<PAGE>
PROSPECTUS
JANUARY 25, 1996
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 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 ("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. For more
information on the Fund's investment objective and policies, see "Investment
Objective and Policies" on page 11.
----------------
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 9081, Princeton, New Jersey 08543-9081 [(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 25, 1996 (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)..... 0.54% 0.54% 0.54% 0.54%
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 become
subject to lower account
maintenance fees)
Other Expenses:
Custodial Fees....... .01% .01% .01% .01%
Shareholder Servicing
Costs(h)............ .05% .06% .05% .04%
Miscellaneous........ .07% .07% .07% .07%
----- ----- ----- -----
Total Other Ex-
penses............ .13% .14% .13% .12%
----- ----- ----- -----
Total Fund Operating
Expenses.............. .67% 1.18% 1.27% .76%
===== ===== ===== =====
</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 25.
(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 26.
(c) Reduced for purchases of $25,000 and over. Class A and 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 25.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
may not be subject to an initial sales charge will instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
(e) Information for Class A and Class B shares is stated for the fiscal year
ended September 30, 1995. Information under "Other Expenses" for Class C
and Class D shares is stated for the period October 21, 1994 (commencement
of operations) to September 30, 1995.
(f) See "Management of the Trust--Management and Advisory Arrangements"--page
21.
(g) See "Purchase of Shares--Distribution Plans"--page 30.
(h) See "Management of the Trust--Transfer Agency Services"--page 22.
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...................................... $47 $61 $76 $120
Class B...................................... $52 $57 $65 $143
Class C...................................... $23 $40 $70 $153
Class D...................................... $47 $63 $81 $130
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...................................... $47 $61 $76 $120
Class B...................................... $12 $37 $65 $143
Class C...................................... $13 $40 $70 $153
Class D...................................... $47 $63 $81 $130
</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 will be subject to a CDSC of 1.0% if redeemed within
one year. See "Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares was 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 as well as 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 and higher account maintenance
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 may 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, 1995 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 presented for Class C and Class
D shares for the period October 21, 1994 (commencement of operations) to
September 30, 1995. 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 Trust at the telephone
number or address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989+
------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 10.88 $ 12.46 $ 11.77 $ 11.22 $ 10.56 $10.81 $10.85
------- ------- ------- ------- ------- ------ ------
Investment income--net.. .61 .64 .70 .72 .74 .73 .68
Realized and unrealized
gain (loss) on invest-
ments--net............. .16 (1.25) .80 .55 .66 (.25) (.04)
------- ------- ------- ------- ------- ------ ------
Total from investment
operations............. .77 (.61) 1.50 1.27 1.40 .48 .64
------- ------- ------- ------- ------- ------ ------
Less dividends and dis-
tributions:
Investment income--net.. (.61) (.64) (.70) (.72) (.74) (.73) (.68)
Realized gain on invest-
ments--net............. -- (.11) (.11) -- -- -- --
In excess of realized
gain on investments--
net.................... -- (.22) -- -- -- -- --
------- ------- ------- ------- ------- ------ ------
Total dividends and dis-
tributions............. (.61) (.97) (.81) (.72) (.74) (.73) (.68)
------- ------- ------- ------- ------- ------ ------
Net asset value, end of
period................. $ 11.04 $ 10.88 $ 12.46 $ 11.77 $ 11.22 $10.56 $10.81
======= ======= ======= ======= ======= ====== ======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 7.37% (5.17)% 13.24% 11.77% 13.60% 4.42% 6.28%#
======= ======= ======= ======= ======= ====== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .67% .63% .64% .65% .66% .67% .66%*
======= ======= ======= ======= ======= ====== ======
Investment income--net.. 5.67% 5.52% 5.80% 6.28% 6.72% 6.79% 6.82%*
======= ======= ======= ======= ======= ====== ======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $23,304 $28,301 $31,976 $18,973 $13,727 $8,905 $3,796
======= ======= ======= ======= ======= ====== ======
Portfolio turnover...... 181.21% 107.96% 38.31% 35.90% 49.78% 53.82% 74.51%
======= ======= ======= ======= ======= ====== ======
</TABLE>
- --------
+ Class A shares commenced operations on October 25, 1988.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986+
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 10.88 $ 12.46 $ 11.77 $ 11.23 $ 10.57 $ 10.81 $ 10.66 $ 10.04 $ 11.05 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income--net.. .56 .58 .64 .67 .67 .68 .69 .70 .70 .67
Realized and unrealized
gain (loss) on
investments--net....... .16 (1.25) .80 .54 .66 (.24) .15 .62 (.94) 1.05
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations............. .72 (.67) 1.44 1.21 1.33 .44 .84 1.32 (.24) 1.72
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net.. (.56) (.58) (.64) (.67) (.67) (.68) (.69) (.70) (.70) (.67)
Realized gain on
investments--net....... -- (.11) (.11) -- -- -- -- -- (.07) --
In excess of realized
gain on investments--
net.................... -- (.22) -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions.......... (.56) (.91) (.75) (.67) (.67) (.68) (.69) (.70) (.77) (.67)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 11.04 $ 10.88 $ 12.46 $ 11.77 $ 11.23 $ 10.57 $ 10.81 $ 10.66 $ 10.04 $ 11.05
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 6.83% (5.66)% 12.67% 11.12% 13.03% 4.00% 8.16% 13.35% (2.50)% 17.65%#
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
account maintenance and
distribution fees...... .68% .64% .64% .66% .67% .68% .66% .66% .64% .60%*
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Expenses................ 1.18% 1.14% 1.14% 1.16% 1.17% 1.18% 1.16% 1.17% 1.14% 1.10%*
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income--net.. 5.16% 5.02% 5.32% 5.79% 6.23% 6.28% 6.38% 6.62% 6.38% 6.71%*
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $564,963 $645,341 $733,981 $616,590 $568,958 $566,095 $635,227 $641,623 $665,547 $487,422
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover...... 181.21% 107.96% 38.31% 35.90% 49.78% 53.82% 74.51% 99.61% 72.35% 172.39%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------
+ Class B shares commenced operations on November 1, 1985.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C CLASS D
------------------ ------------------
FOR THE PERIOD FOR THE PERIOD
OCTOBER 21, 1994+ OCTOBER 21, 1994+
TO TO
SEPTEMBER 30, 1995 SEPTEMBER 30, 1995
------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..... $ 10.76 $ 10.76
------- -------
Investment income--net................... .51 .56
Realized and unrealized gain (loss) on
investments--net........................ .28 .27
------- -------
Total from investment operations......... .79 .83
------- -------
Less dividends from investment income--
net..................................... (.51) (.56)
------- -------
Net asset value, end of period........... $ 11.04 $ 11.03
======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share....... 7.58%# 8.00%#
======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance
and distribution fees................... .67%* .66%*
======= =======
Expenses................................. 1.27%* .76%*
======= =======
Investment income--net................... 4.91%* 5.46%*
======= -------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands). $ 3,556 $ 2,572
======= =======
Portfolio turnover....................... 181.21% 181.21%
======= =======
</TABLE>
- --------
+ Commencement of operations.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
10
<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 interest on Municipal
Bonds may bear a fixed rate or be payable at a variable or floating rate. The
Municipal Bonds purchased by the Fund will be what are commonly referred to as
"investment grade" securities, which are obligations rated at the time of
purchase within the four highest quality ratings as determined by either
Moody's Investors Service, Inc. ("Moody's") (currently Aaa, Aa, A and Baa),
Standard & Poor's 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 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 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 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
11
<PAGE>
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. Under normal conditions, the Fund
anticipates that the average weighted maturity of its portfolio generally will
be in excess of ten years. For temporary periods or to provide liquidity, the
Fund has the authority to invest as much as 35% of its total assets in tax-
exempt or taxable money market obligations with a maturity of one year or less
(such short-term obligations being referred to herein as "Temporary
Investments"), except that taxable Temporary Investments shall not exceed 20%
of the Fund's net assets. The Temporary Investments, VRDOs and Participating
VRDOs in which the Fund may invest will be in the following rating categories
at the time of purchase: MIG-1/VMIG-1 through MIG-4/VMIG-4 for notes and VRDOs
and Prime-1 through Prime-3 for commercial paper (as determined by Moody's),
SP-1+ through 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
12
<PAGE>
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.
SPECIAL CONSIDERATIONS RELATING TO MUNICIPAL 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 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".
Moreover, 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 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,
BBB+ and A-, respectively. On July 10, 1995, Standard & Poor's revised
downwards its ratings on outstanding general obligation bonds of the City from
"A-" to "BBB+". Standard & Poor's stated that the downgrade was a reflection of
the City's inability to eliminate a structural budget imbalance due to
persistent softness in the City's economy, weak job growth, a trend of using
nonrecurring budget devices, optimistic projections of State and federal aid
and high levels of debt service. Moody's, Standard & Poor's and Fitch currently
rate New York State's general obligation bonds A, A- and A+, respectively.
There is no assurance
13
<PAGE>
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. For a discussion of economic and
other conditions in the State of New York, see Appendix I to the Statement of
Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction and equipping of a wide range of public
facilities (including water, sewer, gas, electricity, solid waste, health care,
transportation, education and housing facilities), refunding of outstanding
obligations and obtaining funds for general operating expenses and loans to
other public institutions and facilities. In addition, certain types of bonds
are issued by or on behalf of public authorities to finance various privately
operated facilities, including certain facilities for the local furnishing of
electric energy or gas, sewage facilities, solid waste disposal facilities and
other specialized facilities. For purposes of this Prospectus, such obligations
are Municipal Bonds if the interest paid thereon is exempt from Federal income
tax, and, in the case of New York Municipal Bonds, exempt from New York
personal income tax, even though such bonds may be "private activity bonds" as
discussed below.
The two principal classifications of Municipal Bonds are "general obligation"
and "revenue" bonds which include industrial development bonds ("IDBs") and,
for bonds issued after August 15, 1986, private activity bonds. General
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. The taxing power of any
governmental entity may be limited, however, by provisions of state
constitutions or laws, and an entity's creditworthiness will depend on many
factors, including potential erosion of its tax base due to population
declines, natural disasters, declines in the state's industrial base or
inability to attract new industries, economic limits on the ability to tax
without eroding the tax base, state legislative proposals or voter initiatives
to limit ad valorem real property taxes, and the extent to which the entity
relies on Federal or state aid, access to capital markets or other factors
beyond the state or entity's control. Accordingly, the capacity of the issuer
of a general obligation bond as to the timely payment of interest and the
repayment of principal when due is affected by the issuer's maintenance of its
tax base.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as from the user of
the facility being financed; accordingly the timely payment of interest and the
repayment of principal in accordance with the terms of the revenue or special
obligation bond is a function of the economic viability of such facility or
such revenue source. The Fund will not invest in IDBs, where the entity
supplying the revenues from which the issuer is paid, including predecessors,
has a record of less than three years of continuous business operations if such
investments, together with investments in other unseasoned issuers, would
exceed 5% of the Fund's total assets. Investments involving entities with less
than three years of continuous business operations may pose somewhat greater
risks due to the lack of a substantial operating history for such entities. The
Manager believes, however, that the potential benefits of such investments
outweigh the potential risks, particularly given the Fund's limitations on such
investments.
