fund, which are subject to a lower account maintenance fee of 0.10%
and no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately eight years. If Class B
shares of the Fund are exchanged for Class B shares of another MLAM-
advised mutual fund, the conversion period applicable to the Class B
shares acquired in the exchange will apply, as will the Class D
account maintenance fee of the acquired fund upon the conversion, and
the holding period for the shares exchanged will be tacked on to the
holding period for the shares acquired. Automatic conversion of Class
B shares into Class D shares will occur at least once a month on the
basis of the relative net asset values of the shares of the two
classes on the conversion date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for Federal
income tax purposes. Shares purchased through reinvestment of
dividends on Class B shares also will convert automatically to Class D
shares. The conversion period for dividend reinvestment shares is
modified as described under "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.35%, of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a CDSC if they are redeemed within one year of purchase. Although
Class C shares are subject to a 1.0% CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Trust's Board of Trustees and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of the
Fund's average net assets attributable to Class D shares.
5
<PAGE>
Class D shares are not subject to an ongoing distribution fee or any
CDSC when they are redeemed. Purchases of $1,000,000 or more may not be
subject to an initial sales charge, but if the initial sales charge is
waived such purchases will be subject to a CDSC of 1.0% if the shares
are redeemed within one year after purchase. The schedule of initial
sales charges and reductions for Class D shares is the same as the
schedule for Class A shares. Class D shares also will be issued upon
conversion of Class B shares as described above under "Class B". See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately ten years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby
6
<PAGE>
take advantage of the reduction in ongoing fees resulting from the conversion
into Class D shares. Other investors, however, may elect to purchase Class C
shares if they determine that it is advantageous to have all their assets
invested initially and they are uncertain as to the length of time they intend
to hold their assets in MLAM-advised mutual funds. Although Class C
shareholders are subject to a shorter CDSC period at a lower rate, they are
subject to higher distribution fees and forgo the Class B conversion feature,
making their investment subject to account maintenance and distribution fees
for an indefinite period of time. In addition, while both Class B and Class C
distribution fees are subject to the limitations on asset-based sales charges
imposed by the NASD, the Class B distribution fees are further limited under a
voluntary waiver of asset-based sales charges. See "Purchase of Shares--
Limitations on the Payment of Deferred Sales Charges".
7
<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 LLP, independent auditors. Audited financial statements for the year
ended September 30, 1994 and the independent auditors' report are included in
the Statement of Additional Information. The following per share data and
ratios have been derived from information provided in the Fund's audited
financial statements. Financial information is not presented for Class C or
Class D shares since no shares of those classes were publicly issued during the
fiscal year ended September 30, 1994. 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>
CLASS A
---------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
1994 1993 1992 1991 1990 1989+
------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period.......... $ 12.46 $ 11.77 $ 11.22 $ 10.56 $10.81 $10.85
------- ------- ------- ------- ------ ------
Investment income--net... .64 .70 .72 .74 .73 .68
Realized and unrealized
gain (loss) on invest-
ments--net.............. (1.25) .80 .55 .66 (.25) (.04)
------- ------- ------- ------- ------ ------
Total from investment op-
erations................ (.61) 1.50 1.27 1.40 .48 .64
------- ------- ------- ------- ------ ------
Less dividends and dis-
tributions:
Investment income--net... (.64) (.70) (.72) (.74) (.73) (.68)
Realized gain on invest-
ments--net.............. (.11) (.11) -- -- -- --
In excess of realized
gain--net............... (.22) -- -- -- -- --
------- ------- ------- ------- ------ ------
Total dividends and dis-
tributions.............. (.97) (.81) (.72) (.74) (.73) (.68)
------- ------- ------- ------- ------ ------
Net asset value, end of
period.................. $ 10.88 $ 12.46 $ 11.77 $ 11.22 $10.56 $10.81
======= ======= ======= ======= ====== ======
TOTAL INVESTMENT RETURN**
Based on net asset value
per share............... (5.17)% 13.25% 11.77% 13.60% 4.42% 6.28%#
======= ======= ======= ======= ====== ======
RATIOS TO AVERAGE NET AS-
SETS:
Expenses, excluding dis-
tribution fees.......... .63% .64% .65% .66% .67% .66%*
======= ======= ======= ======= ====== ======
Expenses................. .63% .64% .65% .66% .67% .66%*
======= ======= ======= ======= ====== ======
Investment income--net... 5.52% 5.80% 6.28% 6.72% 6.79% 6.82%*
======= ======= ======= ======= ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).......... $28,301 $31,976 $18,973 $13,727 $8,905 $3,796
======= ======= ======= ======= ====== ======
Portfolio turnover....... 107.96% 38.31% 35.90% 49.78% 53.82% 74.51%
======= ======= ======= ======= ====== ======
</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.
8
<PAGE>
<TABLE>
<CAPTION>
CLASS B
- ------------------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986++
- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 12.46 $ 11.77 $ 11.23 $ 10.57 $ 10.81 $ 10.66 $ 10.04 $ 11.05 $ 10.00
- -------- -------- -------- -------- -------- -------- -------- -------- --------
.58 .64 .67 .67 .68 .69 .70 .70 .67
(1.25) .80 .54 .66 (.24) .15 .62 (.94) 1.05
- -------- -------- -------- -------- -------- -------- -------- -------- --------
(.67) 1.44 1.21 1.33 .44 .84 1.32 (.24) 1.72
- -------- -------- -------- -------- -------- -------- -------- -------- --------
(.58) (.64) (.67) (.67) (.68) (.69) (.70) (.70) (.67)
(.11) (.11) -- -- -- -- -- (.07) --
(.22) -- -- -- -- -- -- -- --
- -------- -------- -------- -------- -------- -------- -------- -------- --------
(.91) (.75) (.67) (.67) (.68) (.69) (.70) (.77) (.67)
- -------- -------- -------- -------- -------- -------- -------- -------- --------
$ 10.88 $ 12.46 $ 11.77 $ 11.23 $ 10.57 $ 10.81 $ 10.66 $ 10.04 $ 11.05
======== ======== ======== ======== ======== ======== ======== ======== ========
(5.66)% 12.68% 11.12% 13.03% 4.00% 8.16% 13.35% (2.50)% 17.65%#
======== ======== ======== ======== ======== ======== ======== ======== ========
.64% .64% .66% .67% .68% .66% .66% .64% .60%*
======== ======== ======== ======== ======== ======== ======== ======== ========
1.14% 1.14% 1.16% 1.17% 1.18% 1.16% 1.17% 1.14% 1.10%*
======== ======== ======== ======== ======== ======== ======== ======== ========
5.02% 5.32% 5.79% 6.23% 6.28% 6.38% 6.62% 6.38% 6.71%*
======== ======== ======== ======== ======== ======== ======== ======== ========
$645,341 $733,981 $616,590 $568,958 $566,095 $635,227 $641,623 $665,547 $487,422
======== ======== ======== ======== ======== ======== ======== ======== ========
107.96% 38.31% 35.90% 49.78% 53.82% 74.51% 99.61% 72.35% 172.39%
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
9
<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. The risks and special
considerations involved in investment in Municipal Bonds, vary with the types
of instruments being acquired. Investments in Non-Municipal Tax-Exempt
Securities, as defined herein, may present similar risks, depending on the
particular product. Certain instruments in which the Fund may invest may be
characterized as derivative instruments. See "Description of Municipal Bonds"
and "Financial Futures Transactions and Options". 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 value of bonds and other fixed-income
obligations may fall when interest rates rise and rise when interest rates
fall. In general, bonds and other fixed-income obligations with longer
maturities will be subject to greater volatility resulting from interest rate
fluctuations than will similar obligations with shorter maturities.
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 Ratings Group ("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.
Certain Municipal Bonds may be entitled to the benefits of letters of credit
or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into
10
<PAGE>
account in assessing the quality of such bonds not only the creditworthiness of
the issuer of such bonds but also the creditworthiness of the financial
institution.
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.
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. The Fund may also invest in securities not issued by or on
behalf of a state or territory or by an agency or instrumentality thereof, if
the Fund nevertheless believes such securities to be exempt from Federal income
taxation ("Non-Municipal Tax-Exempt Securities"). Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interest in one or more long-term municipal securities. Non-Municipal Tax-
Exempt Securities also may include securities issued by other investment
companies that invest in municipal bonds, to the extent such investments are
permitted by the Investment Company Act of 1940, as amended (the "1940 Act").
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. Under normal conditions, the Fund
anticipates that the average weighted maturity of its portfolio generally will
be in excess of ten years. The Temporary Investments, VRDOs and Participating
VRDOs in which the Fund may invest will be in the following rating categories
at
11
<PAGE>
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 certain classes of shares, the account maintenance
and distribution costs.
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
12
<PAGE>
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 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. To the extent the Fund invests in these types
of Municipal Bonds, the Fund's return on such Municipal Bonds will be subject
to the risk with respect to the value of the particular index. Interest and
principal payable on the Municipal Bonds may also be based on relative changes
among particular indices. 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, which may include reduced or eliminated
interest payments and losses of invested principal. 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
13
<PAGE>
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
flexible portfolio management instruments for the Fund which allow the Fund to
seek potential investment rewards, hedge other portfolio positions or 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 15% of the Fund's net assets (however,
in accordance with the provisions of certain state laws, the Fund currently
will not invest in excess of 10% of its net assets in illiquid securities).
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 15% (10% to the extent required by
certain state laws) 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.
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
14
<PAGE>
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 15% (10% to the extent required by certain state laws) 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. In recent years, New York State, New York City and other New York
public bodies have encountered financial difficulties and New York City is
currently encountering financial difficulties which could have an adverse
effect with respect to the performance of the Fund. Currently, Moody's,
Standard & Poor's and Fitch rate New York City's general obligation bonds Baa1,
A- and A-, respectively, and Moody's, Standard & Poor's and Fitch rate New York
State's general obligation bonds A, A- and A+, respectively. On January 17,
1995, Standard & Poor's placed New York City's general obligation bonds on
CreditWatch with negative implications stating it would lower the rating on
such bonds by April 1995 if New York City financial plans continue to include
non-reoccurring budget devices or fail to show ongoing budget relief from New
York State. 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 the
current economic conditions in New York will have a significant adverse effect
on the Fund's ability to invest in high quality New York Municipal Bonds. See
Appendix I to 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 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
15
<PAGE>
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.
16
<PAGE>
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.
17
<PAGE>
REPURCHASE AGREEMENTS
As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer or an affiliate
thereof in U.S. Government securities. Under such agreements, the seller
agrees, upon entering into the contract, to repurchase the security from the
Fund at a mutually agreed upon time and price, thereby determining the yield
during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. The Fund may not invest
more than 10% of its net assets in repurchase agreements maturing in more than
seven days if such investments together with the Fund's other illiquid
investments, exceed 15% (10% to the extent required by certain state laws) of
the Fund's net assets. In the event of default by the seller under a repurchase
agreement, the Fund may suffer time delays and incur costs or possible losses
in connection with the disposition of the underlying securities.
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 33 1/3% of its total assets taken at market value
(including the amount borrowed), and an additional 5% of its total assets for
temporary purposes. As a non-fundamental restriction, the Fund is further
limited and 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.
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 five individuals, four 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 FAM and MLAM;
President and Director of Princeton Services, Inc.; Executive Vice
President of ML&Co., and of Merrill Lynch, since 1990; Director of the
Distributor.
Herbert I. London--John M. Olin Professor of Humanities, New York
University.
Robert R. Martin--Director, WTC Industries, Inc.
Joseph L. May--Attorney in private practice.
Andre F. Perold--Professor, Harvard Business School.
- --------
* Interested person, as defined in the 1940 Act, of the Trust.
18
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
FAM, which is an affiliate of MLAM and is owned and controlled by ML&Co., a
financial services holding company, 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 130 other registered investment companies. MLAM
also provides investment advisory services to individual and institutional
accounts. As of December 31, 1994, the Manager and MLAM had a total of
approximately $163.8 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, 1994, the fee paid by the Fund to the Manager
was $3,999,719 (based on average net assets of approximately $733.9 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 Manager for its
costs in connection with such services. For the fiscal year ended September 30,
1994, the Fund reimbursed the Manager $81,833 for accounting services. For the
fiscal year ended September 30, 1994, the annualized ratio of total expenses,
net of distribution fees, to average net assets was 0.63% for the Class A
shares and 0.64% for the Class B shares; no Class C or Class D shares had been
issued during that year.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act which incorporates the Code of Ethics of the Manager
(together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
19
<PAGE>
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of ML&Co., 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 $11.00 per
Class A or Class D shareholder account and $14.00 per Class B or Class C
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, 1994, the
total fee paid by the Fund to the Transfer Agent pursuant to the Transfer
Agency Agreement was $290,943.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both MLAM and Merrill Lynch, acts as the Distributor of the shares of the Fund.
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 in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
Pricing SM System, 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 15 minutes after the close of business
on the New York Stock Exchange (generally, 4:00 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 15 minutes after the close of business on the New York Stock
Exchange on the day the order is placed with the Distributor, provided the
order is received by the Distributor prior to 30 minutes after the close of
business on the New York Stock Exchange on that day. If the purchase orders are
not received prior to 30 minutes after the close
20
<PAGE>
of business on the New York Stock Exchange, 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 four classes of shares under the Merrill Lynch Select
Pricing SM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a contingent deferred sales charge and ongoing
distribution fees. A discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System is set forth under "Merrill Lynch Select Pricing SM System"
on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on Class D shares, will be imposed directly against those classes and
not against all assets of the Fund and, accordingly, such charges will not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each class
of shares will be calculated in the same manner at the same time and will
differ only to the extent that account maintenance and distribution fees and
any incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid. See "Distribution Plans" below. Each class has
different exchange privileges. See "Shareholder Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell
shares.
21
<PAGE>
The following table sets forth a summary of the distribution arrangements for
each class of shares under the Merrill Lynch Select Pricing SM System:
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.0% initial sales charge(/2/)(/3/) No No No
- ----------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, at a rate of 0.25% 0.25% B shares convert to D shares
4.0% during the first year, decreasing automatically after approximately
1.0% annually to 0.0% ten years(/4/)
- ----------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.35% No
- ----------------------------------------------------------------------------------------------------------------
D Maximum 4.0% initial sales charge(/3/) 0.10% No No
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 1.0% CDSC if redeemed within one
year.
(4) The conversion period for dividend reinvestment shares is modified. Also,
Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made have an eight year conversion period. If Class B
shares of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares acquired.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D 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 SALES CHARGE DISCOUNT TO
AS PERCENTAGE AS PERCENTAGE* SELECTED DEALERS AS
OF OFFERING OF THE NET PERCENTAGE OF THE
AMOUNT OF PURCHASE PRICE AMOUNT INVESTED 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**........ 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** Class A and Class D purchases of $1,000,000 or more made on or after October
21, 1994 (the date Class D shares were initially offered to the public) will
be subject to a CDSC of 1.0% if the shares are redeemed within one year
after purchase. Class A purchases made prior to October 21, 1994 may be
subject to a CDSC if the shares are redeemed within one year of purchase at
the following annual rates: 0.75% on purchases of $1,000,000 to $2,500,000;
0.40% on purchases of $2,500,001 to $3,500,000; 0.25% on purchases of
$3,500,001 to $5,000,000; and 0.20% on purchases of more than $5,000,000, in
lieu of paying an initial sales charge. The charge will be assessed on an
amount equal to the lesser of the proceeds of the redemption or the cost of
the shares being redeemed.
22
<PAGE>
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 and
Class D 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. During the fiscal year ended September 30, 1994, the Fund sold
857,494 Class A shares for aggregate net proceeds of $10,076,116. The gross
sales charges for the sale of Class A shares of the Fund for that year were
$73,174, of which $7,202 and $65,972 were received by the Distributor and
Merrill Lynch, respectively. For the fiscal year ended September 30, 1994, the
Fund received no CDSCs for Class A redemptions. The Fund did not begin to offer
Class D shares publicly until after the fiscal year ended September 30, 1994.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares in a shareholder
account are entitled to purchase additional Class A shares in that account.
Class A shares are available at net asset value to corporate warranty insurance
reserve fund programs provided that the program has $3 million or more
initially invested in MLAM-advised mutual funds. Also eligible to purchase
Class A shares at net asset value are participants in certain investment
programs including TMA SM Managed Trusts to which Merrill Lynch Trust Company
provides discretionary trustee services and certain purchases made in
connection with the Merrill Lynch Mutual Fund Adviser program. In addition,
Class A shares are offered at net asset value to ML&Co. and its subsidiaries
and their directors and employees and to members of the Boards of MLAM advised
investment companies, including the Fund. Certain persons who acquire shares of
MLAM-advised closed-end funds who wish to reinvest the net proceeds from a sale
of their closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met. For example, Class A shares of the
Fund and certain other MLAM-advised mutual funds are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. who wish to
reinvest the net proceeds from a sale of certain of their shares of common
stock of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value without sales charges to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
23
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately ten years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and Class B and Class C
shares are subject to distribution fees of 0.25% and 0.35%, respectively, of
net assets as discussed below under "Distribution Plans". The proceeds from the
account maintenance fees are used to compensate Merrill Lynch for providing
continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares from the dealer's own funds. The combination
of the CDSC and the ongoing distribution fee facilitates the ability of the
Fund to sell the Class B and Class C shares without a sales charge being
deducted at the time of purchase. Approximately ten years after issuance, Class
B shares will convert automatically into Class D shares of the Fund, which are
subject to a lower account maintenance fee and no distribution fee; Class B
shares of certain other MLAM-advised mutual funds into which exchanges may be
made convert into Class D shares automatically after approximately eight years.
If Class B shares of the Fund are exchanged for Class B shares of another MLAM-
advised mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the shares
exchanged will be tacked on to the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities. Class B shareholders of the Fund exercising the
exchange privilege described under "Shareholder Services--Exchange Privilege"
will continue to be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares acquired as a
result of the exchange.
24
<PAGE>
Contingent Deferred Sales Charges--Class B Shares. 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 CDSC
will be imposed on increases in net asset value above the initial purchase
price. In addition, no CDSC will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC AS A
PERCENTAGE OF
DOLLAR AMOUNT
SUBJECT TO
YEAR SINCE PURCHASE PAYMENT MADE CHARGE
-------------------------------- -------------
<S> <C>
0-1........................................................ 4.0%
1-2........................................................ 3.0%
2-3........................................................ 2.0%
3-4........................................................ 1.0%
4 and thereafter........................................... None
</TABLE>
For the fiscal year ended September 30, 1994, the Distributor received CDSCs
of $692,305 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch.
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 held for over four years 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 a CDSC 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 Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Internal Revenue Code of 1986, as amended) of a
shareholder. Additional information concerning the waiver of the Class B CDSC
is set forth in the Statement of Additional Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a
percentage of the dollar amount subject thereto. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the
25
<PAGE>
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applicable 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. The Fund did not begin to
offer Class C shares publicly until after the fiscal year ended September 30,
1994.
Conversion of Class B Shares to Class D Shares. After approximately ten years
(the "Conversion Period"), Class B shares will be converted automatically into
Class D shares of the Fund. Class D shares are subject to an ongoing account
maintenance fee of 0.10% of net assets but are not subject to the distribution
fee that is borne by Class B shares. Automatic conversion of Class B shares
into Class D shares will occur at least once each month (on the "Conversion
Date") on the basis of the relative net asset values of the shares of the two
classes on the Conversion Date, without the imposition of any sales load, fee
or other charge. Conversion of Class B shares to Class D shares will not be
deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked on
to the holding period for the shares acquired.
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DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the 1940 Act (each a "Distribution
Plan") with respect to the account maintenance and/or distribution fees paid by
the Fund to the Distributor with respect to such classes. The Class B and Class
C Distribution Plans provide for the payment of account maintenance fees and
distribution fees, and the Class D Distribution Plan provides for the payment
of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rates of 0.25%, 0.25% and 0.10%, respectively, of the average daily net assets
of the Fund attributable to shares of the relevant class in order to compensate
the Distributor and Merrill Lynch (pursuant to a sub-agreement) in connection
with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.25% and
0.35%, respectively, of the average daily net assets of the Fund attributable
to the shares of the relevant class in order to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) for providing shareholder and
distribution services, and bearing certain distribution-related expenses of the
Fund, including payments to financial consultants for selling Class B and Class
C shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the year ended September 30, 1994, the Fund paid the Distributor account
maintenance fees of $1,765,174 and distribution fees of $1,765,174 under the
Class B Distribution Plan. The Fund did not begin to offer shares of Class C or
Class D publicly until October 21, 1994.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans 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 Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
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, 1993, the last date for which fully allocated accrual data is
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available, the fully allocated accrual expenses incurred by the Distributor and
Merrill Lynch exceeded fully allocated accrual revenues for such period by
approximately $9,283,000 (1.3% of Class B net assets at that date). As of
December 31, 1993, direct cash revenues for the period since the commencement
of operations exceeded direct cash expenses by $13,264,947 (1.8% of Class B net
assets at that date). As of September 30, 1994, direct cash revenues for the
period since the commencement of operations exceeded direct cash expenses by
$15,328,231 (2.3% of Class B net assets at that date). Information about Class
C shares is not available since Class C shares were not offered publicly until
October 21, 1994.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Trustees of the Trust will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Trustees will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives--Conversion of Class B Shares to Class D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the Fund's
distribution fee and the CDSC borne by the Class B and Class C shares but not
the account maintenance fee. The maximum sales charge rule is applied
separately to each class. 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 and Class C shares
computed separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges) plus (2) interest on the unpaid balance for the
respective class, computed separately, at the prime rate plus 1% (the unpaid
balance being the maximum amount payable minus amounts received from the
payment of the distribution fee and the CDSC). In connection with the Class B
shares, the Distributor has voluntarily agreed to waive interest charges on the
unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges
at any time. To the extent payments would exceed the voluntary maximum, the
Fund will not make further payments of the distribution fee with respect to
Class B shares 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.
REDEMPTION OF SHARES
The Trust is required to redeem for cash all 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
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proper notice of redemption. Except for any CDSC which may be applicable, there
will be no charge for redemption if the redemption request is sent directly to
the Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends 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.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge 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 will not exceed 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 such request
is received by the Fund from such dealer not later than 30 minutes after the
close of business on the New York Stock Exchange (generally, 4:00 P.M., New
York time) on the same day. Dealers have the responsibility of submitting such
repurchase requests to the Trust not later than 30 minutes after the close of
business on the New York Stock Exchange, in order to obtain that day's closing
price.
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The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Trust (other than any applicable CDSC).
Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction 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 AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a one-
time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar 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 or Class D 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, copies of the various plans described below 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.
INVESTMENT ACCOUNT
Each shareholder whose account (an "Investment Account") is maintained at the
Transfer Agent has an Investment Account and will receive statements, at least
quarterly, from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for
each purchase or sale transaction other than automatic investment purchases and
the reinvestment of ordinary income dividends and long-term capital gain
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 or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
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<PAGE>
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an
account registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. 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 Commission.
Under the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
second fund in his account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares of the second fund as a result of the exchange. Class D
shares also may be exchanged for Class A shares of a second MLAM-advised mutual
fund at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other Fund.
Class A, Class B, Class C and Class D shares also are exchangeable for shares
of certain MLAM-advised money market funds specifically designated as available
for exchange by holders of Class A, Class B, Class C or Class D shares. The
period of time that Class A, Class B, Class C or Class D shares are held in a
money market fund, however, will not count toward satisfaction of the holding
period requirement for reduction of any CDSC imposed on such shares, if any,
and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
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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 CDSC 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 CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of Class
A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("MFA")
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D
shares of a MLAM-advised mutual fund for Class A or Class D 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 MLAM-
advised mutual fund and the sales charge payable on the shares of the Fund
being acquired in the exchange under the MFA program.
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 on
or about the payment date. Cash payments can also be directly deposited to the
shareholder's bank account. No CDSC will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D 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 or Class D shareholder whose shares are
held within a CMA (R) or CBA (R) Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA (R)/CBA (R) Systematic Redemption Program, subject to certain conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of both Class A, Class B, Class C and Class D 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) or CBA (R)
accounts may arrange to have periodic investments made in the Fund in their
CMA (R) or CBA (R) accounts or in certain related accounts in amounts of $100
or more through the CMA (R)/CBA (R) Automated Investment Program.
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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, 1993, the Trust engaged in nine such transactions for an aggregate of
$22,184,764. During the year ended September 30, 1994, 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. For the fiscal years ended September 30, 1992, 1993 and 1994, the
Fund paid no brokerage commissions.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily prior to
the determination of the net asset value which is calculated 15 minutes after
the close of business on the New York Stock Exchange (generally, 4:00 P.M., New
York Time) 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 the 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 as of the close of business on
the "payment date" 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.
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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 each class of shares will be
reduced as a result of any account maintenance, distribution and transfer
agency fees applicable to that class.
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 (see below), 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 the Fund's Class A, Class B,
Class C and Class D 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 the
portion, if any, of a person's social security and railroad retirement benefits
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. 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.
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.
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.
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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 and, for New York State and New York City income tax purposes, are
treated as capital gains which are taxed at ordinary income tax rates. 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 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 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 reflect 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.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an 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
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charge paid to the Fund reduces any sales charge such shareholder would have
owed upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with 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 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 separately for Class
A, Class B, Class C and Class D shares in accordance with formulas specified by
the Commission.
Average annual total return quotations for the specified periods 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 any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such
as in the case of Class B and Class C shares and the maximum sales charge in
the case of Class A and Class D shares. Dividends paid by the Fund with respect
36
<PAGE>
to all 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 fees and distribution charges and any
incremental transfer agency costs relating to each class of shares will be
borne exclusively by that class. The Fund will include performance data for all
classes of 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 waiver of the CDSC in the case of Class B shares or
reduced sales loads in the case of Class A and Class D shares, 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.
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 ended
September 30, 1994, was 5.19% for Class A shares and 4.89% for Class B shares
and the tax-equivalent yield for the same period (based on a Federal income tax
rate of 28%) was 7.21% for Class A shares and 6.79% for Class B shares. The
Fund did not begin to offer shares of Class C or Class D publicly until after
the fiscal year ended September 30, 1994. The yield for the 30-day period ended
December 31, 1994, was 5.48% for Class A shares, 5.25% for Class B shares,
5.12% for Class C shares and 5.29% for Class D shares; and the tax-equivalent
yield for the same period (based on a Federal income tax rate of 28%) was 7.61%
for Class A shares, 7.29% for Class B shares, 7.11% for Class C shares and
7.35% for Class D 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
37
<PAGE>
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 indicative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined by
the Manager once daily 15 minutes after the close of business on the New York
Stock Exchange (generally, 4:00 P.M., New York 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 per share net asset value of the Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions which will differ by approximately
the amount of the expense accrual differentials between the classes.
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, 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. The shares of the Fund are divided into Class A,
Class B, Class C and Class D shares. Class A, Class B, Class C and Class D
shares represent interests in the same assets of the Fund and are identical in
all respects except that Class B, Class C and Class D shares bear certain
expenses related to the account maintenance associated with such shares, and
Class B and Class C shares bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to matters
relating to account maintenance and distribution expenditures as applicable.
See "Purchase of Shares". The Trust has received an order from the Commission
permitting the issuance and sale of multiple
38
<PAGE>
classes of shares. The Trustees of the Trust may classify and reclassify the
shares of any Series into additional classes at a future date.
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. 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, the Class B, Class C and
Class D shares bear certain additional expenses. 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: TAMFO
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. 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.
39
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
40
<PAGE>
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch New York Municipal Bond Fund and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
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). 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: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. ................................... 4. ..................................
2. ................................... 5. ..................................
3. ................................... 6. ..................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last
Address............................... Name
......................................
(Zip Code)
Occupation.............................. Name and Address of Employer ......
