<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 29, 1997
SECURITIES ACT FILE NO. 2-99473
INVESTMENT COMPANY ACT FILE NO. 811-4375
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 15 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 156 [X]
(CHECK APPROPRIATE BOX OR BOXES)
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
COUNSEL FOR THE TRUST: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP FUND ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX):
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
Title of Securities being Registered: Shares of Beneficial Interest, par value
$.10 per share
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND OF
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
REGISTRATION STATEMENT ON FORM N-1A
----------------
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page.................... Cover Page
Item 2. Synopsis...................... Fee Table
Item 3. Condensed Financial Financial Highlights
Information..................
Item 4. General Description of Investment Objective and Policies;
Registrant................... Additional Information
Item 5. Management of the Fund........ Fee Table; Management of the Trust;
Inside Back Cover Page
Item 5A. Management's Discussion of Not Applicable
Fund Performance.............
Item 6. Capital Stock and Other Cover Page; Merrill Lynch Select
Securities................... Pricing SM System; Additional
Information
Item 7. Purchase of Securities Being Cover Page; Fee Table; Merrill Lynch
Offered...................... Select PricingSM System; Purchase
of Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase...... Fee Table; Merrill Lynch Select
Pricing SM System; Purchase of
Shares; Redemption of Shares
Item 9. Pending Legal Proceedings..... Not Applicable
PART B
Item 10. Cover Page.................... Cover Page
Item 11. Table of Contents............. Back Cover Page
Item 12. General Information and Additional Information
History......................
Item 13. Investment Objective and Investment Objective and Policies;
Policies..................... Investment Restrictions
Item 14. Management of the Fund........ Management of the Trust
Item 15. Control Persons and Principal
Holders of Securities........ Management of the Trust; Additional
Information
Item 16. Investment Advisory and Other Management of the Trust; Purchase of
Services..................... Shares; General Information
Item 17. Brokerage Allocation and Other Portfolio Transactions
Practices....................
Item 18. Capital Stock and Other General Information--Description of
Securities................... Series and Shares
Item 19. Purchase, Redemption and
Pricing of Securities Being Purchase of Shares; Redemption of
Offered...................... Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status.................... Distributions and Taxes
Item 21. Underwriters.................. Purchase of Shares
Item 22. Calculation of Performance Performance Data
Data.........................
Item 23. Financial Statements.......... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
DECEMBER 29, 1997
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 that
seeks to provide shareholders with as high a level of income exempt from
Federal income tax and New York State and New York City personal 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 U.S. Virgin Islands and Guam, which pay interest
exempt, in the opinion of bond counsel to the issuer, from Federal income tax
and New York State and New York City personal income taxes ("New York Municipal
Bonds"). Dividends paid by the Fund are exempt from Federal income tax and New
York State and New York City personal 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 except that for participants in
certain fee-based programs the minimum initial purchase is $500 and the minimum
subsequent purchase is $50. Merrill Lynch may charge its customers a processing
fee (presently $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through Merrill Lynch Financial Data Services, Inc.
(the "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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the 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 December 29, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"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 Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding the Fund.
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, 1.0% for one year(f) None(d)
price or redemption decreasing 1.0% annually
proceeds, whichever thereafter to 0.0% after the
is lower)............. fourth year(e)
Exchange Fee........... None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS):
Management Fees(g)..... 0.55% 0.55% 0.55% 0.55%
12b-1 Fees(h):
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:
Shareholder Servicing
Costs(i)............ 0.04% 0.05% 0.05% 0.04%
Miscellaneous........ 0.06% 0.06% 0.06% 0.06%
----- ----- ----- -----
Total Other Ex-
penses............ 0.10% 0.11% 0.11% 0.10%
----- ----- ----- -----
Total Fund Operating
Expenses.............. 0.65% 1.16% 1.26% 0.75%
===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain fee-based programs. See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares"--
page 24 and "Shareholder Services--Fee-Based Programs"--page 35.
(b) Class B shares convert to Class D shares automatically approximately ten
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 and waived for purchases of
Class A shares by participants in connection with certain fee-based
programs. 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 24.
(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 that
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
Such CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 35.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs" --page 35.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs" --page 35.
(g) See "Management of the Trust--Management and Advisory Arrangements"--page
21.
(h) See "Purchase of Shares--Distribution Plans"--page 29.
(i) 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
on page 2; (2) a 5% annual return throughout
the periods and (3) redemption at the end of
the period (including any applicable CDSC for
Class B and Class C shares):
Class A...................................... $46 $60 $75 $118
Class B...................................... $52 $57 $64 $141
Class C...................................... $23 $40 $69 $152
Class D...................................... $47 $63 $80 $129
An investor would pay the following expenses
on the same $1,000 investment assuming no re-
demption at the end of the period:
Class A...................................... $46 $60 $75 $118
Class B...................................... $12 $37 $64 $141
Class C...................................... $13 $40 $69 $152
Class D...................................... $47 $63 $80 $129
</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
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
Conduct Rules of the National Association of Securities Dealers, Inc.
("NASD"). Merrill Lynch may charge its customers a processing fee (presently
$5.35) for confirming purchases and repurchases. Purchases and redemptions
made 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 registered investment companies advised by Merrill Lynch Asset
Management, L.P. ("MLAM") or Fund Asset Management, L.P. ("FAM" or the
"Manager"), an affiliate of MLAM. Funds advised by MLAM or FAM that utilize
the Merrill Lynch Select Pricing SM System 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 CDSCs,
distribution fees and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, 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 CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees 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 or her 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
- --------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(/2/)(/3/)
- --------------------------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.25% B shares convert to D shares
at a rate of 4.0% during the automatically after approximately
first year, decreasing ten years(/5/)
1.0% annually to 0.0%(/4/)
- --------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 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 and waived for purchases of Class
A shares by participants in connection with certain fee-based programs.
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. Such CDSC may be waived in connection
with certain fee-based programs. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-
based programs 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
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 of the Fund in a
shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Other eligible investors include
participants in certain fee-based programs. In addition, Class A
shares will be offered at net asset value 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 of 4.00% is reduced for purchases of $25,000 and
over and waived for purchases by participants in connection with
certain fee-based programs. 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 1.0% CDSC if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. Sales charges also are
reduced under a right of accumulation that 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. Such CDSC may be modified in
connection with certain fee-based programs. 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 of 1.0% if they are redeemed within one year after purchase.
Such CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly,
5
<PAGE>
an investor who purchases Class C shares will be subject to account
maintenance fees and higher distribution fees that will be imposed on
Class C shares for an indefinite period subject to annual approval by
the Trust's Board of Trustees and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 4.00% 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 CDSC of 1.0%
if the shares are redeemed within one year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. The
schedule of initial sales charges and reductions for Class D shares is
the same as the schedule for Class A shares except that there is no
waiver for purchases of Class D shares in connection with certain fee-
based programs. 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 or
her 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 CDSC 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 that 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
6
<PAGE>
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 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. Financial statements for the fiscal year
ended September 30, 1997 and the independent auditors' report thereon are
included in the Statement of Additional Information. The following per share
data and ratios have been derived from information provided in the Fund's
audited financial statements. 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,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989+
------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <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......... $ 11.12 $ 11.04 $ 10.88 $ 12.46 $ 11.77 $ 11.22 $ 10.56 $10.81 $10.85
------- ------- ------- ------- ------- ------- ------- ------ ------
Investment income--net.. .60 .59 .61 .64 .70 .72 .74 .73 .68
Realized and unrealized
gain (loss) on
investments--net....... .34 .08 .16 (1.25) .80 .55 .66 (.25) (.04)
------- ------- ------- ------- ------- ------- ------- ------ ------
Total from investment
operations............. .94 .67 .77 (.61) 1.50 1.27 1.40 .48 .64
------- ------- ------- ------- ------- ------- ------- ------ ------
Less dividends and dis-
tributions:
Investment income--net. (.60) (.59) (.61) (.64) (.70) (.72) (.74) (.73) (.68)
Realized gain on in-
vestments--net......... -- ++ -- -- (.11) (.11) -- -- -- --
In excess of realized
gain on
investments--net...... -- -- -- (.22) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ ------
Total dividends and dis-
tributions............. (.60) (.59) (.61) (.97) (.81) (.72) (.74) (.73) (.68)
------- ------- ------- ------- ------- ------- ------- ------ ------
Net asset value, end of
period................. $ 11.46 $ 11.12 $ 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.............. 8.69% 6.19% 7.37% (5.17)% 13.24% 11.77% 13.61% 4.42% 6.28%#
======= ======= ======= ======= ======= ======= ======= ====== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .65% .66% .67% .63% .64% .65% .66% .67% .66%*
======= ======= ======= ======= ======= ======= ======= ====== ======
Investment income--net.. 5.30% 5.31% 5.67% 5.52% 5.80% 6.28% 6.72% 6.79% 6.82%*
======= ======= ======= ======= ======= ======= ======= ====== ======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $22,301 $21,762 $23,304 $28,301 $31,976 $18,973 $13,727 $8,905 $3,796
======= ======= ======= ======= ======= ======= ======= ====== ======
Portfolio turnover...... 97.22% 114.78% 181.21% 107.96% 38.31% 35.90% 49.78% 53.82% 74.51%
======= ======= ======= ======= ======= ======= ======= ====== ======
</TABLE>
- --------
+ Class A shares commenced operations on October 25, 1988.
++ Amount is less than $.01 per share.
* 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,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<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 year...... $ 11.12 $ 11.04 $ 10.88 $ 12.46 $ 11.77 $ 11.23 $ 10.57 $ 10.81 $ 10.66 $ 10.04
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income--net.. .54 .54 .56 .58 .64 .67 .67 .68 .69 .70
Realized and unrealized
gain (loss) on
investments--net....... .34 .08 .16 (1.25) .80 .54 .66 (.24) .15 .62
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations............. .88 .62 .72 (.67) 1.44 1.21 1.33 .44 .84 1.32
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net. (.54) (.54) (.56) (.58) (.64) (.67) (.67) (.68) (.69) (.70)
Realized gain on
investments--net...... -- ** -- -- (.11) (.11) -- -- -- -- --
In excess of realized
gain on investments--
net................... -- -- -- (.22) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions.......... (.54) (.54) (.56) (.91) (.75) (.67) (.67) (.68) (.69) (.70)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year................... $ 11.46 $ 11.12 $ 11.04 $ 10.88 $ 12.46 $ 11.77 $ 11.23 $ 10.57 $ 10.81 $ 10.66
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:*
Based on net asset value
per share.............. 8.14% 5.66% 6.82% (5.66)% 12.67% 11.12% 13.03% 4.00% 8.16% 13.35%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.16% 1.16% 1.18% 1.14% 1.14% 1.16% 1.17% 1.18% 1.16% 1.17%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income--net.. 4.79% 4.80% 5.16% 5.02% 5.32% 5.79% 6.23% 6.28% 6.38% 6.62%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $279,754 $403,403 $564,963 $645,341 $733,981 $616,590 $568,958 $566,095 $635,227 $641,623
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover...... 97.22% 114.78% 181.21% 107.96% 38.31% 35.90% 49.78% 53.82% 74.51% 99.61%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- -------
* Total investment returns exclude the effects of sales loads.