14
<PAGE>
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 more than 25% of its total assets in IDBs
or private activity bonds. 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 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. The Fund's return on such Municipal Bonds (and Non-Municipal Tax-
Exempt Securities) 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. 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 total assets (however, in accordance with the
provisions of certain state laws, the Fund currently will not invest in excess
of 10% of its total assets in illiquid securities). The Manager, however,
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.
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
15
<PAGE>
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 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 total 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 obligations rated below
investment grade, 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 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 total 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
16
<PAGE>
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.
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 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
17
<PAGE>
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.
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.
18
<PAGE>
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past moved beyond the
daily limit on a number of consecutive trading days.
The successful use of transactions in futures also depends on the ability of
the Manager to forecast correctly the direction and extent of interest rate
movements within a given time frame. To the extent these rates remain stable
during the period in which a futures contract is held by the Fund or moves in a
direction opposite to that anticipated, the Fund may realize a loss on the
hedging transaction which is not fully or partially offset by an increase in
the value of portfolio securities. As a result, the Fund's total return for
such period may be less than if it had not engaged in the hedging transaction.
Furthermore, the Fund will only engage in hedging transactions from time to
time and may not necessarily be engaging in hedging transactions when movements
in interest rates occur.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts and certain options thereon.
REPURCHASE AGREEMENTS
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 total 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 Fund's investment activities are subject to further restrictions that are
described in the Statement of Additional Information. Investment restrictions
and policies which are fundamental policies of the Fund 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 its fundamental policies,
the Fund may not (i) invest more than 25% of its total assets, taken at market
value at the time of each investment, in securities of issuers in any
particular industry (excluding the U.S. Government and its agencies and
instrumentalities) (For purposes of this restriction, states, municipalities
and their political subdivisions are not considered to be part of any
industry); and (ii) borrow money, except that (a) 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), (b) the Fund may borrow up to an additional 5%
of its total assets for temporary purposes, (c) the Fund may obtain such short-
term credit as may be necessary for the clearance of purchases and sales of
portfolio securities and (d) the Fund may purchase securities on margin to the
extent permitted by applicable law. The Fund may not pledge its assets
19
<PAGE>
other than to secure such borrowings or, to the extent permitted by the Fund's
investment policies as set forth in the 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.
Among its non-fundamental policies, the Fund may not (i) purchase securities
of other investment companies, except to the extent such purchases are
permitted by applicable law; (ii) 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 (ii) 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]; and (iii) invest
in securities or 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 (iii) shall not
apply to mortgage-backed securities, asset-backed securities or obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
The Fund's investments will be limited so as to qualify for the special tax
treatment afforded regulated investment companies under the Code. See
"Distributions and Taxes--Taxes". To qualify, among other requirements, the
Trust will limit the Fund's investments so that, at the close of each quarter
of the taxable year, (i) not more than 25% of the market value of the Fund's
total assets will be invested in the securities of a single issuer, and (ii)
with respect to 50% of the market value of its total assets, not more than 5%
of the market value of its total assets will be invested in the securities of a
single issuer and the Fund will not own more than 10% of the outstanding voting
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 issued 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. The Fund is "diversified" under the 1940 Act and must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets.
Investors are referred to the Statement of Additional Information for a
complete description of such restrictions and policies.
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
20
<PAGE>
The Trustees are:
Arthur Zeikel*--President of FAM and MLAM; President and Director of
Princeton Services, Inc.; Executive Vice President of ML&Co.; Director of
the Distributor.
James H. Bodurtha--Chairman and Chief Executive Officer, China Enterprise
Management Corporation.
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.
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, 1995, the Manager and MLAM had a total of
approximately $196.4 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager.
Subject to the direction of the Trustees, the Manager is responsible for the
actual management of the Fund's portfolio and constantly reviews the Fund's
holdings in light of its own research analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Manager. The Manager performs certain of the
other administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of the Trust and the Fund.
Roberto Roffo became the Portfolio Manager of the Fund in 1996. He also
became a Vice President of MLAM in 1996. He has been a Portfolio Manager of
MLAM since 1992. Prior thereto, he was employed by State Street Bank and Trust
Company from 1989 to 1992.
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).
For the fiscal year ended September 30, 1995, the fee paid by the Fund to the
Manager was $3,363,913 (based on average net assets of approximately $618.9
million.)
21
<PAGE>
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,
1995, the Fund reimbursed the Manager $100,952 for accounting services. For the
fiscal year ended September 30, 1995, the ratio of total expenses, excluding
account maintenance and distribution fees, to average net assets was 0.67% for
the Class A shares and 0.68% for the Class B shares. For the period October 21,
1994 (commencement of operations) to September 30, 1995, the annualized ratio
of total expenses, excluding account maintenance and distribution fees, to
average net assets was .67% for Class C shares and .66% for Class D shares.
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.
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
Merrill Lynch 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, 1995, the total fee paid by the Fund to the Transfer Agent
pursuant to the Transfer Agency Agreement was $353,965. At December 31, 1995,
the Fund had 659 Class A shareholder accounts, 14,640 Class B shareholder
accounts, 152 Class C shareholder accounts and 1,870 Class D shareholder
accounts. At this level of accounts, the annual fee payable to the Transfer
Agent would aggregate approximately $234,907, plus out-of-pocket expenses.
22
<PAGE>
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
the Manager, 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 the close of business on the New York
Stock Exchange (generally, 4:00 P.M. New York time), which includes orders
received after the close of business on the previous day,the applicable
offering price will be based on the net asset value determined as of 15
minutes after the close of business on the New York Stock Exchange on that
day, provided the Distributor in turn receives the order from the securities
dealer 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 by the
Distributor prior to 30 minutes after the close 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
23
<PAGE>
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.
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 was 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.
24
<PAGE>
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.
** The initial sales charge may be waived on 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). If the sales charge is waived
in connection with a purchase of $1,000,000 or more, such purchases 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.
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, 1995, the Fund sold
310,937 Class A shares for aggregate net proceeds of $3,344,063. The gross
sales charges for the sale of Class A shares of the Fund for that year were
$10,725, of which $928 and $9,797 were received by the Distributor and Merrill
Lynch, respectively. For the fiscal year ended September 30, 1995, the Fund
received no CDSCs for Class A redemptions. For the period October 21, 1994
(commencement of operations) to September 30, 1995, the Fund sold 257,719 Class
D shares for aggregate net proceeds of $2,747,387. The gross sales charges for
the sale of Class D shares of the Fund for the stated period were $20,326, of
which $1,958 and $18,368 were received by the Distributor and Merrill Lynch,
respectively. For the period October 21, 1994 (commencement of operations) to
September 30, 1995, the Distributor received no CDSCs with respect to
redemption within one year after purchase of Class D shares purchased subject
to a front-end sales charge waiver.
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
25
<PAGE>
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 A and Class D shares are offered at net asset value to certain
employer sponsored retirement or savings plans and to Employee Access
AccountsSM available through employers which provide such plans.
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.
Class D shares of the Fund are offered at net asset value to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. ("Municipal Strategy Fund") and
Merrill Lynch High Income Municipal Bond Fund, Inc. ("High Income Municipal
Bond Fund") who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock of Municipal Strategy Fund and High Income
Municipal Bond Fund, respectively, in shares of the Fund. Similarly, 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.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
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.
26
<PAGE>
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 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.
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.
27
<PAGE>
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, 1995, the Distributor received CDSCs
of $873,699 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).
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the Merrill Lynch Mutual
Fund Adviser ("MFA") program, the time period that such Class A shares are held
in the MFA program will be included in determining the holding period of Class
B shares reacquired upon termination of participation in the MFA program (see
"Shareholder Services--Exchange Privilege").
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Code) of a shareholder. Additional information
concerning the waiver of the Class B CDSC is set forth in the Statement of
Additional Information.
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Code) of a shareholder. Additional information
concerning the waiver of the Class B CDSC is set forth in the Statement of
Additional Information.
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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 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. For the period October 21, 1994 (commencement
of operations) to September 30, 1995, the Distributor received CDSCs of $56
with respect to redemptions of Class C shares, all of which were paid to
Merrill Lynch.
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.
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
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exchange will apply, and the holding period for the shares exchanged will be
tacked on to the holding period for the shares acquired.
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, 1995, the Fund paid the Distributor
$2,951,037 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Distribution Plan of approximately $591.8 million), all
of which were paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
During the period October 21, 1994 (commencement of operations) to September
30, 1995, the Fund paid the Distributor $9,424 pursuant to the Distribution
Plan relating to Class C shares (based on average net assets subject to such
Distribution Plan of approximately $1.7 million), all of which were paid to
Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class C shares. During the period
October 21, 1994 (commencement of operations) to September 30, 1995, the Fund
paid the Distributor $1,307 pursuant to the Distribution Plan relating to Class
D shares (based on average net assets subject to such Distribution Plan of
approximately $1.4 million), all of which were paid to Merrill Lynch for
providing account maintenance services in connection with Class D shares. At
December 31, 1995, the net assets of the Fund subject to the Class B
Distribution Plan aggregated approximately $536.9 million. At this asset level,
the annual fee payable pursuant to the Class B Distribution Plan would
aggregate approximately $2.7 million.
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At December 31, 1995, the net assets of the Fund subject to the Class C
Distribution Plan aggregated approximately $4.5 million. At this asset level,
the annual fee payable pursuant to the Class C Distribution Plan would
aggregate $26,743. At December 31, 1995, the net assets of the Fund subject to
the Class D Distribution Plan aggregated approximately $40.3 million. At this
asset level, the annual fee payable pursuant to the Class D Distribution Plan
would aggregate $40,302.
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, 1994, the last date for which fully allocated accrual data is available,
the fully allocated accrual expenses incurred by the Distributor and Merrill
Lynch exceeded fully allocated accrual revenues since the commencement of
operations by approximately $8,065,000 (1.38% of Class B net assets at that
date). As of September 30, 1995, direct cash revenues for the period since the
commencement of operations exceeded direct cash expenses by $18,263,099 (3.23%
of Class B net assets at that date). As of September 30, 1995, direct cash
expenses for the period since October 21, 1994 (commencement of operations)
exceeded direct cash revenues by $6,567 (0.18% of Class C net assets at that
date).
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
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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 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, Merrill Lynch Financial Data
Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption
requests delivered other than by mail should be delivered to Merrill Lynch
Financial Data Services, Inc.,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.
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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 (generally, 4:00 P.M., New York time)
on the day received, and such request is received by the Trust from such dealer
not later than 30 minutes after the close of business on the New York Stock
Exchange 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.
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,
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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
automatically 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 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.
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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.
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 by non-retirement plan investors under the 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
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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. 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, subject to certain
conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of 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.
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
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certain conditions. During the years ended September 30, 1994 and 1995, 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. The Trust has applied for an exemptive order
permitting it to, among other things, (i) purchase high quality tax-exempt
securities from Merrill Lynch when Merrill Lynch is a member of an underwriting
syndicate and (ii) purchase tax-exempt securities from and sell tax-exempt
securities to Merrill Lynch in secondary market transactions. 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 years ended September
30, 1993 and 1994, the Fund paid no brokerage commissions. For the year ended
September 30, 1995, the Fund paid brokerage commissions of $89,130.