........................................ ...................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-term Capital Gains
Select One: [_] Reinvest Select One: [_] Reinvest
[_] Cash [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] Check
or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch New York Municipal Bond Fund Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE) [_] checking [_] savings
Name on your account ...........................................................
Bank Name ......................................................................
Bank Number ........................ Account Number ...........................
Bank Address ...................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING THIS
SERVICE.
Signature of Depositor .........................................................
Signature of Depositor .................................. Date.................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
41
<PAGE>
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
[_][_][_] [_][_] [_][_][_][_]
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Distributions and Taxes--Taxes") 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 UNDERREPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
........................................ ...................................
Signature of Owner Signature of Co-Owner (if any)
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
................., 19......
Date of Initial Purchase
Dear Sir/Madam:
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 Merrill Lynch Funds
Distributor, Inc. acts as 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 Merrill Lynch New York Municipal
Bond 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 of Co-Owner
(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...........................
Account Number.......................... Account Number.....................
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
We hereby authorize Merrill Lynch
Branch Office, Address, Stamp 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 Systematic Withdrawal
Plan. We guarantee the
- -- -- shareholder's signature.
This form, when completed, should be
mailed to: ...................................
Dealer Name and Address
Merrill Lynch New York Municipal
Bond Fund
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund By ...........................
Operations Authorized Signature of Dealer
P.O. Box 45289
Jacksonville, Florida 32232-5289
[_][_][_] [_][_][_][_]
............
Branch Code F/C No. F/C Last
Name
[_][_][_] [_][_][_][_][_]
Dealer's Customer Account No.
42
<PAGE>
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Name of Owner........................ [_][_][_] [_][_] [_][_][_][_]
Name of Co-Owner (if any)............ Social Security Number or
Taxpayer Identification
Number
Address.............................. Account Number ..................
(if existing account)
.....................................
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A or [_] Class D shares in Merrill Lynch New York
Municipal Bond Fund at cost or current offering price. Withdrawals to be made
either (check one) [_] Monthly on the 24th day of each month, or [_] Quarterly
on the 24th day of March, June, September and December. If the 24th falls on a
weekend or holiday, the next succeeding business day will be utilized. Begin
systematic withdrawal on (month) or as soon as possible thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [_] $
or [_] % of the current value of [_] Class A or [_] Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (Please Print)......................................................
Address ........................................................................
..........................................................................
Signature of Owner........................................ Date................
Signature of Co-Owner (if any)..................................................
(b) I hereby authorize payment by direct deposit to my bank account and, if
necessary, debit entries and adjustments for any credit entries made to my
account. I agree that this authorization will remain in effect until I provide
written notification to Financial Data Services, Inc. amending or terminating
this service.
Specify type of account (check one): [_] checking [_] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number.......................... Account Number...........................
Bank Address....................................................................
................................................................................
Signature of Depositor.................................... Date................
Signature of Depositor..........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
43
<PAGE>
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART 2)--
(CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below each
month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch New York Municipal Bond Fund subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
AUTHORIZATION TO HONOR ACH DEBITS
FINANCIAL DATA SERVICES, INC. DRAWN BY FINANCIAL DATA SERVICES,
INC.
You are hereby authorized to draw an
ACH debit each month on my bank To................................Bank
account for investment in Merrill (Investor's Bank)
Lynch New York Municipal Bond Fund as
indicated below:
Amount of each ACH debit $......... Bank Address..........................
City...... State...... Zip Code......
Account number..................... As a convenience to me, I hereby
request and authorize you to pay and
Please date and invest ACH debits on charge to my account ACH debits drawn
the 20th of each month beginning on my account by and payable to
Financial Data Services, Inc. I agree
.......(month) or as soon thereafter as that your rights in respect to each
possible. such debit shall be the same as if it
were a check drawn on you and signed
I agree that you are drawing these ACH personally by me. This authority is
debits voluntarily at my request and to remain in effect until revoked
that you shall not be liable for any personally by me in writing. Until
loss arising from any delay in you receive such notice, you shall be
preparing or failure to prepare any fully protected in honoring any such
such debit. If I change banks or debit. I further agree that if any
desire to terminate or suspend this such debit be dishonored, whether
program, I agree to notify you with or without cause and whether
promptly in writing. I hereby intentionally or inadvertently, you
authorize you to take any action to shall be under no liability.
correct erroneous ACH debits of my
bank account or purchases of fund ............. .......................
shares including liquidating shares of Date Signature of Depositor
the Fund and crediting my bank
account. I further agree that if a ............. .......................
check or debit is not honored upon Bank Account Signature of Depositor
presentation, Financial Data Services, Number (If joint account,
Inc. is authorized to discontinue both must sign)
immediately the Automatic Investment
Plan and to liquidate sufficient NOTE: IF AUTOMATIC INVESTMENT PLAN IS
shares held in my account to offset ELECTED, YOUR BLANK, UNSIGNED CHECK
the purchase made with the dishonored MARKED "VOID" SHOULD ACCOMPANY THIS
debit. APPLICATION.
............. ......................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
44
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
45
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
46
<PAGE>
MANAGER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 351
Boston, Massachusetts 02101
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 LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
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 REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTI-
TUTE 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
Merrill Lynch Select Pricing SM System..................................... 3
Financial Highlights....................................................... 8
Investment Objective and Policies.......................................... 10
Potential Benefits........................................................ 12
Description of Municipal Bonds............................................ 12
Call Rights............................................................... 14
When-Issued Securities and Delayed Delivery Transactions.................. 15
Special Considerations Relating to New York Municipal Bonds............... 15
Financial Futures Transactions and Options................................ 15
Repurchase Agreements..................................................... 18
Investment Restrictions................................................... 18
Management of the Trust.................................................... 18
Trustees.................................................................. 18
Management and Advisory Arrangements...................................... 19
Code of Ethics............................................................ 19
Transfer Agency Services.................................................. 20
Purchase of Shares......................................................... 20
Initial Sales Charge Alternatives--Class A and Class D Shares............. 22
Deferred Sales Charge Alternatives--Class B and Class C Shares............ 24
Distribution Plans........................................................ 27
Limitations on the Payment of Deferred Sales Charges...................... 28
Redemption of Shares....................................................... 28
Redemption................................................................ 29
Repurchase................................................................ 29
Reinstatement Privilege--Class A and Class D Shares....................... 30
Shareholder Services....................................................... 30
Investment Account........................................................ 30
Exchange Privilege........................................................ 31
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 32
Systematic Withdrawal Plans............................................... 32
Automatic Investment Plans................................................ 32
Portfolio Transactions..................................................... 33
Distributions and Taxes.................................................... 33
Distributions............................................................. 33
Taxes..................................................................... 34
Performance Data........................................................... 36
Additional Information..................................................... 38
Determination of Net Asset Value.......................................... 38
Organization of the Trust................................................. 38
Shareholder Reports....................................................... 39
Shareholder Inquiries..................................................... 39
Authorization Form......................................................... 41
</TABLE>
Code # 10342-0195
[LOGO OF MERRILL LYNCH]
Merrill Lynch
New York Municipal
Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
PROSPECTUS
January 31, 1995
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
P.O. 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.
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
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This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the Prospectus of the Fund, dated January
31, 1995 (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.
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FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
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The date of this Statement of Additional Information is January 31, 1995.
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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 Ratings Group ("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. The Fund may also invest in securities not issued by or on
behalf of a state or territory or by an agency or instrumentality thereof, if
the Fund nevertheless believes such securities to be exempt from Federal income
taxation ("Non-Municipal Tax-Exempt Securities"). Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interest in one or more long-term municipal securities. Non-Municipal Tax-
Exempt Securities also may include securities issued by other investment
companies that invest in municipal bonds, to the extent such investments are
permitted by the Investment Company Act of 1940, as amended (the "1940 Act").
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,
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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 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. Interest and principal
payable on the Municipal Bonds may also be based on relative changes among
particular indices. 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, which may include reduced or
eliminated interest payments and losses of invested principal. 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
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indexed and inverse floating obligations represent flexible portfolio
management instruments for the Fund which allow the Fund to seek potential
investment rewards, hedge other portfolio positions or 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 15% (10% to the extent required by certain
state laws) 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 15% (10% to the extent required by certain state laws) of the
Fund's net assets.
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
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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 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 15% (10% to the extent required by
certain state laws) 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 by Moody's, 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.
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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 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
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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
The Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or primary dealer or an affiliate thereof, in U.S.
Government securities. Under such agreements, the bank or primary dealer or an
affiliate thereof 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. 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. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund
may suffer time delays and incur costs or possible losses in connection with
the disposition of the collateral. In the event of a default under such a
repurchase agreement, 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 maturing in more than seven days if such
investments, together with all other illiquid investments, would exceed 15% of
the Fund's net assets (however, in accordance with the provisions of certain
state laws, the Fund currently will not invest in excess of 10% of its net
assets in illiquid securities).
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.
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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.
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
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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.
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
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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.
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 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
10
<PAGE>
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 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
11
<PAGE>
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 were approved for trading in 1986.
Trading in such futures contracts may tend to 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.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus 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. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
12
<PAGE>
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the 1940 Act) in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) the Fund may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) the Fund
may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (iv) the Fund may purchase
securities on margin to the extent permitted by applicable law. The Fund
may not pledge its assets other than to secure such borrowings or, to the
extent permitted by the Fund's investment policies as set forth in its
Prospectus and Statement of Additional Information, as they may be amended
from time to time, in connection with hedging transactions, short sales,
when-issued and forward commitment transactions and similar investment
strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Trustees of the Trust has otherwise
determined to be liquid pursuant to applicable law. Notwithstanding the 15%
limitation herein, to the extent the laws of any state in which the Fund's
shares are registered or qualified for sale require a lower limitation, the
Fund will observe such limitation. As of the date hereof, therefore, the
Fund will not invest more than 10% of its total assets in securities which
are subject to this investment restriction (c).
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities, asset-
backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
13
<PAGE>
f. Purchase or retain the securities of any issuer, if those individual
officers and trustees of the Trust, the officers and general partner of the
Manager, the directors of such general partner or the officers and
directors of any subsidiary thereof each owning beneficially more than one-
half of one percent of the securities of such issuer own in the aggregate
more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (7) above, 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.
In addition, to comply with tax requirements for qualification as a
"regulated investment company", the Fund's investments will be limited in a
manner such that, at the close of each quarter of each fiscal year, (a) no more
than 25% of the Fund's total assets are invested in the securities of a single
issuer, and (b) with regard to at least 50% of the Fund's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
[For purposes of this restriction, the Fund will regard each state and each
political subdivision, agency or instrumentality of such state and each multi-
state agency of which such state is a member and each public authority which
issues securities on behalf of a private entity as a separate issuer, except
that if the security is backed only by the assets and revenues of a non-
government entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer.] These
tax-related limitations may be changed by the Trustees of the Trust to the
extent necessary to comply with changes to the Federal tax requirements.
Because of the affiliation of Merrill Lynch with the Fund, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch except
pursuant to a permissive order or otherwise in compliance with the provisions
of the 1940 Act and the rules and regulations thereunder. Included among such
restricted transactions are purchases from or sales to Merrill Lynch of
securities in transactions in which it acts as principal and purchases of
securities from underwriting syndicates of which Merrill Lynch is a member.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust and their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each Trustee and executive officer is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (62)--President and Trustee(1)(2)--President and Chief
Investment Officer of the Manager (which term, as used herein, includes the
Manager's corporate predecessors) since 1977; President of MLAM (which term, as
used herein, includes MLAM's corporate predecessors) 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. ("ML&Co.") since 1990;
14
<PAGE>
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").
Herbert I. London (55)--Trustee(2)--New York University--Gallatin Division,
113-115 University Place, New York, New York 10003. John M. Olin Professor of
Humanities, New York University since 1993 and Professor thereof since 1980;
Dean, Gallatin Division of New York University from 1978 to 1993 and Director
from 1975 to 1976; Distinguished Fellow, Herman Kahn Chair, Hudson Institute
from 1984 to 1985; Trustee, Hudson Institute since 1980; Director, Damon
Corporation since 1991; Overseer, Center for Naval Analyses.
Robert R. Martin (67)--Trustee(2)--513 Grand Hill, St. Paul, Minnesota
55102. Director, WTC Industries, Inc. since 1995 and Chairman thereof from
1994 to 1995; 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 (65)--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 (42)--Trustee(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Limited since 1991 and Teknekron Software Systems since
1994.
Terry K. Glenn (54)--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 (50)--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.
Kenneth A. Jacob (43)--Vice President and Portfolio Manager(1)(2)--Vice
President of the Manager and MLAM since 1984.
Donald C. Burke (34)--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990; Employee of Deloitte & Touche LLP from 1982 to
1990.
Gerald M. Richard (45)--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 MLFD since 1984 and Vice President
since 1981.
Jerry Weiss (36)--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.
15
<PAGE>
At January 1, 1995, the Trustees and officers of the Trust as a group (11
persons) owned an aggregate of less than 1% of the outstanding shares of Common
Stock of ML & Co. and owned an aggregate of less than 1% of the outstanding
shares of the Fund.
COMPENSATION OF TRUSTEES
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, a fee of $2,000 per year plus $500 per meeting attended.
The fees and expenses of the Trustees are allocated to the respective series of
the Trust on the basis of asset size. For the year ended September 30, 1994,
fees and expenses paid to the non-affiliated Trustees and allocated to the Fund
aggregated $35,701.
The following table sets forth for the fiscal year ended September 30, 1994,
compensation paid by the Fund to the non-affiliated Trustees and the aggregate
compensation paid by all investment companies advised by FAM and its affiliate,
MLAM ("FAM/MLAM Advised Funds"), to the non-affiliated Trustees.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
NAME OF COMPENSATION ACCRUED AS PART FUNDS PAID TO
TRUSTEE FROM FUND OF FUND EXPENSE TRUSTEES(1)
- ------- ------------ ------------------- ------------------
<S> <C> <C> <C>
Herbert I. London $7,808.37 None $187,625
Robert R. Martin 6,836.20 None 182,000
Joseph L. May 7,808.37 None 187,625
Andre F. Perold 7,808.37 None 187,625
</TABLE>
- --------
(/1/)In addition to the Trust, the Trustees serve on the boards of other
FAM/MLAM Advised Funds as follows: Mr. London (23 boards); Mr. Martin (23
boards); Mr. May (23 boards); and Mr. Perold (23 boards).
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.
16
<PAGE>
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 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,
1992, 1993 and 1994, the total advisory fees paid by the Fund to the Manager
aggregated $3,270,467, $3,744,878 and $3,999,719, respectively.
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, 1992, 1993 and
1994 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 ML&Co. 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, 1994, the Trust paid the Manager $81,833 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 will be
financed by the Trust pursuant to the Distribution Plans in compliance with
Rule 12b-1 under the 1940 Act. See "Purchase of Shares--Distribution Plans".
17
<PAGE>
The Manager is a limited partnership, the partners of which are ML&Co. and
Princeton Services, Inc.
Duration and Termination. Unless earlier terminated as described herein, 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.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System: shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives, and shares of Class B and
Class C are sold to investors choosing the deferred sales charge alternatives.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid. Each
class has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
The Merrill Lynch Select Pricing SM System is used by more than 50 mutual
funds advised by MLAM or its affiliate, the Manager. Funds advised by MLAM or
the Manager are referred to herein as "MLAM-advised mutual funds".
The Fund has entered into four separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Management
Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
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 gross sales charges for the sale of
18
<PAGE>
Class A shares for the fiscal year ended September 30, 1994 were $73,174, of
which the Distributor received $7,202 and Merrill Lynch received $65,972.
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of 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 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.
Closed-End Fund Investment Option. Class A shares of the Fund and other MLAM-
advised mutual funds ("Eligible Class A shares") are offered at net asset value
to shareholders of certain closed-end funds advised by the Manager or MLAM who
purchased such closed-end fund shares prior to October 21, 1994 (the date the
Merrill Lynch Select PricingSM System commenced operations) and 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. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to buy Class A shares) or Class D shares of the Fund and other MLAM-advised
mutual funds ("Eligible Class D shares"), if the following conditions are met.
First, the sale of closed-end fund shares must be made through Merrill Lynch,
and the net proceeds therefrom must be immediately reinvested in Eligible Class
A or Class D shares. Second the closed-end fund shares must either have 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,
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.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the
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<PAGE>
offering price applicable to the total of (a) the public offering price of the
shares then being purchased plus (b) an amount equal to the then current net
asset value or cost, whichever is higher, of the purchaser's combined holdings
of all classes of 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. Shares held in the name of a nominee or custodian
under pension, profit-sharing or other employee benefit plans may not be
combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or
any other MLAM-advised mutual funds made within a 13-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 recordkeeping services. The Letter of Intention is
not a binding obligation to purchase any amount of Class A or Class D 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 and Class D shares of the Fund and of other MLAM-advised
mutual funds 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 or Class D shares purchased
at the reduced rate and the sales charge applicable to the shares actually
purchased through the Letter. Class A or Class D shares equal to at least five
percent of the intended amount will be held in escrow during the 13-month
period (while remaining registered in the name of the purchaser) for this
purpose. The first purchase under the Letter of Intention must be at least
five percent of the dollar amount of such Letter. If a purchase during the
term of such Letter would otherwise be subject to a further reduced sales
charge based on the right of accumulation, the purchaser will be entitled on
that purchase and subsequent purchases to the reduced percentage sales charge,
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
a MLAM-advised money market fund into the Fund that creates a sales charge
will count toward completing a new or existing Letter of Intention from the
Fund.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
Purchase Privilege of Certain Persons. Trustees of the Trust, members of the
Boards of other MLAM-advised investment companies, ML&Co. and its subsidiaries
(the term "subsidiaries", when used herein with
20
<PAGE>
respect to ML&Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly-owned and controlled by ML&Co.) and their directors and
employees, and any trust, pension, profit-sharing or other benefit plan for
such persons, may purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of
shares of a mutual fund that was sponsored by the financial consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis; and second, the investor must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption had been maintained in the interim in cash
or a money market fund.
Class D shares of the Fund are also offered at net asset value, without sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund sponsored by a non-
Merrill Lynch company for which Merrill Lynch has served as a selected dealer
and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares
of such other fund were subject to a sales charge either at the time of
purchase or on a deferred basis. Second, such purchase of Class D shares must
be made within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: First, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
other mutual funds and that such shares have been outstanding for a period of
no less than six months. Second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must
be maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D 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. The issuance of Class D
shares for consideration other than cash is limited to bona fide
reorganizations, statutory mergers or other acquisitions of portfolio
securities which (i) meet the investment objectives and policies of the Fund;
(ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, which are not restricted as to
transfer either by law or liquidity of market (except that the Fund may acquire
through such transactions restricted or illiquid securities to the extent the
Fund does not exceed the applicable limits on acquisition of such securities
set forth under "Investment Objective and Policies" herein).
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<PAGE>
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
1940 Act (each a "Distribution Plan") with respect to the account maintenance
and/or distribution fees paid by the Fund to the Distributor with respect to
such classes.
Payments of the account maintenance fees and/or distribution fees are subject
to the provisions of Rule 12b-1 under the 1940 Act. Among other things, each
Distribution Plan provides that the Distributor shall provide and the Trustees
shall review quarterly reports of the disbursement of the account maintenance
and/or distribution fees paid to the Distributor. In their consideration of
each Distribution Plan, the 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. Each 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 each
Distribution Plan in accordance with Rule 12b-1, the Independent Trustees
concluded that there is reasonable likelihood that each Distribution Plan will
benefit the Fund and its related class of shareholders. Each Distribution Plan
can be terminated at any time, without penalty, by the vote of a majority of
the Independent Trustees or by the vote of the holders of a majority of the
outstanding related class of voting securities of the Fund. A Distribution Plan
cannot be amended to increase materially the amount to be spent by the Fund
without the approval of the related class of shareholders, 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 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.
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. ("NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the
contingent deferred sales charge ("CDSC") borne by the Class B and Class C
shares but not the account maintenance fee. The maximum sales charge rule is
applied separately to each class. 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 and Class C
shares, computed separately (defined to exclude shares issued pursuant to
dividend reinvestments and exchanges), plus (2) interest on the unpaid balance
for the respective class, computed separately, at the prime rate plus 1% (the
unpaid balance being the maximum amount payable minus amounts received from the
payment of the distribution fee and the CDSC). In connection with the Class B
shares, the Distributor has voluntarily agreed to waive interest charges on the
unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest
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<PAGE>
charges at any time. To the extent payments would exceed the voluntary
maximum, the Fund will not make further payments of the distribution fee with
respect to Class B shares, 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 payment 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,
1994 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 period ended September 30,
1994.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF SEPTEMBER 30, 1994
-----------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT
ELIGIBLE GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
CLASS B SHARES SALES(1) CHARGE BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
- -------------- -------------- --------- ----------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $1,341,443 $83,840 $51,658 $135,498 $26,141 $109,357 $1,613
Under Distributor's Vol-
untary Waiver.......... $1,341,443 $83,840 $ 6,707 $ 90,547 $26,141 $ 64,406 $1,613
</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
distribution plan in effect at that time, 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
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
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<PAGE>
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.
DEFERRED SALES CHARGES--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares", while Class B shares redeemed
within four years of purchase are subject to a CDSC 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, 1992, 1993 and 1994, the Distributor received CDSCs with respect
to Class B shares of $561,826, $622,557 and $692,305, respectively, all of
which was paid to Merrill Lynch.
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, 1992, the Fund engaged in no
transactions pursuant to such order. During the year ended September 30, 1993,
the Fund engaged in nine transactions pursuant to such order aggregating
approximately $22.2 million. During the year ended September 30, 1994, the Fund
engaged in no transactions pursuant to such order. 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.
As a non-fundamental restriction, the Trust will prohibit the purchase or
retention by the Fund of the securities of any issuer if the officers and/or
trustees of the Trust, the officers and general partner of the Manager, the
directors of such general partner or the officers and directors of any
subsidiary thereof each owning beneficially more than one-half of one percent
of the securities of such issuer own in the aggregate more than five percent of
the securities of that issuer. In addition, 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
24
<PAGE>
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 NASD 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.
For the fiscal years ended September 30, 1992, 1993, and 1994, the Fund paid
no brokerage commissions.
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 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 rates for the fiscal years ended September
30, 1992, 1993 and 1994 were 35.90%, 38.31% and 107.96%, respectively. The
increase in the Fund's portfolio turnover rate during the 1994 fiscal year was
due to an attempt to reduce the Fund's exposure to an increase in interest rate
volatility.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which
they manage unless the member (i) has obtained prior express authorization from
the account to effect such transactions, (ii) at least annually furnishes the
account with a statement setting forth the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any rules
the Commission has prescribed with respect to the requirements of clauses (i)
and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined by
the Manager once daily, Monday through Friday 15 minutes after the close of
business on the New York Stock Exchange (generally, 4:00 P.M., New York time),
on each day during which the New York Stock Exchange is open for trading.
25
<PAGE>
The New York Stock Exchange is not open on New Year's Day, Presidents' Day,
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
any account maintenance and/or distribution fees, are accrued daily. The per
share net asset value of the Class B, Class C and Class D shares generally will
be lower than the per share net asset value of the Class A shares reflecting
the daily expense accruals of the account maintenance, distribution and
transfer agency fees applicable with respect to the Class B and Class C shares
and the daily expense accruals of the account maintenance fees applicable with
respect to the Class D shares; moreover the per share net asset value of Class
B and Class C shares generally will be lower than the per share net asset value
of Class D shares reflecting the daily expense accruals of the distribution
fees and higher transfer agency fees applicable with respect to Class B and
Class C shares of the Fund. It is expected, however, that the per share net
asset value of the four classes eventually will tend to converge (although not
necessarily meet) immediately after the payment of dividends, which will differ
by approximately the amount of the expense accrual differentials between the
classes.
The Municipal Bonds and other portfolio securities in which the Fund invests
are traded primarily in over-the-counter 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 and copies of the various plans described below 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 statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders also will receive separate confirmations for each purchase or sale
transaction other than reinvestment of dividends and capital gains
distributions. Shareholders considering
26
<PAGE>
transferring their Class A or Class D shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A or Class D shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A or
Class D shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent.
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 PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer, or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Fund's Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks or automated clearing house debits of $50 or more
to charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder.
Alternatively, investors who maintain CMA (R) or CBA (R) accounts may arrange
to have periodic investments made in the Fund, in their CMA (R) or CBA (R)
accounts or in certain related accounts in amounts of $100 or more through the
CMA (R)/CBA (R) Automated 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 or direct deposited 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 AND CLASS D SHARES
A Class A or Class D 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 or Class D shares of the Fund having a value, based on cost or the
current offering price, of $5,000 or more, and monthly withdrawals are
available for shareholders with Class A or Class D shares with such a value of
$10,000 or more.
27
<PAGE>
At the time of each withdrawal payment, sufficient Class A or Class D 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 or Class D
shares. Redemptions will be made at net asset value as determined 15 minutes
after the close of business on the New York Stock Exchange (generally, 4:00
P.M., New York time) 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 or Class D 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 or Class D shares in the Investment Account are reinvested
automatically in the Fund's Class A or Class D shares, respectively. 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 or
Class D 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 or Class D 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.
Alternatively, a Class A or Class D shareholder whose shares are held within
a CMA (R) or CBA (R) Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA (R)/CBA (R)
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
Fund shares are being purchased within the account pursuant to the Automatic
Investment Program. For more information on the CMA (R)/CBA (R) Systematic
Redemption Program, eligible shareholders should contact their Financial
Consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing SM System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his account in
which the exchange is made at the time of the exchange or is otherwise
eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
second fund in his account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares
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of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares
of the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class B, Class C and
Class D shares are exchangeable with shares of the same class of other MLAM-
advised mutual funds. For purposes of computing the CDSC that may be payable
upon a disposition of the shares acquired in the exchange, the holding period
for the previously owned shares of the Fund is "tacked" to the holding period
of the newly acquired shares of the other fund as more fully described below.
Class A, Class B, Class C and Class D shares are also exchangeable for shares
of certain MLAM-advised money market funds specifically designated below as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. Shares with a net asset value of at least $100 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. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other MLAM-advised mutual
funds ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A or Class D shares acquired through dividend reinvestment
shall be deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was
paid. Based on this formula, Class A and Class D shares generally may be
exchanged into the Class A or Class D shares of the other funds or into shares
of the Class A or Class D money market funds without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B and Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another MLAM-
advised mutual fund ("new Class B or Class C shares") on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the 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 schedule if such
schedule is higher than the CDSC schedule relating to the Class B or Class C
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 or Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B or Class C shares of the Fund for
those of Merrill Lynch Special Value Fund, Inc. ("Special Value") after having
held the Fund's Class B shares for two and a half years. The 2% CDSC 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 Special
Value and receive cash. There will be no CDSC due on this redemption, since
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<PAGE>
by "tacking" the two and a half year holding period of Fund Class B shares to
the three-year holding period for the Special Value 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 shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a Class B or Class C money market
fund will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or, with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
which were acquired as a result of an exchange for Class B or Class C shares of
a fund may, in turn, be exchanged back into Class B or Class C shares,
respectively, of any fund offering such shares, in which event the holding
period for Class B or Class C shares of the Fund will be aggregated with
previous holding periods for purposes of reducing the CDSC. 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% CDSC 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
CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds Issuing Class A, Class B, Class C and Class D shares:
Merrill Lynch Adjustable Rate
Securities Fund, Inc. ..............
High current income consistent with a
policy of limiting the degree of
fluctuation in net asset value of fund
shares resulting from movements in
interest rates through investment
primarily in a portfolio of adjustable
rate securities.
Merrill Lynch Americas Income Fund, A high level of current income,
Inc. ............................... 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.
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<PAGE>
Merrill Lynch Arizona Municipal Bond
Fund................................
A portfolio of Merrill Lynch Multi-
State 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.