** Amount is less than $.01 per share.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C CLASS D
---------------------------------- -------------------------------------
FOR THE FOR THE
YEAR ENDED FOR THE PERIOD YEAR ENDED FOR THE PERIOD
SEPTEMBER 30, OCTOBER 21, 1994+ SEPTEMBER 30, OCTOBER 21, 1994+
--------------- TO SEPTEMBER 30, ------------------ TO SEPTEMBER 30,
1997 1996 1995 1997 1996 1995
------ ------ ----------------- -------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
Per Share Operating Per-
formance:
Net asset value, begin-
ning of period......... $11.12 $11.04 $ 10.76 $ 11.11 $ 11.03 $ 10.76
------ ------ ------- -------- ------- -------
Investment income--net.. .53 .52 .51 .58 .58 .56
Realized and unrealized
gain on
investments--net....... .35 .08 .28 .35 .08 .27
------ ------ ------- -------- ------- -------
Total from investment
operations............. .88 .60 .79 .93 .66 .83
------ ------ ------- -------- ------- -------
LESS DIVIDENDS AND DIS-
TRIBUTIONS:
Investment income-net... (.53) (.52) (.51) (.58) (.58) (.56)
Realized gain on invest-
ments--net............. --++ -- -- --++ -- --
------ ------ ------- -------- ------- -------
Total dividends and dis-
tributions............. (.53) (.52) (.51) (.58) (.58) (.56)
------ ------ ------- -------- ------- -------
Net asset value, end of
period................. $11.47 $11.12 $ 11.04 $ 11.46 $ 11.11 $ 11.03
====== ====== ======= ======== ======= =======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 8.13% 5.55% 7.57%# 8.68% 6.09% 7.99%#
====== ====== ======= ======== ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.26% 1.27% 1.27%* .75% .76% .76%*
====== ====== ======= ======== ======= =======
Investment income--net.. 4.69% 4.70% 4.91%* 5.20% 5.21% 5.46%*
====== ====== ======= ======== ======= =======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $5,034 $4,175 $ 3,556 $139,511 $94,297 $ 2,572
====== ====== ======= ======== ======= =======
Portfolio turnover...... 97.22% 114.78% 181.21% 97.22% 114.78% 181.21%
====== ====== ======= ======== ======= =======
</TABLE>
- --------
+ Commencement of operations.
++ Amount is less than $.01 per share.
* 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 income tax and New York State and New
York City personal 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 U.S. Virgin Islands, and Guam. Obligations exempt from Federal income
taxes are referred to herein as "Municipal Bonds" and obligations exempt from
Federal income tax and New York State and New York City personal 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 Fund may also invest
in variable rate demand obligations ("VRDOs"). The interest on Municipal Bonds
may bear a fixed rate or be payable at a variable or floating rate. At least
80% of 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 a Division of The McGraw-Hill Companies, Inc.
("Standard & Poor's") (currently AAA, AA, A and BBB) or Fitch IBCA, 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 to obligations in which the Fund may invest. Municipal Bonds rated in
the fourth highest rating category, while considered "investment grade," have
certain speculative characteristics and are more likely to be downgraded to
non-investment grade than obligations rated in one of the top three rating
categories. See Appendix II--"Ratings of Municipal Bonds" in the Statement of
Additional Information for more information regarding ratings of debt
securities. An issue of rated Municipal Bonds may cease to be rated or its
rating may be reduced below "investment grade" subsequent to its purchase by
the Fund. If an obligation is downgraded below investment grade, the Manager
will consider factors such as price, credit risk, market conditions, financial
condition of the issuer and interest rates to determine whether to continue to
hold the obligation in the Fund's portfolio.
The Fund may invest up to 20% of its total assets in Municipal Bonds that are
rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or which,
in the Manager's judgment, possess similar credit characteristics. Such
securities, sometimes referred to as "high yield" or "junk" bonds, are
predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. The market prices of high-yielding, lower-rated securities may
fluctuate more than higher-rated securities and may decline significantly in
periods of general economic difficulty, which may follow periods of rising
interest rates. In purchasing such securities, the Fund will rely on the
Manager's judgment, analysis and experience in evaluating the creditworthiness
of the issuer of such securities. The Manager will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and
11
<PAGE>
trends, its operating history, the quality of its management and regulatory
matters. See "Investment Objective and Policies" in the Statement of Additional
Information for a more detailed discussion of the pertinent risk factors
involved in investing in "high yield" or "junk" bonds and Appendix II--"Ratings
of Municipal Bonds" in the Statement of Additional Information for additional
information regarding ratings of debt securities. The Fund does not intend to
purchase debt securities that are in default or which the Manager believes will
be in default.
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 Fund's investments may also include VRDOs and VRDOs in the form of
participation interests ("Participating VRDOs") in variable rate tax-exempt
obligations held by a financial institution. The VRDOs in which the Fund will
invest are tax-exempt obligations which contain a floating or variable interest
rate adjustment formula and an unconditional right of demand on the part of the
holder thereof to receive payment of the unpaid principal balance plus accrued
interest on a short notice period not to exceed seven days. Participating VRDOs
provide the Fund with a specified undivided interest (up to 100%) of the
underlying obligation and the right to demand payment of the unpaid principal
balance plus accrued interest on the Participating VRDOs from the financial
institution on a specified number of days' notice, not to exceed seven days.
There is, however, the possibility that because of default or insolvency, the
demand feature of VRDOs or Participating VRDOs may not be honored. The Fund has
been advised by its counsel that the Fund should be entitled to treat the
income received on Participating VRDOs as interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of the
unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed illiquid securities. A VRDO with a demand notice
period exceeding seven days will therefore be subject to the Fund's restriction
on illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and be ultimately responsible for
such determinations.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal income tax and New York State and New York City personal 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 to the issuer, from
Federal income tax, but not New York State and New York City personal income
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
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"). Other Non-Municipal Tax-
Exempt Securities could include trust certificates or other derivative
instruments evidencing interests in one or more long-term municipal securities.
12
<PAGE>
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 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 income tax and
New York State and New York City personal 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.
13
<PAGE>
New York State, New York City and other New York public bodies have sometimes
encountered financial difficulties of a type that 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. Moody's, Standard & Poor's and Fitch currently rate New York
State's general obligation bonds A2, A and A+, respectively.
The value of Municipal Bonds generally may be affected by uncertainties in
the municipal markets as a result of legislation or litigation changing the
taxation of Municipal Bonds or the rights of Municipal Bond holders in the
event of a bankruptcy. Municipal bankruptcies are rare, and certain provisions
of the U.S. Bankruptcy Code governing such bankruptcies are unclear. Further,
the application of state law to Municipal Bond issuers could produce varying
results among the states or among Municipal Bond issuers within a state. These
uncertainties could have a significant impact on the prices of the Municipal
Bonds or the New York Municipal Bonds in which the Fund invests.
The Manager does not believe that the current economic conditions in New York
or other factors described above will have a significant adverse effect on the
Fund's ability to invest in high quality New York Municipal Bonds. Because the
Fund's portfolio will be comprised primarily of investment grade securities,
the Fund is expected to be less subject to market and credit risks than a fund
that invests primarily in lower quality New York Municipal Bonds. For a
discussion of economic and other conditions in the State of New York, see
Appendix I--"Economic Conditions in New York"--in 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 local facilities for the water supply,
gas, electricity, sewage or solid waste disposal facilities and other
specialized facilities. For purposes of this Prospectus, such obligations are
Municipal Bonds if the interest paid thereon is excluded from gross income for
purposes of Federal income taxation 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 latter category includes 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 its state constitution 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's 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.
14
<PAGE>
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; accordingly the timely payment of interest
and the repayment of principal in accordance with the terms of the revenue or
special obligation bond is a function of the economic viability of such
facility or such revenue source.
The Fund may purchase IDBs and private activity bonds. IDBs and private
activity bonds are, in most cases, tax-exempt securities issued by states,
municipalities or public authorities 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. IDBs and private activity bonds generally are not
secured by a pledge of the taxing power of the issuer of such bonds. Therefore,
an investor should be aware that repayment of such bonds generally 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
so-called "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 (and Non-Municipal Tax-Exempt
Securities) 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
short-term market rates increase and increase as short-term 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.
15
<PAGE>
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 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% 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.
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. Under normal conditions, it is generally
anticipated that the Fund's average maturity will be in excess of ten years.
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.
16
<PAGE>
The economic effect of holding both the Call Right and the related Municipal
Bond is identical to that of 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% 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
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 liquid securities 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. Recent legislation has created
new categories of capital gains taxable at different rates, which the Fund may
pass through to shareholders. 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.
17
<PAGE>
The Fund may purchase and sell financial futures contracts on U.S. Government
securities and write and purchase put and call options on such futures
contracts as a hedge against adverse changes in interest rates as described
more fully in the Statement of Additional Information. With respect to U.S.
Government securities, currently there are financial futures contracts based on
long-term U.S. Treasury bonds, Treasury notes, Government National Mortgage
Association ("GNMA") Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Trustees, the Fund also may engage in
other financial futures contracts transactions and options thereon, such as
financial futures contracts or options on other municipal bond indexes which
may become available, if the Manager of the Fund and the Trustees of the Trust
should determine that there is normally a sufficient correlation between the
prices of such futures contracts and the Municipal Bonds in which the Fund
invests to make such hedging appropriate.
Utilization of futures transactions and options thereon involves the risk of
imperfect correlation in movements in the price of futures contracts and
movements in the price of the security which is the subject of the hedge. If
the price of the futures contract moves more or less than the price of the
security that is the subject of the hedge, the Fund will experience a gain or
loss which will not be completely offset by movements in the price of such
security. There is a risk of imperfect correlation where the securities
underlying futures contracts have different maturities, ratings or geographic
mixes than the security being hedged. In addition, the correlation may be
affected by additions to or deletions from the index which serves as a basis
for a financial futures contract. Finally, in the case of futures contracts on
U.S. Government securities and options on such futures contracts, the
anticipated correlation of price movements between the U.S. Government
securities underlying the futures or options and Municipal Bonds may be
adversely affected by economic, political, legislative or other developments
which have a disparate impact on the respective markets for such securities.
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 liquid 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
18
<PAGE>
of the Fund will not subject the Fund to certain risks frequently associated
with speculation in futures transactions.
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% 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, which means the lesser of (i)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares. Among its fundamental policies, the Fund may not 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.) Investment restrictions and policies which are non-
fundamental policies may be changed by the Board of Trustees without
shareholder approval. As a non-fundamental policy, the Fund may not borrow
amounts in excess of 20% of its total
19
<PAGE>
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, the Fund will not purchase securities while borrowings are
outstanding.
As a non-fundamental policy, the Fund will not 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.
The Fund's investments will be limited so as to qualify as a "regulated
investment company" for purposes of 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.
The Trustees are:
Arthur Zeikel*--Chairman of the Manager and its affiliate, MLAM; and
Executive Vice President of ML & Co.
James H. Bodurtha--Director and Executive Vice President, The China
Business Group, Inc.
Herbert I. London--John M. Olin Professor of Humanities, New York
University.
Robert R. Martin--Former Chairman, Kinnard Investments, Inc.
Joseph L. May--Attorney in private practice.
Andre F. Perold--Professor, Harvard Business School.
- --------
* Interested person, as defined in the 1940 Act, of the Trust.
20
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, 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 140 registered investment companies. MLAM also
provides investment advisory services to individuals and institutions. As of
November 30, 1997, the Manager and MLAM had a total of approximately $273.9
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 has been the Portfolio Manager of the Fund since 1996. He has
been a Vice President of MLAM since 1996 and a Portfolio Manager thereof since
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 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, 1997, the fee paid by the Fund to the Manager was
$2,697,119 (based on average daily net assets of approximately $490.6 million).