Portfolio Turnover. 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. As a result of the investment
policies described herein, under certain market conditions the Fund's portfolio
turnover may be higher than that of other investment companies; however, it is
extremely difficult to predict portfolio turnover rates with any degree of
accuracy. Higher portfolio turnover may contribute to higher transactional
costs and negative tax consequences, such as an increase in capital gain
dividends or in ordinary income dividends of accrued market discount, as well
as greater difficulty meeting the requirement for qualifications as a regulated
investment company that less than 30% of its gross income be derived from the
sale or other disposition of securities held for less than three months. See
"Distributions and Taxes". (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.) For the years ended September
30, 1994 and 1995, the Fund's portfolio turnover rates were 107.96% and
181.21%, respectively. High portfolio turnover involves correspondingly higher
transaction costs in the form of dealer spreads and brokerage commissions,
which are borne directly by the Fund. Such turnover also has certain tax
consequences for the Fund. See "Distributions and Taxes".
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
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and outstanding from the settlement date of a purchase order to the day prior
to the settlement date of a redemption order.
All net realized long- or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders at least annually. Capital gains
distributions will be reinvested automatically in shares of the Fund unless the
shareholder elects to receive such distributions in cash.
The per share dividends and distributions on 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, 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"),
38
<PAGE>
such distributions are considered ordinary income for Federal and New York
State and New York City income tax purposes. Distributions, if any, from an
excess of net long-term capital gains over net short-term capital losses
derived 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. Distributions by the Fund, whether from exempt-interest income, ordinary
income or capital gains, will not be eligible for the dividends received
deduction allowed to corporations under the Code.
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.
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 any sales charge paid to the Fund
reduces any sales charge such shareholder would have owed upon purchase of the
39
<PAGE>
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 to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
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, judicial 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
40
<PAGE>
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
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, 1995, was 5.00% for Class A shares, 4.70% for Class B shares,
4.59% for Class C shares and 4.90% for Class D shares and the tax-equivalent
yield for the same period (based on a Federal income tax rate of 28%) was 6.94%
for Class A shares, 6.53% for Class B shares, 6.38% for Class C shares and
6.81% 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.
41
<PAGE>
On occasion, the Fund may compare its performance to performance data
published by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar"), and CDA Investment Technology, Inc., or to data contained in
publications such as Money Magazine, U.S. News & World Report, Business Week,
Forbes Magazine and Fortune Magazine. From time to time, the Fund may include
the Fund's Morningstar risk-adjusted performance ratings in advertisements or
supplemental sales literature. As with other performance data, performance
comparisons should not be considered 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, and in certain
cases 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
42
<PAGE>
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 (the "Order") from the Commission permitting the issuance and sale of
multiple classes of shares. The Trustees of the Trust may classify and
reclassify the shares of any Series into additional classes at a future date.
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.
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:
Merrill Lynch Financial Data Services, Inc.
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 Merrill Lynch Financial
Data Services, Inc. at 800-637-3863.
43
<PAGE>
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.
44
<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 Merrill Lynch 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 MERRILL LYNCH 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.
45
<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
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases made under a Letter of
Intention or Systematic Withdrawal
Plan. We guarantee the
shareholder's signature.
This form, when completed, should be
mailed to: ...................................
Merrill Lynch New York Municipal Dealer Name and Address
Bond Fund
c/o Merrill Lynch Financial Data By ................................
Services, Inc. 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.
46
<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........................
Social Security Number or
Name of Co-Owner (if any)............ 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 Merrill Lynch 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.
47
<PAGE>
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART 2)--
(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch 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.
MERRILL LYNCH FINANCIAL DATA AUTHORIZATION TO HONOR ACH DEBITS
SERVICES, INC. DRAWN BY MERRILL LYNCH FINANCIAL
DATA SERVICES, INC.
You are hereby authorized to draw an
ACH debit each month on my bank
account for investment in Merrill To...............................Bank
Lynch New York Municipal Bond Fund as (Investor's Bank)
indicated below:
Bank Address.........................
Amount of each ACH debit $.........
City...... State...... Zip Code......
Account number.....................
As a convenience to me, I hereby
Please date and invest ACH debits on request and authorize you to pay and
the 20th of each month beginning charge to my account ACH debits
drawn on my account by and payable
......(month) or as soon thereafter as to Merrill Lynch Financial Data
possible. Services, Inc. I agree that your
rights in respect to each such debit
I agree that you are drawing these shall be the same as if it were a
ACH debits voluntarily at my request check drawn on you and signed
and that you shall not be liable for personally by me. This authority is
any loss arising from any delay in to remain in effect until revoked
preparing or failure to prepare any personally by me in writing. Until
such debit. If I change banks or you receive such notice, you shall
desire to terminate or suspend this be fully protected in honoring any
program, I agree to notify you such debit. I further agree that if
promptly in writing. I hereby any such debit be dishonored,
authorize you to take any action to whether with or without cause and
correct erroneous ACH debits of my whether intentionally or
bank account or purchases of Fund inadvertently, you shall be under no
shares including liquidating shares liability.
of the Fund and crediting my bank
account. I further agree that if a ............ ......................
check or debit is not honored upon Date Signature of
presentation, Merrill Lynch Financial Depositor
Data Services, Inc. is authorized to
discontinue immediately the Automatic ............ ......................
Investment Plan and to liquidate Bank Signature of Depositor
sufficient shares held in my account Account (If joint account,
to offset the purchase made with the Number both must sign)
dishonored debit.
NOTE: IF AUTOMATIC INVESTMENT PLAN
............ ..................... IS ELECTED, YOUR BLANK, UNSIGNED
Date Signature of CHECK MARKED "VOID" SHOULD ACCOMPANY
Depositor THIS APPLICATION.
.....................
Signature of Depositor
(If joint account,
both must sign)
48
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
49
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
50
<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 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 351
Boston, Massachusetts 02101
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
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 REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Merrill Lynch Select Pricing SM System..................................... 3
Financial Highlights....................................................... 8
Investment Objective and Policies.......................................... 11
Potential Benefits........................................................ 13
Special Considerations Relating to
Municipal Bonds......................................................... 13
Description of Municipal Bonds............................................ 14
Call Rights............................................................... 16
When-Issued Securities and Delayed Delivery Transactions.................. 16
Financial Futures Transactions and Options................................ 17
Repurchase Agreements..................................................... 19
Investment Restrictions................................................... 19
Management of the Trust.................................................... 20
Trustees.................................................................. 20
Management and Advisory Arrangements...................................... 21
Code of Ethics............................................................ 22
Transfer Agency Services.................................................. 22
Purchase of Shares......................................................... 23
Initial Sales Charge Alternatives--Class A and Class D Shares............. 25
Deferred Sales Charge Alternatives--Class B and Class C Shares............ 26
Distribution Plans........................................................ 30
Limitations on the Payment of Deferred Sales Charges...................... 31
Redemption of Shares....................................................... 32
Redemption................................................................ 32
Repurchase................................................................ 33
Reinstatement Privilege--Class A and Class D Shares....................... 33
Shareholder Services....................................................... 33
Investment Account........................................................ 34
Exchange Privilege........................................................ 34
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 35
Systematic Withdrawal Plans............................................... 36
Automatic Investment Plans................................................ 36
Portfolio Transactions..................................................... 36
Distributions and Taxes.................................................... 37
Distributions............................................................. 37
Taxes..................................................................... 38
Performance Data........................................................... 40
Additional Information..................................................... 42
Determination of Net Asset Value.......................................... 42
Organization of the Trust................................................. 42
Shareholder Reports....................................................... 43
Shareholder Inquiries..................................................... 44
Authorization Form......................................................... 45
</TABLE>
Code # 10342-0196
[LOGO] Merrill Lynch
Merrill Lynch
New York Municipal
Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Prospectus
January 25, 1996
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 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. 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.
----------------
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
25, 1996 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
----------------
FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is January 25, 1996.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as high
a level of income exempt from Federal, New York State and New York City income
taxes as is consistent with prudent investment management. The Fund seeks to
achieve its objective by investing primarily in a diversified portfolio of
long-term obligations issued by or on behalf of New York State, its political
subdivisions, agencies and instrumentalities and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam, which pay interest exempt, in the opinion of bond counsel to the
issuer, from Federal, New York State and New York City income taxes.
Obligations exempt from Federal income taxes are referred to herein as
"Municipal Bonds" and obligations exempt from Federal, New York State and New
York City income taxes are referred to as "New York Municipal Bonds". Unless
otherwise indicated references to Municipal Bonds shall be deemed to include
New York Municipal Bonds. The Fund anticipates that at all times, except during
temporary defensive periods, it will maintain at least 65% of the Fund's total
assets invested in New York Municipal Bonds. At times, the Fund will seek to
hedge its portfolio through the use of futures transactions to reduce
volatility in the net asset value of Fund shares. Reference is made to
"Investment Objective and Policies" in the Prospectus for a discussion of the
investment objective and policies of the Fund.
Municipal Bonds may include general obligation bonds of the State and its
political subdivisions, revenue bonds of utility systems, highways, bridges,
port and airport facilities, colleges, hospitals, housing facilities, etc., and
industrial development bonds or private activity bonds. The interest on such
obligations may bear a fixed rate or be payable at a variable or floating rate.
The Municipal Bonds purchased by the Fund will be primarily what are commonly
referred to as "investment grade" securities, which are obligations rated at
the time of purchase within the four highest quality ratings as determined by
either Moody's Investors Service, Inc. ("Moody's") (currently Aaa, Aa, A and
Baa), Standard & Poor's 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 applicable law.
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
2
<PAGE>
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. 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. 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 total assets. The Manager, however, believes that indexed and inverse
floating obligations
3
<PAGE>
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.
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 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 total 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. A more complete discussion
concerning futures and options transactions is set forth under "Investment
Objective and Policies" in the Prospectus. 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 ("IDBs") and, in the case of bonds issued after
August 15, 1986, private activity bonds, are in most cases revenue bonds and
generally do not constitute the pledge of the credit or taxing power of the
issuer of
4
<PAGE>
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 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 total 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
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 securities 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 and to general equitable principles, which may
limit the enforcement of certain remedies.
5
<PAGE>
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
6
<PAGE>
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 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 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 total assets
(however, in accordance with the provisions of certain state laws, the Fund
currently will not invest in excess of 10% of its total 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.
7
<PAGE>
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
8
<PAGE>
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 a decrease 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
9
<PAGE>
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 a put option on a futures
contract is analogous to the purchase of a protective put option 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 Investment Company Act of 1940, as amended (the "1940
Act"), in connection with its strategy of investing in futures contracts.
Section 17(f) relates to the custody of securities and other assets of an
investment company and may be deemed to prohibit certain arrangements between
the Fund and commodities brokers with respect to initial and variation margin.
Section 18(f) of the 1940 Act prohibits an open-end investment company such as
the Trust from issuing a "senior security" other than a borrowing from a bank.
The staff of the Commission has in the past indicated that a futures contract
may be a "senior security" under the 1940 Act.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio assets after taking into
account unrealized profits and unrealized losses on any such contracts and
options. (However, the Fund intends to engage in options and futures
transactions only for hedging purposes.) Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When the Fund purchases futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or short-term high-grade fixed income securities
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
The Fund has adopted a number of fundamental and non-fundamental restrictions
and policies relating to the investment of its assets and its activities. The
fundamental policies set forth below 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 at the time
of each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities). For
purposes of this restriction, states, municipalities and their political
subdivisions are not considered part of any industry.