Merrill Lynch Arkansas Municipal
Bond Fund...........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Arkansas income taxes as
is consistent with prudent investment
management.
Merrill Lynch Asset Growth Fund, High total investment return,
Inc. ............................... consistent with prudent risk, from
investment in United States and
foreign equity, debt and money market
securities the combination of which
will be varied both with respect to
types of securities and markets in
response to changing market and
economic trends.
Merrill Lynch Asset Income Fund, A high level of current income through
Inc. ............................... investment primarily in United States
fixed income securities.
Merrill Lynch Balanced Fund for
Investment and Retirement, Inc. ....
As high a level of total investment
return as is consistent with a
relatively low level of risk through
investment in common stock and other
types of securities, including fixed
income securities and convertible
securities.
Merrill Lynch Basic Value Fund, Capital appreciation and, secondarily,
Inc. ............................... income through investments in
securities, primarily equities, that
are undervalued and therefore
represent basic investment value.
Merrill Lynch California Insured
Municipal Bond Fund.................
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide 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.
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<PAGE>
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 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 California Municipal
Bond Fund...........................
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and California income taxes as is
consistent with prudent investment
management.
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 to provide as high
a level of income exempt from Federal
and Colorado income taxes as is
consistent with prudent investment
management.
Merrill Lynch Connecticut Municipal
Bond Fund...........................
A portfolio of Merrill Lynch Multi-
State Limited Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Connecticut
income taxes as is consistent with
prudent investment management.
Merrill Lynch Corporate Bond Fund,
Inc.................................
Current income from three separate
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.
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<PAGE>
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.
Merrill Lynch EuroFund............... Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
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 to provide 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 to provide 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.
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<PAGE>
Merrill Lynch Global Allocation
Fund, Inc...........................
High total investment 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.
Merrill Lynch Global Bond Fund for
Investment and Retirement...........
High total investment return from
investment in government and corporate
bonds 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, Inc.
(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 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 Global SmallCap Fund,
Inc.................................
Long-term growth of capital by
investing primarily in equity
securities of companies with
relatively small market
capitalizations located in various
foreign countries and in the United
States.
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.
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<PAGE>
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.
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, Capital appreciation by investing
Inc................................. 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 to provide 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 to provide 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 to provide as high a
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 to provide 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 to provide as
high a level of income exempt from
Federal and Minnesota personal 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 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 to provide 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 to provide as
high a level of income exempt from
Federal and New Jersey income taxes as
is consistent with prudent investment
management.
Merrill Lynch New Mexico Municipal
Bond Fund...........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and New Mexico 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 to provide 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 investment 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 to provide 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 A portfolio of Merrill Lynch Multi-
Fund................................ 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 to provide as
high a level of income exempt from
Federal and Oregon income taxes 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 to provide as
high a level of income exempt from
Federal and Pennsylvania personal
income taxes as is consistent with
prudent investment management.
Merrill Lynch Phoenix Fund, Inc. .... Long-term growth of capital by
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 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.
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, Capital appreciation through worldwide
Inc. ............................... 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.
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<PAGE>
Merrill Lynch Texas Municipal Bond
Fund................................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide 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 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.
Class A Share Money Market Funds:
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 Fund
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 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.
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<PAGE>
Class B, Class C and Class D Share Money Market Funds:
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 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 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.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange.
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.
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<PAGE>
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 (see below), 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 intends 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, 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, Class B, Class C and
Class D 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 (as well as ordinary income,
capital gains and tax preference items discussed below) among the Class A,
Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission's exemptive order permitting the
issuance and sale of multiple classes of shares) that is based upon the gross
income that is allocable to the Class A, Class B, Class C and Class D
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 shareholders are derived from interest income exempt from Federal
income tax under Code Section 103(a) and are properly designated as exempt-
interest dividends, they will be excludable from a shareholder's gross income
for Federal income tax purposes. Exempt-interest dividends are included,
however, in determining the portion, if any, of a person's social security and
railroad retirement benefits subject to Federal income taxes. Interest on
indebtedness incurred or continued to purchase or carry shares of a RIC paying
exempt-interest dividends, such as the 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. Shareholders are advised to consult their
41
<PAGE>
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 the portion which is exempt from New York State and New
York City personal income taxes. The Trust will allocate exempt-interest
dividends among Class A, Class B, Class C and Class D 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.
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
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. 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
42
<PAGE>
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 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 reflect 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.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an 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 shares in the absence of the exchange privilege. Instead, such sales charge
will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
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.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with 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.
43
<PAGE>
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
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 taxable income 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
option 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
financial futures contracts or the related options.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income 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 option or financial futures contract.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and New York State and City tax
laws presently in effect. For the complete provisions, reference
44
<PAGE>
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 State and City 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, state, local or
foreign taxes.
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, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the 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 and Class C 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.
45
<PAGE>
Set forth in the tables below is total return, yield and tax-equivalent
yield information for the Class A, Class B, Class C and Class D shares of the
Fund for the periods indicated. Since the Fund did not begin to offer Class C
or Class D shares publicly until October 21, 1994, such information is
provided as to those classes for the periods ended December 31, 1994 only.
<TABLE>
<CAPTION>
CLASS A SHARES* CLASS B SHARES
----------------------------------- -----------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended September
30, 1994............... (8.96)% $ 910.40 (9.13)% $ 908.70
Five Years Ended Septem-
ber 30, 1994........... 6.45 % $1,367.00 6.79 % $1,388.60
Inception (November 1,
1985) to September 30,
1994................... 7.79 % $1,952.80
October 25, 1988 to Sep-
tember 30, 1994........ 6.50 % $1,452.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
YEAR ENDED
SEPTEMBER 30,
-------------
<S> <C> <C> <C> <C>
1994.................... (5.17)% $ 948.30 (5.66)% $ 943.40
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 % $1,136.00 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
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (November 1,
1985) to September 30,
1994................... 95.28 % $1,952.80
October 25, 1988 to Sep-
tember 30, 1994........ 45.29 % $1,452.90
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended September
30, 1994............... 5.19 % 4.89 %
<CAPTION>
TAX-EQUIVALENT YIELD**
<S> <C> <C> <C> <C>
30 days ended September
30, 1994............... 7.21 % 6.79 %
</TABLE>
- --------
* Information as to Class A shares is presented only for the period October
25, 1988 to September 30, 1994. Prior to October 25, 1988, no Class A shares
were publicly issued.
** Based upon a Federal income tax rate of 28%.
46
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES* CLASS B SHARES
----------------------------------- -----------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December
31, 1994............... (12.26)% $ 877.40 (12.58)% $ 874.20
Five Years Ended Decem-
ber 31, 1994........... 5.16 % $1,286.30 5.49 % $1,306.60
Inception (November 1,
1985) to December 31,
1994................... 7.24 % $1,897.90
October 25, 1988 to De-
cember 31, 1994........ 5.76 % $1,413.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
For the period October
1, 1994 to
December 31, 1994...... (2.68)% $ 973.20 (2.81)% $ 971.90
<CAPTION>
YEAR ENDED SEPTEMBER 30,
- ------------------------
<S> <C> <C> <C> <C>
1994.................... (5.17)% $ 948.30 (5.66)% $ 943.40
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 % $1,136.00 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
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (November 1,
1985) to December 31,
1994................... 89.79 % $1,897.90
October 25, 1988 to De-
cember 31, 1994........ 41.39 % $1,413.90
---------
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended December
31, 1994............... 5.48 % 5.25 %
<CAPTION>
TAX-EQUIVALENT YIELD**
<S> <C> <C> <C> <C>
30 days ended December
31, 1994............... 7.61 % 7.29 %
</TABLE>
- --------
* Information as to Class A shares is presented only for the period October
25, 1988 to September 30, 1994. Prior to October 25, 1988, no Class A
shares were publicly issued.
** Based upon a Federal income tax rate of 28%.
47
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES* CLASS D SHARES*
----------------------------------- -----------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994)
to December 31, 1994... (14.60)% $969.80 (27.17)% $940.20
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994)
to December 31, 1994... (2.05)% $979.50 (2.05)% $979.50
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994)
to December 31, 1994... (3.02)% 969.80 (5.98)% $940.20
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended December
31, 1994............... 5.12 % 5.29 %
<CAPTION>
TAX-EQUIVALENT YIELD**
<S> <C> <C> <C> <C>
30 days ended December
31, 1994............... 7.11 % 7.35 %
</TABLE>
- --------
* Class C and Class D shares commenced operations on October 21, 1994.
** Based upon a Federal income tax rate of 28%.
In order to reflect the reduced sales charges in the case of Class A or Class
D shares or the waiver of the CDSC 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
CDSC 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.
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 Arkansas Municipal
Bond Fund, Merrill Lynch Colorado Municipal Bond Fund, Merrill Lynch
Connecticut Municipal Bond Fund, Merrill Lynch Florida Municipal Bond Fund,
Merrill Lynch Maryland Municipal Bond Fund, Merrill Lynch
48
<PAGE>
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 New Mexico Municipal Bond Fund, Merrill Lynch North
Carolina Municipal Bond Fund, Merrill Lynch Ohio 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, Class B, Class C and Class D shares.
Class A, Class B, Class C and Class D shares represent an interest in the same
assets of the Fund and are identical in all respects except that the Class B,
Class C and Class D shares bear certain expenses related to the account
maintenance and/or distribution of such shares and have exclusive voting rights
with respect to matters relating to such account maintenance and/or
distribution expenditures. The Trust has received an order (the "Order") from
the Commission permitting the issuance and sale of multiple classes of shares.
The Order permits the Trust to issue additional classes of shares of any Series
if the Board of Trustees deems such issuance to be in the best interests of the
Trust.
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, Class B, Class C and Class D shares have exclusive
voting rights with respect to matters relating to the account maintenance
and/or 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
account maintenance and/or distribution of the Class B, Class C and Class D
shares are 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 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.
49
<PAGE>
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 and number of shares
outstanding on September 30, 1994 is calculated as set forth below. Information
is not provided for Class C and Class D shares since the Fund did not begin to
offer Class C or Class D shares publicly until after the fiscal year ended
September 30, 1994.
<TABLE>
<CAPTION>
CLASS A CLASS B
----------- ------------
<S> <C> <C>
Net Assets............................................ $28,300,768 $645,340,697
=========== ============
Number of Shares Outstanding.......................... 2,602,140 59,326,415
=========== ============
Net Asset Value Per Share (net assets divided by
number of shares outstanding)........................ $ 10.88 $ 10.88
Sales Charge (for Class A shares: 4.00% of offering
price (4.17% of net asset value per share))*......... .45 **
----------- ------------
Offering Price........................................ $ 11.33 $ 10.88
=========== ============
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares" in the
Prospectus.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 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. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101, 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 East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "Management of
the Trust--Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
50
<PAGE>
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 as of January 1, 1995.
51
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APPENDIX I
ECONOMIC CONDITIONS IN NEW YORK
The following information is a brief summary of factors affecting the economy
of the State and does not purport to be a complete description of such factors.
Other factors will affect issuers. The summary is based primarily upon one or
more publicly available offering statements relating to debt offerings of state
issuers, however, it has not been updated nor will it be updated during the
year. The Trust has not independently verified the information.
In recent years, New York State (sometimes referred to as the "State"), some
of its agencies, instrumentalities and public authorities and certain of its
municipalities, have faced serious financial difficulties and New York City is
currently facing serious financial difficulties. New York City's current
financial problems and any further financial problems experienced by the State
or its authorities or municipalities could have a direct adverse effect on the
New York Municipal Bonds in which the New York Fund invests.
NEW YORK CITY
General. More than any other municipality, the fiscal health of New York City
(sometimes referred to as the "City") has a significant effect on the fiscal
health of the State. 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 calendar year 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 after noticeable improvements in the City's
economy during the 1994 calendar year, economic growth will slow in calendar
years 1995 and 1996 with local employment increasing modestly.
For each of the 1981 through 1994 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"). The City was required to close substantial budget gaps in
recent fiscal years in order to maintain balanced operating results. For the
City's 1995 fiscal year (July 1, 1994-June 30, 1995), the City adopted a budget
which halted the trend in recent years of substantial increases in City
spending from one year to the next. However, in December 1994, the City
experienced substantial shortfalls in non-property tax revenues from those
projected. There can be no assurance that the City will continue to maintain a
balanced budget as required by State law without additional reductions in City
services or tax or other revenue increases which could adversely affect the
City's economic base.
The Mayor is responsible for preparing the City's four-year financial plan
(which is reviewed and revised on a quarterly basis), including the City's
current financial plan for the 1995 through 1998 fiscal years (the "1995-1998
Financial Plan," or "City Financial Plan"). The City's projections set forth in
the City 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 condition of the regional and local
economies, 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 City Financial Plan, employment growth, the results of a pending
actuarial audit of the City's pension system
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which is expected to substantially increase the City's annual pension costs,
the ability to implement proposed reductions in City personnel and other cost
reduction initiatives, revenue generating transactions, provision of State and
Federal aid and mandate relief and adoption of the City budget by the City
Council in substantially the form submitted by the Mayor.
Implementation of the City 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 1995 through 1998 contemplates the
issuance of $10.7 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.
1995-1998 Financial Plan. On October 25, 1994, the City published the City
Financial Plan for the 1995-1998 fiscal years, which is a proposed modification
to the City Financial Plan submitted by the City to the New York State
Financial Control Board (the "Control Board") on July 8, 1994 (the "July
Financial Plan"). The July Financial Plan set forth proposed City and State
actions and a proposed increase in federal assistance for the 1995 fiscal year
to close a previously projected gap of approximately $2.3 billion for the 1995
fiscal year. Proposed City actions under the July Financial Plan included City
agency productivity savings; tax and fee enforcement initiatives; service
reductions; transfer of a projected 1994 fiscal year surplus to the 1995 fiscal
year; the sale of certain City assets; and savings accrued from the
restructuring of City services, tort reform, reduced employee health care
costs, reduced pension costs and bond refinancings.
The City Financial Plan published on October 25, 1994 takes into account
actual receipts and expenditures and changes in forecast revenues and
expenditures since the July Financial Plan and projects revenues and
expenditures for the 1995 fiscal year balanced in accordance with GAAP. For the
1995 fiscal year, the City Financial Plan includes actions to offset an
additional projected $1.1 billion budget gap over and above the $2.3 billion
gap projected in the July Financial Plan. The gap-closing measures include
reductions in the number of City employees, additional expenditure reductions
and the use of reserves held for unreported health insurance claims.
Shortly after release of the City Financial Plan, the Mayor submitted to, and
then withdrew from, the City Council two budget modifications to the 1995
fiscal year budget to reflect the City Financial Plan. The Mayor has the power
under the City Charter to impound funds to reduce expenditures below the amount
appropriated by the City Council if the Mayor determines that funds are not
available for the full amount of the appropriation. Unable to come to an
agreement with the City Council regarding modification of the City's 1995
fiscal year budget, in December 1994 the Mayor reduced agency expenditures by
impounding a total of $790 million, effectively carrying out the expenditure
reductions proposed in the Mayor's withdrawn budget modifications.
The Mayor's Office of Management and Budget ("OMB") believes that since the
publication of the City Financial Plan on October 25, 1994, developments have
caused an additional $650 million budget gap in the City's 1995 fiscal year.
OMB has identified additional gap-closing actions totaling $650 million in the
1995 fiscal year which include, among other things, additional expenditure
reductions, a $100 million refund to
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the City by the Internal Revenue Service ("IRS") of social security payments,
increased social service cost reimbursements and debt service savings resulting
from a refunding of City debt. Certain of the gap-closing actions for the 1995
fiscal year will be subject to the City's ability to implement expenditure
reductions and, in the case of the social security refund, final approval by
the IRS. In the event such gap-closing actions are not implemented, additional
gap-closing measures may be required and there is no assurance that such
measures will enable the City to achieve a balanced budget for the 1995 fiscal
year.
The City Financial Plan also sets forth projections for the 1996 through 1998
fiscal years and outlines a proposed gap-closing program to close projected
budget gaps of $1.0 billion, $1.5 billion and $2.0 billion for the 1996 through
1998 fiscal years, respectively. These projections assume the extension by the
State Legislature of the 14% personal income tax surcharge beyond calendar year
1995 and the extension of the 12.5% personal income tax surcharge beyond
calendar year 1996, State assumption of certain Medicaid costs, agreement with
the City's unions with respect to savings derived from employee health
insurance programs, savings from tort reform and an increase in federal
assistance in each of the 1996, 1997 and 1998 fiscal years. In addition, the
City Financial Plan assumes the continuation of the current assumption with
respect to wages for City employees and the assumed 9% earnings on pension fund
assets affecting the City's pension fund contributions. An actuarial audit of
the City's pension system is currently being conducted, which is expected to
significantly increase the City's annual pension costs. Proposed City actions
include additional spending reductions, the reduction of City personnel through
attrition, government efficiency initiatives and procurement initiatives.
Various actions proposed in the City Financial Plan for the 1996-1998 fiscal
years, including the proposed State actions, are subject to approval by the
Governor and the State Legislature and the proposed increases in federal
assistance are subject to approval by Congress and the President. The State
Legislature has in previous legislative sessions failed to approve certain of
the City's proposals for the State assumption of certain Medicaid costs and
mandate relief, thereby increasing the uncertainty as to the receipt of the
State assistance included in the City Financial Plan.
OMB believes that developments since the publication of the City Financial
Plan have caused the $1.0 billion budget gap projected in the 1996 fiscal year
to increase to $2.5 billion. In February 1995 the Mayor is expected to publish
a modification (the "February Modification") of the City Financial Plan which
will reflect changes since publication of the City Financial Plan including
measures described above to assure balance in the 1995 fiscal year and the
City's program to address the $2.5 billion gap forecast for the 1996 fiscal
year.
The City's financial plans have been the subject of extensive public comment
and criticism. On December 8, 1994, the staff of the Control Board issued a
report on the City Financial Plan in which it concluded the City faces budget
risks of $513 million in the 1995 fiscal year and risks of $2 billion, $2.5
billion and $3.1 billion in the 1996, 1997 and 1998 fiscal years, respectively.
On November 30, 1994, the Office of the State Deputy Comptroller of New York
issued a report which reviewed the City Financial Plan. The report cited budget
risks of $500 million for the 1995 fiscal year and projected budget gaps of
$2.1 billion, $2.6 billion and $2.8 billion for the fiscal years 1996, 1997 and
1998, respectively. On November 21, 1994, the City Comptroller issued a report
on the City Financial Plan stating budget risks of $408 million existed in the
1995 fiscal year and stating that fiscal years 1996, 1997 and 1998 faced
potential budget gaps of $2.4 billion, $3.3 billion and $3.9 billion,
respectively. On January 17, 1995, the City Comptroller issued a report stating
that the budget risks for the 1995 fiscal year had increased to $658 million.
It is reasonable to expect that such reports will continue to be issued and to
engender public comment.
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Ratings. As of November 16, 1994, Moody's Investors Service, Inc. ("Moody's")
rated the City's general obligation bonds "Baa1" and Standard & Poor's Ratings
Group ("Standard & Poor's") and Fitch Investors Service, Inc. ("Fitch") each
rated such bonds "A-". On January 17, 1995, Standard and Poor's placed the
City's general obligation bonds on CreditWatch with negative implications in
light of plans by the City to refund some of its debt in order to provide $120
million of budget savings in the City's 1995 fiscal year. Standard and Poor's
stated that, by April 1995, City financial plans which continue to incorporate
non-reoccurring budget devices such as refundings, or fail to reflect ongoing
budget relief from the State, will result in a lowering of the rating to the
"BBB" category for New York City general obligation debt. Such ratings reflect
only the view of Moody's, Standard & Poor's and Fitch, from which an
explanation of the significance of such ratings may be obtained. There is no
assurance that such ratings will continue for any given period of time or that
they will not be revised downward or withdrawn entirely. Any such downward
revision or withdrawal could have an adverse effect on the market prices of
bonds.
Outstanding Indebtedness. As of September 30, 1994, the City and the
Municipal Assistance Corporation ("MAC") had, respectively, $21.673 billion and
$4.146 billion of outstanding net long-term debt.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. If the State experiences
revenue shortfalls or spending increases beyond its projections during its
1994-1995 fiscal year or subsequent fiscal years, such developments could
result in reductions in anticipated State aid to the City. In addition, there
can be no assurance that State budgets in future fiscal years will be adopted
by the April 1 statutory deadline and that there will not be adverse effects on
the City's cash flow and additional City expenditures as a result of such
reductions or delays.
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 contracts and other violations
of law and condemnation proceedings and other tax and miscellaneous actions.
While the ultimate outcome and fiscal impact, if any, on the proceedings and
claims are not currently predictable, adverse determination in certain of them
might have a material adverse effect upon the City's ability to carry out the
City Financial Plan. As of June 30, 1994, the City estimated its potential
future liability on account of all outstanding claims to be approximately $2.6
billion.
NEW YORK STATE
Current Economic Outlook. The national economy began to expand in 1991,
although the growth rate for the first two years of the expansion was modest by
historical standards. The State economy remained in recession until 1993, when
employment growth resumed. Since early 1993, New York has gained approximately
100,000 jobs.
The State's economy is expected to continue to expand during 1995. Industries
that export goods and services to the rest of the country and abroad are
expected to benefit from growing national and international markets. Both
upstate and downstate regions are expected to share in this renewed growth.
Employment is expected to grow moderately throughout the year, although the
rate of increase is expected to be below the experience of the 1980s due to
cutbacks in federal spending and employment, as well as continued downsizing by
large corporations.
State Financial Plan for the 1994-1995 Fiscal Year. The State's budget for
the 1994-95 fiscal year (April 1, 1994-March 31, 1995) was enacted by the State
Legislature on June 7, 1994, more than two months after
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the start of the fiscal year. Prior to adoption of the budget, the State
Legislature enacted appropriations for disbursements considered to be necessary
for State operations and other purposes, including all necessary appropriations
for debt service. The State Financial Plan for the 1994-95 fiscal year (the
"1994-95 State Financial Plan" or "State Financial Plan") was formulated on
June 16, 1994 and is based on the State's budget as enacted by the State
Legislature and signed into law by the Governor.
The State Financial Plan, as updated on October 28, 1994, projects a General
Fund balanced on a cash basis with total projected receipts of $34.054 billion.
Total General Fund disbursements in the current fiscal year are projected to be
$34.967 billion. However, it has more recently been reported that the State
could face a revenue shortfall of $200-300 million, primarily as a result of
weakness in tax collections.
The State anticipates that its capital programs will be financed, in part, by
State and public authorities borrowings in the 1994-95 fiscal year. The State
expects to issue $374 million in general obligation bonds (including $140
million for purposes of redeeming outstanding Bond Anticipation Notes ("BANs"),
$140 million in general obligation commercial paper and up to $69 million in
certificates of participation during the State's 1994-95 fiscal year for
equipment purchases. Borrowings by public authorities pursuant to lease-
purchase and contractual-obligation financings for capital programs of the
State are projected to total $2.426 billion. Additionally, the Local Government
Assistance Corporation ("LGAC") is authorized to provide net proceeds of up to
$315 million during the State's 1994-95 fiscal year.
The State Financial Plan is based upon forecasts of national and State
economic activity. Economic forecasts have frequently failed to predict
accurately the timing and magnitude of changes in the national and State
economies. 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 1994-95 fiscal year, with corresponding material and adverse
effects on the State's projections of receipts and disbursements.
Owing to these and other factors the State may 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 required levels. Any such recurring
imbalance would be exacerbated by the use by the State of nonrecurring
resources to achieve budgetary balance in a particular fiscal year. To correct
any recurring budgetary imbalance, the State would need to take significant
actions to align recurring receipts and disbursements in future fiscal years.
There can be no assurance, however, that the State's action will be sufficient
to preserve budget balances in the then current or future fiscal years.
The State Financial Plan contains actions that provide nonrecurring resources
or savings, as well as actions that impose nonrecurring losses of receipts or
costs. The Division of the Budget believes that the amount of such actions do
not materially affect the underlying financial condition of the State, and
represent less than one-half of one percent of the State's General Fund. This
amount is significantly lower than the amount included in the State Financial
Plans in recent years. In addition to these nonrecurring actions, the 1994-95
State Financial Plan reflects the use of $1.026 billion in the positive cash
margin carried over from the prior fiscal year, resources that are not expected
to be available in 1995-96.
The Governor has recently indicated that the State faces a potential budget
gap as high as $5 billion for the State's 1995-1996 fiscal year. The Governor
is expected to submit a proposed budget for the 1995-1996 fiscal year on or
about February 1, 1995 which will include measures to address the budget gap
for the 1995-1996 fiscal year.
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Local Government Assistance Corporation. In 1990, as part of a state fiscal
reform program, legislation was enacted creating LGAC, a public benefit
corporation empowered to issue long-term obligations to fund certain payments
to local governments traditionally funded through the State's annual seasonal
borrowing. The legislation authorized LGAC to issue its bonds and notes in an
amount not in excess of $4.7 billion (exclusive of certain refunding bonds)
plus certain other amounts. Over a period of years, the issuance of those long-
term obligations, which are to be amortized over no more than 30 years, was
expected to eliminate the need for continued short-term seasonal borrowing. The
legislation also dedicated revenues equal to one-quarter of the four cent State
sales and use tax to pay debt service on these bonds. The legislation also
imposed a cap on the annual seasonal borrowing of the State at $4.7 billion,
less net proceeds of bonds issued by LGAC and bonds issued to provide for
capitalized interest, except in cases where the Governor and the legislative
leaders have certified both the need for additional borrowing and provided a
schedule for reducing it to the cap. If borrowing above the cap is thus
permitted in any fiscal year, it is required by law to be reduced to the cap by
the fourth fiscal year after the limit was first exceeded. This provision
capping the seasonal borrowing was included as a covenant with LGAC's
bondholders in the resolution authorizing such bonds.
To date, LGAC has issued bonds to provide net proceeds of $3.856 billion and
has been authorized to issue its bonds to provide net proceeds of up to an
additional $315 million during the State's 1994-95 fiscal year. The impact of
this borrowing, together with the availability of certain cash reserves, is
that, for the first time in nearly 35 years, the State's 1994-95 Financial Plan
includes no short-term seasonal borrowing.
Financing Activities. State financing activities include general obligation
debt of the State and State-guaranteed debt, to which the full faith and credit
of the State has been pledged, as well as lease-purchase and contractual-
obligation financings, moral obligation financings and other financings through
public authorities and municipalities, where the State's obligation to make
payments for debt service is generally subject to annual appropriation by the
State Legislature.
As of March 31, 1994, the total amount of outstanding general obligation debt
was approximately $5.370 billion, including $224 million in BANs, the total
amount of debt issued by the LGAC was approximately $4.462 billion, the total
amount of moral obligation debt was approximately $7.261 billion and $16.604
billion of bonds issued primarily in connection with lease-purchase and
contractual-obligation financings of State capital programs were outstanding.
Public Authorities. The fiscal stability of the State is related, in part, to
the fiscal stability of its public authorities. Public 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, 1993, the latest data available, there were 18 public authorities
that had outstanding debt of $100 million or more and the aggregate outstanding
debt, including refunding bonds, of these 18 public authorities was $63.5
billion. The State's access to the public credit markets could be impaired and
the market price of its outstanding debt may be adversely affected, if any of
its public authorities were to default on their respective obligations.
Ratings. On June 6, 1990, Moody's changed its ratings on all of the State's
outstanding general obligation bonds from "A1" to "A". On March 26, 1990,
Standard & Poor's changed its ratings on all of the State's outstanding general
obligation bonds from "AA-" to "A". On January 13, 1992, Standard & Poor's
changed its ratings on all of the State's outstanding general obligation bonds
from "A" to "A-". Ratings
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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 New York State Municipal Bonds in which the New York
Fund invests.