The Management Agreement obligates the Trust and the Fund to pay certain
expenses incurred in the Fund's operations, including, among other things, the
management fee, legal and audit fees, unaffiliated Trustees' fees and expenses,
registration fees, custodian and transfer agency fees, accounting and pricing
costs, and certain of the costs of printing proxies, shareholder reports,
prospectuses and statements of additional information. Accounting services are
provided to the Fund by the Manager and the Fund reimburses the Manager for its
costs in connection with such services. For the fiscal year ended September 30,
1997, the Fund reimbursed the Manager $64,284 for accounting services. For the
fiscal year ended September 30, 1997, the ratio of total expenses to average
net assets was 0.65% for Class A shares, 1.16% for Class B shares, 1.26% for
Class C shares and 0.75% 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
21
<PAGE>
are designed to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions applicable to all
employees of the Manager include a ban on acquiring any securities in a "hot"
initial public offering and a prohibition from profiting on short-term trading
in securities. In addition, no employee may purchase or sell any security that
at the time is being purchased or sold (as the case may be), or to the
knowledge of the employee is being considered for purchase or sale, by any
fund advised by the Manager. Furthermore, the Codes provide for trading
"blackout periods" which prohibit trading by investment personnel of the Fund
within periods of trading by the Fund in the same (or equivalent) security (15
or 30 days depending upon the transaction).
TRANSFER AGENCY SERVICES
The Transfer Agent, a 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 Transfer Agent receives a fee of up to $11.00 per Class A or
Class D account and up to $14.00 per Class B or Class C account and is
entitled to reimbursement for certain transaction charges and out-of-pocket
expenses incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the
beneficial interest of a person in the relevant share class on a recordkeeping
system, provided the recordkeeping system is maintained by a subsidiary of ML
& Co. For the fiscal year ended September 30, 1997, the total fee paid by the
Fund to the Transfer Agent pursuant to the Transfer Agency Agreement was
$234,098.
PURCHASE OF SHARES
The Distributor, an affiliate of each 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, except that for participants in certain fee-based
programs, the minimum initial purchase is $500 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 (the "NYSE") (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 NYSE 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 NYSE on that day. If the
purchase orders are not received by
22
<PAGE>
the Distributor prior to 30 minutes after the close of business on the NYSE on
that day, such orders shall be deemed received on the next business day. Any
order may be rejected by the Distributor or the Trust. The Trust or the
Distributor may suspend the continuous offering of the Fund's shares of any
class 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 $5.35) to confirm a sale of shares to such
customers. Purchases made 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 CDSC and ongoing distribution fees
and higher account maintenance 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 CDSCs, distribution fees and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on Class D shares, will be imposed directly against those classes and
not against all assets of the Fund and, accordingly, such charges will not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. The proceeds from the account
maintenance fees are used to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing continuing account maintenance
activities. 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 (except that Class B shareholders may vote upon any material changes
to expenses charged under the Class D Distribution Plan). 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 CDSCs and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees 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
23
<PAGE>
D shares may be available for purchase through securities dealers, other than
Merrill Lynch, that 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 4.00% initial
sales charge(/2/)(/3/) No No No
- --------------------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.25%
years, at a rate of 4.0% B shares convert to D
during the first year, shares automatically
decreasing 1.0% annually after
to 0.0%(/4/) approximately ten years(/5/)
- --------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.35% No
- --------------------------------------------------------------------------------------------------------
D Maximum 4.00% 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 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 "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by participants in connection with certain fee-based programs.
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. Such CDSC may be waived in connection
with certain fee-based programs.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-
based programs may be 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
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 and on Class A purchases by certain participants in
connection with certain fee-based programs. If the sales charge is waived
in connection with a purchase of $1,000,000 or more, such purchases may be
subject to a 1.0% CDSC if the shares are redeemed within one year after
purchase. Such CDSC may be waived in connection with certain fee-based
programs. 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.
24
<PAGE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act
of 1933, as amended. For the fiscal year ended September 30, 1997, the Fund
sold 723,895 Class A shares for aggregate net proceeds of $8,125,178. The
gross sales charges for the sale of Class A shares of the Fund for that year
were $8,710, of which $946 and $7,764 were received by the Distributor and
Merrill Lynch, respectively. For the fiscal year ended September 30, 1997, the
Fund received no CDSCs with respect to redemptions within one year after
purchase of Class A shares purchased subject to a front-end sales charge
waiver. For the fiscal year ended September 30, 1997, the Fund sold 156,140
Class D shares for aggregate net proceeds of $1,754,784. The gross sales
charges for the sale of Class D shares of the Fund for the year were $22,686,
of which $2,411 and $20,275 were received by the Distributor and Merrill
Lynch, respectively. For the fiscal year ended September 30, 1997, 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 and U.S. branches of foreign banking
institutions provided that the program or branch 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, collective investment trusts for
which Merrill Lynch Trust Company serves as trustee and purchases made in
connection with certain fee-based programs. 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 in their initial offerings 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. In addition, 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. and, if certain conditions set
forth in the Statement of Additional Information are met, to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted
by such funds in shares of the Fund and certain other MLAM-advised mutual
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." See
"Shareholder Services--Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access SM Accounts
available through authorized employers. Class A shares are offered at net
asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
and, subject to certain conditions, Class A and Class D shares are offered at
net asset value to shareholders of Merrill Lynch
25
<PAGE>
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc., who wish to reinvest in shares of the Fund the net proceeds from a
sale of certain of their shares of common stock, pursuant to tender offers
conducted by those funds.
Class D shares are offered at net asset value without sales charges to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC
which declines each year, 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."
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.
26
<PAGE>
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. 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 that 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 proceeds of
or the cost of the shares being redeemed. Accordingly, no CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no CDSC will be assessed on shares derived from reinvestment of dividends or
capital gains distributions.
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC AS A
PERCENTAGE OF
DOLLAR AMOUNT
SUBJECT TO
YEAR SINCE PURCHASE PAYMENT MADE CHARGE
-------------------------------- -------------
<S> <C>
0-1........................................................ 4.0%
1-2........................................................ 3.0%
2-3........................................................ 2.0%
3-4........................................................ 1.0%
4 and thereafter........................................... None
</TABLE>
For the fiscal year ended September 30, 1997, the Distributor received CDSCs
of $406,117 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. Additional CDSCs payable to the Distributor may have
been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
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).
27
<PAGE>
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Code) of a shareholder. The Class B CDSC also is
waived for any Class B shares that are purchased within qualifying Employee
Access SM Accounts. Additional information concerning the waiver of the Class
B CDSC is set forth in the Statement of Additional Information. The terms of
the CDSC may be modified in connection with redemptions to fund participation
in certain fee-based programs. See "Shareholder Services--Fee-Based Programs."
Contingent Deferred Sales Charges--Class C Shares. Class C shares that 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 fiscal year ended September 30, 1997,
the Distributor received CDSCs of $1,035 with respect to redemptions of Class
C shares, all of which were paid to Merrill Lynch. The Class C CDSC may be
waived in connection with certain fee-based programs. See "Shareholder
Services--Fee-Based Programs."
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 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.
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.
28
<PAGE>
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked on
to the holding period for the shares acquired.
The conversion period also may be modified for investors who participate in
certain fee-based programs. See "Shareholder Services--Fee-Based Programs."
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 provides
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 provides 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 fiscal year ended September 30, 1997, the Fund paid the Distributor
$1,693,589 pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of approximately $338.7
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended September 30, 1997, the Fund paid the
Distributor $26,560 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately
$4.4 million), all of
29
<PAGE>
which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended September 30, 1997, the Fund paid the Distributor
$124,649 pursuant to the Class D Distribution Plan (based on average daily net
assets subject to such Class D Distribution Plan of approximately $124.6
million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
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, 1996, the last date for which fully allocated accrual data
is available, the fully allocated accrual expenses incurred by the Distributor
and Merrill Lynch for the period since the commencement of operations of Class
B shares exceeded fully allocated accrual revenues by approximately $5,503,000
(1.48% of Class B net assets at that date). As of September 30, 1997, direct
cash revenues for the period since the commencement of operations of Class B
shares exceeded direct cash expenses by $22,167,237 (7.92% of Class B net
assets at that date). As of December 31, 1996, the fully allocated accrual
expenses incurred by the Distributor and Merrill Lynch for the period since the
commencement of operations of Class C shares exceeded fully allocated revenues
by approximately $35,000 (0.88% of Class C net assets at that date). As of
September 30, 1997, direct cash revenues for the period since the commencement
of operations of Class C shares exceeded direct cash expenses by $29,534 (0.59%
of Class C net assets at that date).
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the Fund's distribution
fee and the CDSC borne by the Class B and Class C shares but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges) plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum,
30
<PAGE>
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.
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."
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 that 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
in part 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 redemption request 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.
31
<PAGE>
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 NYSE (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 NYSE 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 NYSE, 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 that 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 $5.35) to confirm a repurchase of
shares to such customers. Repurchases made 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.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
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. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant 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.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various
services or plans, or to change options with respect thereto, can be obtained
from the Trust by calling the telephone number on the cover page hereof or from
the Distributor or Merrill Lynch.
32
<PAGE>
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 gains 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. 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 such shares and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence.
EXCHANGE PRIVILEGE
U.S. 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 the 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 or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in
which the exchange is made or is otherwise eligible to purchase Class A shares
of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge
33
<PAGE>
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 that 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 for 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 of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically in
full and fractional shares of the Fund, without a sales charge, at the net
asset value per share at the close of business on the monthly payment date for
such dividends and distributions. A shareholder may at any time, by written
notification to Merrill Lynch, if the shareholder's account is maintained with
Merrill Lynch, or by written notification or by telephone (1-800-MER-FUND) to
the Transfer Agent, if the shareholder's account is maintained with the
Transfer Agent, elect to have subsequent dividends or both dividends and
capital gains distributions paid in cash, rather than reinvested, in which
event payment will be mailed monthly. The Fund is not responsible for any
failure of delivery to the shareholder's address of record and no interest will
accrue on amounts represented by uncashed distribution or redemption checks.
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 shareholder may elect to receive systematic withdrawal payments from his or
her Investment Account through automatic payment by check or through automatic
payment by direct deposit to his or her bank
34
<PAGE>
account on either a monthly or quarterly basis. Alternatively, a 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) or CBA (R) Systematic Redemption Program, subject to
certain conditions. With respect to redemptions of Class B or Class C shares
pursuant to a systematic withdrawal plan, the maximum number of Class B or
Class C shares that can be redeemed from an account annually shall not exceed
10% of the value of shares of such class in that account at the time the
election to join the systematic withdrawal plan was made. Any CDSC that
otherwise might be due on such redemption of Class B or Class C shares will be
waived. Shares redeemed pursuant to a systematic withdrawal plan will be
redeemed in the same order as Class B or Class C shares are otherwise redeemed.
See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class
C Shares--Contingent Deferred Sales Charges--Class B Shares" and "--Contingent
Deferred Sales Charges--Class C Shares." Where the systematic withdrawal plan
is applied to Class B shares, upon conversion of the last Class B shares in an
account to Class D shares, the systematic withdrawal plan will automatically be
applied thereafter to Class D shares. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares."