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, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Trust, the Trust is prohibited from
engaging in certain transactions involving such firm or its affiliates except
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. See
"Portfolio Transactions". An exemptive order has been obtained which permits
the Trust to effect principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities subject to conditions set forth in such
order.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
Information about the Trustees, executive officers and the portfolio manager
of the Trust, including their ages and their principal occupations for at least
the last five years, is set forth below. Unless otherwise noted, the address of
each Trustee and executive officer is P.O. Box 9011, Princeton, New Jersey
08543-9011.
14
<PAGE>
Arthur Zeikel (63)--President and Trustee(1)(2)--President 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; President and Director of Princeton
Services, Inc. ("Princeton Services") since 1993; Executive Vice President of
Merrill Lynch & Co., Inc. ("ML&Co.") since 1990; Director of Merrill Lynch
Funds Distributor, Inc. ("MLFD" or the "Distributor").
James H. Bodurtha (51)--Trustee(2)--124 Long Pond Road, Plymouth,
Massachusetts 02360. Chairman and Chief Executive Officer, China Enterprise
Management Corporation since 1993; Chairman, Berkshire Corporation since 1980;
Partner, Squire, Sanders & Dempsey from 1980 to 1993.
Herbert I. London (56)--Trustee(2)--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; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Director, Damon Corporation since 1991; Overseer,
Center for Naval Analyses from 1983 to 1993.
Robert R. Martin (68)--Trustee(2)--513 Grand Hill, St. Paul, Minnesota 55102.
Director, WTC Industries, Inc. since 1994 and Chairman thereof in 1994;
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 (66)--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 (43)--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 (55)--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 (51)--Vice President(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 (44)--Vice President(1)(2)--Vice President of the Manager
and MLAM since 1984.
Roberto Roffo (30)--Portfolio Manager(1)(2)--Vice President of MLAM since
1996 and a Portfolio Manager thereof since 1992; prior thereto, employee of
State Street Bank and Trust Company from 1989 to 1992.
15
<PAGE>
Donald C. Burke (35)--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 (46)--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
thereof since 1981.
Jerry Weiss (37)--Secretary(1)(2)--Vice President of MLAM since 1990;
Attorney in private practice from 1982 to 1990.
- --------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At January 1, 1996, the Trustees and officers of the Trust as a group (12
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. The Trust also compensates members
of its Audit and Nominating Committee, which consists of all the non-
affiliated Trustees, a fee of $2,000 per year plus $500 per meeting attended.
The Trust reimburses each unaffiliated Trustee for his out-of-pocket expenses
relating to attendance at Board and committee meetings. 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, 1995, fees and expenses
paid to the non-affiliated Trustees and allocated to the Fund aggregated
$30,885.
The following table sets forth for the fiscal year ended September 30, 1995,
compensation paid by the Fund to the non-affiliated Trustees, and for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
investment companies (including the Fund) 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
AME OFN COMPENSATION ACCRUED AS PART FUNDS PAID TO
RUSTEET FROM FUND(1) OF FUND EXPENSE TRUSTEES(2)
- ------- ------------ ------------------- ------------------
<S> <C> <C> <C>
James H. Bodurtha.......... $1,766.56 None $157,500*
Herbert I. London.......... 6,030.59 None 157,500
Robert R. Martin........... 6,030.59 None 157,500
Joseph L. May.............. 6,030.59 None 157,500
Andre F. Perold............ 6,030.59 None 157,500
</TABLE>
- --------
* $157,500 represents the amount Mr. Bodurtha would have received if he had
been a Trustee for the entire calendar year ended December 31, 1995. Mr.
Bodurtha was elected to the Trust's Board of Trustees effective June 23,
1995.
(1) Includes the September 1995 Board of Trustees meeting, which was
rescheduled for October 13, 1995.
(2) In addition to the Trust, the Trustees serve on the boards of other
FAM/MLAM Advised Funds as follows: Mr. Bodurtha (46 funds); Mr. London (46
funds); Mr. Martin (46 funds); Mr. May (46 funds); and Mr. Perold (46
funds). For purposes of this table, each series of a series investment
company, including the Trust, is treated as a separate fund.
16
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Trust.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Manager or MLAM.
Because of different objectives or other factors, a particular security may be
bought for one or more clients when one or more clients are selling the same
security. If purchases or sales of securities for the Fund or other funds for
which they act as manager or for their advisory clients arise for consideration
at or about the same time, transactions in such securities will be made,
insofar as feasible, for the respective funds and clients in a manner deemed
equitable to all. To the extent that transactions on behalf of more than one
client of the Manager or MLAM during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there
may be an adverse effect on price.
The Trust has entered into a Management Agreement on behalf of the Fund (the
"Management Agreement") with the Manager pursuant to which the Manager receives
for its services to the Fund monthly compensation at the annual rate of 0.55%
of the average daily net assets of the Fund. As discussed in the Prospectus,
effective December 23, 1987, the Manager has voluntarily agreed to waive the
amount of compensation set forth in the Management Agreement and instead has
agreed to receive from the Fund a 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,
1993, 1994 and 1995, the total advisory fees paid by the Fund to the Manager
aggregated $3,744,878, $3,999,719 and $3,363,913, 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, 1993, 1994 and
1995 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
affiliates. 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
17
<PAGE>
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. 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.
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, 1995, the Trust paid the Manager $100,952 for
such services. As required by the Fund's distribution agreements, the
Distributor will pay the promotional expenses of the Fund incurred in
connection with the offering of shares of the Fund. Certain expenses in
connection with the account maintenance and distribution of Class B and Class
C shares 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--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Distribution
Plans".
The Manager is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons"
of the Manager as defined under the 1940 Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies.
Duration and Termination. Unless earlier terminated as described herein, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Trustees who are not parties
to such contract or interested persons (as defined in the 1940 Act) of any
such party. Such contracts are not assignable and may be terminated without
penalty on 60 days' written notice at the option of either party thereto or by
vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues 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
18
<PAGE>
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 year ended
September 30, 1994 were $73,174, of which the Distributor received $7,202 and
Merrill Lynch received $65,972. The gross sales charges for the sale of Class
A shares for the year ended September 30, 1995 were $10,725, of which the
Distributor received $928 and Merrill Lynch received $9,797. The gross sales
charges for the sale of Class D shares for the period October 21, 1994
(commencement of operations) to September 30, 1995, were $20,326, of which the
Distributor received $1,958 and Merrill Lynch received $18,368.
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
19
<PAGE>
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 on such day. Similarly,
Class D shares of the Fund are offered at net asset value to shareholders of
either Merrill Lynch Municipal Strategy Fund, Inc., ("Municipal Strategy Fund")
or Merrill Lynch High Income Municipal Bond Fund, Inc. ("High Income Municipal
Bond Fund") who wish to purchase shares of the Fund with the net proceeds from
a sale of certain of their shares of common stock pursuant to a tender offer by
Municipal Strategy Fund or by High Income Municipal Bond Fund. This investment
option is available only with respect to the proceeds of Municipal Strategy
Fund shares as to which no CDSC (as defined in the Municipal Strategy Fund's
prospectus) is applicable or to the proceeds of High Income Municipal Bond Fund
shares as to which no Early Withdrawal Charge (as defined in the High Income
Municipal Bond Fund's prospectus) is applicable.
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 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.
20
<PAGE>
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.
Employee Access Accounts SM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through employers that
provide employer sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
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 plus a reduced sales charge of 0.50% of the offering price,
which is 0.50% of the net amount invested.
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 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.
21
<PAGE>
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; and 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 shares of such
other mutual fund and that such shares have been outstanding for a period of no
less than six months; and 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).
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.
22
<PAGE>
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 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
23
<PAGE>
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,
1995 with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to the Class B shares, the Distributor's
voluntary maximum for Class B shares for the period November 1, 1985
(commencement of operations) to September 30, 1995.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF SEPTEMBER 30, 1995
-----------------------------------------------------------------------------------
(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................ $1,370,703 $85,669 $62,549 $148,218 $28,490 $119,728 $1,412
Under Distributor's
Voluntary Waiver....... $1,370,703 $85,669 $ 6,854 $ 92,523 $28,490 $ 64,033 $1,412
<CAPTION>
CLASS C
- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $ 3,535 $ 221 $ 9 $ 230 $ 5 $ 225 $ 12
</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. Purchase price of all eligible
Class C shares sold since October 21, 1994 (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 (with respect to
Class B shares) or the NASD maximum (with respect to Class B and Class C
shares).
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the
New York Stock Exchange is restricted as determined by the Commission or such
Exchange is closed (other than customary weekend and holiday closings), for
any period during which an emergency exists as defined by the Commission as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
24
<PAGE>
DEFERRED SALES CHARGES--CLASS B AND CLASS C 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, 1993, 1994 and 1995, the Distributor received CDSCs with respect
to Class B shares of $622,557, $692,305 and $873,699, respectively, with
respect to redemptions of Class B shares, all of which was paid to Merrill
Lynch.
For the period October 21, 1994 (commencement of operations) to September 30,
1995, the Distributor received CDSCs of $56 with respect to redemptions of
Class C shares, all of which were paid to Merrill Lynch.
The CDSC is also waived for any Class B shares that were acquired and held at
the time of redemption by Employee Access Accounts available through employers
that provide Eligible 401(k) Plans. The initial minimum for such accounts of
$500, except that the initial minimum for shares purchased for such accounts
pursuant to the Automatic Investment Program is $50.
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 years ended September 30, 1994 and 1995, the Fund
engaged in no transactions pursuant to such order. The Trust has applied for an
exemptive order, subject to certain conditions, permitting the Trust to, among
other things, (i) purchase investment grade tax-exempt securities from Merrill
Lynch when Merrill Lynch is a member of an underwriting syndicate for such
securities and (ii) purchase tax-exempt securities from and sell tax-exempt
securities to Merrill Lynch in secondary market transactions. 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.
25
<PAGE>
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 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. As indicated above, the Trust has applied for a
conditional exemption from these restrictions.
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 year ended September 30, 1994, the Fund paid no brokerage
commissions. For the year ended September 30, 1995, the Fund paid brokerage
commissions of $89,130.
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. As a result of the investment policies described in
the Prospectus, under certain market conditions the Fund's portfolio turnover
may be higher than that of other investment companies; however, it is extremely
difficult to predict portfolio turnover rates with any degree of accuracy.
Higher portfolio turnover may contribute to higher transactional costs and
negative tax consequences, such as an increase in capital gain dividends or in
ordinary income dividends of accrued market discount, as well as greater
difficulty meeting the requirement for qualifications as a regulated investment
company that less than 30% of its gross income be derived from the sale or
other disposition of securities held for less than three months. See
"Distribution and Taxes" on page 43. (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 years ended September 30, 1994 and 1995 were 107.96% and 181.21%,
respectively. High portfolio turnover involves correspondingly higher
transaction costs in the form of dealer spread and brokerage commissions, which
are borne directly by the Fund. Such turnover also has certain tax consequences
of the Fund. See "Distributions and Taxes".
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<PAGE>
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. 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 higher 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.
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<PAGE>
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. A shareholder may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the specific
request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
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
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. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he or she be issued certificates for his or her shares, and then must turn the
certificates over to the new firm for reregistration as described in the
preceding sentence.
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. The
Fund's Automatic Investment Plan is not available to shareholders whose shares
are held in brokerage accounts 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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<PAGE>
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. Cash payments also can
be direct deposited to the shareholder's bank account.
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 in the form of payments by check or through
automatic payment by direct deposit to such shareholder's bank 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.
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.