Litigation. The State is a defendant in numerous legal proceedings including,
but 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.
On May 31, 1988 the Supreme Court of the United States (the "Court") took
jurisdiction of a claim of the State of Delaware that certain unclaimed
dividends, interest and other distributions made by issuers of securities and
held by New York-based brokers incorporated in Delaware for beneficial owners
who cannot be identified or located, had been, and were being, wrongfully taken
by the State of New York pursuant to New York's Abandoned Property Law (State
of Delaware v. State of New York, United States Supreme Court). Texas
intervened, claiming a portion of such distributions and similar property taken
by the State of New York from New York-based banks and depositories
incorporated in Delaware. All other states and the District of Columbia moved
to intervene. In a decision dated March 30, 1993, the Court granted all pending
motions of the states and the District of Columbia to intervene and remanded
the case to a Special Master for further proceedings consistent with the
Court's decision. The Court determined that the abandoned property should be
remitted first to the state of the beneficial owner's last known address, if
ascertainable and, if not, then to the state of incorporation of the
intermediary bank, broker or depository. New York and Delaware have executed a
settlement agreement which provides for payments by New York to Delaware of $35
million in the State's 1993-94 fiscal year and five annual payments thereafter
of $33 million. New York and Massachusetts have executed a settlement agreement
which provides for aggregate payments by New York of $23 million, payable over
five consecutive years. The claims of the other states and the District of
Columbia remain.
In an action commenced on August 6, 1991 (Schulz, et al., v. State of New
York, et al., State Supreme Court, Albany County), plaintiffs challenge the
constitutionality of two bonding programs of the New York State Thruway
Authority (the "TA") authorized by Chapters 166 and 410 of the Laws of 1991.
Plaintiffs argue that cooperative highway contractual agreements and service
contracts to be entered into by the State and the TA in connection with the
bonding programs constitute State debt and a gift or loan of State credit in
violation of Sections 8 and 11 of Article VII and Section 5 of Article X of the
State Constitution. In addition, plaintiffs challenge the fiscal year 1991-92
Judiciary budget as having been enacted in violation of Sections 1 and 2 of
Article VII of the State Constitution. The defendants' motion to dismiss the
action on procedural grounds was denied by order of the State Supreme Court
dated January 2, 1992. By order dated November 5, 1992, the Appellate Division,
Third Department, reversed the order of the State Supreme Court and granted
defendants' motion to dismiss on grounds of standing and mootness. By order
dated September
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16, 1993, on motion to reconsider, the Appellate Division, Third Department,
ruled that plaintiffs have standing to challenge the bonding program authorized
by Chapter 166 of the Laws of 1991. The action is pending in State Supreme
Court, Albany County.
In Schulz, et al. v. State of New York, et al. (State Supreme Court, Albany
County) which was commenced May 24, 1993, plaintiffs, among other things,
challenge the constitutionality of, and seek to enjoin, certain highway, bridge
and mass transportation bonding programs of the TA and the Metropolitan
Transportation Authority (the "MTA") authorized by Chapter 56 of the Laws of
1993. Plaintiffs contend that the application of State tax receipts held in
dedicated transportation funds to pay debt service on bonds of the TA and the
MTA violates Sections 8 and 11 of Article VII and Section 5 of Article X of the
State Constitution and due process provisions of the State and federal
constitutions. By order dated July 27, 1993, the State Supreme Court granted
defendants' motions for summary judgment, dismissed the complaint and vacated
the temporary restraining order previously issued. By decision dated October
21, 1993, the Appellate Division, Third Department, affirmed the judgment of
the State Supreme Court. By decision dated June 30, 1994, the New York Court of
Appeals ("Court of Appeals") affirmed the judgment of the Appellate Division.
Plaintiffs' motion for reargument before the Court of Appeals was denied on
September 1, 1994. Plaintiffs have petitioned to the United States Supreme
Court for a writ of certiorari which remains pending.
Several cases pending in State courts including Matter of New York
Association of Homes and Services for the Aging, Inc. v. Commissioner (State
Supreme Court, Albany County) challenge the rationality and the retroactive
application of State regulations recalibrating nursing home Medicaid rates.
Following invalidation of such previous regulations by the Court of Appeals,
the New York State Department of Health (the "DH") in 1991 promulgated new
recalibration regulations, 10 NYCRR (S)86-2.31(a) and (b), for 1989-1991 and
1992 and subsequent rate years, respectively. In Matter of New York Association
of Homes and Services for the Aging, Inc. v. Commissioner, by decision dated
June 30, 1994, the Court of Appeals held invalid the DH's retroactive
application to rate years 1989 through 1991 of the nursing home Medicaid
reimbursement rate recalibration adjustment set forth in 10 NYCRR (S)86-
2.31(a). Plaintiffs and the State have executed a settlement which provides for
payments of $53 million to the plaintiffs by the State prior to the end of the
State's 1994-1995 fiscal year.
Adverse developments in these proceedings or the initiation of new
proceedings could affect the ability of the State to maintain a balanced State
Financial Plan. The State believes that the State Financial Plan includes
sufficient reserves for the payment of judgments that may be required during
the 1994-95 fiscal year. There can be no assurance, however, that an adverse
decision in any of these proceedings would not exceed the amount of the State
Financial Plan reserves for the payment of judgments and, therefore, could
affect the ability of the State to maintain a balanced State Financial Plan.
Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1994-95 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1994-95 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.
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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 RATINGS GROUP ("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 Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on
B balance, as predominately speculative with respect to capacity
CCC to pay interest and repay principal in accordance with the terms
of the obligations. "BB" indicates the lowest degree of
CC speculation and "C" the highest degree of speculation. While
such bonds will likely have some quality and protective
C 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.
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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.
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
Standard & Poor's believes that such payments will be made during such
grace period.
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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).
--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 issuer 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 Standard & Poor'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.
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<PAGE>
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.
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 ARROW/RIGHT ARROW]
Declining [DOWN ARROW]
Uncertain [UP ARROW/DOWN ARROW]
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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.
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.
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<PAGE>
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.
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.
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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.
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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, 1994, 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, 1994 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, 1994, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 31, 1994
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<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
New York--96.1%
<S> <S> <C> <S> <C>
BBB+ Baa1 $ 2,955 Babylon, New York, IDA, Resource Recovery Revenue Bonds (Ogden Martin Systems),
Series C, 8.50% due 1/01/2019 $ 3,205
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)(j) 16,750
Buffalo, New York, Sewer Authority Revenue Bonds:
AAA Aaa 2,000 Refunding, Series G, 5% due 7/01/2012(b) 1,686
AAA Aaa 2,250 Series E, 7.75% due 7/01/1997(a)(d) 2,459
AAA Aaa 4,000 Series F, 6% due 7/01/2013(b) 3,899
Clifton Park, New York, Water Authority, Water System Revenue Bonds (b):
AAA Aaa 2,000 Refunding, 5% due 10/01/2026 1,585
AAA Aaa 1,000 Series A, 6.375% due 10/01/2002(d) 1,082
AAA Aaa 1,210 Erie County, New York, Water Authority, Water Revenue Refunding Bonds
(Fourth Resolution), 7.30% due 12/01/2017(a)(g) 227
Grand Central District Management Association Inc., New York, Business Improvement
District, Capital Improvement Revenue Bonds:
AAA Aaa 2,170 6.50% due 1/01/2002(d) 2,337
A A1 2,300 Refunding, 5.125% due 1/01/2014 1,907
A A1 4,750 Refunding, 5.25% due 1/01/2022 3,822
NR Aa1 6,200 Hornell, New York, IDA, IDR (Crowley Foods, Inc.), 7.75% due 12/01/2016 6,580
Metropolitan Transportation Authority, New York, Service Contract Revenue Bonds
(Commuter Facilities):
BBB Baa1 8,475 Refunding, Series 5, 7% due 7/01/2012 8,742
BBB Baa1 1,195 Series 3, 9.25% due 7/01/1999 1,382
BBB Baa1 1,300 Series 3, 9.25% due 7/01/2000 1,536
BBB Baa1 4,370 Series O, 5.75% due 7/01/2013 3,947
BBB Baa1 2,000 Series O, 5.50% due 7/01/2017 1,717
</TABLE>
PORTFOLIO ABBREVIATIONS
- -----------------------
To simplify the listings AMT Alternative Minimum Tax (subject to)
of Merrill Lynch New York COP Certificates of Participation
Municipal Bond Fund's GO General Obligation Bonds
portfolio holdings in the HFA Housing Finance Authority
Schedule of Investments, IDA Industrial Development Authority
we have abbreviated the IDR Industrial Development Revenue Bonds
names of many of the LEVRRS Leveraged Reverse Rate Securities
securities according to M/F Multi-Family
the list at right. PCR Pollution Control Revenue Bonds
TRAN Tax Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
70
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<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
New York (continued)
<S> <S> <C> <S> <C>
Metropolitan Transportation Authority, New York, Service Contract Revenue Bonds
(Transit Facilities):
BBB Baa1 $ 4,350 Series 3, 9.25% due 7/01/1999 $ 5,069
BBB Baa1 4,755 Series 3, 9.25% due 7/01/2000 5,619
BBB Baa1 1,845 Series O, 5.75% due 7/01/2013 1,666
BBB Baa1 2,585 Series O, 5.50% due 7/01/2017 2,220
AAA Aaa 1,210 Metropolitan Transportation Authority, New York, Transportation Facilities Revenue
Refunding Bonds, Series N, 6.60% due 7/01/2014(b)(g) 336
AAA Aaa 2,950 Monroe County, New York, Airport Authority Revenue Bonds (Greater Rochester
International), AMT, 7.25% due 1/01/2009(c) 3,221
Monroe County, New York, COP:
BBB+ Baa 510 7.375% due 1/01/1996 528
BBB+ Baa 9,770 8.05% due 1/01/2011 10,747
NR A 6,125 Monroe County, New York, IDA, Civic Facilities Revenue Bonds (Genesee Hospital),
Series A, 7% due 11/01/2018 6,290
A1+ NR 500 Nassau County, New York, IDA, Research Facilities Revenue Bonds (Cold Spring
Harbor Lab Project), VRDN, 3.80% due 7/01/2019(e) 500
NR Aa 1,500 New Castle, New York, Refunding Bonds, UT, 4.50% due 6/01/2006 1,297
New York City, New York, GO, UT:
A- Baa1 4,500 Refunding, Series C, 6.50% due 8/01/2006 4,525
A- Baa1 15,400 Series D, 9.50% due 8/01/2002 18,723
A- Baa1 1,000 Series H, 7.20% due 2/01/2014 1,032
A- Baa1 3,135 Series I, 7.75% due 8/15/1999(d) 3,539
A- Baa1 1,865 Series I, 7.75% due 8/15/2018 2,021
AA Aa 8,475 New York City, New York, Housing Development Corporation, M/F Housing Revenue
Bonds, Series B, 5.70% due 11/01/2013(f) 7,782
New York City, New York, IDA, Civic Facilities Revenue Bonds:
BBB NR 2,000 (New York Blood Center), 7.20% due 5/01/2012 2,054
BBB NR 3,250 (New York Blood Center), 7.25% due 5/01/2022 3,354
AAA Aaa 9,100 (Rockefeller Foundation Project), 5.375% due 7/01/2023 7,848
A1+ NR 1,100 New York City, New York, IDA, IDR (Japan Airlines Company Ltd. Project), AMT,
VRDN, 3.90% due 11/01/2015(e) 1,100
BB+ Baa2 2,030 New York City, New York, IDA, Special Facilities Revenue Bonds (American
Airlines Inc., Project), AMT, 7.75% due 7/01/2019 2,079
New York City, New York, IDA, Special Facilities Revenue Bonds (Terminal One
Group Association Project), AMT:
A A 5,500 6% due 1/01/2015 5,110
A A 16,000 6.125% due 1/01/2024 14,824
New York City, New York, Municipal Water Finance Authority Water and Sewer
System Revenue Bonds:
AAA Aaa 20,000 5.35% due 6/15/2012(c) 17,774
AAA Aaa 10,000 LEVRRS, 7.828% due 6/15/2019(c)(h) 7,875
A- A 7,000 Series A, 6.75% due 6/15/2017 7,091
AAA VMIG1 1,000 Series G, VRDN, 3.60% due 6/15/2024(b)(e) 1,000
AAA Aaa 3,750 New York City, New York, Trust for Cultural Resources Revenue Bonds (American
Museum of Natural History), Series A, 6.90% due 4/01/2001(c)(d) 4,150
</TABLE>
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<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
New York (continued)
<S> <S> <C> <S> <C>
New York State Dormitory Authority Revenue Bonds:
BBB Baa1 $ 9,635 (City University System), Refunding, Series B, 6% due 7/01/2014 $ 8,961
BBB Baa1 3,500 (City University System), Series A, 9.25% due 7/01/2000 4,143
BBB Baa1 7,030 (City University System), Series C, 9.25% due 7/01/2000 8,322
A NR 1,065 (Community Memorial Hospital, Hamilton), 9% due 7/01/2005 1,121
A1+ VMIG1 600 (Cornell University), Series B, VRDN, 3.80% due 7/01/2025(e) 600
BBB+ Baa1 2,500 (Court Facilities Lease Bonds), Series A, 5.50% due 5/15/2010 2,221
BBB+ Baa1 1,500 (Court Facilities Lease Bonds), Series A, 5.25% due 5/15/2021 1,202
BBB+ Baa1 3,000 (Court Facilities Lease Bonds), Series A, 5.50% due 5/15/2023 2,491
AAA Aaa 2,900 (Insured-Colgate University), 5.625% due 7/01/2023(b) 2,595
AA Aa 3,130 (Rochester General Hospital), 8.75% due 8/01/1995(d)(f) 3,306
NR VMIGl 600 (Saint Francis Center), VRDN, 3.75% due 7/01/2023(e) 600
BBB+ Baa1 9,410 (State University Educational Facilities), Refunding, Series B, 7.50% due 5/15/2011 10,347
BBB- Baa1 5,000 (Upstate Community College), Series A, 5.70% due 7/01/2021 4,304
New York State Energy Research and Development Authority, Electric Facilities
Revenue Bonds (Consolidated Edison Company), AMT:
A+ Aa3 9,610 Refunding, Series C, 5.375% due 9/15/2022 7,927
A+ Aa3 4,000 Series A, 6.75% due 1/15/2027 3,999
AAA Aaa 1,000 Series B, 6.375% due 12/01/2027(c) 966
A A1 8,400 New York State Energy Research and Development Authority, Gas Facilities Revenue
Bonds (Brooklyn Union Gas Co. Project), Series II, 7% due 12/01/2020 8,810
BBB Baa1 4,510 New York State Energy Research and Development Authority, PCR (New York State
Electric & Gas Corp.), AMT, Series A, 5.95% due 12/01/2027 3,902
A1+ NR 200 New York State Energy Research and Development Authority, PCR (Niagara Power
Corporation Project), VRDN, AMT, Series B, 3.80% due 7/01/2027 (e) 200
AAA Aaa 2,300 New York State Energy Research and Development Authority, PCR, Refunding (Rochester
Gas and Electric Project), AMT, Series B, 6.50% due 5/15/2032 2,252
New York State Environmental Facilities Corporation, PCR (Water-Revolving Fund):
A Aa 2,450 Series A, 7.25% due 6/15/2010 2,634
A Aa 1,250 Series A, 7% due 6/15/2012 1,321
A Aa 5,000 Series A, 7.50% due 6/15/2012 5,461
A Aa 16,350 Series E, 6.875% due 6/15/2010 17,138
A Aa 5,000 Series E, 6.50% due 6/15/2014 5,016
New York State Environmental Facilities Corporation, Solid Waste Disposal Revenue
Bonds (Occidental Petroleum Corp.), AMT:
BBB Baa 2,000 Sub-Series A, 5.70% due 9/01/2028 1,685
BBB Baa 1,500 Sub-Series B, 5.50% due 9/01/2003 1,481
New York State Environmental Facilities Corporation, Special Obligation Bonds
(Riverbank State Park):
BBB NR 1,485 7.25% due 4/01/2007 1,568
BBB NR 3,000 7.25% due 4/01/2012 3,185
BBB NR 8,400 7.375% due 4/01/2022 8,854
AAA Aaa 6,225 New York State Environmental Facilities Corporation, Water Facilities Revenue
Refunding Bonds (Spring Valley Water Company), Series B, 6.15% due 8/01/2024(a) 5,978
AAA Aaa 7,190 New York State, GO, UT, 6% due 6/15/2011(a) 7,041
New York State, HFA, Service Contract Obligation Revenue Bonds:
BBB Baa1 5,100 Refunding, Series C, 5.875% due 9/15/2014 4,651
BBB Baa1 18,585 Series A, 5.50% due 9/15/2022 15,479
</TABLE>
72
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
New York (continued)
<S> <S> <C> <S> <C>
New York State Local Government Assistance Corporation Revenue Bonds:
A A $ 1,600 Series A, 7.125% due 4/01/2011 $ 1,689
A A 5,500 Series A, 6.875% due 4/01/2019 5,648
A A 5,000 Series A, 6.50% due 4/01/2020 4,969
A A 1,740 Series B, 6.25% due 4/01/2021 1,675
A1+ VMIG1 7,800 Series B, VRDN, 3.50% due 4/01/2023(e) 7,800
A A 10,000 Series C, 6.25% due 4/01/2018 9,689
New York State Medical Care Facilities Finance Agency Revenue Bonds:
AAA Aaa 6,820 (Health Insurance Plan of Greater New York), Series B, 8.50% due 12/01/1997(a)(d) 7,585
AAA NR 4,000 (Hospital & Nursing Home Mortgage), Refunding, Series C, 5.75% due 8/15/2019(f) 3,596
AAA NR 1,000 (Hospital & Nursing Home Mortgage), Series A, 8.30% due 2/15/1998(d)(f) 1,121
AA Aa 2,700 (Hospital & Nursing Home Mortgage), Series B, 8.10% due 2/15/1998(d)(f) 3,006
AAA NR 6,375 (Hospital & Nursing Home Mortgage), Series C, 6.40% due 8/15/2014(f) 6,327
AAA Aaa 4,000 (Long Term Health Care Capital Guaranty Insured), Series D, 6.50% due 11/01/2015 4,029
AAA Aaa 1,050 (Mental Health Services), Series A, 5.25% due 8/15/2023(b) 870
BBB+ Baa1 2,200 (Mental Health Services), Series B, 6% due 2/15/2011 2,079
BBB+ Baa1 1,215 (Mental Health Services), Series B, 7.625% due 8/15/2017 1,305
AAA Aaa 3,240 (Mental Health Services), Series C, 7.30% due 8/15/2001(d) 3,672
AAA Aaa 5,000 (Mental Health Services), Series C, 5.25% due 8/15/2014(b) 4,298
BBB+ Baa1 1,075 (Mental Health Services), Series C, 7.30% due 2/15/2021 1,141
BBB+ Baa1 2,455 (Mental Health Services), Series D, 7.40% due 2/15/2018 2,606
BBB+ Baa1 4,655 (Mental Health Services), Series E, 6.50% due 8/15/2015 4,618
AAA Aaa 2,000 (Mental Health Services), Series F, 5.375% due 2/15/2014(i) 1,778
BBB+ Baa1 3,425 (Mental Health Services), Series F, 6.50% due 2/15/2019 3,323
AAA Aaa 6,140 (Saint Francis Hospital Project), Series A, 7.625% due 11/01/2021(b) 6,755
BBB Baa 7,750 (Security Hospital), Series A, 7.40% due 8/15/2021 8,225
New York State Mortgage Agency, Homeowner Mortgage Revenue Bonds:
NR Aa 525 10th Series A, 8.10% due 4/01/2014 561
NR Aa 1,500 Series 40--B, AMT, 6.60% due 4/01/2025 1,462
NR Aa 12,570 Series BB--2, 7.95% due 10/01/2015 13,278
NR Aa 1,750 Series EE--3, 7.75% due 4/01/2016 1,835
NR Aa 2,375 Series FF, 7.95% due 10/01/2014 2,568
NR Aa 1,640 Series GG, AMT, 8.125% due 4/01/2020 1,754
New York State Power Authority, General Purpose and Revenue Bonds:
AA- Aa 5,000 6.25% due 1/01/2023 4,857
AA- Aa 5,000 Refunding, Series Z, 6.50% due 1/01/2019 5,013
AA- Aa 21,715 Series Y, 6.75% due 1/01/2018 22,376
AAA Aaa 2,500 New York State Thruway Authority, General Revenue Bonds, Series A, 5.75% due
1/01/2019(b) 2,292
A- A 6,790 New York State Thruway Authority, Highway and Bridge Trust Fund, Series A, 6%
due 4/01/2014 6,490
New York State Thruway Authority, Service Contract Revenue Bonds
(Local Highway and Bridge):
BBB Baa1 3,700 6% due 1/01/2011 3,487
BBB Baa1 7,125 5.25% due 4/01/2013 5,992
New York State Urban Development Corporation Revenue Bonds:
BBB Baa1 1,500 (Alfred Technology Resource Income Project), 7.875% due 1/01/2020 1,622
BBB Baa1 2,800 (Correctional Capital Facilities), Refunding, 5.50% due 1/01/2015 2,411
BBB Baa1 11,325 (Correctional Capital Facilities), Refunding, Series A, 5.25% due 1/01/2021 9,118
AAA Aaa 5,000 Niagara Falls, New York, Bridge Commission, Toll Revenue Refunding Bonds, Series B,
5.25% due 10/01/2021(b) 4,149
</TABLE>
73
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
New York (concluded)
<S> <S> <C> <S> <C>
BBB Baa $ 10,550 Oneida-Herkimer, New York, Solid Waste Management Authority, Revenue Refunding
Bonds, 6.75% due 4/01/2014 $ 10,382
AAA Aaa 4,000 Onondaga County, New York, IDA, Sewer Facilities Revenue Bonds (Bristol-Myers
Squibb Co. Project), AMT, 5.75% due 3/01/2024 3,623
Port Authority of New York and New Jersey, Consolidated Revenue Bonds, AMT:
AA- A1 2,000 Seventy-Third Series, 6.75% due 4/15/2026 2,022
AA- A1 8,345 Seventy-Sixth Series, 6.50% due 11/01/2026 8,255
A1+ VMIG1 5,100 Suffolk County, New York, IDA, IDR, Refunding (Nissequogue Cogeneration Partners),
VRDN, 3.50% due 12/15/2023(e) 5,100
Triborough Bridge and Tunnel Authority, New York, Revenue Bonds (General Purpose):
A+ Aa 6,270 Refunding, Series Q, 6.75% due 1/01/2009 6,635
A+ Aa 9,500 Refunding, Series Y, 6.125% due 1/01/2021 9,122
A+ Aa 14,055 Series X, 6.625% due 1/01/2012 14,575
A+ Aa 5,000 Series X, 6.50% due 1/01/2019 5,013
BBB Baa 7,220 Ulster County, New York, Resource Recovery Agency Revenue Bonds (Solid Waste
Systems), 6% due 3/01/2014 6,646
United Nations Development Corp., New York, Revenue Refunding Bonds:
NR A 14,425 Senior-Lien, Series A, 6% due 7/01/2026 13,314
NR A 2,250 Sub-Lien, Series B, 6.25% due 7/01/2026 2,151
AA- Aa3 1,720 Westchester County, New York, Westchester, IDA, Airport Facility Revenue Bonds
(West Chester Airport Association), AMT, Series A, 5.95% due 8/01/2024 1,573
Puerto Rico--1.7%
A Baa1 2,500 Puerto Rico Commonwealth, GO, UT, 6.45% due 7/01/2017 2,497
A Baa1 4,415 Puerto Rico Commonwealth Highway and Transportation Authority, Highway Revenue
Refunding Bonds, Series X, 5.25% due 7/01/2021 3,618
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 2,625
A Baa1 3,000 Puerto Rico Public Buildings Authority, Guaranteed Public Education and Health
Facilities, Revenue Refunding Bonds, Series M, 5.50% due 7/01/2021 2,558
Total Investments (Cost--$659,204)--97.8% $ 658,776
Variation Margin on Futures Contracts*--0.0% (45)
Other Assets Less Liabilities--2.2% 14,910
---------
Net Assets--100.0% $ 673,641
=========
<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 rate shown is the rate in
effect at September 30, 1994.
(f)FHA Insured.
(g)Represents the yield to maturity on this zero coupon issue.
(h)The interest rate is subject to change periodically and inversely
based upon the prevailing market rate. The interest rate shown is
the rate in effect at September 30, 1994.
(i)FSA Insured.
(j)As of September 30, 1994, $3 million of this issue was held in
connection with open futures contracts.
*Futures contracts sold as of September 30, 1994 were as follows:
Value
Number of Expiration (Note 1a)
Contracts Issue Date (in Thousands)
1,442 United States Treasury Bonds Dec. 1994 ($147,377)
Total Futures Contracts
(Total Contract Price--$148,111) ($147,377)
=========
NR--Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.
See Notes to Financial Statements.
</TABLE>
74
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of September 30, 1994
<CAPTION>
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$659,204,146)(Note 1a) $658,776,306
Receivables:
Securities sold $ 29,859,210
Interest 12,465,918
Beneficial interest sold 703,291 43,028,419
------------
Prepaid registration fees and other assets (Note 1e) 109,688
------------
Total assets 701,914,413
------------
Liabilities: Payables:
Securities purchased 17,415,690
Beneficial shares redeemed 2,466,115
Dividends to shareholders (Note 1f) 601,589
Investment adviser (Note 2) 326,987
Distributor (Note 2) 288,403
Variation margin (Note 1b) 45,063 21,143,847
------------
Accrued expenses and other liabilities 7,129,101
------------
Total liabilities 28,272,948
------------
Net Assets: Net assets $673,641,465
============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $ 260,214
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 5,932,641
Paid-in capital in excess of par 680,736,439
Accumulated distributions in excess of realized capital gains
on investments--net (13,593,958)
Unrealized appreciation on investments--net 306,129
------------
Net assets $673,641,465
============
Net Asset Class A--Based on net assets of $28,300,768 and 2,602,140
Value: shares of beneficial interest outstanding $ 10.88
============
Class B--Based on net assets of $645,340,697 and 59,326,415
shares of beneficial interest outstanding $ 10.88
============
See Notes to Financial Statements.
</TABLE>
75
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended September 30, 1994
<CAPTION>
<S> <S> <C>
Investment Interest and amortization of premium and discount earned $ 45,400,834
Income ------------
(Note 1d): Other 1,646
------------
45,402,480
Expenses: Investment advisory fees (Note 2) 3,999,719
Distribution fees--Class B (Note 2) 3,530,348
Transfer agent fees--Class B (Note 2) 280,053
Printing and shareholder reports 119,755
Accounting services (Note 2) 81,833
Professional fees 68,879
Custodian fees 55,244
Trustees' fees and expenses 35,701
Registration fees (Note 1e) 19,243
Pricing fees 17,727
Transfer agent fees--Class A (Note 2) 10,890
Amortization of organization expenses (Note 1e) 712
Other 10,014
------------
Total expenses 8,230,118
------------
Investment income--net 37,172,362
------------
Realized & Realized loss on investments (5,792,148)
Unrealized Loss on Change in unrealized appreciation on investments--net (74,453,611)
Investments--Net ------------
(Notes 1d & 3): Net Decrease in Net Assets Resulting from Operations $(43,073,397)
============
See Notes to Financial Statements
</TABLE>
76
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended
September 30,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 37,172,362 $ 36,795,050
Realized gain (loss) on investments--net (5,792,148) 15,506,899
Change in unrealized appreciation on investments--net (74,453,611) 30,754,959
------------ ------------
Net increase (decrease) in net assets resulting from operations (43,073,397) 83,056,908
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (1,758,497) (1,475,206)
Shareholders Class B (35,413,865) (35,319,844)
(Note 1f): Realized gain on investments--net:
Class A (299,209) (194,989)
Class B (6,828,149) (5,828,788)
In excess of realized gain on investments--net:
Class A (570,678) --
Class B (13,023,280) --
------------ ------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (57,893,678) (42,818,827)
------------ ------------
Beneficial Net increase in net assets derived from beneficial interest
Interest transactions 8,652,057 90,154,954
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (92,315,018) 130,393,035
Beginning of year 765,956,483 635,563,448
------------ ------------
End of year $673,641,465 $765,956,483
============ ============
See Notes to Financial Statements.