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. 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) or CBA (R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(800) MER-FUND or (800) 637-3863.
35
<PAGE>
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities of the Fund. Municipal
Bonds and other securities in which the Fund invests are traded primarily in
the over-the-counter market. Where possible, the Trust deals directly with the
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Trust to obtain the best results in conducting portfolio
transactions for the Fund, taking into account such factors as price (including
the applicable dealer spread or commission), the size, type and difficulty of
the transaction involved, the firm's general execution and operations
facilities, and the firm's risk in positioning the securities involved and the
provision of supplemental investment research by the firm. While reasonable
competitive spreads or commissions are sought, the Fund will not necessarily be
paying the lowest spread or commission available.
The sale of shares of the Fund may be taken into consideration as a factor in
the selection of brokers or dealers to execute portfolio transactions for the
Fund. The portfolio securities of the Fund generally are traded on a principal
basis and normally do not involve either brokerage commissions or transfer
taxes. The cost of portfolio securities transactions of the Fund primarily
consists of dealer or underwriter spreads. Under the 1940 Act, persons
affiliated with the Trust, including Merrill Lynch, are prohibited from dealing
with the Trust as a principal in the purchase and sale of securities unless
such trading is permitted by an exemptive order issued by the Commission. The
Trust has obtained an exemptive order permitting it to engage in certain
principal transactions with Merrill Lynch involving high quality short-term
Municipal Bonds subject to certain conditions. During the fiscal year ended
September 30, 1997 the Fund engaged in one such transaction having an aggregate
dollar amount of approximately $700,000. In addition, the Fund may not purchase
securities, including Municipal Bonds, during the existence of any underwriting
syndicate of which Merrill Lynch is a member or in a private placement in which
Merrill Lynch serves as placement agent except pursuant to procedures approved
by the Trustees of the Trust which either comply with rules adopted by the
Commission or with interpretations of the Commission staff. 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.
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 representing accrued market discount.
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.)
36
<PAGE>
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 NYSE (generally, 4:00 p.m., New York time) on that
day. The net investment income of the Fund for dividend purposes consists of
interest earned on portfolio securities, less expenses, in each case computed
since the most recent determination of net asset value. Expenses of the Fund,
including the management fees and the account maintenance and distribution
fees, are accrued daily. Dividends of net investment income are declared daily
and reinvested monthly in the form of additional full and fractional shares of
the Fund at net asset value as of the close of business on the "payment date"
unless the shareholder elects to receive such dividends in cash. Shares will
accrue dividends as long as they are issued and outstanding. Shares are issued
and outstanding from the settlement date of a purchase order to the day prior
to the settlement date of a redemption order.
All net realized 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 "Additional Information--
Determination of Net Asset Value."
See "Shareholder Services" for information as to how to elect either dividend
reinvestment or cash payments. Portions of dividends and distributions which
are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of the Fund or received in cash.
TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). As long as 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
37
<PAGE>
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. Distributions from investment income and capital gains of the Fund,
including exempt-interest dividends, may be subject to taxes in states other
than New York and may be subject to local taxes. Accordingly, investors in the
Fund should consult their tax advisors with respect to the application of such
taxes to the receipt of Fund dividends and to the holding of shares in the
Fund.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal income tax purposes and New York State
and New York City personal 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 personal income
tax purposes, are treated as capital gains which are taxed at ordinary income
tax rates. Recent legislation creates additional categories of capital gains
taxable at different rates. Generally not later than 60 days after the close of
its taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any exempt-interest dividends, ordinary income
dividends or capital gain dividends, as well as the amount of capital gain
dividends in the different categories of capital gain referred to above.
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 disallowed to the extent of any exempt interest dividends received by
the shareholder. In addition, any such loss that is not disallowed under the
rule stated above will be treated as long-term capital loss to the extent of
any capital gain dividends received by the shareholder. If the Fund pays a
dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other 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
38
<PAGE>
an item of "tax preference," which could subject certain 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 the shareholder would have owed upon purchase of the
new shares in the absence of the exchange privilege. Instead, such sales charge
will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Under certain Code provisions, 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 for information purposes 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 and regulations. The Code and the Treasury regulations, as well as the
New York tax laws and regulations, 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.
39
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return, yield
and tax equivalent yield for various specified time periods in advertisements
or information furnished to present or prospective shareholders. Average annual
total return, yield and tax equivalent yield are computed separately for Class
A, Class B, Class C and Class D shares in accordance with formulas specified by
the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such
as in the case of Class B and Class C shares and the maximum sales charge in
the case of Class A and Class D shares. Dividends paid by the Fund with respect
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, 1997, was 4.40% for Class A shares, 4.07% for Class B shares,
3.97% for Class C shares and 4.30% for Class D shares and
40
<PAGE>
the tax-equivalent yield for the same period (based on a Federal income tax
rate of 28%) was 6.11% for Class A shares, 5.66% for Class B shares, 5.51% for
Class C shares and 5.97% for Class D shares.
Total return, yield and tax-equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance. The
Fund's total return, yield and tax-equivalent yield will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and the amount of realized and unrealized net capital gains
or losses during the period. The value of an investment in the Fund will
fluctuate and an investor's shares, when redeemed, may be worth more or less
than their original cost.
On occasion, the Fund may compare its performance to performance data
published by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar"), and CDA Investment Technology, Inc., or to data contained in
publications such as Money Magazine, U.S. News & World Report, Business 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 NYSE
(generally, 4:00 p.m., New York time), on each day during which the NYSE 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
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) 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
fees, higher account maintenance fees 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 a 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 again changed
its
41
<PAGE>
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 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, $.10 par value per share, of different classes.
Shareholder approval is not required for the authorization of additional Series
or classes of a Series of the Trust. At the date of this Prospectus, the shares
of the Fund are divided into Class A, Class B, Class C and Class D shares.
Class A, Class B, Class C and Class D shares represent interests in the same
assets of the Fund and are identical in all respects except that Class B, Class
C and Class D shares bear certain expenses relating to the account maintenance
associated with such shares, and Class B and Class C shares bear certain
expenses relating to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to distribution and/or account
maintenance expenditures, as applicable. See "Purchase of Shares." The Trustees
of the Trust may classify and reclassify the shares of any Series into
additional or other classes at a future date.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to the
extent hereinafter provided) and on other matters submitted to the vote of
shareholders. There normally will be no meeting of shareholders for the purpose
of electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Shareholders may, in accordance with the terms of the Declaration of
Trust, cause a meeting of shareholders to be held for the purpose of voting on
the removal of Trustees. Also, the Trust will be required to call a special
meeting of shareholders of a Series in accordance with the requirements of the
1940 Act to seek approval of new management and advisory arrangements, of a
material increase in distribution fees or of a change in the fundamental
policies, objectives or restrictions of a Series. Except as set forth above,
the Trustees shall continue to hold office and appoint successor Trustees. Upon
liquidation or dissolution of a Series, each issued and outstanding share is
entitled to participate equally in dividends and distributions declared with
respect to that Series and in net assets of such Series 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
42
<PAGE>
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch Financial Consultant or Merrill Lynch Financial
Data Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Trust 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.
43
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
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 or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
[ ] shareholder's signature.
This form, when completed, should be ...................................
mailed to: Dealer Name and Address
Merrill Lynch New York Municipal By ................................
Bond Fund Authorized Signature of Dealer
c/o Merrill Lynch Financial Data
Services, Inc. [ ][ ][ ] [ ][ ][ ][ ]
P.O. Box 45289 Branch Code F/C No.
Jacksonville, Florida 32232-5289
.......................
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 (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A, [_] Class B*, [_] Class C* 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
or as soon as possible thereafter.
(month)
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU: $ of the
current value of (check one) [_] Class A, [_] Class B*, [_] Class C* 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.
- --------
* Annual withdrawal cannot exceed 10% of the value of shares of such class
held in the account at the time the election to join the systematic
withdrawal plan is made.
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.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA DRAWN BY MERRILL LYNCH FINANCIAL
SERVICES, INC. DATA SERVICES, INC.
You are hereby authorized to draw an To...............................Bank
ACH debit each month on my bank (Investor's Bank)
account for investment in Merrill
Lynch New York Municipal Bond Fund as
indicated below:
Amount of each ACH debit $......... Bank Address.........................
City...... State...... Zip Code......
Account number.....................
As a convenience to me, I hereby
request and authorize you to pay and
Please date and invest ACH debits on charge to my account ACH debits
the 20th of each month beginning drawn on my account by and payable
to Merrill Lynch Financial Data
......(month) or as soon thereafter as Services, Inc. I agree that your
possible. rights in respect to each such debit
shall be the same as if it were a
I agree that you are drawing these check drawn on you and signed
ACH debits voluntarily at my request personally by me. This authority is
and that you shall not be liable for to remain in effect until revoked
any loss arising from any delay in personally by me in writing. Until
preparing or failure to prepare any you receive such notice, you shall
such debit. If I change banks or be fully protected in honoring any
desire to terminate or suspend this such debit. I further agree that if
program, I agree to notify you any such debit be dishonored,
promptly in writing. I hereby whether with or without cause and
authorize you to take any action to whether intentionally or
correct erroneous ACH debits of my inadvertently, you shall be under no
bank account or purchases of Fund liability.
shares including liquidating shares
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]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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 LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, 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.................. 17
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............................................................ 21
Transfer Agency Services.................................................. 22
Purchase of Shares......................................................... 22
Initial Sales Charge Alternatives--Class A and Class D Shares............. 24
Deferred Sales Charge Alternatives--Class B and Class C Shares............ 26
Distribution Plans........................................................ 29
Limitations on the Payment of Deferred Sales Charges...................... 30
Redemption of Shares....................................................... 31
Redemption................................................................ 31
Repurchase................................................................ 32
Reinstatement Privilege--Class A and Class D Shares....................... 32
Shareholder Services....................................................... 32
Investment Account........................................................ 33
Exchange Privilege........................................................ 33
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 34
Systematic Withdrawal Plans............................................... 34
Automatic Investment Plans................................................ 35
Fee-Based Programs........................................................ 35
Portfolio Transactions..................................................... 36
Distributions and Taxes.................................................... 37
Distributions............................................................. 37
Taxes..................................................................... 37
Performance Data........................................................... 40
Additional Information..................................................... 41
Determination of Net Asset Value.......................................... 41
Organization of the Trust................................................. 41
Shareholder Reports....................................................... 42
Shareholder Inquiries..................................................... 43
Authorization Form......................................................... 45
</TABLE>
Code # 10342-1297
[LOGO] MERRILL LYNCH
Merrill Lynch
New York Municipal
Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
[ART]
PROSPECTUS
December 29, 1997
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 income tax and New York State and New York
City personal 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 U.S. Virgin
Islands and Guam, which pay interest exempt, in the opinion of bond counsel to
the issuer, from Federal income tax and New York State and New York City
personal 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 December
29, 1997 (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 December 29, 1997.
<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 income tax and New York State and New
York City personal 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 U.S. Virgin Islands and Guam, which pay interest exempt, in the
opinion of bond counsel to the issuer, from Federal income tax and New York
State and New York City personal income taxes. Obligations exempt from Federal
income taxes are referred to herein as "Municipal Bonds" and obligations exempt
from Federal income tax and New York State and New York City personal 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 a Division of The McGraw-Hill Companies, Inc.