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<PAGE>
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 CMA (R)/CBA (R) Systematic Redemption Program is
not available if Fund shares are being purchased within the account pursuant
to the CMA (R)/CBA (R) 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 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
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<PAGE>
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 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.
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<PAGE>
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.
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.
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<PAGE>
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
reasonable and 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.
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.
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<PAGE>
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.
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
34
<PAGE>
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.
Merrill Lynch Fundamental Value
Portfolio (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as custodian and
by certain CBA(R) Accounts and
CMA(R) Sub-Accounts)................
A portfolio of Merrill Lynch Asset
Builder Program, Inc., a series fund,
whose objective is to provide capital
appreciation and income by investing
in securities, with at least 65% of
the portfolio's assets being invested
in equities.
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.
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<PAGE>
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 Opportunity
Portfolio (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as custodian and
by certain CBA(R) Accounts and
CMA(R) Sub-Accounts)................
A portfolio of Merrill Lynch Asset
Builder Program, Inc., a series fund,
whose objective is to provide a high
total investment return through an
investment policy utilizing United
States and foreign equity, debt and
money market securities, the
combination of which will vary
depending upon changing market and
economic trends.
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.
38
<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.
39
<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 Quality Bond Portfolio
(available only for exchanges by
certain individual retirement
accounts for which Merrill Lynch
acts as custodian and by certain
CBA(R) Accounts and CMA(R) Sub-
Accounts)...........................
A portfolio of Merrill Lynch Asset
Builder Program, Inc., a series fund,
whose objective is to provide a high
level of current income through
investment in a diversified portfolio
of debt obligations, such as corporate
bonds and notes, convertible
securities, preferred stocks and
governmental obligations.
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.
40
<PAGE>
Merrill Lynch Strategic Dividend Long-term total return from investment
Fund................................ in dividend- paying common stocks
which yield more than Standard &
Poor's 500 Composite Stock Price
Index.
Merrill Lynch Technology Fund, 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.
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 U.S. Government
Securities Portfolio (available
only for exchanges by certain
individual retirement accounts for
which Merrill Lynch acts as
custodian and by certain CBA(R)
Accounts and CMA(R) Sub-Accounts)...
A portfolio of Merrill Lynch Asset
Builder Program, Inc., a series fund,
whose objective is to provide a high
current return through investments in
U.S. Government and government agency
securities, including GNMA mortgage-
backed certificates and other
mortgage-backed government securities.
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.
41
<PAGE>
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.
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.
42
<PAGE>
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.
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, 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
43
<PAGE>
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 Securities and Exchange 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 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. Distributions, if any, from an excess of net long-term
capital gains over net short-term capital losses derived 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
44
<PAGE>
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. Distributions by the Fund, whether from exempt-
interest income, ordinary income or capital gains, will not be eligible for the
dividends received deduction allowed to corporations under the Code.
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 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.
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 any 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
45
<PAGE>
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 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.
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, unless extended. 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. The mark-to-market rules outlined above, however, will not apply
to certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund
46
<PAGE>
may be required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and 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 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,
judicial 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 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.
47
<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.
<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, 1995............... 3.08 % $1,030.80 2.83 % $1,028.30
Five Years Ended Septem-
ber 30, 1995........... 7.05 % $1,405.50 7.36 % $1,426.20
Inception (November 1,
1985) to September 30,
1995................... 7.70 % $2,086.10
Inception (October 25,
1988) to September 30,
1995................... 6.62 % $1,559.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
YEAR ENDED
SEPTEMBER 30,
-------------
<S> <C> <C> <C> <C>
1995.................... 7.37 % $1,073.70 6.83 % $1,068.30
1994.................... (5.17)% $ 948.30 (5.66)% $ 943.40
1993.................... 13.24 % $1,132.40 12.67 % $1,126.70
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
Inception (October 25,
1988) to September 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,
1995................... 108.61 % $2,086.10
Inception (October 25,
1988) to September 30,
1995................... 55.99 % $1,559.90
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended September
30, 1995............... 5.00 % 4.70 %
<CAPTION>
TAX-EQUIVALENT YIELD**
<S> <C> <C> <C> <C>
30 days ended September
30, 1995............... 6.94 % 6.53 %
</TABLE>
- --------
* Information as to Class A shares is presented only for the period October
25, 1988 to September 30, 1995. Prior to October 25, 1988, no Class A shares
were publicly issued.
** Based upon a Federal income tax rate of 28%.
48
<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 September 30, 1995.. 7.00% $1,065.80 3.91% $1,036.80
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994)
to September 30, 1995.. 7.58% $1,075.80 8.00% $1,080.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994)
to September 30, 1995.. 6.58% $1,065.80 3.68% $1,036.80
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended September
30, 1995............... 4.59% 4.90%
<CAPTION>
TAX-EQUIVALENT YIELD**
<S> <C> <C> <C> <C>
30 days ended September
30, 1995............... 6.38% 6.81%
</TABLE>
- --------
* Information as to Class C and Class D shares is presented only for the
period October 21, 1994 (commencement of operations) to September 30, 1995.
Prior to October 21, 1994, no Class C or Class D shares had been publicly
issued.
** 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 or Class C 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 Massachusetts
Municipal Bond Fund, Merrill Lynch Michigan Municipal Bond Fund, Merrill Lynch
49
<PAGE>
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.
50
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on September 30, 1995 is set forth
below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Net Assets....................... $23,303,584 $564,962,933 $3,556,322 2,571,792
=========== ============ ========== =========
Number of Shares Outstanding..... 2,111,100 51,173,239 322,061 233,102
=========== ============ ========== =========
Net Asset Value Per Share (net
assets divided by number of
shares outstanding)............. $ 11.04 $ 11.04 $ 11.04 $ 11.03
Sales Charge (for Class A and
Class D shares: 4.00% of
offering price (4.17% of net
asset value per share))*........ .46 ** ** .46
----------- ------------ ---------- ---------
Offering Price................... $ 11.50 $ 11.04 $ 11.04 $ 11.49
=========== ============ ========== =========
</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 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
Merrill Lynch 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.
51
<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, 1996.
52
<PAGE>
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" or "New
York"), some of its agencies, instrumentalities and public authorities and
certain of its municipalities, have faced serious financial difficulties that
could have an adverse effect on the sources of payment for or the market value
of the New York Municipal Bonds in which the 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.
However, after noticeable improvements in the City's economy during the
calendar year 1994, the City's current four-year financial plan assumes that
economic growth will slow in calendar years 1995 and 1996 with local employment
increasing modestly. During the 1995 fiscal year, the City experienced
substantial shortfalls in payments of non-property taxes from those forecasted.
For each of the 1981 through 1995 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 years fiscal years in order to maintain balanced operating results. For
the City's 1995 fiscal year, the City adopted a budget which halted the trend
in recent years of substantial increases in City spending from one year to the
next. 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 entitlement programs or tax or other revenue increases which could
adversely affect the City's economic base.
Pursuant to the laws of the State, the Mayor is responsible for preparing the
City's four-year financial plan, including the City's current financial plan
for the 1996 through 1999 fiscal years (the "1996-1999 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.
53
<PAGE>
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 1996 through 1999 contemplates the
issuance of $11 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 notes 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.
1996-1999 Financial Plan. On November 29, 1995, the City published the City
Financial Plan for the 1996 through 1999 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 11, 1995 (the "July
Financial Plan"). The July Financial Plan set forth proposed actions by the
City including spending reductions for its Medicaid and welfare programs, City
agency spending reductions, additional State and federal aid, revenue
initiatives and labor, pension and debt service savings to close a previously
projected gap of approximately $3.1 billion for the 1996 fiscal year (July 1,
1995-June 30, 1996). The City Financial Plan published on November 29, 1995
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 1996 fiscal year balanced in accordance with GAAP.
Changes to the July Financial Plan made in the City Financial Plan for the 1996
fiscal year include actions to offset increases in projected City expenditures
and an increase in the City's General Reserve. The additional gap closing
measures for the 1996 fiscal year include additional expenditure reductions and
debt service savings. The City Financial Plan also sets forth projections for
the 1997 through 1999 fiscal years and outlines a proposed gap-closing program
to close projected budget gaps of $1.4 billion, $2.3 billion and $2.7 billion
for the 1997 through 1999 fiscal years, respectively, after successful
implementation of the gap-closing program for the 1996 fiscal year.
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 real estate market, employment growth, wage
increases for City employees consistent with those assumed in the City
Financial Plan, continuation of interest earnings assumptions for pension fund
assets, the ability of the City's hospital and education entities to maintain
balanced budgets, provision of State and federal aid and mandate relief, the
impact of proposed federal and State welfare reforms on City revenues, and
adoption of the budget for each fiscal year by the City Council in
substantially the form submitted by the Mayor.
The City Financial Plan is also subject to the ability of the City to
implement the expenditure reductions and to obtain the savings outlined in the
City Financial Plan. In addition, the City may incur expenditures which exceed
those projected in the City Financial Plan. There can be no assurance that
additional gap-closing measures will not be required to enable the City to
achieve a balanced budget in a particular fiscal year. Certain of the proposed
actions are subject to negotiation with the City's municipal unions. Various
54
<PAGE>
other actions proposed for the 1997 through 1999 fiscal years are subject to
approval by the Governor and the State Legislature and the proposed reductions
in spending for entitlement programs may be subject to legal challenge.
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
1995-1996 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 the State budget 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.
The City's financial plans have been the subject of extensive public comment
and criticism. On December 14, 1995, the City Comptroller issued a report
stating that the City Financial Plan includes budget risks of up to $989
million for the 1996 fiscal year. The City Comptroller's report also identified
budget risks of $2.3 billion, $3.3 billion and $3.7 billion for the City's
1997, 1998 and 1999 fiscal years, respectively, not including the impact of
probable State and federal reductions in aid, the extent of which are currently
unknown. On December 14, 1995, the Control Board issued a report on the City
Financial Plan which identified budget risks of $509 million, $1.9 billion,
$2.8 billion and $3.1 billion for the 1996 through 1999 fiscal years,
respectively. On December 21, 1995, the Office of the State Deputy Comptroller
of New York (OSDC) issued a report which reviewed the City Financial Plan and
concluded that a budget gap of $239 million and potential budget risks of $755
million exist for the 1996 fiscal year. The OSDC report stated that projected
budget gaps could exceed $2 billion in the 1997 fiscal year and approach $3.5
billion in the 1999 fiscal year. It is reasonable to expect that such reports
will continue to be issued and to engender public comment.
Ratings. As of January 9, 1996, Moody's Investors Service, Inc. ("Moody's")
rated the City's outstanding general obligation bonds "Baa1", Standard & Poor's
Ratings Group ("Standard & Poor's") rated such bonds "BBB+" and Fitch Investors
Service, Inc. ("Fitch") rated such bonds "A-". On July 10, 1995, Standard &
Poor's revised downwards its ratings on outstanding general obligation bonds of
the City from "A-" to "BBB+". Standard & Poor's stated that the downgrade was a
reflection of the City's inability to eliminate a structural budget imbalance
due to persistent softness in the City's economy, weak job growth, a trend of
using nonrecurring budget devices, optimistic projections of State and federal
aid and high levels of debt service. 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 City bonds.
Outstanding Indebtedness. As of September 30, 1995 the City had approximately
$24.2 billion of long-term debt and as of June 30, 1994, the New York City
Municipal Water Finance Authority (the "Water Authority") has approximately
$5.6 billion of net long-term debt.