</TABLE>
77
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived from
information provided in the financial statements. Class A
For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.46 $ 11.77 $ 11.22 $ 10.56 $ 10.81
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .64 .70 .72 .74 .73
Realized and unrealized gain
(loss) on investments--net (1.25) .80 .55 .66 (.25)
--------- --------- --------- --------- ---------
Total from investment operations (.61) 1.50 1.27 1.40 .48
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.64) (.70) (.72) (.74) (.73)
Realized gain on investments--net (.11) (.11) -- -- --
In excess of realized gain--net (.22) -- -- -- --
--------- --------- --------- --------- ---------
Total dividends and distributions (.97) (.81) (.72) (.74) (.73)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 10.88 $ 12.46 $ 11.77 $ 11.22 $ 10.56
========= ========= ========= ========= =========
Total Investment Based on net asset value per share (5.17%) 13.25% 11.77% 13.60% 4.42%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses .63% .64% .65% .66% .67%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 5.52% 5.80% 6.28% 6.72% 6.79%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in
Data: thousands) $ 28,301 $ 31,976 $ 18,973 $ 13,727 $ 8,905
========= ========= ========= ========= =========
Portfolio turnover 107.96% 38.31% 35.90% 49.78% 53.82%
========= ========= ========= ========= =========
<FN>
*Total investment returns exclude the effect of sales loads.
See Notes to Financial Statements.
</TABLE>
78
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
The following per share data and ratios have been derived from
information provided in the financial statements. Class B
For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.46 $ 11.77 $ 11.23 $ 10.57 $ 10.81
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .58 .64 .67 .67 .68
Realized and unrealized gain
(loss) on investments--net (1.25) .80 .54 .66 (.24)
--------- --------- --------- --------- ---------
Total from investment operations (.67) 1.44 1.21 1.33 .44
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.58) (.64) (.67) (.67) (.68)
Realized gain on investments--net (.11) (.11) -- -- --
In excess of realized gain--net (.22) -- -- -- --
--------- --------- --------- --------- ---------
Total dividends and distributions (.91) (.75) (.67) (.67) (.68)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 10.88 $ 12.46 $ 11.77 $ 11.23 $ 10.57
========= ========= ========= ========= =========
Total Investment Based on net asset value per share (5.66%) 12.68% 11.12% 13.03% 4.00%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses, excluding distribution
Net Assets: fees . 64% .64% .66% .67% .68%
========= ========= ========= ========= =========
Expenses 1.14% 1.14% 1.16% 1.17% 1.18%
========= ========= ========= ========= =========
Investment income--net 5.02% 5.32% 5.79% 6.23% 6.28%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in
Data: thousands) $ 645,341 $ 733,981 $ 616,590 $ 568,958 $ 566,095
========= ========= ========= ========= =========
Portfolio turnover 107.96% 38.31% 35.90% 49.78% 53.82%
========= ========= ========= ========= =========
<FN>
*Total investment returns exclude the effect of sales loads.
See Notes to Financial Statements.
</TABLE>
79
<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 management investment 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. On September 27, 1994, shareholders
approved the implementation of the Merrill Lynch Select PricingSM
System, which will offer two new classes of shares, Class C and
Class D. 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 and options thereon, 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 sixty 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. 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. 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. Distributions in excess
of realized capital gains are due primarily to differing tax
treatments for futures transactions and post October losses.
80
<PAGE>
(g) Non-income producing investments--Written and purchased options
are non-income producing investments.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). Effective January 1, 1994, the
investment advisory business of FAM was reorganized from a
corporation to a limited partnership. Both prior to and after the
reorganization, ultimate control of FAM was vested with Merrill
Lynch & Co., Inc. ("ML & Co."). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of ML & Co. The limited partners are ML & Co. and Fund
Asset Management, Inc. ("FAMI"), which is also an indirect wholly-
owned subsidiary of ML & Co.
FAM 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
FAM 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. FAM's obligation to reimburse the Fund
is limited to the amount of the management fee. No fee payment will
be made to FAM during any fiscal year which will cause such expenses
to exceed the expense limitation at the time of such payment.
Pursuant to a distribution plan (the "Distribution Plan") adopted by
the Fund in accordance with Rule 12b-1 under the Investment Company
Act of 1940, the Fund pays Merrill Lynch Funds Distributor, Inc.
("MLFD" or "Distributor") an ongoing account maintenance and a
distribution fee, 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, Pierce, Fenner &
Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides
account maintenance and distribution services to the Fund. The
ongoing account maintenance fee compensates the Distributor and
MLPF&S for providing account maintenance services to Class B
shareholders. The ongoing distribution fee compensates the
Distributor and MLPF&S for providing shareholder and distribution
services and bearing certain distribution-related expenses of the
Fund.
For the year ended September 30, 1994, MLFD earned underwriting
discounts of $7,202, and MLPF&S earned dealer concessions of $65,972
on sales of the Fund's Class A Shares.
MLPF&S also received contingent deferred sales charges of $692,305
for the sale of the Fund's Class B Shares during the period.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, FAMI, PSI, MLFD, FDS, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended September 30, 1994 were $750,400,277 and
$830,226,443, respectively.
81
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
Net realized and unrealized gains (losses) as of September 30, 1994
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $(10,567,768) $ 3,923,160
Short-term investments (4,758) (4,351,000)
Financial futures contracts 4,780,378 733,969
------------ ------------
Total $ (5,792,148) $ 306,129
============ ============
As of September 30, 1994, net unrealized depreciation for Federal
income tax purposes aggregated $655,362, of which $19,275,967
related to appreciated securities and $19,931,329 related to
depreciated securities. The aggregate cost of investments at
September 30, 1994 for Federal income tax purposes was $659,431,668.
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest
transactions was $8,652,057 and $90,154,954 for the years ended
September 30, 1994 and September 30, 1993, respectively.
Transactions in shares of beneficial interest for Class A and Class
B Shares were as follows:
Class A Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 857,494 $ 10,076,116
Shares issued to share-
holders in reinvestment
of dividends and
distributions 145,242 1,703,433
------------ ------------
Total issued 1,002,736 11,779,549
Shares redeemed (967,073) (11,024,027)
------------ ------------
Net increase 35,663 $ 755,522
============ ============
Shares for the Year Dollar
Ended September 30, 1993 Shares Amount
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 B Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 7,245,112 $ 85,135,787
Shares issued to share-
holders in reinvestment
of dividends and
distributions 2,392,697 28,072,759
------------ ------------
Total issued 9,637,809 113,208,546
Shares redeemed (9,213,059) (105,312,011)
------------ ------------
Net increase 424,750 $ 7,896,535
============ ============
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
============ ============
82
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
83
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Description of Municipal Bonds and Temporary Investments................... 4
Description of Municipal Bonds............................................ 4
Description of Temporary Investments...................................... 6
Repurchase Agreements..................................................... 7
Financial Futures Transactions and Options................................ 8
Investment Restrictions.................................................... 12
Management of the Trust.................................................... 14
Trustees and Officers..................................................... 14
Compensation of Trustees.................................................. 16
Management and Advisory Arrangements...................................... 16
Purchase of Shares......................................................... 18
Initial Sales Charge Alternatives--Class A and Class D Shares............. 18
Reduced Initial Sales Charges............................................. 19
Distribution Plans........................................................ 22
Limitations on the Payment of Deferred Sales Charges...................... 22
Redemption of Shares....................................................... 23
Deferred Sales Charges--Class B Shares.................................... 24
Portfolio Transactions..................................................... 24
Determination of Net Asset Value........................................... 25
Shareholder Services....................................................... 26
Investment Account........................................................ 26
Automatic Investment Plans................................................ 27
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 27
Systematic Withdrawal Plans--Class A and Class D Shares................... 27
Exchange Privilege........................................................ 28
Distributions and Taxes.................................................... 41
Environmental Tax......................................................... 44
Tax Treatment of Options and Futures Transactions......................... 44
Performance Data........................................................... 45
General Information........................................................ 48
Description of Series and Shares.......................................... 48
Computation of Offering Price Per Share................................... 50
Independent Auditors...................................................... 50
Custodian................................................................. 50
Transfer Agent............................................................ 50
Legal Counsel............................................................. 50
Reports to Shareholders................................................... 51
Additional Information.................................................... 51
Appendix I--Economic Conditions in New York................................ 52
Appendix II--Ratings of Municipal Bonds.................................... 60
Independent Auditors' Report............................................... 69
Financial Statements....................................................... 70
</TABLE>
Code #10343-0195
[LOGO]
Merrill Lynch
New York Municipal
Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
STATEMENT OF
ADDITIONAL
INFORMATION
January 31, 1995
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 eight-year period
ended September 30, 1994 and for the period November 1, 1985
(commencement of operations) to September 30, 1986.
Contained in Part B:
Schedule of Investments as of September 30, 1994.
Statement of Assets and Liabilities as of September 30, 1994.
Statement of Operations for the year ended September 30, 1994.
Statement of Changes in Net Assets for the years ended September 30,
1994 and September 30, 1993.
Financial Highlights for each of the years in the five-year period
ended September 30, 1994.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Declaration of Trust of the Registrant, dated August 2, 1985.
(b) --Instrument establishing Merrill Lynch New York Municipal Bond Fund
(the "Fund") as a series of the Registrant.
(c) --Amendment to Declaration of Trust, dated October 3, 1988.
(d) --Instrument establishing Class A Shares and Class B Shares of the
Fund.
(e) --Amendment to Declaration of Trust and Establishment and Designation
of Classes, dated October 17, 1994.
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(a) --Management Agreement between Registrant and Fund Asset Management,
L.P.(b)
(b) --Supplement to Management Agreement between Registrant and Fund
Asset Management, L.P.(h)
6(a) --Class B Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(b)
(b)(1) --Class A Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(d)
(b)(2) --Form of Revised Class A Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.(h)
(c) --Form of Class C Shares Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc.(h)
(d) --Form of Class D Shares Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc.(h)
(e) --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.(g)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
7 --None.
8 --Form of Custody Agreement between the Registrant and State Street
Bank and Trust Company.(c)
9 --Transfer Agency Agreement between Registrant and Merrill Lynch
Financial Data Service, Inc. (now known as Financial Data Services,
Inc.).(d)
10 --Opinion of Brown & Wood, counsel for the Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --None.
13 --Certificate of Fund Asset Management, L.P.(b)
14 --None.
15(a) --Amended and Restated Class B Shares Distribution Plan of the
Registrant and Amended and Restated Class B Shares Distribution Plan
Sub-Agreement.(g)
(b) --Form of Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of the Registrant.(h)
(c) --Form of Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of the Registrant.(h)
16 --Schedule for computation of performance quotations for Class C and
Class D Shares provided in the Registration Statement in response to
Item 22.
17(a) --Financial Data Schedule for the Year Ended September 30, 1994
relating to Class A Shares.
(b) --Financial Data Schedule for the Year Ended September 30, 1994
relating to Class B Shares.
</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) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933, as amended, relating to shares of the Merrill Lynch Minnesota
Municipal Bond Fund series of the Registrant (File No. 33-44734).
(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 as amended by the Amendments to Declaration of Trust, dated October
3, 1988 and October 17, 1994, filed as Exhibits 1(c) and (e) to the
Registration Statement; 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,
filed as Exhibits 1(b) and 1(d), respectively, to the Registration
Statement; to the section of the Amendment to the Declaration of Trust,
dated October 17, 1994, filed as Exhibit 1(e) to the Registration Statement
establishing Class C and Class D Shares of beneficial interest of the Fund;
and to Articles I, V and VI of the Registrant's By-Laws, previously filed
as Exhibit 2 to the Registrant Statement referred to in paragraph (a)
above.
C-2
<PAGE>
(g) Filed on January 28, 1994, as an Exhibit to Post-Effective Amendment No. 10
to the Registrant's Registration Statement under the Securities Act of
1933.
(h) Filed on October 18, 1994, as an Exhibit to Post-Effective Amendment No. 11
to the Registrant's Registration Statement under the Securities Act of
1933.
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, 1994
-------------- -----------------
<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.............................................. 1,544
Class C shares of beneficial interest, par value $0.10
per share.............................................. 2
Class D shares of beneficial interest, par value $0.10
per share.............................................. 2
</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 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 Trustees may
make advance payments in connection with indemnification under this Section
5.3, provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently
determined that he is not entitled to such indemnification."
C-3
<PAGE>
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 jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 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., Emerging
Tigers 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 Multi-State Limited
Maturity Municipal Series Trust, Merrill Lunch 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,
C-4
<PAGE>
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., Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest Fund, Inc. Merrill
Lynch Asset Management, L.P. ("MLAM"), an affiliate of the Manager, 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 Asset Growth Fund, Inc., Merrill Lynch Asset
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 Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Government Fund, 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 Middle East/Africa
Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund,
Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Senior Floating Rate Fund, Inc., 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 P.O. Box 9011, Princeton, New Jersey
08543-9011, except that the address of Merrill Lynch Funds for Institutions
Series, and Merrill Lynch Institutional Intermediate Fund is One Financial
Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of the
Manager, MLAM, Merrill Lynch Funds Distributor, Inc. ("MLFD"), Princeton
Services, Inc. ("Princeton Services") and Princeton Administrators, L.P. is
also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill
Lynch, 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. The address of Financial Data Services, Inc.
is 4800 Deer Lake Drive East, Jacksonville, Florida 32446-6484.
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
October 1, 1992 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
C-5
<PAGE>
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, Kirstein, Monagle and Ms.
Griffin are directors/trustees or officers of one or more of such companies.
Officers and Partners of FAM are set forth as follows:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME POSITION WITH THE MANAGER VOCATION OR EMPLOYMENT
---- ------------------------- ---------------------------------------
<C> <C> <S>
ML & Co................. Limited Partner Financial Services Holding Company
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 MLFD;
Executive Vice President of ML & Co.;
Executive Vice President of Merrill Lynch
Terry K. Glenn.......... Executive Vice Executive Vice President of MLAM; Executive
President Vice President and Director of Princeton
Services; President and Director of MLFD;
President of Princeton Administrators,
L.P.
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, General Counsel and
President, General Secretary of MLAM; Senior Vice President,
Counsel and General Counsel, Director and Secretary of
Secretary Princeton Services; Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller of
and Controller MLAM; Senior Vice President and Controller
of Princeton Services
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 Treasurer of
and Treasurer MLAM; Senior Vice President and Treasurer
of Princeton Services; Vice President and
Treasurer of MLFD
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME POSITION WITH THE MANAGER VOCATION OR EMPLOYMENT
---- ------------------------- ---------------------------------------
<C> <C> <S>
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., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Emerging Tigers Fund, 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., Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings,
Inc., Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest Fund, Inc.
C-7
<PAGE>
(b) Set forth below is information concerning each director and officer of
the Distributor. The principal business address of each such person is P.O. 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
Kevin P. Boman............. Vice President None
Michael J. Brady........... Vice President None
William M. Breen........... Vice President None
Sharon Creveling........... Vice President and None
Assistant 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
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.
C-8
<PAGE>
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-9
<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, 1995.
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.
SIGNATURE TITLE DATE
--------- ----- ----
President and
/s/ Arthur Zeikel Trustee (Principal January 27,
- ------------------------------------ Executive Officer) 1995
(ARTHUR ZEIKEL)
Treasurer
/s/ Gerald M. Richard (Principal January 27,
- ------------------------------------ Financial and 1995
(GERALD M. RICHARD) Accounting
Officer)
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)
/s/ Arthur Zeikel January 27, 1995
*By ________________________________
(ARTHUR ZEIKEL, ATTORNEY-IN-FACT)
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) --Declaration of Trust of the Registrant, dated August 2, 1985.
(b) --Instrument establishing Merrill Lynch New York Municipal Bond Fund
(the "Fund") as a series of the Registrant.
(c) --Amendment to Declaration of Trust, dated October 3, 1988.
(d) --Instrument establishing Class A Shares and Class B Shares
of the Fund.
(e) --Amendment to the Declaration of Trust, dated October 17,
1994.
10 --Opinion of Brown & Wood, counsel for the Registrant.
11 --Consent of Deloitte & Touche llp, independent auditors for the
Registrant.
16 --Schedule for computation of performance quotations for Class C and
Class D Shares provided in the Registration Statement in response to
Item 22.
17(a) --Financial Data Schedule for the Year Ended September 30, 1994
relating to Class A Shares.
(b) --Financial Data Schedule for the Year Ended September 30, 1994
relating to Class B Shares.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1994
<PERIOD-START> OCT-01-1993
<PERIOD-END> SEP-30-1994
<INVESTMENTS-AT-COST> 659,204,146
<INVESTMENTS-AT-VALUE> 658,776,306
<RECEIVABLES> 43,028,419
<ASSETS-OTHER> 109,688
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 701,914,413
<PAYABLE-FOR-SECURITIES> 17,415,690
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,857,258
<TOTAL-LIABILITIES> 28,272,948
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 686,929,294
<SHARES-COMMON-STOCK> 2,602,140
<SHARES-COMMON-PRIOR> 2,566,477
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 13,593,958
<ACCUM-APPREC-OR-DEPREC> 306,129
<NET-ASSETS> 28,300,768
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 45,400,834
<OTHER-INCOME> 1,646
<EXPENSES-NET> 8,230,118
<NET-INVESTMENT-INCOME> 37,172,362
<REALIZED-GAINS-CURRENT> (5,792,148)
<APPREC-INCREASE-CURRENT> (74,453,611)
<NET-CHANGE-FROM-OPS> (43,073,397)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,758,497
<DISTRIBUTIONS-OF-GAINS> 869887
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 857,494
<NUMBER-OF-SHARES-REDEEMED> 967,073
<SHARES-REINVESTED> 145,242
<NET-CHANGE-IN-ASSETS> (92,315,018)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 12,919,506
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,999,719
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,230,118
<AVERAGE-NET-ASSETS> 31,668,190
<PER-SHARE-NAV-BEGIN> 12.46
<PER-SHARE-NII> .64
<PER-SHARE-GAIN-APPREC> (1.25)
<PER-SHARE-DIVIDEND> .64
<PER-SHARE-DISTRIBUTIONS> .33
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.88
<EXPENSE-RATIO> .63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1994
<PERIOD-START> OCT-01-1993
<PERIOD-END> SEP-30-1994
<INVESTMENTS-AT-COST> 659,204,146
<INVESTMENTS-AT-VALUE> 658,776,306
<RECEIVABLES> 43,028,419
<ASSETS-OTHER> 109,688
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 701,914,413
<PAYABLE-FOR-SECURITIES> 17,415,690
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,857,258
<TOTAL-LIABILITIES> 28,272,948
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 686,929,294
<SHARES-COMMON-STOCK> 59,326,415
<SHARES-COMMON-PRIOR> 58,901,665
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 13,593,958
<ACCUM-APPREC-OR-DEPREC> 306,129
<NET-ASSETS> 645,340,697
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 45,400,834
<OTHER-INCOME> 1,646
<EXPENSES-NET> 8,230,118
<NET-INVESTMENT-INCOME> 37,172,362
<REALIZED-GAINS-CURRENT> (5,792,148)
<APPREC-INCREASE-CURRENT> (74,453,611)
<NET-CHANGE-FROM-OPS> (43,073,397)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 35,413,865
<DISTRIBUTIONS-OF-GAINS> 19,851,429
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,245,112
<NUMBER-OF-SHARES-REDEEMED> 9,213,059
<SHARES-REINVESTED> 2,392,697
<NET-CHANGE-IN-ASSETS> (92,315,018)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 12,919,506
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,999,719
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,230,118
<AVERAGE-NET-ASSETS> 702,221,825
<PER-SHARE-NAV-BEGIN> 12.46
<PER-SHARE-NII> .58
<PER-SHARE-GAIN-APPREC> (1.25)
<PER-SHARE-DIVIDEND> .58
<PER-SHARE-DISTRIBUTIONS> .33
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.88
<EXPENSE-RATIO> 1.14
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.1(A)
DECLARATION OF TRUST
MERRILL LYNCH MULTI-STATE
TAX-EXEMPT SERIES TRUST
THE DECLARATION OF TRUST of Merrill Lynch Multi-State Tax-Exempt Series
Trust is made the 2nd day o(Pounds) August, 1985 by the parties signatory
hereto, as trustees (such persons, so long as they shall continue in office in
accordance with the terms of this Declaration of Trust, and all other persons
who at the time in question have been duly elected or appointed as trustees in
accordance with the provisions of this Declaration of Trust and are then in
office, being hereinafter called the "Trustees").
W I T N E S S E T H:
-------------------
WHEREAS, the Trustees desire to form a trust fund under the laws of
Massachusetts for the investment and reinvestment of funds contributed thereto;
and
WHEREAS, it is proposed that the beneficial interest in the trust assets be
divided into transferable shares of beneficial interest which may, at the
discretion of the Trustees, be divided into separate series as hereinafter
provided;
NOW, THEREFORE, the Trustees hereby declare that they will hold in trust,
all money and property contributed to the trust fund to manage and dispose of
the same for the benefit of the holders from time to time of the shares of
beneficial interest issued hereunder and subject to the provisions hereof, to
wit:
<PAGE>
ARTICLE I
The Trust
---------
1.1. Name. The name of the trust created hereby (the "Trust", which term
----
shall be deemed to include any Series of the Trust when the context requires)
shall be "Merrill Lynch Multi-State Tax-Exempt Series Trust", and so far as may
be practicable the Trustees shall conduct the activities of the Trust, execute
all documents and sue or be sued under that name, which name (and the word
"Trust" wherever hereinafter used) shall refer to the Trustees as Trustees, and
not individually, and shall not refer to the officers, agents, employees or
Shareholders of the Trust or any Series thereof. Each Series of the Trust which
shall be established and designated by the Trustees pursuant to Section 6.2
shall conduct its activities under such name as the Trustees shall determine and
set forth in the instrument establishing such Series. Should the Trustees
determine that the use of the name of the Trust or any Series is not advisable,
they may select such other name for the Trust or such Series as they deem proper
and the Trust or Series may conduct its activities under such other name. Any
name change shall be effective upon the execution by a majority of the then
Trustees of an instrument setting forth the new name. Any such instrument shall
have the status of an amendment to this Declaration.
1.2. Definitions. As used in this Declaration, the following terms shall
-----------
have the following meanings:
The terms "Affiliated Person", "Assignment", "Commission", "Interested
----------------- ---------- ---------- ----------
Person", "Majority Shareholder Vote" (the 67% or 50% requirement of the third
- ------ -------------------------
sentence of Section 2(a)(42) of the 1940 Act, whichever may be applicable) and
"Principal Underwriters" shall have the meanings given them in the 1940 Act.
- -----------------------
"Declarations" shall mean this Declaration of Trust as amended from time to
------------
time. References in this Declaration to "Declaration", "hereof", "herein" and
----------- ------ ------
"hereunder" shall be deemed to refer to the Declaration rather than the article
- ----------
or section in which such words appear.
"Fundamental Policies" shall mean the investment restrictions set forth in
--------------------
the Prospectus of any Series and designated as fundamental policies therein.
"Person" shall mean and include individuals, corporations, partnerships,
------
trusts, associations, joint ventures and other entities, whether or not legal
entities, and governments and agencies and political subdivisions thereof.
2
<PAGE>
"Prospectus" shall mean the currently effective Prospectus of any Series of
----------
the Trust under the Securities Act of 1933, as amended, including the Statement
of Additional information incorporated by reference therein.
"Series" shall mean the separate series that may be established and
------
designated pursuant to Section 6.2.
"Shareholders" shall mean as of any particular time all holders of record
------------
of outstanding Shares at such time.
"Shares" shall mean the equal proportionate transferable units of interest
------
into which the beneficial interest in any Series of the Trust shall be divided
from time to time and includes fractions of Shares as well as whole Shares. All
references to Shares shall be deemed to be Shares of any or all Series as the
context may require.
"Trustees" shall mean the signatories to this Declaration of Trust, so long
--------
as they shall continue in office in accordance with the terms hereof, and all
other persons who at the time in question have been duly elected or appointed
and have qualified as trustees in accordance with the provisions hereof and are
then in office, are herein referred to as the "Trustees", and reference in this
Declaration of Trust to a Trustee or Trustees shall refer to such person or
persons in their capacity as Trustees hereunder.
"Trust Property" shall mean as of any particular time any and all property,
--------------
real or personal, tangible or intangible, which at such time is owned or held by
or for the account of the Trust, any Series thereof or the Trustees.
The "1940 Act" refers to the Investment Company Act of 1940 and the
--------
regulations promulgated thereunder, as amended from time to time.
3
<PAGE>
ARTICLE II
Trustees
--------
2.1. Number and Qualification. The number of Trustees shall be fixed from
------------------------
time to time by written instrument signed by a majority of the Trustees then in
office, provided, however, that the number of Trustees shall in no event be less
than three or more than fifteen (except prior to the first public offering of
Shares). Any vacancy created by an increase in Trustees may, to the extent
permitted by the 1940 Act, be filled by the appointment of an individual having
the qualifications described in this Article made by a written instrument signed
by a majority of the Trustees then in office. Any such appointment shall not
become effective, however, until the individual named in the written instrument
of appointment shall have accepted in writing such appointment and agreed in
writing to be bound by the terms of this Declaration of Trust. No reduction in
the number of Trustees shall have the effect of removing any Trustee from office
prior to the expiration of his term. Whenever a vacancy in the number of
Trustees shall occur, until such vacancy is filled as provided in 4 Section 2.3
hereof, the Trustees in office, regardless of their number, sell have all the
powers granted to the Trustees and shall discharge all the duties imposed upon
the Trustees by this Declaration of Trust. A Trustee shall be an individual at
least 21 years of age who is not under legal disability. Trustees need not own
Shares.
2.2. Term of Office. The Trustees shall hold office during the lifetime
--------------
of this Trust, and until its termination as hereinafter provided; except (a)
that any Trustee may resign his trust by written instrument signed by him and
delivered to the other Trustees, which shall take effect upon such delivery or
upon such later date as is specified therein; (b) that any trustee may be
removed at any time by written instrument, signed by at least two-thirds of the
number of Trustees prior to such removal, specifying the date when such removal
shall become effective; (c) that any Trustee who requests in writing to be
retired or, who had become incapacitated by illness or injury may be retired by
written instrument signed by a majority of the other Trustees, specifying the
date of his retirement; and (d) a Trustee may be removed at any special meeting
of the shareholders by a vote of two-thirds of the outstanding Shares. Upon the
resignation or removal of a Trustee, or his otherwise ceasing to be a Trustee,
he shall execute and deliver such documents as the remaining Trustees shall
require for the purpose of conveying to the Trust or the remaining Trustees any
Trust Property held in the name of the resigning or removed Trustee. Upon the
incapacity or death of any Trustee, his legal representative shall execute and
deliver on his behalf such documents as the remaining Trustees shall require as
provided in the preceding sentence.
4
<PAGE>
2.3. Vacancies. The term of office of a Trustee shall terminate and a
---------
vacancy shall occur in the event of the death, resignation, bankruptcy,
adjudicated incompetence or other incapacity to perform the duties of the
office, or removal, of a Trustee. No such vacancy shall operate to annul this
Declaration of Trust or to revoke any existing agency created pursuant to the
terms of this Declaration of Trust. in the case of a vacancy, the Shareholders,
acting at any meeting of Shareholders held in accordance with Section 10.2
hereof, or, to the extent permitted by the 1940 Act, a majority of the Trustees
continuing in office acting by written instrument or instruments, may fill such
vacancy and any Trustee so elected by the Trustees shall hold office as provided
ln this Declaration.