("Standard & Poor's") (currently AAA, AA, A and BBB) or Fitch IBCA, 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" or "FAM"), to other obligations in
which the Fund may invest.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal income tax and New York State and New York City personal 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 to the issuer, from
Federal income tax, but not New York State and New York City personal income
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% of the Fund's total assets. The Manager, however,
3
<PAGE>
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.
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% of the Fund's total assets.
The Fund may invest up to 20% of its total assets in Municipal Bonds which
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or
which, in the Manager's judgment, possess similar credit characteristics ("high
yield securities"). See Appendix II--"Ratings of Municipal Bonds" for
additional information regarding ratings of debt securities. The Manager
considers the ratings assigned by Standard & Poor's, Moody's or Fitch as one of
several factors in its independent credit analysis of issuers.
High yield securities are considered by Standard & Poor's, Moody's and Fitch
to have varying degrees of speculative characteristics. Consequently, although
high yield securities can be expected to provide higher yields, such securities
may be subject to greater market price fluctuations and risk of loss of
principal than lower yielding, higher rated debt securities. Investments in
high yield securities will be made only when, in the judgment of the Manager,
such securities provide attractive total return potential relative to the risk
of such securities, as compared to higher quality debt securities. The Fund
generally will not invest in debt securities in the lowest rating categories
(those rated CC or lower by Standard & Poor's or Fitch or Ca or lower by
Moody's) unless the Manager believes that the financial condition of the issuer
or the protection afforded the particular securities is stronger than would
otherwise be indicated by such low ratings. The Fund does not intend to
purchase debt securities that are in default or which the Manager believes will
be in default.
Issuers or obligors of high yield securities may be highly leveraged and may
not have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers generally
are greater than is the case with higher rated securities. For example, during
an economic downturn or a sustained period of rising interest rates, issuers or
obligors of high yield securities may be more likely to experience financial
stress, especially if such issuers or obligors are highly leveraged. During
such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of high yield securities
because such securities may be unsecured and may be subordinated to other
creditors of the issuer.
High yield securities frequently have call or redemption features that would
permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
4
<PAGE>
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
secondary market for many of these securities, and the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for high
yield securities does exist, it generally is not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by the Fund will be purchased upon issuance, which may involve special
risks because the securities so acquired are new issues. In such instances the
Fund may be a substantial purchaser of the issue and therefore have the
opportunity to participate in structuring the terms of the offering. Although
this may enable the Fund to seek to protect itself against certain of such
risks, the considerations discussed herein would nevertheless remain
applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent that it is required to seek recovery upon a default on a portfolio
holding or participate in the restructuring of the obligation.
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 Municipal Bonds if
the interest paid thereon is excluded from gross income for Federal income tax
purposes and, in the case of New York Municipal Bonds, 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.
5
<PAGE>
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 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% 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 latter, the Manager must, among other things, also review the
creditworthiness of the entity 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
6
<PAGE>
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.
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 VRDOs at approximately the par value of the
VRDOs on the adjustment date. The adjustments typically are based upon the
Public Securities Association Index 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.
7
<PAGE>
VRDOs that contain an unconditional right of demand to receive payment of the
unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed to be illiquid securities. A VRDO with a demand notice
period exceeding seven days will therefore be subject to the Fund's restriction
on illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and will be ultimately responsible
for such determinations.
The Trust has established the following standards with respect to money
market securities and VRDOs in which the Fund invests. Commercial paper
investments at the time of purchase must be rated A-1 through A-3 by Standard &
Poor's, Prime-1 through Prime-3 by Moody's or 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.
8
<PAGE>
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest. The treatment of purchase and sales contracts is less certain.
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 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
"marking 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.
9
<PAGE>
The Municipal Bond Index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the
exchange membership which is also responsible for handling daily accounting of
deposits or withdrawals of margin.
As described in the Prospectus, the Fund may purchase and sell financial
futures contracts on U.S. Government securities as a hedge against adverse
changes in interest rates as described below. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-term
U.S. Treasury bonds, Treasury notes, Government National Mortgage Association
("GNMA") Certificates and three-month U.S. Treasury bills. The Fund may
purchase and write call and put options on futures contracts on U.S. Government
securities in connection with its hedging strategies.
Subject to policies adopted by the Trustees, the Fund also may engage in
other futures contracts transactions such as futures contracts on other
municipal bond indices that 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
10
<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 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 liquid securities will be deposited in a segregated
11
<PAGE>
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 a result, the Fund's total return for such period may be less
than if it had not engaged in the hedging transaction.
12
<PAGE>
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.
6. Issue senior securities to the extent such issuance would violate
applicable law.
13
<PAGE>
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, to the extent permitted
by applicable law, 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. As a matter of
policy, however, the Fund will not purchase shares of any registered open-
end investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the 1940 Act
at any time the Fund's shares are owned by another investment company that
is part of the same group of investment companies as the Fund.
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.
d. 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
14
<PAGE>
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 Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the 1940 Act involving only usual
and customary commissions or transactions pursuant to an exemptive order under
the 1940 Act. Included among such restricted transactions 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 and executive officers of the Trust and the
portfolio manager of the Fund, including their ages and their principal
occupations for at least the last five years, is set forth below. Unless
otherwise noted, the address of the portfolio manager and of each Trustee and
executive officer is P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (65)--President and Trustee(1)(2)--Chairman of the Manager
(which term, as used herein, includes its corporate predecessors) since 1997;
President of the Manager from 1977 to 1997; Chairman of MLAM (which term, as
used herein, includes MLAM's corporate predecessors) since 1997; President of
MLAM from 1977 to 1997; President and Director of Princeton Services, Inc.
("Princeton Services") from 1993 to 1997; Executive Vice President of Merrill
Lynch & Co., Inc. ("ML & Co.") since 1990.
James H. Bodurtha (53)--Trustee(2)--36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996. Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
Herbert I. London (58)--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; President, Hudson Institute since 1997
and Trustee since 1980; Dean, Gallatin Division of New York University from
1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from
1984 to 1985; Director, Damon Corporation from 1991 to 1995; Overseer, Center
for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech LP since 1996.
Robert R. Martin (70)--Trustee(2)--513 Grand Hill, St. Paul, Minnesota 55102.
Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990 to
1993; Executive Vice President, Dain Bosworth from 1974 to 1989; Director,
Carnegie Capital Management from 1977 to 1985 and Chairman thereof in 1979;
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC Industries
Inc. in 1994; Trustee, Northland College since 1992.
15
<PAGE>
Joseph L. May (68)--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 (45)--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 TIBCO from 1994 to 1996.
Terry K. Glenn (57)--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 Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor") since 1986 and Director
thereof since 1991; President of Princeton Administrators, L.P. since 1988.
Vincent R. Giordano (53)--Senior Vice President(1)(2)--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 (46)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997; Vice President of the
Manager since 1984.
Roberto Roffo (32)--Vice President and Portfolio Manager(1)(2)--Vice
President of MLAM since 1996 and a Portfolio Manager thereof since 1992.
Donald C. Burke (37)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
Gerald M. Richard (48)--Treasurer(1)(2)--Senior Vice President and Treasurer
of 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.
Robert E. Putney, III (37)--Secretary(1)(2)--Director (Legal Advisory) of
MLAM since 1997; Vice President of MLAM from 1994 to 1997; Attorney employed
by MLAM from 1991 to 1994; Attorney in private practice prior thereto.
- --------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At December 1, 1997, the Trustees and officers of the Trust as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Trustee and officer of the Trust and the
other officers of the Trust owned an aggregate of less than 1% of the
outstanding shares of Common Stock of ML & Co.
COMPENSATION OF TRUSTEES
The Trust pays each Trustee not affiliated with the Manager (each a "non-
affiliated Trustee") a fee of $10,000 per year plus $1,000 per meeting
attended. The Trust also compensates members of its Audit and Nominating
Committee (the "Committee"), which consists of all the non-affiliated
Trustees, a fee of $2,000 per year plus $500 per Committee meeting attended.
The Trust reimburses each non-affiliated Trustee for his out-of-pocket
expenses relating to attendance at Board and Committee meetings. The fees and
expenses of
16
<PAGE>
the Trustees are allocated to the respective series of the Trust on the basis
of asset size. For the fiscal year ended September 30, 1997, fees and expenses
paid to the non-affiliated Trustees that were allocated to the Fund aggregated
$26,357.
The following table sets forth for the fiscal year ended September 30, 1997,
compensation paid by the Fund to the non-affiliated Trustees, and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
registered investment companies (including the Trust) advised by FAM and its
affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-affiliated Trustees:
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
PENSION OR FROM TRUST AND OTHER
RETIREMENT BENEFITS FAM/MLAM ADVISED
AME OFN COMPENSATION ACCRUED AS PART FUNDS PAID TO
RUSTEET FROM FUND OF FUND EXPENSE TRUSTEES(1)
- ------- ------------ ------------------- ----------------------
<S> <C> <C> <C>
James H. Bodurtha....... $5,272 None $148,500
Herbert I. London....... $5,272 None $148,500
Robert R. Martin........ $5,272 None $148,500
Joseph L. May........... $5,272 None $148,500
Andre F. Perold......... $5,272 None $148,500
</TABLE>
- --------
(/1/The)Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (22 registered investment companies consisting of 46 portfolios);
Mr. London (22 registered investment companies consisting of 46
portfolios); Mr. Martin (22 registered investment companies consisting of
46 portfolios); Mr. May (22 registered investment companies consisting of
46 portfolios); and Mr. Perold (22 registered investment companies
consisting of 46 portfolios).
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.
Pursuant to a Management Agreement between the Trust on behalf of the Fund
and the Manager (the "Management Agreement"), 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 fiscal years ended September
30, 1995, 1996 and 1997, the total advisory fees paid by the Fund to the
Manager aggregated $3,363,913, $3,125,896 and $2,697,119, respectively.
17
<PAGE>
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 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 that 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 years ended September 30, 1995, 1996 and 1997, the Trust paid the
Manager $100,952, $110,355 and $64,284, respectively, 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.
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
18
<PAGE>
Class C are sold to investors choosing the deferred sales charge alternatives.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid
(except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). Each class has
different exchange privileges. See "Shareholder Services--Exchange Privilege."
The Merrill Lynch Select Pricing SM System is used by more than 50
registered investment companies advised by MLAM or its affiliate, the Manager.
Funds advised by MLAM or the Manager that utilize the Merrill Lynch Select
Pricing SM System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into four separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Management
Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal year
ended September 30, 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 A shares for the fiscal year ended September 30, 1996 were $7,511, of
which the Distributor received $772 and Merrill Lynch received $6,739. The
gross sales charges for the sale of Class A shares for the fiscal year ended
September 30, 1997 were $8,710, of which the Distributor received $946 and
Merrill Lynch received $7,764. 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 gross sales charges for the sale of Class
D shares for the fiscal year ended September 30, 1996 were $24,378, of which
the Distributor received $2,366 and Merrill Lynch received $22,012. The gross
sales charges for the sale of Class D shares for the fiscal year ended
September 30, 1997 were $22,686, of which the Distributor received $2,411 and
Merrill Lynch received $20,275. For the fiscal years ended September 30, 1995,
1996 and 1997, the Distributor received no CDSCs with respect to redemption
within one year after purchase of Class A shares purchased subject to a front-
end sales charge waiver. For the period October 21, 1994 (commencement of
operations) to September 30, 1995 and for the fiscal years ended September 30,
1996 and 1997, the Distributor received no CDSCs with respect to the
redemption within one year after purchase of Class D shares purchased subject
to a front-end sales charge waiver.