Debt service on Water Authority obligations is secured by fees and charges
collected from the users of the City's water and sewer system. State and
federal regulations require the City's water supply to meet certain standards
to avoid filtration. The City's water supply now meets all technical standards
and the City's current efforts are directed toward protection of the watershed
area. The City has taken the position that
55
<PAGE>
increased regulatory, enforcement and other efforts to protect its water
supply, relating to such matters as land use and sewage treatment, will
preserve the high quality of water in the upstate water supply system and
prevent the need for filtration. The U.S. Environmental Protection Agency has
granted the City a waiver of filtration regulations through 1996. If filtration
of the City's water supply is ultimately required, the capital expenditure
required could be between $4 billion and $5 billion. Such an expenditure could
cause significant increases in City water and sewer charges.
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 alleged
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, 1995, the City estimated its
potential future liability on account of all outstanding claims to be
approximately $2.5 billion.
NEW YORK STATE
Current Economic Outlook. The national economy began to expand in 1991 and
has added over 7 million jobs since early 1992. Although the State has added
approximately 185,000 jobs since November 1992, employment growth in the State
has been hindered during recent years by significant cutbacks in the computer
and instrument manufacturing, utility, defense and banking industries.
The State expects New York's economy to continue to expand modestly during
1995, but there is expected to be a pronounced slow-down during the course of
the year. On an average annual basis, employment growth is expected to be about
the same as 1994. Both personal income and wages are expected to record
moderate gains in 1995. The annual rates of job growth and growth in personal
income and wages are expected to slow gradually during 1996.
State Financial Plan for the 1995-1996 Fiscal Year. The State's budget for
its 1995-1996 fiscal year (April 1, 1995-March 31, 1996) was enacted by the
State Legislature on June 7, 1995, more than two months after 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 1995-1996 fiscal year budget includes a planned three-year 20%
reduction in the State's personal income tax and is the first budget in over 50
years which projects a decline in General Fund disbursements and spending on
State operations. On June 20, 1995, the State published the State Financial
Plan for the 1995-1996 fiscal year based on the enacted 1995-1996 budget and
issued its first and second quarterly updates of the State Financial Plan in
July and October 1995, respectively (the "State Financial Plan").
The State Financial Plan projects a General Fund balanced on a cash basis
with total projected receipts of $32.788 billion and total projected
disbursements of $32.774 billion. The State Financial Plan includes gap-closing
actions to offset a previously projected budget gap of $5 billion, the largest
in the State's history. Such gap-closing actions include, among others,
substantial reductions in social and medical entitlement
56
<PAGE>
programs, reductions in State services and capital programs and increased
lottery revenues. There can be no assurance that additional gap-closing
measures will not be required and there is no assurance that any such measures
will enable the State to achieve a balanced budget for its 1995-1996 fiscal
year.
On December 15, 1995, the Governor released the Executive Budget for the
State's 1996-1997 fiscal year (the "Executive Budget") which the State
Legislature must enact and the Governor must sign in order to become law. The
Executive Budget projects balances on a cash basis but identifies a potential
budget gap of approximately $3.9 billion due primarily to the effect of current
and prior year tax reductions and the use of nonrecurring revenues in the 1995-
1996 State Financial Plan. Proposed gap-closing actions in the Executive Budget
include cost containment and spending reductions in State Medicaid, welfare,
health, mental health and education programs. The Executive Budget also
anticipates a significant increase in federal aid to the State related to
changes in the Medicaid program that are expected to be enacted by Congress and
approved by the President. There can be no assurance that the Executive Budget
will be enacted as proposed, the cost containment and spending reduction
programs can be implemented as proposed or the anticipated increase in federal
aid will materialize as expected.
The State Financial Plan and the Executive Budget are 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 1995-1996 and 1996-1997 fiscal years, 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 actions 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 baseline losses of receipts. The
Division of the Budget estimates the net amount of nonrecurring resources used
in the State Financial Plan to be at least $600 million. In addition to these
nonrecurring actions, the adoption of the three-year 20% reduction in the
State's personal income tax in combination with business tax reductions enacted
in 1994 will reduce State tax receipts by as much as $5.5 billion by the 1997-
1998 fiscal year.
Uncertainties with regard to both the economy and potential decisions at the
federal level add further pressure on future budget balance in New York State.
Specific budget proposals being discussed at the federal level but not included
in the State's current economic forecast would (if enacted) have a
disproportionately negative impact on the longer-term outlook for the State's
economy as compared to other states.
57
<PAGE>
The State anticipates that its capital programs will be financed, in part, by
State and public authorities borrowings in the 1995-1996 fiscal year. The State
expects to issue $248 million in general obligations bonds (including $70
million for purposes of redeeming outstanding Bond Anticipation Notes
("BANs")), $186 million in general obligation commercial paper and up to $47
million in certificates of participation during the State's 1995-1996 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 $2.7 billion. Additionally, the Local
Government Assistance Corporation ("LGAC") issued net proceeds of $529 million
during the State's 1995-1996 fiscal year.
1994-1995 Fiscal Year. In July, 1995, the State Comptroller issued its audit
of the State's 1994-1995 fiscal year prepared in accordance with generally
accepted auditing standards. The State completed its 1994-1995 fiscal year with
a General Fund operating deficit of $1.426 billion, as compared with an
operating surplus of $914 million for the previous fiscal year. The 1994-1995
fiscal year deficit was caused by several factors, including the use of $1.026
billion of the 1993-1994 fiscal year surplus in the 1994-1995 fiscal year and
the adoption of changes in accounting methodologies by the State Comptroller.
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. As of June 1995, LGAC has issued bonds to provide net proceeds of
$4.7 billion completing the program. The impact of LGAC's borrowing is that the
State is able to meet its cash flow needs without relying on 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, 1995, the total amount of outstanding general obligation debt
was approximately $5.181 billion, including $149 million in BANs; the total
amount of moral obligation debt was approximately $7.01 billion; and $17.98
billion of bonds issued primarily in connection with lease-purchase and
contractual-obligation financing 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, 1994, 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 $70.3
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 in their respective obligations.
Ratings. Currently, Moody's, Standard & Poor's and Fitch rate New York
State's outstanding general obligation bonds "A", "A"- and "A+", respectively.
Ratings reflect only the respective views of such
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<PAGE>
organizations, and 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 may have an effect on the
market price of the New York State Obligations 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. State programs are frequently
challenged on State and Federal constitutional grounds. Adverse developments in
legal 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 1995-1996 fiscal year. There can be
no assurance, however, that an adverse decision in one or more legal
proceedings would not exceed the amount of the State Financial Plan reserves
for the payment of judgments or materially impair the State's financial
operations.
Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1995-1996 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 1995-1996 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for 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.
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.
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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
CC of the obligations. "BB" indicates the lowest degree of
C speculation and "C" the highest degree of speculation. While
such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
CI The rating "CI" is reserved for income bonds on which no
interest is being paid.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments of principal payments are not made
on the date due even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments
will be made during such grace period. The "D" rating also will
be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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DESCRIPTION OF STANDARD & POOR'S CORPORATE BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong. Debt rated "AA" has a
very strong capacity to pay interest and to repay principal and differs from
the highest rated issues only in small degree. Debt rated "A" has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt of a higher rated category. Debt rated "BBB" is regarded
as having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
The ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-1"
for the highest quality obligations to "D" for the lowest. These categories are
as follows:
A-1
This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2
Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3
Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
B
Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D
Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period.
A Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a long-
term debt rating. The following criteria will be used in making that
assessment.
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--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.
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.
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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 (arrow pointing up)
Stable (arrow pointing left and right)
Declining (arrow pointing down)
Uncertain (arrow pointing up and down)
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.
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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.
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.
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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.
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, 1995, 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, 1995 by correspondence with the custodian. 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, 1995, 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
November 3, 1995
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<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