2.4. Meetings. Meetings of the Trustees shall be held from time to time
--------
upon the call of the Chairman, if any, the President, the Secretary or any two
Trustees. Regular meetings of the Trustees may be held without call or notice
at a time and place fixed by the By-Laws or by resolution of the Trustees.
Notice of any other meeting shall be mailed or otherwise given not less than 48
hours before the meeting but may be waived in writing by any Trustee either
before or after such meeting. The attendance of a Trustee at a meeting shall
constitute a waiver of notice of such meeting except where a Trustee attends a
meeting for the express purpose of objecting to the transaction of any business
on the grounds that the meeting has not been lawfully called or convened. The
Trustees may act with or without a meeting. A quorum for all meetings of the
Trustees shall be a majority of the Trustees. Unless provided otherwise in this
Declaration of Trust, any action of the Trustees may be taken at a meeting by
vote of a majority of the Trustees present (a quorum being present) or without a
meeting by written consents of a majority of the Trustees.
Any committee of the Trustees, including an executive committee, if any,
may act with or without a meeting. A quorum for all meetings of any such
committee shall be a majority of the members thereof. Unless provided otherwise
in this Declaration, any action of any such committee may be taken at a meeting
by vote of a majority of the members present (a quorum being present) or without
a meeting by written consent of a majority of the members.
With respect to actions of the Trustees and any committee of the Trustees,
Trustees who are Interested Persons of the Trust within the meaning of Section
1.2 hereof or otherwise interested in any action to be taken may be counted for
quorum purposes under this Section and shall be entitled to vote to the extent
permitted by the 1940 Act.
To the extent permitted by the 1940 Act, all or any one or more Trustees
may participate in a meeting of the Trustees or any
5
<PAGE>
committee thereof by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other and participation in a meeting pursuant to such communications
systems shall constitute presence in person at such meeting.
2.5. Officers. The Trustees shall annually elect a President, a Secretary
--------
and a Treasurer and may elect a Chairman. The Trustees may elect or appoint or
authorize the Chairman, if any, or President to appoint such other officers or
agents with such powers as the Trustees may deem to be advisable. The Chairman
and President shall be and the Secretary and Treasurer may, but need not, be a
Trustee.
2.6. By-Laws. The Trustees may adopt and from time to time amend or
-------
repeal the By-Laws for the conduct of the business of the Trust.
6
<PAGE>
ARTICLE III
Powers of Trustees
------------------
3.1. General. The Trustees shall have exclusive and absolute control over
-------
the Trust Property and over the business of the Trust or any Series thereof to
the same extent as if the Trustees were the sole owners of the Trust Property
and business in their own right, but with such powers of delegation as may be
permitted by this Declaration. The Trustees may perform such acts as in their
sole discretion are proper for conducting the business of the Trust or any
Series thereof. The enumeration of any specific power herein shall not be
construed as limiting the aforesaid power. Such powers of the Trustees may be
exercised without order of or resort to any court.
3.2. Investments. The Trustees shall have power, subject to the
-----------
Fundamental Policies, to:
(a) conduct, operate and carry on the business of an investment company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise acquire,
hold, pledge, sell, assign, transfer, exchange, distribute or otherwise deal in
or dispose of negotiable or non-negotiable instruments, obligations, evidences
of indebtedness, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, reverse repurchase agreements and other securities,
including, without limitation, those issued, guaranteed or sponsored by any
state, territory or possession of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, or by the
United States Government or its agencies or instrumentalities, or international
instrumentalities, or by any bank, savings institution, corporation or other
business entity organized under the laws of the United States and, to the extent
provided in the Prospectus and not prohibited by the Fundamental Policies,
organized under foreign laws; and to exercise any and all rights, powers and
privileges of ownership or interest in respect of any and all such investments
of every kind and description, including, without limitation, the right to
consent and otherwise act with respect thereto, with power to designate one or
more persons, firms, associations or corporations to exercise any of said
rights, powers and privileges in respect of any of said instruments; and the
Trustees shall be deemed to have the foregoing powers with respect to any
additional securities in which any Series of the Trust may invest should the
investment policies set forth in the Prospectus or the Fundamental Policies be
amended.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust
7
<PAGE>
or any Series, nor shall the Trustees be limited by any law limiting the
investments which may be made by fiduciaries.
3.3. Legal Title. Legal title to all the Trust Property shall be vested in
-----------
the Trustees as joint tenants except that the Trustees shall have power to cause
legal title to any Trust Property to be held by or in the name of one or more of
the Trustees, or in the name of the Trust or any Series thereof, or in the name
of any other Person as nominee, on such terms as the Trustees may determine,
provided that the interest of the Trust or any Series thereof therein is
appropriately protected.
The right, title and interest of the Trustees in the Trust Property shall
vest automatically in each Person who may hereafter become a Trustee upon his
due election and qualification. Upon the resignation, removal or death of a
Trustee he shall automatically cease to have any right, title or interest in any
of the Trust Property, and the right, title and interest of such Trustee in the
Trust Property shall vest automatically in the remaining Trustees. Such vesting
and cessation of title shall be effective whether or not conveyancing documents
have been executed and delivered.
3.4. Issuance and Repurchase of Securities. The Trustees shall have the
-------------------------------------
power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold, resell,
reissue, dispose of, transfer, and otherwise deal in, Shares, including shares
in fractional denominations, and, subject to the more detailed provisions set
forth in Articles VIII and IX, to apply to any such repurchase, redemption,
retirement, cancellation or acquisition of Shares any funds or property of the
applicable Series of the Trust whether capital or surplus or otherwise, to the
full extent now or hereafter permitted by the laws of the Commonwealth of
Massachusetts governing business corporations.
3.5. Borrow Money. Subject to the Fundamental Policies, the Trustees
------------
shall have power to borrow money or otherwise obtain credit and to secure the
same by mortgaging, pledging or otherwise subjecting as security the assets of
the Trust or any Series thereof, including the lending of portfolio securities,
and to endorse, guarantee, or undertake the performance of any obligation,
contract or engagement of any other person, firm, association or corporation.
3.6. Delegation; Committees. The Trustees shall have power, consistent
----------------------
with their continuing exclusive authority over the management of the Trust and
the Trust Property, to delegate from time to time to such of their number or to
officers, employees or agents of the Trust the doing of such things and the
execution of such instruments either in the name of the Trust or the names of
the Trustees or otherwise as the Trustees may deem expedient, to the same extent
as such delegation is permitted to
8
<PAGE>
directors of a Massachusetts business corporation and is permitted by the 1940
Act.
3.7. Collection and Payment. The Trustees shall have power to collect all
----------------------
property due to the Trust or any Series thereof; to pay all claims, including
taxes, against the Trust Property; to prosecute, defend, compromise or abandon
any claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust
or any Series thereof; and to enter into releases, agreements and other
instrument.
3.8. Expenses. The Trustees shall have power to incur and pay any
--------
expenses which in the opinion of the Trustees are necessary or incidental to
carry out any of the purposes of this Declaration of Trust, and to pay
reasonable compensation from the funds of the Trust to themselves as Trustees.
The Trustees shall fix the compensation of all officers, employees and Trustees.
The Trustees may pay themselves such compensation for special services,
including legal, underwriting, syndicating and brokerage services, as they in
good faith may deem reasonable and reimbursement for expenses reasonably
incurred by themselves on behalf of the Trust.
3.9. Miscellaneous Powers. The Trustees shall have the power to: (a)
--------------------
employ or contract with such Persons as the Trustees may deem desirable for the
transaction of the business of the Trust or any Series thereof; (b) enter into
joint ventures, partnerships and any other combinations or associations; (c)
purchase, and pay for out of Trust Property, insurance policies insuring the
Shareholders, Trustees, officers, employees, agents, investment advisors,
distributors, selected dealers or independent contractors of the Trust or any
Series thereof against all claims arising by reason of holding any such position
or by reason of any action taken or omitted by any such Person in such capacity,
whether or not constituting negligence, or whether or not the Trust would have
the power to indemnify such Person against such liability; (d) establish
pension, profit-sharing, share purchase, and other retirement, incentive and
benefit plans for any Trustees, officers, employees and agents of the Trust; (e)
make donations, irrespective of benefit to the Trust, for charitable, religious,
educational, scientific, civic or similar purposes; (f) to the extent permitted
by law, indemnify any Person with whom the Trust or any Series thereof has
dealings, including any advisor, administrator, manager, distributor and
selected dealers with respect to any Series, to such extent as the Trustees
shall determine; (g) guarantee indebtedness or contractual obligations of
others; (h) determine and change the fiscal year of the Trust and the method in
which its accounts shall be kept; and (i) adopt a seal for the Trust but the
absence of such seal shall not impair the validity of any instrument executed on
behalf of the Trust.
9
<PAGE>
3.10. Further Powers. The Trustees shall have power to conduct the
--------------
business of the Trust or any Series thereof and carry on its operations in any
and all of its branches and maintain offices both within and without the
Commonwealth of Massachusetts, in any and all states of the United States of
America, in the District of Columbia, and in any and all commonwealths,
territories, dependencies, colonies, possessions, agencies or instrumentalities
of the United States of America and of foreign governments, and to do all such
other things and execute all such instruments as they deem necessary, proper or
desirable in order to promote the interests of the Trust or any Series thereof
although such things are not herein specifically mentioned. Any determination
as to what is in the interests of the Trust or any Series thereof made by the
Trustees in good faith shall be conclusive. In construing the provisions of
this Declaration, the presumption shall be in favor of a grant of power to the
Trustees. The Trustees will not be required to obtain any court order to deal
with the Trust Property.
10
<PAGE>
ARTICLE IV
Advisory, Management and Distribution Arrangements
--------------------------------------------------
4.1. Advisory and Management Arrangements. Subject to a Majority
------------------------------------
Shareholder Vote of the applicable Series, as required by the 1940 Act, the
Trustees may in their discretion from time to time enter into advisory or
management contracts whereby the other party to such contract shall undertake to
furnish the Trustees such advisory and management services, with respect to a
Series as the Trustees shall from time to time consider desirable and all upon
such terms and conditions as the Trustees may in their discretion determine.
Notwithstanding any provisions of this Declaration of Trust, the Trustees may
authorize any advisor or manager (subject to such general or specific
instructions as the Trustees may from time to time adopt) to effect purchases,
sales, loans or exchanges of portfolio securities of any Series of the Trust on
behalf of the Trustees or may authorize any officer, employee or Trustee to
effect such purchases, sales, loans or exchanges pursuant to recommendations of
any such advisor, administrator or manager (and all without further action by
the Trustees). Any such purchases, sales, loans and exchanges shall be deemed
to have been authorized by all of the Trustees.
4.2. Distribution Arrangements. The Trustees may in their discretion from
-------------------------
time to time enter into a contract, providing for the sale of the Shares of the
Trust or any Series of the Trust to net the Trust not less than the par value
per share, whereby the Trust may either agree to sell the Shires to the other
party to the contract or appoint such other party its sales agent for such
Shares. In either case, the contract shall be on such terms and conditions as
the Trustees may in their discretion determine not inconsistent with the
provisions of this Article IV or the By-Laws; and such contract may also provide
for the repurchase or sale of Shares by such other party as principal or as
agent of the Trust and may provide that such other party may enter into selected
dealer agreements with registered securities dealers to further the purpose of
the distribution or repurchase of the Shares.
4.3. Parties to Contract. Any contract of the character described in
-------------------
Section 4.1 and 4.2 of this Article IV or in Article VII hereof may be entered
into with any corporation, firm, trust or association, although one or more of
the Trustees or officers of the Trust may be an officer, director, Trustee,
shareholder, or member of such other party to the contract, and no such contract
shall be invalidated or rendered voidable by reason of the existence of any such
relationship, nor shall any person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when
11
<PAGE>
entered into was reasonable and fair and not inconsistent with the provisions of
this Article IV or the By-Laws. The same person (including a firm, corporation,
trust, or association) may be the other party to contracts entered into pursuant
to Sections 4.1 and 4.2 above or Article VII, and any individual may be
financially interested or otherwise affiliated with persons who are parties to
any or all of the contracts mentioned in this Section 4.3.
4.4. Provisions and Amendments. Any contract entered into pursuant to
-------------------------
Sections 4.1 and 4.2 of this Article IV shall be consistent with and subject to
the requirements of Section 15 of the 1940 Act with respect to its continuance
in effect, its termination, and the method of authorization and approval of such
contract or renewal thereof, and no amendment to any contract entered into
pursuant to Section 4.1 shall be effective unless assented to by a Majority
Shareholder Vote of the applicable Series.
12
<PAGE>
ARTICLE V
Limitations of Liability of Shareholders,
Trustees and Others
-----------------------------------------
5.1. No Personal Liability of Shareholders, Trustees, etc. No Shareholder
-----------------------------------------------------
shall be subject to any personal liability whatsoever to any Person in
connection with Trust Property or the acts, obligations or affairs of the Trust
or any Series thereof. No Trustee, officer, employee or agent of the Trust
shall be subject to any personal liability whatsoever to any Person, other than
the Trust or its Shareholders, in connection with Trust Property or the affairs
of the Trust or any Series thereof, save only that arising from his bad faith,
willful misfeasance, gross negligence or reckless disregard of his duty to such
Person; and all such Persons shall look solely to the Trust Property for
satisfaction of claims of any nature arising in connection with the affairs of
the Trust or any Series thereof. If any Shareholder, Trustee, officer,
employee, or agent, as such, of the Trust, is made a party to any suit or
proceeding to enforce any such liability, he shall not on account thereof, be
held to any personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and liabilities, to which such
Shareholder may become subject by reason of his being or having been a
Shareholder, and shall reimburse such Shareholder for all legal and other
expenses reasonably incurred by him in connection with any such claim or
liability. The rights accruing to a Shareholder under this Section 5.1 shall
not exclude any other right to which such Shareholder may be lawfully entitled,
nor shall anything herein contained restrict the right of the Trust to indemnify
or reimburse a Shareholder in any appropriate situation even though not
specifically provided herein.
5.2. Non-Liability of Trustees, etc. No Trustee, officer, employee or
-------------------------------
agent of the Trust shall be liable to the Trust, any Series, its Shareholders,
or to any Shareholder, Trustee, officer, employee, or agent thereof for any
action or failure to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of trust) except for
his own bad faith, willful misfeasance, gross negligence or reckless disregard
of his duties.
5.3. Mandatory Indemnification. 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
13
<PAGE>
civil or criminal, in which he may be involved or with which he may be
threatened, while in office or thereafter, by reason of his being or having been
such a trustee, officer, employee or agent, except with respect to any matter as
to which he shall have been adjudicated to have acted in bad faith, willful
misfeasance, gross negligence or reckless disregard of his duties; provided,
however, that as to any matter disposed of by a compromise payment by such
person, pursuant to a consent decree or otherwise, no indemnification either for
said payment or for any other expenses shall be provided unless the Trust shall
have received a written opinion from independent legal counsel approved by the
Trustees to the effect that if either the matter of willful misfeasance, gross
negligence or reckless disregard of duty, or the matter of good faith and
reasonable belief as to the best interests of the Trust, had been adjudicated,
it would have been adjudicated in favor of such person. The rights accruing to
any Person under these provisions shall not exclude any other right to which he
may be lawfully entitled; provided that no Person may satisfy any right of
indemnity or reimbursement granted herein or in Section 5.1 or to which he may
be otherwise entitled except out of the property of the Trust, and no
Shareholder shall be personally liable to any Person with respect to any claim
for indemnity or reimbursement or otherwise. The Trustees may make advance
payments in connection with indemnification under this Section 5.3, provided
that the indemnified person shall have given a written undertaking to reimburse
the Trust in the event it is subsequently determined that he is not entitled to
such indemnification.
5.4. No Bond Required of Trustees. No Trustee shall, as such, be
----------------------------
obligated to give any bond or security or other security for the performance of
any of his duties hereunder.
5.5. No Duty of Investigation; Notice in Trust Instruments, etc. No
-----------------------------------------------------------
purchaser, lender, transfer agent or other person dealing with the Trustees or
any officer, employee or agent of the Trust shall be bound to make any inquiry
concerning the validity of any transaction purporting to be made by the Trustees
or by said officer, employee or agent or be liable for the application of money
or property paid, loaned, or delivered to or on the order of the Trustees or of
said officer, employee or agent. Every obligation, contract, undertaking,
instrument, certificate, Share, other security of the Trust or any Series, and
every other act or thing whatsoever executed in connection with the Trust or any
Series shall be conclusively taken to have been executed or done by the
executors thereof only in their capacity as Trustees under this Declaration of
Trust or in their capacity as officers, employees or agents of the Trust. Every
written obligation, contract, undertaking, instrument, certificate, Share, other
security of the Trust or any Series made or issued by the Trustees or by any
officers, employees or agents of the Trust, in their capacity as such, shall
contain an
14
<PAGE>
appropriate recital to the effect that the Shareholders, Trustees, officers,
employees and agents of the Trust shall not personally be bound by or liable
thereunder, nor shall resort be had to their private property for the
satisfaction of any obligation or claim thereunder, and appropriate references
shall be made therein to the Declaration of Trust, and may contain any further
recital which they may deem appropriate, but the omission of such recital shall
not operate to impose personal liability on any of the Trustees, Shareholders,
officers, employees or agents of the Trust. The Trustees may maintain insurance
for the protection of the Trust Property, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees shall deem adequate to cover
possible tort liability, and such other insurance as the Trustees in their sole
judgment shall deem advisable.
5.6. Reliance on Experts, etc. Each Trustee and officer or employee of
-------------------------
the Trust shall, in the performance of his duties, be fully and completely
justified and protected with regard to any act or any failure to act resulting
from reliance in good faith upon the books of account or other records of the
Trust, upon an opinion of counsel, or upon reports made to the Trust by any of
its officers or employees or by any advisor, administrator, manager,
distributor, selected dealer, accountant, appraiser or other expert or
consultant selected with reasonable care by the Trustees, officers or employees
of the Trust, regardless of whether such counsel or expert may also be a
Trustee.
15
<PAGE>
ARTICLE VI
Shares of Beneficial Interest
-----------------------------
6.1. Beneficial Interest. The interest of the beneficiaries hereunder
-------------------
shall be divided into transferable shares of beneficial interest with par value
$.10 per share. The number of such shares of beneficial interest authorized
hereunder is unlimited. All Shares issued hereunder including, without
limitation, Shares issued in connection with a dividend in Shares or a split of
Shares, shall be fully paid and nonassessable.
6.2. Series Designation. The Trustees, in their discretion from time to
------------------
time, may authorize the division of Shares into two or more Series, each Series
relating to a separate portfolio of investments. The different Series shall be
established and designated, and the variations in the relative rights and
preferences as between the different Series shall be fixed and determined, by
the Trustees; provided, that all Shares shall be identical except that there may
be variations between different Series as to purchase price, determination of
net asset value, the price, terms and manner of redemption, special and relative
rights as to dividends and on liquidation, conversion rights, and conditions
under which the several Series shall have separate voting rights. All
references to Shares in this Declaration shall be deemed to be shares of any or
all Series as the context may require.
If the Trustees shall divide the Shares into two or more Series, the
following provisions shall be applicable:
(a) The number of Shares of each Series that may be issued shall be
unlimited. The Trustees may classify or reclassify any unissued Shares or any
Shares previously issued and reacquired of any Series into one or more Series
that may be established and designated from time to time. The Trustees may hold
as treasury Shares (of the same or some other Series), reissue for such
consideration and on such terms as they may determine, or cancel any Shares of
any Series reacquired by the Trust at their discretion from time to time.
(b) The power of the Trustees to invest and reinvest the Trust Property of
each Series that may be established shall be governed by Section 3.2 of this
Declaration.
(c) All consideration received by the Trust for the issue or sale of Shares
of a particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any investment of such proceeds
in whatever form the same may be, shall irrevocably
16
<PAGE>
belong to that Series for all purposes, subject only to the rights of creditors,
and shall be so recorded upon the books of account of the Trust. In the event
that there are any assets, income, earnings, profits, and proceeds thereof,
funds, or payments which are not readily identifiable as belonging to any
particular Series, the Trustees shall allocate them among any one or more of the
Series established and designated from time to time in such manner and on such
basis as they, in their sole discretion, deem fair and equitable. Each such
allocation by the Trustees shall be conclusive and binding upon the shareholders
of all Series for all purposes.
(d) The assets belonging to each particular Series shall be charged with
the liabilities of the Trust in respect of that Series only and all expenses,
costs, charges and reserves attributable to that Series and shall not be charged
with the liabilities, expenses, costs, charges and reserves attributable to
other Series, and any general liabilities, expenses, costs, charges or reserves
of the Trust which are not readily identifiable as belonging to any particular
Series shall be allocated and charged by the Trustees to and among any one or
more of the Series established and designated from time to time in such manner
and on such basis as the Trustees in their sole discretion deem fair and
equitable. Each allocation of liabilities, expenses, costs, charges and
reserves by the Trustees shall be conclusive and binding upon the holders of all
Series for all purposes. The Trustees shall have full discretion, to the extent
not inconsistent with the 1940 Act, to determine which items shall be treated as
income and which items as capital, and each such determination and allocation
shall be conclusive and binding upon the Shareholders.
(e) The power of the Trustees to pay dividends and make distributions with
respect to any one or more Series shall be governed by Section 9.2 of this
Trust. Dividends and distributions on Shares of a particular Series may be paid
with such frequency as the Trustees may determine, to the holders of Shares of
that Series, from such of the income and capital gains, accrued or realized,
from the assets belonging to that Series, as the Trustees may determine, after
providing for actual and accrued liabilities belonging to that Series. All
dividends and distributions on Shares of a particular Series shall be
distributed pro rata to the holders of that Series in proportion to the number
of Shares of that Series held by such holders at the date and time of record
established for the payment of such dividends or distributions.
The establishment and designation of any Series of Shares shall be
effective upon the execution by a majority of the then Trustees of an instrument
setting forth the establishment and designation of such Series. Such instrument
shall also set forth any rights and preferences of such Series which are in
addition
17
<PAGE>
to the rights and preferences of Shares set forth in this Declaration. At any
time that there are no Shares outstanding of any particular Series previously
established and designated, the Trustees may by an instrument executed by a
majority of their number abolish that Series and the establishment and
designation thereof. Each instrument referred to in this paragraph shall have
the status of an amendment to this Declaration.
6.3. Rights of Shareholders. The ownership of the Trust Property of every
----------------------
description and the right to conduct any business hereinbefore described are
vested exclusively in the Trustees, and the Shareholders shall have no interest
therein other than the beneficial interest conferred by their Shares with
respect to a particular Series, and they shall have no right to call for any
partition or division of any property, profits, rights or interests of the Trust
nor can they be called upon to share or assume any losses of the Trust or suffer
an assessment of any kind by virtue of their ownership of Shares. The Shares
shall be personal property giving only the rights in this Declaration
specifically set forth. The Shares shall not entitle the holder to preference,
preemptive, appraisal, conversion or exchange rights (except for rights of
appraisal specified in Section 11.4).
6.4. Trust Only. It is the intention of the Trustees to create only the
----------
relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration of Trust shall be construed to make the Shareholders
either by themselves or with the Trustees, partners or members of a joint stock
association.
6.5. Issuance of Shares. The Trustees, in their discretion, may from time
------------------
to time without vote of the Shareholders issue Shares with respect to any Series
that may have been established pursuant to Section 6.2, in addition to the then
issued and outstanding Shares and Shares held in the treasury, to such party or
parties and for such amount not less than par value and type of consideration,
including cash or property, at such time or times (including, without
limitation, each business day in accordance with the maintenance of a constant
net asset value per share as set forth in Section 9.3 hereof), and on such terms
as the Trustees may deem best, and may in such manner acquire other assets
(including the acquisition of assets subject to, and in connection with the
assumption of, liabilities) and businesses. In connection with any issuance of
Shares, the Trustees may issue fractional Shares. The Trustees may from time to
time divide or combine the Shares of any Series into a greater or lesser number
without thereby changing the proportionate beneficial interests in such Series
of the Trust.
18
<PAGE>
Reductions in the number of outstanding Shares may be made pursuant to the
constant net asset value per share formula set forth in Section 9.3.
Contributions to the Trust may be accepted for, and Shares shall be redeemed as,
whole Shares and/or 1/1,000ths of a Share or multiples thereof.
6.6. Register of Shares. A register shall be kept at the Trust or any
------------------
transfer agent duly appointed by the Trustees under the direction of the
Trustees which shall contain the names and addresses of the Shareholders and the
number of Shares (with respect to each Series that may have been established)
held by them respectively and a record of all transfers thereof. Separate
registers shall be established and maintained for each Series of the Trust.
Each such register shall be conclusive as to who are the holders of the Shares
of the applicable Series and who shall be entitled to receive dividends or
distributions or otherwise to exercise or enjoy the rights of Shareholders. No
Shareholder shall be entitled to receive payment of any dividend or
distribution, nor to have notice given to him as herein provided, until he has
given his address to a transfer agent or such other officer or agent of the
Trustees as shall keep the register for entry thereon it is not contemplated
that certificates will be issued for the Shares; however, the Trustees, in their
discretion, may authorize the issuance of share certificates and promulgate
appropriate rules and regulations as to their use.
6.7. Transfer Agent and Registrar. The Trustee shall have power to employ
----------------------------
a transfer agent or transfer agents, and a registrar or registrars, with respect
to the Shares of the various Series. The transfer agent or transfer agents may
keep the applicable register and record therein the original issues and
transfers, if any, of the said Shares of the applicable Series. Any such
transfer agent and registrars shall perform the duties usually performed by
transfer agents and registrars of certificates of stock in a corporation, except
as modified by the Trustees.
6.8. Transfer of Shares. Shares shall be transferable on the records of
------------------
the Trust only by the record holder thereof or by his agent thereto duly
authorized in writing, upon delivery to the Trustees or a transfer agent of the
Trust of a duly executed instrument of transfer, together with such evidence of
the genuineness of each such execution and authorization and of other matters as
may reasonably be required. Upon such delivery the transfer shall be recorded
on the applicable register of the Trust. Until such record is made, the
Shareholder of record shall be deemed to be the holder of such Shares for all
purposes hereof and neither the Trustees nor any transfer agent or registrar nor
any officer, employee or agent of the Trust shall be affected by any notice of
the proposed transfer.
19
<PAGE>
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the applicable register of Shares as the holder of
such Shares upon production of the proper evidence thereof to the Trustees or a
transfer agent of the Trust, but until such record is made, the Shareholder of
record shall be deemed to be the holder of such Shares for all purposes hereof
and neither the Trustees nor any transfer agent or registrar nor any officer or
agent of the Trust shall be affected by any notice of such death, bankruptcy or
incompetence, or other operation of law.
6.9. Notices. Any and all notices to which any Shareholder hereunder may
-------
be entitled and any and all communications shall be deemed duly served or given
if mailed, postage prepaid, addressed to any Shareholder of record at his last
known address as recorded on the applicable register of the Trust.
20
<PAGE>
ARTICLE VII
Custodians
----------
7.1 Appointment and Duties. The Trustees shall at all times employ a
----------------------
custodian or custodians, meeting the qualifications for custodians for portfolio
securities of investment companies contained in the 1940 Act, as custodian with
respect to each Series of the Trust. It is contemplated that separate
custodians may be employed for the different Series of the Trust. Any
custodian, acting with respect to one or more Series, shall have authority as
agent of the Trust or the Series with respect to which it is acting, but subject
to such restrictions, limitations and other requirements, if any, as may be
contained in the By-Laws of the Trust and the 1940 Act:
(1) to hold the securities owned by the Trust or the Series and
deliver the same upon written order;
(2) to receive and receipt for any moneys due to the Trust or the
Series and deposit the same in its own banking department (if a bank) or
elsewhere as the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and accounts of
the Trust or the Series and furnish clerical and accounting services; and
(5) if authorized to do so by the Trustees, to compute the net income
of the Trust or the Series,
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. If so directed by a Majority Shareholder vote of the Series
with respect to which the custodian is acting, the custodian shall deliver and
pay over all property of the Trust held by it as specified in such vote.