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
19
<PAGE>
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 that 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 certain
other MLAM-advised mutual funds ("Eligible Class A shares") are offered at net
asset value to shareholders of certain closed-end funds advised by the Manager
or MLAM who purchased such closed-end fund shares prior to October 21, 1994
(the date the Merrill Lynch Select PricingSM System commenced operations) and
wish to reinvest the net proceeds from 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.
Shareholders of certain MLAM-advised continuously offered closed-ends funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A shares and the
other requirements pertaining to the reinvestment privilege are met. In order
to exercise this investment option, shareholder of one of the above-referenced
continuously offered closed-end funds (an "eligible fund") must sell his or her
shares of common stock of the eligible fund (the "eligible shares") back to the
eligible fund in connection with a tender offer conducted by the eligible fund
and reinvest the proceeds immediately in the designated class of shares of the
Fund. This investment option is available only with respect to eligible shares
as to which no Early Withdrawal Charge or CDSC (each as defined in the eligible
fund's prospectus) is applicable. Purchase orders from eligible fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related tender offer terminates and will be effected at the
net asset value of the designated class of the Fund on such day.
20
<PAGE>
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 MLAM-advised mutual funds. For any such
right of accumulation to be made available, the Distributor must be provided at
the time of purchase, by the purchaser or the purchaser's securities dealer,
with sufficient information to permit confirmation of qualification. Acceptance
of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares held in the name
of a nominee or custodian under pension, profit-sharing or other employee
benefit plans may not be combined with other shares to qualify for the right of
accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
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 AccessSM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee AccessSM Accounts available through authorized employers. 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.
21
<PAGE>
TMASM Managed Trusts. Class A shares are offered at net asset value to
TMA SM Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
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.
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 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 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 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 that might result from an acquisition of assets having net unrealized
appreciation that 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 that (i) meet the investment objectives and policies of the Fund;
(ii) are acquired for investment and not for resale
22
<PAGE>
(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.
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 Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount
23
<PAGE>
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 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,
1997 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.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF SEPTEMBER 30, 1997
-----------------------------------------------------------------------------------
(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
SALES(1) CHARGE BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
- --------------- -------------- --------- ----------- -------- -------------- --------- ------------
CLASS B SHARES, FOR THE
PERIOD NOVEMBER 1, 1985
(COMMENCEMENT OF
OPERATIONS) TO SEPTEMBER
30, 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $1,417,927 $88,620 $87,098 $175,718 $31,699 $144,019 $699
Under Distributor's
Voluntary Waiver....... $1,417,927 $88,620 $ 7,090 $ 95,710 $31,699 $ 64,011 $699
<CAPTION>
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO SEPTEMBER
30, 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $ 8,602 $ 538 $ 82 $ 620 $ 40 $ 580 $ 18
</TABLE>
- --------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated 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. See
"Purchase of Shares--Distribution Plans" in the Prospectus. This figure
may include CDSCs that were deferred when a shareholder redeemed shares
prior to the expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFA SM) Program (the "MFA Program").
The CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(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.
24
<PAGE>
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the NYSE is restricted as determined by the Commission or the
NYSE 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.
The value of shares at the time of the redemption may be more or less than
the shareholder's cost, depending in part on the market value of the securities
held by the Fund at such time.
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 in certain circumstances,
including 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 fiscal years ended September 30, 1995, 1996 and 1997,
the Distributor received CDSCs of $873,699, $676,121 and $406,117,
respectively, with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. Additional Class B CDSCs payable to the Distributor
during the fiscal year ended September 30, 1997 may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs.
For the period October 21, 1994 (commencement of operations) to September 30,
1995, and for the fiscal years ended September 30, 1996 and 1997, the
Distributor received CDSCs of $56, $2,876 and $1,035, respectively, 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 "Portfolio Transactions" 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 ("OTC") transactions are usually principal
transactions, affiliated persons of the Trust, 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. For the fiscal year ended September 30, 1995, the Fund
25
<PAGE>
engaged in no transactions pursuant to such order. For the fiscal year ended
September 30, 1996, the Fund engaged in six transactions pursuant to such order
having an aggregate market value of approximately $12.6 million. For the fiscal
year ended September 30, 1997 the Fund engaged in one transaction pursuant to
such order having an aggregate market value of approximately $700,000.
Affiliated persons of the Trust may serve as broker for the Fund in OTC
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.
The Fund may not purchase securities including Municipal Bonds, during the
existence of any underwriting syndicate of which Merrill Lynch is a member or
in a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Trustees of the Trust which either
comply with rules adopted by the Commission or with interpretations of the
Commission staff. Rule 10f-3 under the 1940 Act sets forth conditions under
which the Fund may purchase municipal bonds from an underwriting syndicate of
which Merrill Lynch is a member. The rule sets forth requirements relating to,
among other things, the terms of an issue of municipal bonds purchased by the
Fund, the amount of municipal bonds which may be purchased in any one issue and
the assets of the Fund which may be invested in a particular issue.
The Fund does not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who
provide supplemental investment research (such as information concerning tax-
exempt securities, economic data and market forecasts) to the Manager may
receive orders for transactions by the Fund. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Manager under its Management Agreement and the expense of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information.
The Trust has no obligation to deal with any broker in the execution of
transactions for the Fund's portfolio securities. In addition, consistent with
the Conduct Rules of the NASD and policies established by the Trustees of the
Trust, the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
For the fiscal years ended September 30, 1995, 1996, and 1997 the Fund paid
brokerage commissions of $89,130, $93,825 and $45,435, respectively.
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 the Manager. As a result of the investment policies described in
the Prospectus and herein, the Fund's annual portfolio turnover rate may be
higher than that of other investment companies. Higher portfolio turnover may
contribute to higher transactional costs in the form of dealer spreads and
brokerage commissions which are borne directly by the Fund. High portfolio
turnover may also result in negative tax consequences, such as an increase in
capital gains dividends or in ordinary income dividends of accrued market
discount. 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
26
<PAGE>
determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded. The portfolio turnover rates for
the fiscal years ended September 30, 1996 and 1997 were 114.78% and 97.22%,
respectively.
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 that 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
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus for information concerning the 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 NYSE (generally, 4:00 p.m., New York time), on each day during
which the NYSE is open for trading. The NYSE is not open on New Year's Day,
Martin Luther King, Jr. 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 (including interest and
dividends accrued but not yet received) minus all liabilities (including
accrued expenses) 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 Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance, distribution
and 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 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, higher account maintenance 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 OTC municipal bond and money markets and are valued at
the last available bid price in the OTC 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
27
<PAGE>
of 60 days or less are valued on an amortized cost basis which approximates
market value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Trustees of the Trust, including valuations furnished by a
pricing service retained by the Trust, which may utilize a matrix system for
valuations. The procedures of the pricing service and its valuations are
reviewed by the officers of the Trust under the general supervision of the
Trustees.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Fund. Full details as to
each of such services and copies of the various plans described below can be
obtained from the Trust, the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders also will receive separate confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
ordinary income dividends and long-term 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 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
28
<PAGE>
made through a service known as the Fund's Automatic Investment Plan whereby
the Fund is authorized through pre-authorized checks or automated clearing
house debits of $50 or more to charge the regular bank account of the
shareholder on a regular basis to provide systematic additions to the
Investment Account of such shareholder. Alternatively, investors who maintain
CMA (R) or CBA (R) accounts may arrange to have periodic investments made in
the Fund, in their CMA (R) or CBA (R) accounts or in certain related accounts
in amounts of $100 or more through the CMA (R) or CBA (R) Automated Investment
Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
automatically reinvested in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of
business on the monthly payment date for such dividends and distributions.
Shareholders may elect in writing to receive either their income dividends or
capital gains distributions, or both, in cash, in which event payment will be
mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify Merrill Lynch in writing if their
account is maintained with Merrill Lynch or notify the Transfer Agent in
writing or by telephone (1-800-MER-FUND) if their account is maintained with
the Transfer Agent 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. The Fund is not responsible for any
failure of delivery to the shareholder's address of record and no interest will
accrue on amounts represented by uncashed distribution or redemption checks.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make systematic withdrawals from an Investment
Account on either a monthly or quarterly basis as provided below. Quarterly
withdrawals are available for shareholders who have acquired 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 shares having a
value of $10,000 or more.
At the time of each withdrawal payment, sufficient 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 the dollar amount and
class of shares to be redeemed. Redemptions will be made at net asset value as
determined 15 minutes after the close of business on the NYSE (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 NYSE is not open for
business on such date, the 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 shares in the Investment
Account are reinvested automatically in Fund shares. A shareholder's Systematic
Withdrawal Plan may be terminated at any time, without charge or penalty, by
the shareholder, the Trust, the Transfer Agent or the Distributor.
With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the value
of shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the
29
<PAGE>
same order as Class B or Class C shares are otherwise redeemed. See "Purchase
of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Contingent Deferred Sales Charges--Class B Shares" and "--Contingent Deferred
Sales Charges--Class C Shares." Where the systematic withdrawal plan is
applied to Class B shares, upon conversion of the last Class B shares in an
account to Class D shares, the systematic withdrawal plan will automatically
be applied thereafter to Class D shares. See "Purchase of Shares--Deferred
Sales Charge Alternatives--Class B and Class C Shares--Conversion of Class B
Shares to Class D Shares" in the Prospectus; if an investor wishes to change
the amount being withdrawn in a systematic withdrawal plan the investor should
contact his or her Financial Consultant.
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 shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Trust will not knowingly accept purchase
orders for shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
Alternatively, a 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) or CBA (R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to the
shareholder's account three business days after the date the shares are
redeemed. All redemptions are made at net asset value. A shareholder may elect
to have his or her shares redeemed on the first, second, third or fourth
Monday of each month, in the case of monthly redemptions, or of every other
month, in the case of bimonthly redemptions. For quarterly, semiannual or
annual redemptions, the shareholder may select the month in which the shares
are to be redeemed and may designate whether the redemption is to be made on
the first, second, third or fourth Monday of the month. If the Monday selected
is not a business day, the redemption will be processed at net asset value on
the next business day. The Systematic Redemption Program is not available if
Fund shares are being purchased within the account pursuant to the Automatic
Investment Program. For more information on the CMA (R) or CBA (R) Systematic
Redemption Program, eligible shareholders should contact their Financial
Consultant.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. 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 or her
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, but does not hold Class A shares of the second fund in
his or her 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
30
<PAGE>
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 as follows: Class A shares may be exchanged for shares of Merrill Lynch
Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund (available
only for exchanges within certain retirement plans), Merrill Lynch U.S.A.
Government Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B, Class
C and Class D shares may be exchanged for shares of Merrill Lynch Government
Fund, Merrill Lynch Institutional Fund, Merrill Lynch Institutional Tax-Exempt
Fund and Merrill Lynch Treasury Fund. 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 at least 15
days. It is contemplated that the exchange privilege may be applicable to other
new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other MLAM-advised mutual
funds ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A or Class D shares acquired through dividend reinvestment
shall be deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was
paid. Based on this formula, Class A and Class D shares generally may be
exchanged into the Class A or Class D shares of the other funds or into shares
of certain money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or 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 CDSC 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
31
<PAGE>
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 Special
Value Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Manager or its affiliates, but the period of
time that Class B or Class C shares are held in amoney 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 that were
acquired as a result of an exchange for Class B or Class C shares of the 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 newly acquired 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 that the shareholder continues to hold for an
additional two and a half years, any subsequent redemption would not incur a
CDSC.