New York--96.8%
<S> <S> <C> <S> <C>
BBB+ Baa1 $ 3,205 Babylon, New York, IDA, Resource Recovery Revenue Bonds
(Ogden Martin Systems), Series C, 8.50% due 1/01/2019 $ 3,621
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) 16,761
NR* NR* 3,500 Babylon, New York, Union Free School District, TAN, UT, Series B, 4.25%
due 6/14/1996 3,508
Buffalo, New York, Sewer Authority Revenue Bonds (b):
AAA Aaa 2,000 Refunding, Series G, 5% due 7/01/2012 1,846
AAA Aaa 4,000 Series F, 6% due 7/01/2013 4,142
AA+ Aa1 6,200 Hornell, New York, IDA, IDR (Crowley Foods, Inc.), 7.75% due 12/01/2016 6,554
Metropolitan Transportation Authority, New York, Service Contract Revenue
Bonds, Series O:
BBB Baa1 11,825 (Commuter Facilities), 5.75% due 7/01/2013 11,292
BBB Baa1 16,820 (Transit Facilities), 5.75% due 7/01/2013 16,062
AAA Aaa 2,950 Monroe County, New York, Airport Authority Revenue Bonds
(Greater Rochester International), AMT, 7.25% due 1/01/2009 (c)(h) 3,296
BBB+ Baa 9,770 Monroe County, New York, COP, 8.05% due 1/01/2011 10,794
A1+ NR* 2,900 Nassau County, New York, IDA, Civic Facilities Revenue Bonds (Cold Spring
Harbor Laboratory Project), VRDN, 4.85% due 7/01/2019 (e) 2,900
A1+ NR* 2,000 Nassau County, New York, IDA, Research Facilities Revenue Bonds (Cold Spring
Harbor Laboratory Project), VRDN, 4.85% due 7/01/2023 (e) 2,000
New York City, New York, GO, UT:
BB+ Baa1 6,585 Series A-1, 6.50% due 8/01/2015 6,660
BBB+ Baa1 5,000 Series B, 7% due 6/01/2016 5,182
BBB+ Baa1 2,500 Series B, Sub-Series B-1, 7% due 8/15/2016 2,604
BBB+ Baa1 5,450 Series C, 7.25% due 8/15/2024 5,703
BBB+ Baa1 11,140 Series F, 6.625% due 2/15/2025 11,241
New York City, New York, IDA, Civic Facilities Revenue Bonds:
A1+ NR* 1,200 (National Audobon Society), VRDN, 4.85% due 12/01/2014 (e) 1,200
BBB NR* 2,000 (New York Blood Center), 7.20% due 5/01/2012 2,114
BBB NR* 6,895 (New York Blood Center), 7.25% due 5/01/2022 7,221
AAA Aaa 3,890 (USTA National Tennis Center Project), 6.60% due 11/15/2011 (g) 4,188
New York City, New York, IDA, Special Facilities Revenue Bonds, AMT:
BB+ Baa2 2,030 (American Airlines Inc. Project), 7.75% due 7/01/2019 2,155
A A 1,000 (Terminal One Group Association Project), 6% due 1/01/2019 959
A A 14,215 (Terminal One Group Association Project), 6.125% due 1/01/2024 13,778
New York City, New York, Municipal Water Finance Authority Water and Sewer
System Revenue Bonds:
A- A 13,000 Refunding, Series A, 5.50% due 6/15/2020 11,971
A- A 4,550 Series A, 6% due 6/15/2025 4,457
A- A 6,125 Series B, 6.50% due 6/15/2020 6,278
AAA VMIG1++ 2,000 VRDN, Series G, 4.40% due 6/15/2024 (b)(e) 2,000
New York City, New York, Trust for Cultural Resources Revenue Bonds:
AAA Aaa 3,750 (American Museum of Natural History), Series A, 6.90% due 4/01/2001 (c)(d) 4,247
A1+ VMIG1++ 800 (Soloman R. Guggenheim), VRDN, Series B, 4.85% due 12/01/2015 (e) 800
New York State Dormitory Authority Revenue Bonds:
BBB Baa1 8,000 (City University System), Series C, 7.50% due 7/01/2010 9,231
A NR* 930 (Community Memorial Hospital, Hamilton), 9% due 7/01/2005 (h) 958
BBB Baa1 12,000 (Consolidated City University Systems), Series A, 5.75% due 7/01/2013 11,585
A1+ VMIG1++ 2,700 (Cornell University), VRDN, Series B, 4.85% due 7/01/2025 (e) 2,700
</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 (concluded):
BBB+ Baa1 $ 6,020 (Court Facilities Lease Bonds), Series A, 5.625% due 5/15/2013 $ 5,645
BBB+ Baa1 4,500 (Court Facilities Lease Bonds), Series A, 5.375% due 5/15/2016 4,051
BBB+ Baa1 12,000 (Court Facilities Lease Bonds), Series A, 5.25% due 5/15/2021 (h) 10,421
AAA Aaa 17,620 (University of Rochester Strong Memorial Hospital), 5.50% due
7/01/2021 (c)(h) 16,713
NR* VMIG1++ 700 (Saint Francis Center at The Knolls), VRDN, 4.70% due 7/01/2023 (e) 700
BBB+ Baa1 5,000 (State University Educational Facilities), Refunding, Series A, 5.25%
due 5/15/2015 4,504
BBB+ Baa1 12,000 (State University Educational Facilities), Refunding, Series B, 7% due
5/15/2016 12,740
BBB+ Baa1 6,000 (State University Educational Facilities), Series A, 6% due 5/15/2022 5,791
BBB+ Baa1 2,500 (State University Educational Facilities), Series B, 5.75% due 5/15/2024 2,340
BBB- Baa1 7,250 (Upstate Community College), Series A, 5.70% due 7/01/2021 6,707
New York State Energy Research and Development Authority, Facilities Revenue
Bonds (Consolidated Edison Company Inc.), Series A:
A+ A1 5,000 6.10% due 8/15/2020 5,008
AAA Aaa 7,820 AMT, 6.75% due 1/15/2027 (c) 8,132
New York State Energy Research and Development Authority, PCR (Niagara Power
Corporation Project), VRDN (e):
A1+ NR* 200 AMT, Series B, 4.55% due 7/01/2027 200
NR* NR* 300 Series A, 5.15% due 3/01/2027 300
A- Aa 4,250 New York State Environmental Facilities Corporation, PCR (State-Water
Revolving Fund), Series E, 6.875% due 6/15/2014 4,728
BBB Baa 2,500 New York State Environmental Facilities Corporation, Solid Waste Disposal
Revenue Bonds (Occidental Petroleum Corp.), AMT, Sub-Series B, 5.50% due
9/01/2003 2,533
BBB NR* 2,750 New York State Environmental Facilities Corporation, Special Obligation Bonds
(Riverbank State Park), 7.25% due 4/01/2012 2,947
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) 6,328
BBB Baa1 7,500 New York State, HFA, Service Contract Obligation Revenue Bonds, Series A,
5.50% due 9/15/2022 (h) 6,744
New York State Local Government Assistance Corporation Revenue Bonds:
A A 2,000 Refunding, Series C, 5.50% due 4/01/2017 1,878
A A 5,600 Refunding, Series E, 6% due 4/01/2014 5,694
A A 16,740 Refunding, Series E, 5% due 4/01/2021 (h) 14,509
A1+ VMIG1++ 3,000 VRDN, Series B, 4.20% due 4/01/2023 (e) 3,000
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) 7,062
AAA NR* 11,705 (Hospital & Nursing Home Insured Mortgage), Refunding, Series C, 6.40%
due 8/15/2014 (f) 12,112
AAA NR* 2,000 (Hospital & Nursing Home Mortgage), Refunding, Series C, 5.75% due
8/15/2019 (f) 1,932
AAA Aaa 4,000 (Long-Term Health Care Capital Guaranty Insured), Series D, 6.50% due
11/01/2015 4,187
AAA Aaa 2,000 (Mental Health Services), Refunding, Series F, 5.375% due 2/15/2014 (b) 1,900
AAA Aaa 5,000 (Mental Health Services), Refunding, Series F, 5.375% due 2/15/2014 (g)(h) 4,740
AAA Aaa 5,000 (Mental Health Services), Refunding, Series F, 5.25% due 2/15/2019 (g) 4,590
BBB+ Baa1 1,215 (Mental Health Services), Series B, 7.625% due 8/15/2017 1,335
BBB+ Baa1 1,075 (Mental Health Services), Series C, 7.30% due 2/15/2021 1,155
BBB+ Baa1 5,115 (Mental Health Services), Series D, 7.40% due 2/15/2018 5,534
AA- NR* 7,635 (Mercy Medical Center Project), Series A, 5.875% due 11/01/2015 7,506
AAA Aaa 10,500 (Montefiore Medical Center Insured Mortgage), Series A, 5.75% due
2/15/2025 (a)(f) 10,281
AAA Aaa 6,140 (Saint Francis Hospital Project), Series A, 7.625% due 11/01/2021 (b) 6,832
BBB Baa 12,200 (Secured Hospital), Series A, 7.40% due 8/15/2021 12,798
</TABLE>
71
<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>
New York State Mortgage Agency, Homeowner Mortgage Revenue Bonds:
NR* Aa $ 2,500 AMT, Series 30-C-1, 5.85% due 10/01/2025 $ 2,336
NR* Aa 14,025 AMT, Series 46, 6.65% due 10/01/2025 14,296
NR* Aa 5,000 Series 41-A, 6.45% due 10/01/2014 5,125
AAA Aaa 8,500 Series 43, 6.45% due 10/01/2017 (c) 8,754
New York State Power Authority, General Purpose and Revenue Bonds:
AAA Aaa 750 Refunding, Series CC, 5.125% due 1/01/2010 (a) 716
AA- Aa 4,660 Refunding, Series CC, 5.25% due 1/01/2018 4,287
AA- Aa 20,000 Series Y, 6.75% due 1/01/2018 21,545
AAA Aaa 6,320 New York State Thruway Authority, General Revenue Bonds, Series A, 5.75%
due 1/01/2019 (b) 6,169
AAA Aaa 10,850 New York State Thruway Authority, Highway and Bridge Trust Fund, Series B,
UT, 6.25% due 4/01/2012 (b) 11,291
New York State Thruway Authority, Service Contract Revenue Bonds
(Local Highway and Bridge):
BBB Baa1 2,950 6.20% due 4/01/2003 3,088
BBB Baa1 4,500 6.25% due 4/01/2014 4,522
New York State Urban Development Corporation Revenue Bonds:
BBB Baa1 1,500 (Alfred Technology Resource Income Project), 7.875% due 1/01/2020 1,658
BBB Baa1 3,775 (Correctional Facilities), Refunding, Series A, 5.50% due 1/01/2014 3,500
BBB Baa1 2,600 (Correctional Facilities), Refunding, Series A, 5.50% due 1/01/2016 2,380
BBB Baa1 12,060 (Correctional Facilities), Refunding, Series A, 5.25% due 1/01/2021 (h) 10,455
BBB Baa1 4,000 (State Facilities), 7.50% due 4/01/2020 4,427
Port Authority of New York and New Jersey, Consolidated Revenue Bonds:
AA- A1 3,345 AMT, Seventy-Sixth Series, 6.50% due 11/01/2026 3,444
AA- A1 5,000 One-Hundredth Series, 5.75% due 12/15/2020 4,870
AA- A1 8,000 Sixty-Ninth Series, 7.125% due 6/01/2025 8,690
A1+ VMIG1++ 5,750 Port Authority of New York and New Jersey, Versatile Structure Special
Obligation Revenue Bonds, VRDN, Series 3, 4.25% due 6/01/2020 (e) 5,750
Triborough Bridge and Tunnel Authority, New York Revenue Bonds:
BBB Baa1 5,150 (Convention Center Project), Series E, 7.25% due 1/01/2010 5,755
A+ Aa 5,000 (General Purpose), Series X, 6.50% due 1/01/2019 5,253
A- A1 10,550 (Special Obligations), Refunding, Series B, 6.875% due 1/01/2015 11,342
A1+ VMIG1++ 5,000 (Special Obligations), VRDN, 4.05% due 1/01/2024 (b)(e) 5,000
BBB Baa 7,220 Ulster County, New York, Resource Recovery Agency Revenue Bonds (Solid
Waste Systems), 6% due 3/01/2014 6,925
Total Investments (Cost--$552,896)--96.8% 575,163
Variation Margin on Futures Contracts+++--(0.2%) (994)
Other Assets Less Liabilities--3.4% 20,226
--------
Net Assets--100.0% $594,395
========
<FN>
*Not Rated.
(a)AMBAC Insured.
(b)FGIC Insured.
(c)MBIA Insured.
(d)Prerefunded.
(e)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at September 30, 1995.
(f)FHA Insured.
(g)FSA Insured.
(h)All or portion of security held as collateral in connection with
open financial futures contracts.
++Highest short-term rating by Moody's Investors Service, Inc.
+++Futures contracts sold as of September 30, 1995 were as follows
(in thousands):
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
900 United States Treasury Bonds Dec. 1995 ($102,909)
Total (Contract Price--$101,360) ($102,909)
=========
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
72
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of September 30, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$552,895,777)(Note 1a) $575,163,205
Cash 80,193
Receivables:
Securities sold $ 10,937,750
Interest 10,182,946
Beneficial interest sold 830,715 21,951,411
------------
Prepaid registration fees and other assets (Note 1e) 81,237
------------
Total assets 597,276,046
------------
Liabilities: Payables:
Variation margin (Note 1b) 993,750
Beneficial interest redeemed 746,771
Dividends to shareholders (Note 1f) 487,017
Investment adviser (Note 2) 277,499
Distributor (Note 2) 243,707 2,748,744
------------
Accrued expenses and other liabilities 132,671
------------
Total liabilities 2,881,415
------------
Net Assets: Net assets $594,394,631
============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $ 211,110
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 5,117,324
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 32,206
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 23,310
Paid-in capital in excess of par 594,439,161
Accumulated realized capital losses on investments--net (Note 5) (12,552,731)
Accumulated distributions in excess of realized capital gains on
investments--net (13,593,958)
Unrealized appreciation on investments--net 20,718,209
------------
Net assets $594,394,631
============
Net Asset Class A--Based on net assets of $23,303,584 and 2,111,100 shares
Value: of beneficial interest outstanding $ 11.04
============
Class B--Based on net assets of $564,962,933 and 51,173,239
shares of beneficial interest outstanding $ 11.04
============
Class C--Based on net assets of $3,556,322 and 322,061 shares
of beneficial interest outstanding $ 11.04
============
Class D--Based on net assets of $2,571,792 and 233,102 shares
of beneficial interest outstanding $ 11.03
============
See Notes to Financial Statements.