The Trustees may also authorize each custodian to employ one or more
subcustodians from time to time to perform such of the acts and services of the
custodian and upon such terms and conditions, as may be agreed upon between the
custodian end such sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall meet the qualifications for custodians
contained in the 1940 Act.
7.2 Central Certificate System. Subject to such rules, regulations and
--------------------------
order as the Commission may adopt, the Trustees may direct the custodian to
deposit all or any part of the securities owned by the Trust or the Series in a
system for the central handling of securities established by a national
21
<PAGE>
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or series
or any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust.
22
<PAGE>
ARTICLE VIII
Redemption
----------
8.1 Redemptions. All outstanding Shares of any Series of the Trust may be
-----------
redeemed at the option of the holders thereof, upon and subject to the terms and
conditions provided in this Article VIII. The Trust shall, upon application of
any Shareholder or pursuant to authorization from any Shareholder of a
particular Series, redeem or repurchase from such Shareholder outstanding Shares
of such Series for an amount per share determined by the application of a
formula adopted for such purpose by the Trustees with respect to such Series
(which formula shall be consistent with the 1940 Act); provided that (a) such
amount per share shall not exceed the cash equivalent of the proportionate
interest of each share in the assets of the Series of the Trust at the time of
the purchase or redemption end (b) if so authorized by the Trustees, the Trust
may, at any time and from time to time, charge fees for effecting such
redemption, at such rates as the Trustees say establish, as and to the extent
permitted under the 1940 Act, and may, at any time and from time to time,
pursuant to such Act, suspend such right of redemption. The procedures for
effecting redemption shall be as set forth in the Prospectus with respect to the
applicable Series from time to time.
8.2 Redemption of Shares; Disclosure of Holding. If the Trustees shall,
-------------------------------------------
at any time and in good faith, be of the opinion that direct or indirect
ownership of Shares or other securities of the Trust has or may become
concentrated in any person to an extent which would disqualify the Trust as a
regulated investment company under the Internal Revenue Code, then the Trustees
shall have the power by lot or other means deemed equitable by them (i) to call
for redemption a number, or principal amount, of Shares or other securities of
the Trust sufficient, in the opinion of the Trustees, to maintain or bring the
direct or indirect ownership of Shares or other securities of the Trust into
conformity with the requirements for such qualification and (ii) to refuse to
transfer or issue Shares or other securities of the Trust to any Person whose
acquisition of the Shares or other securities of the Trust in question would in
the opinion of the Trustees result in such disqualification. The redemption
shall be effected at a redemption price determined in accordance with Section
8.1.
The holders of Shares or other securities of the Trust shall upon demand
disclose to the Trustees in writing such information with respect to direct and
indirect ownership of Shares or other securities of the Trust as the Trustees
deem necessary to comply with the provisions of the Internal Revenue Code, or to
comply with the requirements of any other taxing authority.
23
<PAGE>
8.3 Redemptions of Accounts of Less than $1,000. Due to the relatively
-------------------------------------------
high cost of maintaining investment accounts of less than $1,000, the Trustees
shall have the power to redeem shares at a redemption price determined in
accordance with Section 8.1 if at any time the total investment in such account
does not have a value of at least $1,000; provided, however, that the Trustees
not exercise such power with respect to Shares of any Series if the prospectus
of such Series does not describe such power. In the event the Trustees
determine to exercise their power to redeem Shares provided ln this Section 8.3,
shareholders shall be notified that the value of their account is less than
$1,000 and allowed 60 days to make an additional investment before redemption is
processed.
8.4 Redemptions Pursuant to Constant Net Asset Value Formula. The Trust
--------------------------------------------------------
may also reduce the number of outstanding Shares of any Series pursuant to the
provisions of Section 9.3.
24
<PAGE>
ARTICLE IX
Determination of Net Asset Value,
Net Income and Distributions
--------------------------------
9.1 Net Asset Value. The net asset value of each outstanding Share of
---------------
each Series of the Trust shall be determined at such time or times on such days
as the Trustees may determine, in accordance with the 1940 Act, with respect to
each Series. The method of determination of net asset value shall be determined
by the Trustees and shall be as set forth in the Prospectus with respect to the
applicable Series. The power and duty to make the daily calculations for any
Series may be delegated by the Trustees to the adviser, administrator, manager,
custodian, transfer agent or such other person as the Trustees may determine.
The Trustees may suspend the daily determination of net asset value to the
extent permitted by the 1940 Act.
9.2 Distributions to Shareholders. The Trustees shall from time to time
-----------------------------
distribute ratably among the Shareholders of any Series such proportion of the
net profits, surplus (including paid-in surplus), capital, or assets with
respect to such Series held by the Trustees as they may deem proper. Such
distribution may be made in cash or property (including without limitation any
type of obligations of the Trust or any assets thereof), and the Trustees may
distribute ratably among the Shareholders of any Series additional Shares of
such Series in such manner, at such times, and on such terms as the Trustees may
deem proper. Such distributions may be among the Shareholders of record at the
time of declaring a distribution or among the Shareholders of record at such
later date as the Trustees shall determine. The Trustees may always retain from
the net profits such amount as they may deem necessary to pay the debts or
expenses of the Trust or to meet obligations of the Trust, or as they may deem
desirable to use in the conduct of its affairs or to retain for future
requirements or extensions of the business. The Trustees may adopt and offer to
Shareholders of any Series such dividend reinvestment plans, cash dividend
payout plans or related plans as the Trustees shall deem appropriate for such
Series.
Inasmuch as the computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes.
9.3 Constant Net Asset Value; Reduction of Outstanding Shares. The
---------------------------------------------------------
Trustees shall have the power to determine the net income of any Series of the
Trust on each day the net asset value
25
<PAGE>
of such Series is determined as provided in Section 9.1 and at each such
determination declare such net income for such Series as dividends with the
result that the net asset value per share of the series of the Trust shall
remain at a constant dollar value. The determination of net income end the
resultant declaration of dividends shall be as set forth in the Prospectus. In
such event fluctuations in value may be reflected in the number of
outstanding Shares in each Shareholder's account. It is expected that each
Series of the Trust will have a positive net income at the time of each
determination. If for any reason such net income is a negative amount, the
trust may offset such amount against dividends accrued in the account of the
Shareholder of the applicable Series. If and to the extent such negative amount
exceeds such accrued dividends, the Trust shall have authority to reduce the
number of the outstanding Shares of the Series. Such reduction will be effected
by having each Shareholder proportionately contributing to the Series capital
the necessary Shares that represent the amount of the excess upon such
determination. Each Shareholder will be deemed to have agreed to such
contribution in these circumstances by his investment in the Series of the
trust. This procedure will permit the net asset value per share of the Series
of the Trust to be maintained at a constant dollar value per share.
The Trustees, by resolution, may discontinue or amend the practice of
maintaining the net asset value per share at a constant dollar amount with
respect to any Series at any time and such modification shall be evidenced by
appropriate changes ln the Prospectus.
9.4 Power to Modify Foregoing Procedures. Notwithstanding any of the
------------------------------------
foregoing provisions of this Article IX, the Trustees may prescribe, in their
absolute discretion, such other bases and times for determining the per share
net asset value of the Trust's Shares or net income, or the declaration and
payment of dividends and distributions as they may deem necessary or desirable
to enable the Trust to comply with any provision of the 1940 Act, or any
securities association registered under the Securities Exchange Act of 1934, or
any order of exemption issued by said Commission, all as in effect now or
hereafter amended or modified.
26
<PAGE>
ARTICLE X
Shareholders
------------
10.1 Voting Powers. The Shareholders shall have power to vote (i) for the
-------------
removal of Trustees as provided in Section 2.2; (ii) with respect to any
advisory or management contract of a Series as provided in Section 4.1; (iii)
with respect to the amendment of this Declaration as provided in Section 11.3;
and (iv) with respect to such additional matters relating to the Trust as may be
required or authorized by the 1940 Act or other applicable law or by this
Declaration or by the By-Laws of the Trust.
10.2 Meetings of Shareholders. Special meetings of the Shareholders may be
------------------------
called at any time by a majority of the Trustees and shall be called by any
Trustee upon written request of Shareholders of any Series holding in the
aggregate not less than 10% of the outstanding Shares of such Series having
voting rights, such request specifying the purpose or purposes for which such
meeting is to be called. Any such meeting shall be held within or without the
Commonwealth of Massachusetts on such day and at such time as the Trustees shall
designate. The holders of one-third of outstanding Shares of each Series
present in person or by proxy shall constitute a quorum for the transaction of
any business, except as may otherwise be required by the 1940 Act or other
applicable law or by this Declaration or the By-Laws of the Trust. If a quorum
is present at a meeting of a particular Series, the affirmative vote of a
majority of the Shares of such Series represented at the meeting constitutes the
action of the Shareholders, unless the 1940 Act, other applicable law, this
Declaration or the By-Laws of the Trust requires a greater number of affirmative
votes.
10.3 Notice of Meetings. Notice of all meetings of the Shareholders,
------------------
stating the time, place and purposes of the meeting, shall be given by the
Trustees by mail to each Shareholder at his registered address, mailed st least
10 days and not more than 60 days before the meeting. Only the business stated
in the notice of the meeting shall be considered at such meeting. Any adjourned
meeting may be held as adjourned without further notice.
10.4 Record Date for Meetings. For the purpose of determining the
------------------------
Shareholders who are entitled to notice of and to vote at any meeting, or to
participate in any distribution, or for the purpose of any other action, the
Trustees may from time to time close the transfer books for such period, not
exceeding 30 days, as the Trustees may determine; or without closing the
transfer books the Trustees may fix a date not more than 60 days prior to the
date of any meeting of Shareholders or daily dividends or other action as a
record date for the determination
27
<PAGE>
of the Persons to be treated as Shareholders of record for such purposes, except
for dividend payments which shall be governed by Section 9.2 hereof.
10.5 Proxies, Etc. At any meeting of Shareholders, any holder of Shares
------------
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
select, for verification prior to the time at which such vote shall be taken.
Pursuant to a resolution of a majority of the Trustees, proxies may be solicited
in the name of one or core Trustees or one or more of the officers of the Trust.
Only Shareholders of record shall be entitled to vote. Each full Share shall be
entitled to one vote and fractional Shares shall be entitled to a vote of such
fraction. When any Share is held jointly by several persons, any one of them
may vote at any meeting in person or by proxy ln respect of such Share, but if
more than one of them shall be present at such meeting in person or by proxy,
and such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Share. A proxy
purporting to be executed by or on behalf of a Shareholder shall be deemed valid
unless challenged at or prior to its exercise, and the burden of proving
invalidity shall rest on the challenger. If the holder of any such Share is a
minor or a person of unsound mind, and subject to guardianship or to the legal
control of any other person as regards the charge or management of such Share,
he may vote by his guardian or such other person appointed or having such
control, and such vote may be given in person or by proxy.
10.6 Reports. The Trustees shall cause to be prepared with respect to each
-------
Series at least annually a report of operations containing a balance sheet and
statement of income and undistributed income of the applicable Series of the
Trust prepared in conformity with generally accepted accounting principles end
an opinion of an independent public accountant on such financial statements. It
is contemplated that separate reports may be prepared for the various Series.
Copies of such reports shall be mailed to all Shareholders of record of the
applicable Series within the time required by the 1940 Act, and in any event
within a reasonable period preceding the annual meeting of Shareholders. The
Trustees shall, in addition, furnish to the Shareholders at least annually,
interim reports containing an unaudited balance sheet of the Series as of the
end of such period and an unaudited statement of income and surplus for the
period from the beginning of the current fiscal year to the end of such period.
10.7 Inspection of Records. The records of the Trust shall be open to
---------------------
inspection by Shareholders to the same extent as is permitted shareholders of a
Massachusetts business corporation.
28
<PAGE>
10.8 Shareholder Action by Written Consent. Any action which may be
-------------------------------------
taken by Shareholders may be taken without a meeting if a majority of
Shareholders of each Series entitled to vote on the matter (or such larger
proportion thereof as shall be required by any express provision of this
Declaration) consent to the action in writing and the written consents are filed
with the records of the meetings of Shareholders. Such consent shall he treated
for all purposes as a vote taken at a meeting of Shareholders.
29
<PAGE>
ARTICLE XI
Duration; Termination of Trust;
Amendment; Mergers, Etc.
------------------------------
11.1 Duration. Subject to possible termination in accordance with the
--------
provisions of Section 11.2 hereof, the Trust created hereby shall continue until
the expiration of 20 years after the death of the last survivor of the initial
Trustees named herein and the following named persons:
<TABLE>
<CAPTION>
Name Address Date of Birth
- ----------------------------------------------------------------------
<S> <C> <C>
Avery Moores Bruno 25 Rutgers Place September 19, 1983
Scarsdale, N.Y. 10583
Avery Daniel Katz 435 E. 70th Street July 20, 1984
New York, N.Y. 10021
Lindsay Rider MacKinnon Mountain Farm Road January 27, 1981
Tuxedo Park, N.Y. 10987
Eric Alfred Pietrzak 95 Corona Avenue January 29, 1981
Pelham, N.Y. 10803
Angus Washburn Smith 12 Masterton Road October 15, 1982
Bronxville, N.Y. 10708
Elisabeth Lyon Smith 12 Masterton Road October 15, 1982
Bronxville, N.Y. 10708
</TABLE>
11.2 Termination.
-----------
(a) The Trust may be terminated by the affirmative vote of the holders of
not less than two-thirds of the Shares of each Series of the Trust at any
meeting of Shareholders or by an instrument in writing, without a meeting,
signed by a majority of the Trustees and consented to by the holders of not less
than two-thirds of such Shares. Any Series may be so terminated by vote or
written consent of not less than two-thirds of the Shares of such Series. Upon
the termination of the Trust or any Series,
(i) The Trust or such Series shall carry on no business except for the
purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the Trust or
such Series and all of the powers of the Trustees under this Declaration
shall continue until the affairs of the Trust or such Series shall have
been wound up, including the power to fulfill or discharge the contracts of
the Trust or such Series, collect its assets, sell, convey, assign,
exchange, transfer or otherwise
30
<PAGE>
dispose of all or any part of the remaining Trust Property to one or more
persons at public or private sale for consideration which may consist in
whole or in part of cash, securities or other property of any kind,
discharge or pay its liabilities, and do all other acts appropriate to
liquidate its business; provided that any sale, conveyance, assignment,
exchange, transfer or other disposition of all or substantially all the
Trust Property shall require approval of the principal terms of the
transaction and the nature and amount of the consideration by vote or
consent of the holders of a majority of the Shares entitled to vote.
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and refunding
agreements, as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property of any Series, in cash or in kind
or partly each, among the Shareholders of such Series according to their
respective rights.
(b) After termination of the Trust or any Series and distribution to the
Shareholders as herein provided, a majority of the Trustees shall execute and
lodge among the records of the Trust an instrument in writing setting forth the
fact of such termination. Upon termination of the Trust, the Trustees shall
thereupon be discharged from all further liabilities and duties hereunder, and
the rights and interests of all Shareholders shall thereupon cease. Upon
termination of any Series, the Trustees shall thereunder be discharged from all
further liabilities and duties with respect to such Series, and the rights and
interests of all Shareholders of such Series shall thereupon cease.
11.3 Amendment Procedure.
-------------------
(a) This Declaration may be amended by the affirmative vote of the holders
of not less than a majority of the Shares at any meeting of Shareholders or by
an instrument in writing, without a meeting, signed by a majority of the
Trustees and consented to by the holders of not less than a majority of such
Shares. The Shareholders of each Series shall have the right to vote separately
on amendments to this Declaration to the extent provided by Section 10.1. The
Trustees may also amend this Declaration without the vote or consent of
Shareholders if they deem it necessary to conform this Declaration to the
requirements of applicable federal laws or regulations or the requirements of
the regulated investment company provisions of the internal Revenue Code, but
the Trustees shall not be liable for failing so to do.
(b) No amendment may be made, under Section 11.3(a) above, which would
change any rights with respect to any Shares of the Trust by reducing the amount
payable thereon upon liquidation of
31
<PAGE>
the Trust or by diminishing or eliminating any voting rights pertaining thereto,
except with the vote or consent of the holders of two-thirds of the Shares of
each Series. Nothing contained in this Declaration shall permit the amendment
of this Declaration to impair the exemption from personal liability of the
Shareholders, Trustees, officers, employees and agents of the Trust or to permit
assessments upon Shareholders.
(c) A certification in recordable form signed by a majority of the Trustees
setting forth an amendment and reciting that it was duly adopted by the
Shareholders or by the Trustees as aforesaid or a copy of the Declaration, as
amended, in recordable form, and executed by a majority of the Trustees, shall
be conclusive evidence of such amendment when lodged among the records of the
trust.
Notwithstanding any other provision hereof, until such time us a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of Shares of the Trust shall have become effective,
this Declaration of Trust may be terminated or amended in any respect by the
affirmative vote of a majority of the Trustees or by an instrument signed by a
majority of the Trustees.
11.4 Merger, Consolidation and Sale of Assets. The Trust may merge or
----------------------------------------
consolidate with any other corporation, association, trust or other organization
or may sell, lease or exchange all or substantially all of the Trust Property,
including its good will, upon such terms and conditions and for such
consideration when and as authorized at any meeting of Shareholders called for
the purpose by the affirmative vote of the holders of not less than two-thirds
of the Shares of each Series, or by an instrument or instruments in writing
without a meeting, consented to by the holders of not less than two-thirds of
such Shares of each Series, and any such merger, consolidation, sale, lease or
exchange shall be deemed for all purposes to have been accomplished under and
pursuant to the statutes of the Commonwealth of Massachusetts. Any Series may
so merge, consolidate or effect a sale or exchange of assets by the vote or
written consent of not less than two-thirds of the Shares of such Series. In
respect of any such merger, consolidation, sale or exchange of assets, any
Shareholder shall be entitled to rights of appraisal of his Shares to the same
extent as a shareholder of a Massachusetts business corporation in respect of a
merger, consolidation, sale or exchange of assets of a Massachusetts business or
corporation, and such rights shall be his exclusive remedy in respect of his
dissent from any such action.
11.5 Incorporation. With the approval of the holders of a majority of the
-------------
Shares, the Trustees may cause to be organized or assist in organizing a
corporation or corporations under the laws of any jurisdiction or any other
trust, partnership, association
32
<PAGE>
or other organization to take over all of the Trust Property or to carry on any
business in which the Trust shall directly or indirectly have any interest, and
to sell, convey and transfer the Trust Property to any such corporation, trust,
association or organization in exchange for the Shares or securities thereof or
otherwise, and to lend money to, subscribe for the Shares or securities of, and
enter into any contracts with any such corporation, trust, partnership,
association or organization, or any corporation, partnership, trust, association
or organization in which the Trust holds or is about to acquire shares or any
other interest the Trustees may also cause a merger or consolidation between the
Trust or any successor thereto and any such corporation, trust, partnership,
association or other organization if and to the extent permitted by law, as
provided under the law then in effect. Nothing contained herein shall be
construed as requiring approval of shareholders for the Trustees to organize or
assist in organizing one or more corporations, trusts, partnerships,
associations or other organizations and selling, conveying or transferring a
portion of the Trust Property to such organizations or entities.
33
<PAGE>
ARTICLE XII
Miscellaneous
-------------
12.1 Filing. This Declaration and any amendment hereto shall be filed in
------
the office of the Secretary of the Commonwealth of Massachusetts and in such
other places as may be required under the laws of Massachusetts and may also be
filed or recorded ln such other places as the Trustees deem appropriate. Each
amendment so filed shall be accompanied by a certificate signed and acknowledged
by a Trustee stating that such action as duly taken in a manner provided herein,
and unless such amendment or such certificate sets forth some later time for the
effectiveness of such amendment, such amendment shall be effective upon its
filing. A restated Declaration, containing the original Declaration and all
amendments theretofore made, may be executed from time to time by a majority of
the Trustees and shall, upon filing with the Secretary of the Commonwealth of
Massachusetts, be conclusive evidence of all amendments contained therein and
may thereafter be referred to in lieu of the original Declaration and the
various amendments thereto.
12.2 Resident Agent. The Trust shall maintain a resident agent in
--------------
the Commonwealth of Massachusetts, which agent shall initially be CT Corporation
System, 10 Post Office Square, Boston, Massachusetts 02109. The Trustees may
designate a successor resident agent, provided, however, that such appointment
shall not become effective until written notice thereof is delivered to the
office of the Secretary of the Commonwealth.
12.3 Governing Law. This Declaration is executed by the Trustees and
-------------
delivered in the Commonwealth of Massachusetts and with reference to the lows
thereof, and the rights of all parties and the validity and construction of
every provision hereof shall be subject to end construed according to the-laws
of said State and reference shall be specifically made to the business
corporation law of the Commonwealth of Massachusetts as to the construction of
matters not specifically covered herein or as to which an ambiguity exists.
12.4 Counterparts. This Declaration may be simultaneously executed
------------
in several counterparts, each of which shall be deemed to be an original, and
such counterparts, together, shall constitute one and the same instrument, which
shall be sufficiently evidenced by any such original counterpart.
12.5 Reliance by Third Parties. Any certificate executed by an individual
-------------------------
who, according to the records of the Trust, or of any recording office in which
this Declaration may be recorded, appears to be a Trustee hereunder, certifying
to: (a) the number or identity of Trustees or Shareholders, (b) the name of the
34
<PAGE>
Trust or any Series thereof, (c) the establishment of any Series, (d) the due
authorization of the execution of any instruments or writing, (e) the form of
any vote passed at a meeting of Trustees or Shareholders, (f) the fact that the
number of Trustees or Shareholders present at any meeting or executing any
written instrument satisfies the requirements of this Declaration, (g) the form
of any By-Laws adopted by or the identity of any officers elected by the
Trustees, or (h) the existence of any fact or facts which in any manner relate
to the affairs of the Trust or any Series, shall be conclusive evidence as to
the matters so certified in favor of any person dealing with the Trustees and
their successors.
12.6 Provisions in Conflict With Law or Regulations.
----------------------------------------------
(a) The provisions of this Declaration are severable, and if the
Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with 1940 Act, the regulated investment company
provisions of the Internal Revenue Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of this Declaration; provided, however, that such determination shall not
affect any of the remaining provisions of this Declaration or render invalid or
improper any action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
35
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.
/s/ Philip L. Kirstein
----------------------
Philip L. Kirstein
9 Liberty Street
Ossing, New York 10562
/s/ Gerald M. Richard
---------------------
Gerald M. Richard
6 Fawn Drive
Belle Mead, New Jersey 08502
/s/ Robert Harris
-----------------
Robert Harris
22 Zeloof Drive
West Windsor, New Jersey 08646
/s/ William E. Aldrich
----------------------
William E. Aldrich
111 Windsor Road
Needham, Massachusetts 02192
36
<PAGE>
EXHIBIT 99.1(B)
MERRILL LYNCH MULTI-STATE TAX-EXEMPT SERIES TRUST
Establishment and Designation
Merrill Lynch New York Municipal Bond Fund
The undersigned, being all of the Trustees of Merrill Lynch Multi-State
Tax-Exempt Series Trust, a Massachusetts business trust (the "Trust"), acting
pursuant to Section 6.2 of the Declaration of Trust, as amended, dated August 2,
1985 (the "Declaration") of the Trust, do hereby divide the shares of beneficial
interest of the Trust, par value $.10 per share ("Shares"), to create a separate
Series, within the meaning of said Section 6.2, as follows:
1. The Series is designated the "Merrill Lynch New York Municipal Bond
Fund" (referred to herein as the "Fund").
2. Shares of the Fund shall be entitled to all of the rights and
preferences accorded to Shares under the Declaration.
3. The purchase price of Shares of the Fund, the method of determination
of net asset value of the Fund, the price, terms and manner of
redemption of Shares of the Fund, and the relative dividend rights of
holders of Shares of the Fund shall be established by the Trustees of
the Trust in accordance with the provisions of the Declaration and
shall be set forth in the currently effective prospectus and statement
of additional information relating to shares of the Fund, as amended
from time to time, under the Securities Act of 1933, as amended.
IN WITNESS WHEREOF, the undersigned have signed this instrument in
duplicate original counterparts and have caused a duplicate original to be
lodged among the records of the Trust this 17th day of September, 1985.
/s/ Philip L. Kirstein /s/ Gerald M. Richard
- ---------------------- ---------------------
Philip L. Kirstein Gerald M. Richard
9 Liberty Street 6 Fawn Drive
Ossining, New York 10562 Belle Mead, New Jersey 08502
<PAGE>
/s/ Robert Harris /s/ William E. Aldrich
- ----------------- ----------------------
Robert Harris William E. Aldrich
22 Zeloof Drive 111 Windsor Road
West Windsor, New Jersey 08648 Needham, Massachusetts 02192
The Declaration of Trust establishing Merrill Lynch Multi-State Tax-Exempt
Series 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 Tax-Exempt 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 Merrill Lynch Multi-State
Tax-Exempt Series 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 or otherwise in connection with the affairs of said Trust but the Trust
Property only shall be liable.
2
<PAGE>
EXHIBIT 99.1(C)
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
The Undersigned, constituting a majority of the Trustees of Merrill Lynch
Multi-State Municipal Series Trust (the "Trust"), a Massachusetts business
trust, hereby certify that the Trustees of the Trust have duly adopted the
following amendment, as approved by a majority of the shareholders of the Trust,
to the Declaration of Trust, as amended, of the Trust, dated the 2nd day of
August, 1985 (the "Declaration").
VOTED: Section 1.2 of Article 1 of the Declaration be, and it hereby is,
amended in its entirety to read as follows:
1.2 Definitions. As used in this Declaration, the following terms
-----------
shall have the following meanings:
The terms "Affiliated Person", "Assignment", "Commission",
----------------- ---------- ----------
"Interested Person", "Majority Shareholder Vote" (the 67% or more than 50%
------------------ -------------------------
requirement of the third sentence of Section 2(a)(42) of the 1940 Act,
whichever may be applicable) and "Principal Underwriter" shall have the
---------------------
meanings given them in the 1940 Act.
"Declaration" shall mean this Declaration as amended from time to
-----------
time. Reference in this Declaration to "Declaration", "hereof", "herein"
----------- ------ ------
and "hereunder" shall be deemed to refer to the Declaration rather than the
---------
article or section in which such words appear.
"Fundamental Policies" shall mean the investment restrictions set
--------------------
forth in the Prospectus of any Series and designated as fundamental
policies therein.
"Person" shall mean and include individuals, corporations,
------
partnerships, trusts, associations, joint ventures and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof.
"Prospectus" shall mean the currently effective Prospectus of any
----------
Series of the Trust under the Securities Act of 1933, as amended, including
the Statement of Additional Information incorporated by reference therein.
"Series" shall mean the separate series that may be established and
------
designated pursuant to Section 6.2.
<PAGE>
"Shareholders" shall mean as of any particular time all holders of
------------
record or outstanding shares at such time.
"Shares" shall mean the equal proportionate transferable units of
------
interest into which the beneficial interest in any Series of Trust shall be
divided from time to time and includes fractions of shares as well as whole
shares. As provided in Article VI hereof, a series of the Trust may issue
separate classes of Shares; all references to Shares shall be deemed to be
shares of any or all series or a single class of a Series or all classes of
a Series as the context may require.