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, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other MLAM-advised funds 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 Code. As
long as 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.
32
<PAGE>
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 that are attributable to
interest on tax-exempt obligations and designated by the Trust as exempt-
interest dividends in a written notice mailed to the Fund's shareholders within
60 days after the close of the Fund's taxable year. For this purpose, the Fund
will allocate interest from tax-exempt obligations (as well as ordinary income,
capital gains, including new categories of capital gains, and tax preference
items discussed below) among the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with the
Commission rule 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 that constitutes exempt-
interest dividends and the portion that 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 personal income tax purposes based on a method similar
to that described above for Federal income tax purposes.
33
<PAGE>
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 New
York City. 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 income tax purposes and New York State
and New York City personal 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 personal income
tax purposes, are treated as capital gains which are taxed at ordinary income
tax rates. Recent legislation creates additional categories of capital gains
taxable at different rates. Generally not later than 60 days after the close of
its taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any exempt-interest dividends, ordinary income
dividends or capital gain dividends, as well as the amount of capital gain
dividends in the different categories of capital gain referred to above.
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 disallowed to the extent of any exempt-interest dividends received by
the shareholder. In addition, any such loss that is not disallowed under the
rule stated above will be treated as long-term capital loss to the extent of
any capital gain dividends received by the shareholder. If the Fund pays a
dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on certain "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 certain 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
34
<PAGE>
dividends declared during the year which constitute an item of tax preference
for alternative minimum tax purposes. The Code further provides that
corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay alternative minimum tax on exempt-
interest dividends paid by the Fund.
The Fund may invest in high yield securities, as described in the Prospectus.
Furthermore, the Fund may also invest in instruments the return on which
includes non-traditional features such as indexed principal or interest
payments ("non-traditional instruments"). These instruments may be subject to
special tax rules under which the Fund may be required to accrue and distribute
income before amounts due under the obligations are paid. In addition, it is
possible that all or a portion of the interest payments on such high yield
securities and/or non-traditional instruments could be recharacterized as
taxable ordinary income.
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 the shareholder would have owed upon purchase of the
new shares in the absence of the exchange privilege. Instead, such sales charge
will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Ordinary income dividends paid 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.
35
<PAGE>
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 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.
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
36
<PAGE>
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.
37
<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, 1997............... 4.35 % $1,043.50 4.14 % $1,041.40
Five Years Ended Septem-
ber 30, 1997........... 5.02 % $1,277.60 5.35 % $1,297.50
Ten Years Ended Septem-
ber 30, 1997........... -- -- 7.59 % $2,077.80
Inception (October 25,
1988) to September 30,
1997................... 6.81 % $1,800.50 -- --
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended September 30,
1997.................... 8.69 % $1,086.90 8.14 % $1,081.40
1996.................... 6.19 % $1,061.90 5.66 % $1,056.60
1995.................... 7.37 % $1,073.70 6.82 % $1,068.20
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.................... 13.61 % $1,136.10 13.03 % $1,130.30
1990.................... 4.42 % $1,044.20 4.00 % $1,040.00
1989.................... -- -- 8.16 % $1,081.60
1988.................... -- -- 13.35 % $1,133.50
1987.................... -- -- (2.50)% $ 975.00
Inception (November 1,
1985) to September 30,
1986................... -- -- 17.65 % $1,176.50
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,
1997................... -- -- 138.34 % $2,383.40
Inception (October 25,
1988) to September 30,
1997................... 80.05 % $1,800.50 -- --
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended September
30, 1997............... 4.40 % -- 4.07 % --
<CAPTION>
TAX-EQUIVALENT YIELD*
<S> <C> <C> <C> <C>
30 days ended September
30, 1997............... 6.11 % -- 5.65 % --
</TABLE>
- --------
* Based upon a Federal income tax rate of 28%.
38
<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>
One Year Ended September
30, 1997............... 7.13% $1,071.30 4.34% $1,043.40
Inception (October 21,
1994)
to September 30, 1997.. 7.22% $1,227.70 6.25% $1,195.40
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended September 30,
1997.................... 8.13% $1,081.30 8.68% $1,086.80
1996.................... 5.55% $1,055.50 6.09% $1,060.90
Inception (October 21,
1994)
to September 30, 1995.. 7.57% $1,075.70 7.99% $1,079.90
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994)
to September 30, 1997.. 22.77% $1,227.70 19.54% $1,195.40
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended September
30, 1997............... 3.97% -- 4.30% --
<CAPTION>
TAX-EQUIVALENT YIELD*
<S> <C> <C> <C> <C>
30 days ended September
30, 1997............... 5.51% -- 5.97% --
</TABLE>
- --------
* 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
39
<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 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 may classify or reclassify the shares of any Series
into additional or other classes of shares 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, as appropriate, being borne solely by such class.
Each issued and outstanding share of a Series is entitled to one vote and to
participate equally in dividends and distributions with respect to that Series
and, upon liquidation or dissolution of the Series, in the net assets of such
Series remaining after satisfaction of outstanding liabilities except that, as
noted above, expenses relating to distribution and/or account maintenance of
the Class B, Class C and Class D shares are borne solely by the respective
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
will be 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, other than amendments necessary to conform the
Declaration to certain laws or regulations, to change the name of the Trust, or
to make certain non-material changes, without the affirmative vote of a
majority of the outstanding shares of the Trust, or of the affected Series or
class, as applicable.
40
<PAGE>
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of the Fund for $100,000. Such shares were acquired for investment and
can only be disposed of by redemption. 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.
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, 1997 is set forth
below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Net Assets.................... $22,300,544 $279,753,850 $5,034,327 $139,510,796
=========== ============ ========== ============
Number of Shares Outstanding.. 1,945,698 24,405,156 439,094 12,178,109
=========== ============ ========== ============
Net Asset Value Per Share (net
assets divided by number of
shares outstanding).......... $ 11.46 $ 11.46 $ 11.47 $ 11.46
Sales Charge (for Class A and
Class D shares: 4.00% of
offering price; 4.17% of net
asset value per share)*...... .48 ** ** .48
----------- ------------ ---------- ------------
Offering Price................ $ 11.94 $ 11.46 $ 11.47 $ 11.94
=========== ============ ========== ============
</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 and "Redemption of Shares--Deferred Sales Charges--Class B and
Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Trust. The selection of
independent auditors is subject to approval by the independent Trustees 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.
41
<PAGE>
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 LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on September 30 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements
audited by independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive Federal income tax information
regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the 1940 Act, 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 December 1, 1997.
42
<PAGE>
APPENDIX I
ECONOMIC CONDITIONS IN NEW YORK
The information set forth below is derived from the official statements
prepared in connection with the issuance of New York Municipal Bonds and other
sources that are generally available to investors. The following information is
provided as general information intended to give a recent historical
description and is not intended to indicate future or continuing trends in the
financial or other conditions of New York City (the "City") or New York State
(the "State" or "New York"). The Trust has not independently verified this
information.
The State, some of its agencies, instrumentalities and public authorities and
certain of its municipalities have sometimes faced serious financial
difficulties of the type 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 the City has
a significant effect on the fiscal health of the State. After noticeable
improvements in the City's economy during the calendar year 1994, economic
growth slowed in calendar year 1995. It improved thereafter commencing in
calendar year 1996, reflecting improved securities industry earnings and
employment in other sectors. The City's current four-year financial plan
assumes that moderate economic growth will exist through calendar year 2001
with moderate job growth and wage increases.
For each of the 1981 through 1997 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"). The City has been required to close substantial gaps
between forecast revenues and forecast expenditures in recent fiscal years in
order to maintain balanced operating results. There can be no assurance that
the City will continue to maintain balanced operating results as required by
State law without additional reductions in City services or entitlement
programs or tax or other revenue increases that 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 1998 through 2001 fiscal years (the "1998-2001 Financial Plan" or "City
Financial Plan"). The City's projections set forth in the City Financial Plan
are based on various assumptions and contingencies that are uncertain and 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.
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 1998 through 2001 contemplates the
issuance of $4.0 billion of general obligation bonds and $7.3 billion of bonds
to be issued by the New York City Transitional Finance Authority (the
"Transitional Finance Authority") to finance City capital projects. In 1997,
the State enacted the New York City Transitional Finance Authority Act (the
"Finance Authority Act"), which created the Transitional Finance Authority, to
assist the City in keeping the City's indebtedness within the forecast level of
the constitutional restrictions on the amount of
43
<PAGE>
debt the City is authorized to incur. The Transitional Finance Authority is
authorized to issue up to $7.5 billion in long term debt. In a challenge to the
constitutionality of the Finance Authority Act, the state trial court, by
summary judgement, recently held the Finance Authority Act to be
constitutional. The decision has been appealed to the New York Court of
Appeals. 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, New York City Municipal Water Finance
Authority (the "Water Authority") bonds and Transitional Finance Authority
bonds 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 or the Water Authority or the Transitional
Finance Authority were unable to sell its bonds, the City would be prevented
from meeting its planned operating and capital expenditures.
1998-2001 Financial Plan. On November 25, 1997, the City submitted to the New
York State Financial Control Board (the "Control Board") the Financial Plan for
the 1998 through 2001 fiscal years, which relates to the City, the Board of
Education ("BOE") and the City University of New York ("CUNY"). The Financial
Plan is a modification to the financial plan submitted to the Control Board on
June 10, 1997 (the "June Financial Plan").
The June Financial Plan identified actions to close a previously projected
budget gap for the 1998 fiscal year. The proposed actions in the June Financial
Plan for the 1998 fiscal year included (i) agency actions; (ii) the proposed
sale of various assets; and (iii) additional State aid, including a proposal
that the State accelerate a revenue sharing payment to the City from March
1999. The June Financial Plan also included a proposed discretionary transfer
in the 1998 fiscal year of debt service due in the 1999 fiscal year for budget
stabilization purposes.
The 1998-2001 Financial Plan published on November 25, 1997 reflects actual
receipts and expenditures and changes in forecast revenues and expenditures
since the June Financial Plan. The 1998-2001 Financial Plan projects revenues
and expenditures for the 1998 fiscal year balanced in accordance with GAAP, and
projects gaps of $1.2 billion, $2.7 billion and $2.6 billion for the 1999, 2000
and 2001 fiscal years respectively. The City has outlined a gap-closing program
for these years that assumes additional agency actions, savings from
restructuring City government and privatization initiatives, additional revenue
initiatives and asset sales, additional State aid, additional entitlement cost
containment initiatives and the availability of funds from the General Reserve.
The June Financial Plan includes a proposed tax reduction program totaling
$272 million, $435 million, $465 million and $481 million in the 1998 through
2001 fiscal years, respectively. The June Financial Plan assumes that portions
of these reductions will be offset by State aid.