</TABLE>
73
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended September 30, 1995
<S> <S> <C>
Investment Interest and amortization of premium and discount earned $ 39,111,699
Income Other 353
(Note 1d): ------------
Total income 39,112,052
------------
Expenses: Investment advisory fees (Note 2) 3,363,913
Account maintenance and distribution fees--Class B (Note 2) 2,951,037
Transfer agent fees--Class B (Note 2) 340,716
Printing and shareholder reports 103,163
Accounting services (Note 2) 100,952
Registration fees (Note 1e) 80,291
Professional fees 73,979
Custodian fees 33,772
Trustees' fees and expenses 30,885
Pricing fees 14,530
Transfer agent fees--Class A (Note 2) 11,721
Account maintenance and distribution fees--Class C (Note 2) 9,424
Account maintenance fees--Class D (Note 2) 1,307
Transfer agent fees--Class C (Note 2) 913
Transfer agent fees--Class D (Note 2) 615
Other 12,687
------------
Total expenses 7,129,905
------------
Investment income--net 31,982,147
------------
Realized & Realized loss on investments--net (12,552,800)
Unrealized Gain Change in unrealized appreciation on investments--net 20,412,080
(Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 39,841,427
- --Net (Notes ============
1b, 1d & 3):
See Notes to Financial Statements.
</TABLE>
74
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended
September 30,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 31,982,147 $ 37,172,362
Realized loss on investments--net (12,552,800) (5,792,148)
Change in unrealized appreciation/depreciation on
investments--net 20,412,080 (74,453,611)
------------ ------------
Net increase (decrease) in net assets resulting from
operations 39,841,427 (43,073,397)
------------ ------------
Dividends and Investment income--net:
Distributions to Class A (1,357,050) (1,758,497)
Shareholders Class B (30,476,605) (35,413,865)
(Note 1f): Class C (77,075) --
Class D (71,417) --
Realized gain on investments--net:
Class A -- (299,209)
Class B -- (6,828,149)
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 (31,982,147) (57,893,678)
------------ ------------
Beneficial Net increase (decrease) in net assets derived from
Interest beneficial interest transactions (87,106,114) 8,652,057
Transactions ------------ ------------
(Note 4):
Net Assets: Total decrease in net assets (79,246,834) (92,315,018)
Beginning of year 673,641,465 765,956,483
------------ ------------
End of year $594,394,631 $673,641,465
============ ============
See Notes to Financial Statements.
</TABLE>
75
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived Class A
from information provided in the financial statements.
For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.88 $ 12.46 $ 11.77 $ 11.22 $ 10.56
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .61 .64 .70 .72 .74
Realized and unrealized gain (loss) on
investments--net .16 (1.25) .80 .55 .66
-------- -------- -------- -------- --------
Total from investment operations .77 (.61) 1.50 1.27 1.40
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.61) (.64) (.70) (.72) (.74)
Realized gain on investments--net -- (.11) (.11) -- --
In excess of realized gain on
investments--net -- (.22) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.61) (.97) (.81) (.72) (.74)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.04 $ 10.88 $ 12.46 $ 11.77 $ 11.22
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 7.37% (5.17%) 13.24% 11.77% 13.60%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses .67% .63% .64% .65% .66%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.67% 5.52% 5.80% 6.28% 6.72%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 23,304 $ 28,301 $ 31,976 $ 18,973 $ 13,727
Data: ======== ======== ======== ======== ========
Portfolio turnover 181.21% 107.96% 38.31% 35.90% 49.78%
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
76
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements.
For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.88 $ 12.46 $ 11.77 $ 11.23 $ 10.57
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .56 .58 .64 .67 .67
Realized and unrealized gain (loss) on
investments--net .16 (1.25) .80 .54 .66
-------- -------- -------- -------- --------
Total from investment operations .72 (.67) 1.44 1.21 1.33
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.56) (.58) (.64) (.67) (.67)
Realized gain on investments--net -- (.11) (.11) -- --
In excess of realized gain on investments
--net -- (.22) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.56) (.91) (.75) (.67) (.67)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.04 $ 10.88 $ 12.46 $ 11.77 $ 11.23
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 6.83% (5.66%) 12.67% 11.12% 13.03%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses, excluding account maintenance
Net Assets: and distribution fees .68% .64% .64% .66% .67%
======== ======== ======== ======== ========
Expenses 1.18% 1.14% 1.14% 1.16% 1.17%
======== ======== ======== ======== ========
Investment income--net 5.16% 5.02% 5.32% 5.79% 6.23%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $564,963 $645,341 $733,981 $616,590 $568,958
Data: ======== ======== ======== ======== ========
Portfolio turnover 181.21% 107.96% 38.31% 35.90% 49.78%
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
77
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. October 21, 1994++
to September 30, 1995
Increase (Decrease) in Net Asset Value: Class C Class D
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 10.76 $ 10.76
Operating ------------ ------------
Performance: Investment income--net .51 .56
Realized and unrealized gain on investments--net .28 .27
------------ ------------
Total from investment operations .79 .83
------------ ------------
Less dividends from investment income--net (.51) (.56)
------------ ------------
Net asset value, end of period $ 11.04 $ 11.03
============ ============
Total Investment Based on net asset value per share 7.58%+++ 8.00%+++
Return:** ============ ============
Ratios to Average Expenses, excluding account maintenance and distribution fees .67%* .66%*
Net Assets: ============ ============
Expenses 1.27%* .76%*
============ ============
Investment income--net 4.91%* 5.46%*
============ ============
Supplemental Net assets, end of period (in thousands) $ 3,556 $ 2,572
Data: ============ ============
Portfolio turnover 181.21% 181.21%
============ ============
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
78
<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
four classes of shares under the Merrill Lynch Select Pricingsm
System. Class A and Class D Shares are sold with a front-end sales
charge. Class B and Class C Shares may be subject to a contingent
deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear
certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to
the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to its account maintenance
and distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds and other portfolio
securities are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid
price or yield equivalents as obtained from one or more dealers that
make markets in the 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. Short-term
investments with a remaining maturity of sixty days or less are
valued at amortized cost, 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, 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.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* 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
securities 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) Prepaid registration fees--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.
79
<PAGE>
(g) Reclassification--Generally accepted accounting principles
require that certain differences between paid-in capital for
financial reporting and tax purposes, if permanent, be reclassified
to accumulated net realized capital losses. Accordingly, current
year's permanent book/tax differences of $69 have been reclassified
from paid-in capital to accumulated net realized capital losses.
These reclassifications have no effect on net assets or net asset
values per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
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 the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor an
ongoing account maintenance fee and a distribution fee. These fees
are accrued daily and paid monthly, at the annual rates based upon
the average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.25%
Class C 0.25% 0.35%
Class D 0.10% --
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, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended September 30, 1995, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on the sales of the
Fund's Class A and Class D Shares as follow:
MLFD MLPF&S
Class A $ 928 $ 9,797
Class D $1,958 $18,368
For the year ended September 30, 1995, MLPF&S received contingent
deferred sales charges of $873,699 and $56 relating to transactions
in Class B and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, MLPF&S, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended September 30, 1995 were $1,027,133,884 and
$1,136,147,894, respectively.
80
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
Net realized and unrealized gains (losses) as of September 30, 1995
were as follows:
Realized Unrealized
Losses Gains (Losses)
Long-term investments $ (10,467,342) $ 22,271,910
Short-term investments (22,891) (4,482)
Financial futures contracts (2,062,567) (1,549,219)
------------- ------------
Total $ (12,552,800) $ 20,718,209
============= ============
As of September 30, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $22,256,040, of which $22,781,125
related to appreciated securities and $525,085 related to
depreciated securities. The aggregate cost of investments at
September 30, 1995 for Federal income tax purposes was $552,907,165.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial
interest transactions was $(87,106,114) and $8,652,057 for the years
ended September 30, 1995 and September 30, 1994, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended September 30, 1995 Shares Amount
Shares sold 310,937 $ 3,344,063
Shares issued to share-
holders in reinvestment
of dividends. 76,814 829,561
----------- ------------
Total issued 387,751 4,173,624
Shares redeemed (878,791) (9,342,889)
----------- ------------
Net decrease (491,040) $ (5,169,265)
=========== ============
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
=========== ============
Class B Shares for the Year Dollar
Ended September 30, 1995 Shares Amount
Shares sold 3,667,182 $ 39,752,322
Shares issued to share-
holders in reinvestment
of dividends 1,322,739 14,277,855
----------- ------------
Total issued 4,989,921 54,030,177
Automatic conversion
of shares (18,699) (201,021)
Shares redeemed (13,124,398) (141,756,812)
----------- ------------
Net decrease (8,153,176) $(87,927,656)
=========== ============
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 C Shares for the Period
October 21, 1994++ Dollar
to September 30, 1995 Shares Amount
Shares sold 350,647 $ 3,811,029
Shares issued to share-
holders in reinvestment
of dividends 4,349 47,691
----------- ------------
Total issued 354,996 3,858,720
Shares redeemed (32,935) (360,612)
----------- ------------
Net increase 322,061 $ 3,498,108
=========== ============
[FN]
++Commencement of Operations.
81
<PAGE>
Class D Shares for the Period
October 21, 1994++ Dollar
to September 30, 1995 Shares Amount
Shares sold 257,719 $ 2,747,387
Automatic conversion
of shares 18,714 201,021
Shares issued to share-
holders in reinvestment
of dividends 2,989 32,646
----------- ------------
Total issued 279,422 2,981,054
Shares redeemed (46,320) (488,355)
----------- ------------
Net increase 233,102 $ 2,492,699
=========== ============
[FN]
++Commencement of Operations.
5. Capital Loss Carryforward:
At September 30, 1995, the Fund had a net capital loss carryforward
of approximately $21,350,000, all of which expires in 2003. This
amount will be available to offset like amounts of any future
taxable gains.
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...................................... 17
Purchase of Shares......................................................... 18
Alternative Sales Arrangements............................................ 18
Initial Sales Charge Alternatives--Class A and Class D Shares............. 19
Reduced Initial Sales Charges............................................. 20
Distribution Plans........................................................ 23
Limitations on the Payment of Deferred Sales Charges...................... 23
Redemption of Shares....................................................... 24
Deferred Sales Charges--Class B and Class C Shares........................ 25
Portfolio Transactions..................................................... 25
Determination of Net Asset Value........................................... 27
Shareholder Services....................................................... 28
Investment Account........................................................ 28
Automatic Investment Plans................................................ 28
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 29
Systematic Withdrawal Plans--Class A and Class D Shares................... 29
Exchange Privilege........................................................ 30
Distributions and Taxes.................................................... 43
Environmental Tax......................................................... 46
Tax Treatment of Options and Futures Transactions......................... 46
Performance Data........................................................... 47
General Information........................................................ 49
Description of Series and Shares.......................................... 49
Computation of Offering Price Per Share................................... 51
Independent Auditors...................................................... 51
Custodian................................................................. 51
Transfer Agent............................................................ 51
Legal Counsel............................................................. 51
Reports to Shareholders................................................... 52
Additional Information.................................................... 52
Appendix I--Economic Conditions in New York................................ 53
Appendix II--Ratings of Municipal Bonds.................................... 61
Independent Auditors' Report............................................... 69
Financial Statements....................................................... 70
</TABLE>
Code #10343-0196
[LOGO] Merrill Lynch
Merrill Lynch
New York Municipal
Bond Fund
Merrill Lynch Multi-State
Municpal Series Trust
Statement of
Additional
Information
January 25, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