"Trustees" shall mean the signatories to this Declaration, so long as
--------
they shall continue in office in accordance with the terms hereof, and all
other persons who at the time in question have been duly elected or
appointed and have qualified as trustees in accordance with the provisions
hereof and are then in office, are herein referred to as the "Trustees",
and reference in this Declaration to a Trustee or Trustees shall refer to
such person or persons in their capacity as Trustees hereunder.
"Trust Property" shall mean as of any particular time any and all
--------------
property, real or personal, tangible or intangible, which at such time is
owned or held by or for the account of the Trust, any Series thereof or the
Trustees.
The "1940 Act" refers to the Investment Company Act of 1940, as
--------
amended from time to time, and shall include the rules and regulations and
any relevant order of exemption promulgated thereunder by the Securities
and Exchange Commission.
VOTED: That Section 6.2 of Article VI of the Declaration be, and it hereby
is, amended in its entirety to read as follows:
6.2. Series Designation. The Trustee, in their discretion from time
------------------
to time, may authorize the division of Shares into two or more Series, each
Series relating to a separate portfolio of investments. The different
Series shall be established and designated, and the variations in the
relative rights and preferences as between the different Series shall be
fixed and determined, by the Trustees; provided that all Shares shall be
identical except that there may be variations between different Series as
to purchase price, determination or net asset value, the price, terms and
manner of redemption, special and relative rights as to dividends and on
liquidation, conversion rights, and conditions under which the several
Series shall have
2
<PAGE>
separate voting rights. All references to Shares in this Declaration shall
be deemed to be shares of any or all Series as the context may require.
The Trustees, in their discretion without a vote of the Shareholders,
may divide the shares of beneficial interest of any Series into classes.
In such event, each class of a Series shall represent interests in the
Trust Property of a Series and have identical voting, dividend,
liquidation and other rights and the same terms and conditions except that
expenses related directly or indirectly to the distribution of the Shares
of a class of a Series may be borne solely by such class (as shall be
determined by the Trustees) and, as provided in Section 10.1, a class of a
Series may have exclusive voting rights with respect to matters relating to
the expenses being borne solely by such class. The bearing of such
expenses solely by a class of Shares of a Series shall be appropriately
reflected (in the manner determined by the Trustees) in the net asset
value, dividend and liquidation rights of the Shares of such class of a
Series. The division of the Shares of a Series into classes and the terms
and conditions pursuant to which the shares of the classes of a Series will
be issued must be made in compliance with the 1940 Act. No division of
Shares of a Series into classes shall result in the creation of a class of
Shares having a preference as to dividends or distributions or a preference
in the event of any liquidation, termination or winding up of the Trust.
If the Trustee shall divide the Shares into two or more Series, the
following provisions shall be applicable:
(a) the number of Shares of each Series and of each class of a
Series that may be issued shall be unlimited. The Trustees may
classify or reclassify any unissued Shares or any Shares previously
issued and required of any Series into one or more Series that may be
established and designated from time to time. The Trustees may hold
as treasury Shares (of the same or some other Series), reissue for
such consideration and on such terms as they may determine, or cancel
any Shares of any Series required by the Trust at their discretion
from time to time.
(b) The power of the Trustees to invest and reinvest the Trust
Property of each Series that may be established shall be governed by
Section 3.2 of this Declaration.
(c) All consideration received by the Trust for the issue or
sale of Shares of a particular Series, together with all assets in
which such consideration is
3
<PAGE>
invested or reinvested, all income, earnings, profits, and proceeds
thereof, including any proceeds derived from the sale, exchange or
liquidation or such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that Series for all purposes, subject only to
the rights of creditors, and shall be so recorded upon the books of
account of the Trust. In the event that there are any assets, income,
earnings, profits, and proceeds thereof, funds, or payments which are
not readily identifiable as belonging to any particular Series, the
Trustee shall allocate them among any one or more of the Series
established and designated from time to time in such manner and on
such basis as they, in their sole discretion, deem fair and equitable.
Each such allocation by the Trustees shall be conclusive and binding
upon the shareholders of all Series for all purposes.
(d) The assets belonging to each particular Series shall be
charged with the liabilities of the Trust in respect of that Series
only and all expenses, costs, charges and reserves attributable to
that Series and shall not be charged with the liabilities, expenses,
costs, charges and reserves attributable to other Series, and any
general liabilities, expenses, costs, charges or reserves of the Trust
which are not readily identifiable as belonging to any particular
Series shall be allocated and charged by the Trustees to and among any
one or more of the Series established and designated from time to time
in such manner and on such basis as the Trustees in their sole
discretion deem fair and equitable. Each allocation of liabilities,
expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the holders of all Series for all
purposes. The Trustees shall have full discretion, to the extent not
inconsistent with the 1940 Act, to determine which items shall be
treated as income and which items as capital; and each such
determination and allocation shall be conclusive and binding upon the
Shareholders.
(e) The power of the Trustees to pay dividends and make
distributions with respect to any one or more Series shall be governed
by Section 9.2 of this Declaration. Dividends and distributions on
Shares of a particular Series may be paid with such frequency as the
Trustees may determine, to the holders of Shares of that Series, from
such of the income and capital gains, accrued or realized, from the
assets belonging to that Series, as the Trustees may determine, after
providing
4
<PAGE>
for actual and accrued liabilities belonging to the Series. All
dividends and distributions on Shares of a particular Series shall be
distributed pro rata to the holders of that Series in proportion to
the number of Shares of that Series held by such holders at the date
and time of record established for the payment of such dividends or
distributions, except that such dividends and distributions shall
appropriately reflect expenses related directly or indirectly to the
distribution of Shares of a class of such Series.
The establishment and designation of any Series of Shares shall
be effective upon the execution by a majority of the then Trustees of
an instrument setting forth the establishment and designation of such
Series. Such instrument shall also set forth any rights and
preferences of such Series which are in addition to the rights and
preferences of Shares set forth in this Declaration. At any time that
there are no Shares outstanding of any particular Series previously
established and designated, the Trustees may by an instrument executed
by a majority of their number abolish that Series and the
establishment and designation thereof. Each instrument referred to in
this paragraph shall have the status of an amendment to this
Declaration.
VOTED: That Sections 9.1, 9.2 and 9.4 of Article IX of the Declaration be,
and they hereby are, amended in their entirety to read as follows:
9.1. Net Asset Value. The net asset value of each outstanding Share
---------------
of each Series of the Trust shall be determined at such time or time on
such days as the Trustees may determine, in accordance with the 1940 Act,
with respect to each Series. The method of determination of net asset
value of Shares of each class of a Series shall be determined by the
Trustees an shall be as set forth in the Prospectus with respect to the
applicable Series with any expenses being borne solely by a class Shares
being reflected in the net asset value of such Shares. The power and duty
to make the daily calculations for any Series may be delegated by the
Trustees to the adviser, administrator, manager, custodian, transfer agent
or such other person as the Trustees may determine. The Trustee may
suspend the daily determination of net asset value to the extent permitted
by the 1940 Act.
9.2. Distributions to Shareholders. The Trustees shall from time to
-----------------------------
time distribute ratably among the shareholders of any Series such
proportion of the net profits, surplus (including paid-in-surplus),
capital, or
5
<PAGE>
assets with respect to such Series held by the Trustees as they deem proper
with any expenses being borne solely by a class of Shares of any Series
being reflected in the net profits or other assets being distributed to
such class. Such distribution may be made in cash or property (including
without limitation any type of obligations of the Trust or any assets
thereof), and the Trustees may distribute ratably among the shareholders of
any Series additional Shares of such Series issuable hereunder in such
manner, at such times, and on such terms as the Trustees may deem proper.
Such distributions may be among the Shareholders of record at the time of
declaring a distribution or among the Shareholders of record at such later
date as the Trustees shall determine. The Trustees may always retain from
the net profits such amount as they may deem necessary to pay the debts or
expenses of the Trust or to meet obligations of the Trust, or as they deem
desirable to use in the conduct of its affairs or to retain for future
requirements or extensions of the business. The Trustees may adopt and
offer to Shareholders of any Series such dividend reinvestment plans, cash
dividend payout plans or related plans as the Trustees shall deem
appropriate for such Series.
Inasmuch as the computation of net income and gains for Federal income
tax purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes.
9.4. Power to Modify Foregoing Procedures. Notwithstanding any of
------------------------------------
the foregoing provisions of this Article IX, the Trustees may prescribe, in
their absolute discretion, such other bases and times for determining the
per share net asset value of the Trust's Shares or net income, or the
declaration and payment of dividends and distributions as they deem
necessary or desirable or to enable the Trust to comply with any provision
of the 1940 Act, including any rule or regulation adopted pursuant to
Section 22 of the 1940 Act by the Commission or any securities association
registered under the Securities Exchange Act of 1934, all as in effect now
or hereafter amended or modified.
VOTED: That Sections 10.1 and 10.2 of Article X of the Declaration be, and
they hereby are, amended in their entirety to read as follows:
6
<PAGE>
10.1. Voting Powers. The Shareholders shall have power to vote (i)
-------------
for the removal of Trustees as provided in Section 2.2; (ii) with respect
to any advisory or management contract of a Series as provided in Section
4.1; (iii) with respect to the amendment of this Declaration as provided in
Section 11.3; (iv) with respect to such additional matters relating to the
Trust as may be required or authorized by the 1940 Act, the laws of the
Commonwealth of Massachusetts or other applicable law or by this
Declaration or the By-Laws of the Trust; and (v) with respect to such
additional matters relating to the Trust as may be properly submitted for
Shareholder approval. If the Shares of a Series shall be divided into
classes as provided in Article VI hereof, the Shares of each class shall
have identical voting rights except that the Trustees, in their discretion,
may provide a class of a Series with exclusive voting rights with respect
to matters related to expenses being borne solely by such class.
10.2. Meetings of Shareholders. Special meetings of the Shareholders
------------------------
may be called at any time by a majority of the Trustees and shall be called
by any Trustee upon written request of Shareholders of any Series holding
in the aggregate not less than 10% of the outstanding Shares of such Series
having voting rights, such request specifying the purpose or purposes for
which such meeting is to be called. Any such meeting shall be held within
or without the Commonwealth of Massachusetts on such day and at such time
as the Trustees shall designate. The holders of one-third of the
outstanding Shares of each Series present in person or by proxy shall
constitute a quorum for the transaction of any business, except as may
otherwise be required by the 1940 Act, the laws of the Commonwealth of
Massachusetts or other applicable law or by this Declaration or the By-Laws
of the Trust. If a quorum is present at a meeting of a particular Series,
the affirmative vote of a majority of the Shares of each Series represented
at the meeting constitutes the action of the Shareholders, unless the 1940
Act, the laws of the Commonwealth of Massachusetts or other applicable law,
the Declaration or by the By-Laws of the Trust requires a greater number of
affirmative votes. If the Shares of any Series shall be divided into
classes with a class having exclusive voting rights with respect to certain
matters, the aforesaid quorum and voting requirements with respect to
action to be taken by the Shareholders of the class of such Series on such
matters shall be applicable only to the Shares of such class.
VOTED: That Section 11.2 of Article XI of the Declaration be, and it hereby
is, amended in its entirety to read as follows:
7
<PAGE>
11.2. Termination.
-----------
(a) The Trust may be terminated by the affirmative vote of the holders
of not less than two-third of the Shares of each Series of the Trust at any
meeting of Shareholders or by an instrument in writing, without a meeting,
signed by a majority of the Trustees and consented to by the holders of not
less than two-thirds of such Shares. Any Series may be so terminated by
vote or written consent of not less than two-thirds of the Shares of such
Series. Upon the termination of the Trust or any Series,
(i) The Trust or such Series shall carry on no business except
for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust or such Series and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust or such
Series shall have been wound up, including the power to fulfill or
discharge the contracts of the Trust or such Series, collects its
assets, sell, convey, assign, exchange, transfer or otherwise dispose
of all or any part of the remaining Trust Property to one or more
persons at public or private sale for consideration which may consist
in whole or in part of cash, securities or other property of any kind,
discharge or pay its liabilities, and do all other acts appropriate to
liquidate its business; provided that any sale, conveyance,
assignment, exchange, transfer or other disposition of all or
substantially all the Trust Property shall require approval of the
principal terms of the transaction and the nature and amount of the
consideration by vote or consent of the holders of a majority of the
Shares entitled to vote.
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and
refunding agreements, as they deem necessary for their protection, the
Trustees may distribute the remaining Trust Property of any Series, in
cash or in kind or partly each, among the Shareholders of such Series
and each class of such Series, according to their respective rights
taking into account the proper allocation of expenses being borne
solely by any Series or any class of Shares of a Series.
(b) After termination of the Trust or a Series and distribution to the
Shareholders as herein provided, a majority of the Trustees shall execute
and lodge among the
8
<PAGE>
records of the Trust an instrument in writing setting forth the fact of
such termination. Upon termination of the Trust, the Trustees shall
thereupon be discharged from all further liabilities and duties hereunder,
and the rights and interests of all Shareholders shall thereupon cease.
Upon termination of any Series, the Trustees shall thereupon be discharged
from all further liabilities and duties with respect to such Series, and
the rights and interests of all Shareholders of such Series shall thereupon
cease.
IN WITNESS WHEREOF, the undersigned, constituting a majority of the
Trustees, have signed this certificate in duplicate original counterparts and
have caused a duplicate original to be lodged among the records of the Trust as
required by Article XI, Section 11.3(c) of the Declaration of Trust as of the
3rd day of October, 1988.
/s/ Kenneth G. Axelson /s/ Andre F. Perold
- ---------------------- -------------------
Kenneth G. Axelson Andre F. Perold
307 Gross Neck Road 56 Barnstable Road
Waldoboro, Maine 04572 West Newton, Massachusetts 02165
Herbert I. London /s/ Arthur Zeikel
- ----------------- -----------------
Herbert I. London Arthur Zeikel
2 Washington Square Village 279 Watchung Fork
New York, New York 10012 Westfield, New Jersey 07090
/s/ Joseph L. May
- -----------------
Joseph L. May
2305 Hampton Avenue
Nashville, Tennessee 37215
9
<PAGE>
EXHIBIT 99.1(D)
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
Establishment and Designation
of
Class A Shares and Class B Shares of
Beneficial Interest of the
Series Designated Merrill Lynch
New York Municipal Bond Fund of the Trust
The undersigned, being a majority of the Trustees of Merrill Lynch Multi-
State Municipal Series Trust, a Massachusetts business trust (the "Trust"),
acting pursuant to Section 6.2 of the Declaration of Trust, as amended, dated
August 2, 1985 (the "Declaration") of the Trust, do hereby divide the shares of
beneficial interest of the Series designated "Merrill Lynch New York Municipal
Bond Fund" (the "Fund") of the Trust, par value $.10 per share ("Shares"), to
create two classes of Shares, within the meaning of said Section 6.2, as
follows:
1. The two classes of Shares are designated "Class A Shares" and "Class B
Shares".
2. Class A Shares and Class B Shares shall be entitled to all of the
rights and preferences accorded to Shares under the Declaration.
3. The purchase price of Class A Shares and Class B Shares, the method of
determination of net asset value of Class A Shares and Class B Shares,
the price, terms and manner of redemption of Class A Shares and Class
B Shares, and the relative dividend rights of holders of Class A
Shares and Class B Shares shall be established by the Trustees of the
Trust in accordance with the provisions of the Declaration and shall
be set forth in the currently effective prospectus and statement of
additional information of the Trust relating to the Fund, as amended
from time to time, under the Securities Act of 1933, as amended.
4. All Shares issued prior to the filing of this instrument with the
Commonwealth of Massachusetts shall be deemed Class B Shares.
<PAGE>
IN WITNESS WHEREOF, the undersigned, have signed this instrument in
duplicate original counterparts and have caused a duplicate original to be
lodged among the records of the Trust this 3rd day of October, 1988.
/s/ Kenneth S. Axelson /s/ Andre F. Perold
- ---------------------- -------------------
Kenneth S. Axelson Andre F. Perold
357 Gross Neck Road 56 Barnstable Road
Waldoboro, Maine 04572 West Newton, Massachusetts 02165
/s/ Herbert I. London /s/ Arthur Zeikel
- --------------------- -----------------
Herbert I. London Arthur Zeikel
2 Washington Square Village 279 Watchung Fork
New York, New York 10043 Westfield, New Jersey 07090
/s/ Joseph L. May
- -----------------
Joseph L. May
2305 Hampton Avenue
Nashville, Tennessee 37219
The Declaration of Trust establishing Merrill Lynch Multi-State Municipal
Series 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 Merrill Lynch Multi-State
Municipal Series 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
or otherwise in connection with the affairs of said Trust but the Trust Property
only shall be liable.
2
<PAGE>
EXHIBIT 99.1(E)
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
Certification Of Amendment
To Declaration Of Trust
and
Establishment and Designation of Classes
The undersigned, constituting a majority of the Trustees of Merrill Lynch
Multi-State Municipal Series Trust (the "Trust"), a Massachusetts business
trust, hereby certify that the Trustees of the Trust have duly adopted the
following amendments, as approved by a majority of the shareholders of the
Trust, to the Trust's Declaration of Trust.
VOTED: That the second paragraph of Section 6.2 of Article VI of the
Declaration of Trust be, and it hereby is, amended by adding the
following:
The Trustees may provide that shares of a class will be exchanged for shares of
another class without any act or deed on the part of the holder of shares of the
class being exchanged, whether or not shares of such class are issued and
outstanding, all on terms and conditions as the Trustees may specify. The
Trustees may redesignate a class or series of shares of beneficial interest or a
portion of a class or series of shares of beneficial interest whether or not
shares of such class or series are issued and outstanding, provided that such
redesignation does not substantially adversely affect the preference, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such issued and
outstanding shares of beneficial interest.
VOTED: That Section 6.3 of Article VI of the Declaration of Trust be, and it
hereby is, amended in its entirety to read as follows:
6.3. Rights of Shareholders. The ownership of the Trust Property of every
----------------------
description and the right to conduct any business hereinbefore described are
vested exclusively in the Trustees, and the Shareholders shall have no interest
therein other than the beneficial interest conferred by their Shares with
respect to a particular Series, and they shall have no right to call for any
partition or division of any property, profits, rights or interests of the Trust
nor can they be called upon to share or assume any losses of the Trust or suffer
an assessment of any kind by virtue of their ownership of Shares. The Shares
shall be personal property giving only the rights in this Declaration
specifically set forth. The Shares shall not entitle the holder to preference,
preemptive, appraisal, conversion or
<PAGE>
exchange rights (except for rights of appraisal specified in Section 11.4 and
except as may be specified by the Trustees in connection with the division of
shares into classes or the redesignation of classes or portions of classes in
accordance with Section 6.2).
VOTED: That Section 10.1 of Article X of the Declaration of Trust be, and it
hereby is, amended in its entirety to read as follows:
10.1. Voting Powers. The Shareholders shall have power to vote (i) for
-------------
the removal of Trustees as provided in Section 2.2; (ii) with respect to any
advisory or management contract of a Series as provided in Section 4.1; (iii)
with respect to the amendment of this Declaration as provided in Section 11.3;
(iv) with respect to such additional matters relating to the Trust as may be
required or authorized by the 1940 Act, the laws of the Commonwealth of
Massachusetts or other applicable law or by this Declaration or the By-Laws of
the Trust; and (v) with respect to such additional matters relating to the Trust
as may be properly submitted for Shareholder approval. If the Shares of a
Series shall be divided into classes as provided in Article VI hereof, the
Shares of each class shall have identical voting rights except that the
Trustees, in their discretion, may provide a class of a Series with exclusive
voting rights with respect to matters related to expenses being borne solely by
such class whether or not shares of such class are issued and outstanding.
2
<PAGE>
The undersigned, being a majority of the Trustees of the Trust, acting
pursuant to Section 6.2 of the Declaration of Trust, do hereby divide the shares
of beneficial interest of each series of the Trust to create four classes of
shares, within the meaning of said Section 6.2, as follows:
I. The four classes of shares are designated "Class A Shares," "Class B
Shares," "Class C Shares," and "Class D Shares."
II. Class A Shares, Class B Shares, Class C Shares and Class D Shares
shall be entitled to all of the rights and preferences accorded to
Shares under the Declaration of Trust.
III. The purchase price, the method of determination of net asset value,
the price, terms and manner of redemption, and the relative dividend
rights of holders of Class A Shares, Class B Shares, Class C Shares
and Class D Shares shall be established by the Trustees of the Trust
in accordance with the provisions of the Declaration of Trust and
shall be set forth in the currently effective prospectus and statement
of additional information of the Trust relating to each series of the
Trust, as amended from time to time, contained in the Trust's
registration statement under the Securities Act of 1933, as amended.
IV. Class A Shares, Class B Shares, Class C Shares and Class D Shares
shall vote together as a single class except that shares of a class
may vote separately on matters affecting only that class and shares of
a class not affected by a matter will not vote on that matter.
V. A class of shares of any series of the Trust may be terminated by the
Trustees by written notice to the Shareholders of the class.
3
<PAGE>
IN WITNESS WHEREOF, the undersigned, constituting a majority of the
Trustees of the Trust, have signed this certificate in duplicate original
counterparts and have caused a duplicate original to be lodged among the records
of the Trust as required by Article XI, Section 11.3(c) of the Declaration of
Trust, as of the 17th day of October, 1994.
/s/ Kenneth S. Axelson /s/ Herbert I. London
- ---------------------- ---------------------
Kenneth S. Axelson Herbert I. London
75 Jameson Point Road 2 Washington Square Village
Rockland, ME 04841 Apartment 12B
New York, NY 10012
/s/ Robert R. Martin /s/ Joseph L. May
- -------------------- -----------------
Robert R. Martin Joseph L. May
513 Grand Hill 2136 Golf Club Lane
St. Paul, MN 55102 Nashville, TN 37215
/s/ Andre F. Perold /s/ Arthur Zeikel
- ------------------- -----------------
Andre F. Perold Arthur Zeikel
56 Barnstable Road 300 Woodland Avenue
West Newton, MA 02165 Westfield, NJ 07090
The Declaration of Trust establishing Merrill Lynch Multi-State Municipal
Series 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 of the
Trust, "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
Merrill Lynch Multi-State Municipal Series 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 or otherwise in connection with the
affairs of said Trust, but the "Trust Property" only shall be liable.
4
<PAGE>
EXHIBIT 99.10
BROWN & WOOD
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
Telephone: 212-839-5300
Facsimile: 212-839-5599
January 30, 1995
Merrill Lynch New York Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust
P.O. Box 9011
Princeton, New Jersey 08543-9011
Dear Sirs:
This opinion is furnished in connection with the registration by Merrill
Lynch Multi-State Municipal Series Trust, a Massachusetts business trust (the
"Trust"), of 10,206,616 shares of beneficial interest, par value $0.10 per share
(the "Shares"), of the Merrill Lynch New York Municipal Bond Fund, a series of
the Trust, under the Securities Act of 1933 pursuant to a registration statement
on Form N-1A (File No. 2-99473), as amended (the "Registration Statement").
As counsel for the Trust, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Declaration of Trust of the
Trust, as amended, the By-Laws of the Trust and such other documents as we have
deemed relevant to the matters referred to in this opinion.
<PAGE>
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and nonassessable shares of beneficial interest, except that shareholders
of the Trust may under certain circumstances be held personally liable for the
Trust's obligations.
In rendering this opinion, we have relied as to matters of Massachusetts
law upon an opinion of Bingham, Dana & Gould rendered to the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood
2
<PAGE>
EXHIBIT 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. 12 to Registration
Statement No. 2-99473 of our report dated October 31, 1994 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 LLP
Deloitte & Touche LLP
Princeton, New Jersey
January 30, 1995
<PAGE>
EXHIBIT 16
<TABLE>
<CAPTION>
New York Municipal Bond Fund - Class C
10/21/94 - 12/31/94
Since Since
Inception Inception
Avg Annual Total
Return Return*
---------- ----------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 10.76 10.00
---------- ----------
Equals Shares Purchased 92.94 100.00
Plus Shares Acquired through
Dividend Reinvestment 0.97 -6.09
---------- ----------
Equals Shares Held at 12/31/94 93.91 93.91
Multiplied by Net Asset Value at 12/31/94 10.43 10.43
---------- ----------
Equals Ending Value before deduction for
contingent deferred sales charge 979.45 979.45
Less deferred sales charge (9.69) 0.00
---------- ----------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 12/31/94 $969.76 $979.45
---------- ----------
Divided by $1,000 (P) 0.9698 0.9795
Subtract 1 -0.0302 -0.0205
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -3.02%
==========
Expressed as a percentage equals the
Aggregate Total Return for the Period -2.05%
==========
ERV divided by P 0.9698
Raise to the power of 5.1408
Equals 0.8540
Subtract 1 -0.1460
Expressed as a percentage equals the
Average Annualized Total Return -14.60%
==========
</TABLE>
* Does not include sales charge for the period.
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD ENDING 12-31-94
NEW YORK MUNICIPAL BOND FUND - CLASS C
<S> <C>
Long term income generally based on yield to
maturity times market value of each security $2,503
Plus short term income accrued for the past
thirty days 187
--------
Equals Total Income 2,690
Less expenses for the past thirty days -541
--------
Equals net monthly income for yield
calculation 2,149
--------
Average shares outstanding for 30 days 48,816
Times the Net Asset Value 10.43
--------
Equals total dollars $509,148
========
Net monthly income divided by total dollars
equals 0.004220681
Add 1 1.004220681
Raise to the power of 6 1.025592804
Subtract 1 0.025592804
Times 2 0.051185608
Expressed as a percentage equals the
standardized yield for the 30 day
period 5.12%
======
Tax Rate 28.00%
X=1 minus Tax Rate 72.00%
Standardized Yield divided by X equals
Tax Equivalent Yield for 30 day period 7.11%
======
</TABLE>
<PAGE>
EXHIBIT 16
<TABLE>
<CAPTION>
New York Municipal Bond Fund - Class D
10/21/94 - 12/31/94
Since Since
Inception Inception
Avg Annual Total
Return Return*
---------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price 11.21
----------
Divided by Net Asset Value 10.76
---------
Equals Shares Purchased 89.21 92.94
Plus Shares Acquired through
Dividend Reinvestment 1.02 1.07
---------- ---------
Equals Shares Held at 12/31/94 90.23 94.01
Multiplied by Net Asset Value at 12/31/94 10.42 10.42
---------- ---------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 12/31/94 $940.19 $979.54
Divided by $1,000 (P) 0.9402 0.9795
Subtract 1 -0.0598 -0.0205
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -5.98%
----------
Expressed as a percentage equals the
Aggregate Total Return for the Period -2.05%
---------
ERV divided by P 0.9402
Raise to the power of 5.1408
Equals 0.7283
Subtract 1 -0.2717
Expressed as a percentage equals the
Average Annualized Total Return -27.17%
----------
</TABLE>
* Does not include sales charge for the period.
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD ENDING 12-31-94
NEW YORK MUNICIPAL BOND FUND - CLASS D
<S> <C>
Long term income generally based on yield
to maturity times market value of each
security $ 3,924
Plus short term income accrued for the past
thirty days 294
--------
Equals Total Income 4,218
Less expenses for the past thirty days -539
--------
Equals net monthly income for yield
calculation 3,679
--------
Average shares outstanding for 30 days 77,774
Times the Maximum Offering Price 10.85
--------
Equals total dollars $843,851
========
Net monthly income divided by total
dollars equals 0.004360139
Add 1 1.004360139
Raise to the power of 6 1.026447661
Subtract 1 0.026447661
Times 2 0.052895322
Expressed as a percentage equals the
standardized yield for 30 day period 5.29%
========
Tax Rate 28.00%
X = 1 minus Tax Rate 72.00%
Standardized Yield divided by X equals
Tax Equivalent Yield for 30 day period 7.35%
========
</TABLE>