Changes since the June Financial Plan include (i) an increase in projected
tax revenues; (ii) an increase in sales tax revenues, resulting from the State
adopting a smaller sales tax reduction than previously assumed; (iii) a
reduction in assumed State aid reflecting the State adopted budget; (iv) a
reduction in projected debt service expenditures and reduced pension costs; (v)
an increase in expenditures of BOE in the 1998 fiscal year; and (vi) an
increase in expenditures in each of the 1998 through 2001 fiscal years,
reflecting additional agency spending and costs for the City's proposed drug
initiative. The 1998-2001 Financial Plan also includes a proposed discretionary
transfer in the 1998 fiscal year of additional debt service due in the 1999
fiscal year
44
<PAGE>
for budget stabilization purposes. Subsequently, the City modified its expense
budget for the 1998 fiscal year to reflect the changes made in the 1998-2001
Financial Plan and spending not included in the 1998-2001 Financial Plan,
primarily for the City's proposed drug initiative. The increased spending was
offset by reducing the proposed discretionary transfer in the 1998 fiscal year
of debt service due in the 1999 fiscal year.
The City's projections set forth in the City Financial Plan are based on
various assumptions and contingencies that are uncertain and may not
materialize. 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, the ability to
implement proposed reductions in City personnel and other cost reduction
initiatives, collection of projected rent payments for the City's airports, the
ability of the City's hospital entities to take actions to offset potential
budget shortfalls, the ability to complete revenue generating transactions,
provision of State and Federal aid and mandate relief, the impact on City
revenues and expenditures of Federal and State welfare reform and any future
legislation affecting Medicare or other entitlements and approval by the
Governor and the State Legislature of the extension of certain personal income
tax surcharges that are scheduled to expire in 1998 and 1999.
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 that 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 identified
savings are subject to negotiation with the City's municipal unions. Various
other actions proposed for the 1998 through 2001 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
1997-1998 fiscal year or subsequent fiscal years, such developments could
result in reductions in anticipated State aid to the City. The State did not
adopt its budget for the 1997-1998 fiscal year until August 4, 1997, more than
four months after April 1, 1997, the beginning of the fiscal year. In addition,
there can be no assurance that State budgets in future fiscal years will be
adopted by the April 1 statutory deadline and that there will not be adverse
effects on the City's cash flow and additional City expenditures as a result of
such reductions or delays.
The City's financial plans have been the subject of extensive public comment
and criticism. On September 18, 1997, the City Comptroller issued a report
commenting on developments with respect to the 1998 fiscal year. The report
noted that the City's adopted budget, which is reflected in the June Financial
Plan, had assumed additional State resources of $612 million in the 1998 fiscal
year, and that the approved State budget provided resources of only $216
million for gap-closing purposes. The report further noted that, while the City
will receive $322 million more in education aid in the 1998 fiscal year than
assumed in the City's adopted budget, it is unlikely that the funding will be
entirely available for gap-closing purposes. In addition, the report noted that
the City's financial statements currently contain approximately $643 million in
uncollected State education aid receivables from prior years as a result of the
failure of the State to appropriate funds to pay these claims, and that the
staff of the Board of Education ("BOE") has indicated that an additional $302
45
<PAGE>
million in prior year claims is available for accrual. The report stated that
the City Comptroller maintains the position that no further accrual of prior
year aid will take place, including $75 million in aid assumed in the City's
adopted budget for the 1998 fiscal year, unless the State makes significant
progress to retire the outstanding prior year receivables.
On October 28, 1997, the City Comptroller issued a subsequent report
commenting on recent developments. With respect to the 1997 fiscal year, the
report noted that the City ended the 1997 fiscal year with an operating surplus
of $1.367 billion, before certain expenditures and discretionary transfers, of
which $1.362 billion was used for expenditures due in the 1998 fiscal year.
With respect to tax revenues for the 1998 fiscal year, the report noted that
total tax revenues in the first quarter of the 1998 fiscal year were $244.3
million above projections in the June Financial Plan, excluding audit
collections which were $31.2 million less than projected. The report stated
that the increased tax revenues included $110.3 million of greater than
projected general property tax receipts, which resulted, in part, from a
prepayment discount program, and increased revenues from the personal income,
banking corporation, general corporation and unincorporated business taxes. The
report noted that Wall Street profits exceeded expectations in the first half
of the 1997 calendar year. However, the report noted that the stock market in
the last two weeks of October declined as a result of currency turmoil in
Southeast Asia. The report noted that, while tax revenues in the 1998 fiscal
year should not be significantly affected by the recent stock market activity,
since there is a lag between activity on Wall Street and City tax revenues, if
the stock market declines, tax revenue forecasts for subsequent years will have
to be revised downward.
On July 2, 1997, the staff of the Office of the State Deputy Comptroller of
New York (the "OSDC") issued a report on the June Financial Plan. For the 1998
fiscal year, the report projected a potential surplus of $190 million. The
report also identified risks of $518 million, $1.1 billion, $1.3 billion and
$1.4 billion for the 1998 through 2001 fiscal years, respectively. On July 15,
1997, the staff of the Control Board issued a report commenting on the June
Financial Plan. The report stated that, while the City should end the 1998
fiscal year with its budget in balance, the June Financial Plan still contains
large gaps beginning in the 1999 fiscal year, reflecting revenues which are not
projected to grow during the June Financial Plan period and expenditures which
are projected to grow at about the rate of inflation. The principal risks of
revenues and cost savings to the City which may not materialize, identified in
the report, included (i) potential tax revenue shortfalls based on historical
average trends; (ii) BOE's structural gap, uncertain State funding of BOE and
implementation by BOE of various unspecified actions; (iii) the proposed sale
of certain assets in the 1998 fiscal year which could be delayed; (iv) assumed
additional State actions; (v) revenues from the extension of the personal
income tax surcharge beyond December 31, 1998, which requires State
legislation; and (vi) the receipt of revenues from the Port Authority in the
1999 through 2001 fiscal years, respectively, which is the subject of
arbitration. Taking into account risks identified in the report and the gaps
projected in the June Financial Plan, the report projected a gap of $485
million for the 1998 fiscal year, which could be offset by available reserves,
and gaps of $2.7 billion, $4.1 billion and $4.0 billion for the 1999 through
2001 fiscal years, respectively. The report also noted that (i) if the
securities industry or economy slows down to a greater extent than projected,
the City could face sudden and unpredictable changes to its forecast; (ii) the
City's entitlement reduction assumptions require a decline of historic
proportions in the number of eligible welfare recipients; (iii) the City has
not yet shown how the City's projected debt service, which would consume 20% of
tax revenues by the 1999 fiscal year, can be accommodated on a recurring basis;
(iv) the City is deferring recommended capital maintenance; and (v) continuing
growth in enrollment at BOE has helped create projected gaps of over $100
million annually at BOE.~
46
<PAGE>
On October 31, 1996 the City's Independent Budget Office (the "IBO")
released a report assessing the costs that could be incurred by the City in
response to the Personal Responsibility and Work Opportunity Reconciliation
Act of 1996 (the "1996 Welfare Act"). The IBO report noted that if the
requirement that all recipients work after two years of receiving benefits is
enforced, these additional costs could be substantial starting in 1999,
reflecting costs for worker training and supervision of new workers and
increased child care costs. The report further notes that if economic
performance weakened and resulted in an increased number of public assistance
cases, potential costs to the City could substantially increase. The report
noted that the new welfare law's most significant fiscal impact is likely to
occur in the years 2002 and beyond, reflecting the full impact of the lifetime
limit on welfare participation, which only will begin to be felt in 2002. In
addition, the report noted that, given the State constitutional requirement to
care for the needy, the 1996 Welfare Act might well prompt a migration of
benefit-seekers into the City. The report concluded that the impact of the
1996 Welfare Act on the City will ultimately depend on decisions of State and
City officials, including the allocation of block grant funds between the
State and New York local governments and the divisions between the State and
local governments of welfare costs not funded by the Federal Government, the
performance of the local economy and the behavior of thousands of individuals
in response to the new system. On August 25, 1997, the IBO issued a report
relating to recent developments regarding welfare reform. The report noted
that Federal legislation adopted in August 1997 modified certain aspects of
the 1996 Welfare Act, by reducing SSI eligibility restrictions for certain
legal aliens residing in the country as of August 22, 1996, resulting in the
continuation of Federal benefits by providing funding to the states to move
welfare recipients from public assistance and into jobs and by providing
continued Medicaid coverage for those children who lose SSI due to stricter
eligibility criteria. In addition, the report noted that the State had enacted
the Welfare Reform Act of 1997 which, among other things, requires the City to
achieve work quotas and other work requirements and requires all able-bodied
recipients to work after receiving assistance for two years. The report noted
that this provision could require the City to spend substantial funds over the
next several years for workfare and day care in addition to the funding
reflected in the June Financial Plan. The report also noted that the State
Welfare Reform Act of 1997 established a Food Assistance Program designed to
replace Federal food stamp benefits for certain classes of legal aliens denied
eligibility for such benefits by the 1996 Welfare Act. The report noted that
if the City elects to participate in the Food Assistance Program, it will be
responsible for 50% of the costs for the elderly and disabled.
General Obligation Bond Ratings. As of December 11, 1997, Moody's Investors
Service, Inc. ("Moody's") rated the~ City's outstanding general obligation
bonds "Baa 1," Standard & Poor's a Division of The McGraw-Hill Companies, Inc.
("Standard & Poor's") rated such bonds BBB+ and Fitch IBCA, 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+.
On July 17, 1997, Moody's changed its outlook on City bonds to positive from
stable. 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, 1997, the City and the
Municipal Assistance Corporation for the City of New York had respectively
approximately $26.2 and $3.7 billion of outstanding net long-term debt. As of
October 8, 1997, the New York City Municipal Water Finance Authority (the
47
<PAGE>
"Water Authority") had approximately $8.1 billion of aggregate principal amount
of outstanding bonds, inclusive of subordinate second resolution bonds, and
$200 million aggregate principal amount of outstanding commercial paper notes.
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 has taken the position that increased regulatory, enforcement and
other efforts to protect its water supply, will prevent the need for
filtration. On May 6, 1997, the U.S. Environmental Protection Agency granted
the City a filtration avoidance waiver through April 15, 2002 in response to
the City's adoption of certain watershed regulations, which became effective
May 1, 1997. The estimated incremental cost to the City of implementing this
Watershed Memorandum of Agreement, beyond investments in the watershed which
are planned independently, is approximately $400 million. The City has
estimated that if filtration of the upstate water supply system is ultimately
required, the construction expenditures 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, 1997, the City estimated its
potential future liability on account of all outstanding claims to be
approximately $3.5 billion.
NEW YORK STATE
Current Economic Outlook. The national economy has resumed a more robust rate
of growth after a "soft landing" in 1995, with approximately 14 million jobs
added since early 1992. Although the State has added approximately 300,000 jobs
since late 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 forecast of the State's economy shows moderate expansion during the first
half of calendar 1997 with the trend continuing through the year. On an average
annual basis, employment growth in the State, although less than that for the
nation, is expected to be up substantially from the 1996 rate. Personal income
is expected to record moderate gains in 1997. The State's overall employment
growth is projected to be 1.4 percent in 1997 and 1.0 percent in 1998 while
personal income growth is projected to be 6.1 percent in 1997 and 4.5 percent
in 1998.
The 1997-1998 Financial Plan. The State's current fiscal year commenced on
April 1, 1997, and ends on March 31, 1998. The State's budget for the 1997-1998
fiscal year was adopted by the Legislature on August 4, 1997, more than four
months after the start of the fiscal year. Prior to adoption of the budget, the
Legislature enacted necessary appropriations for state-supported debt service.
The State Financial Plan for the 1997-1998 fiscal year was formulated on August
11, 1997 and is based on the State's budget as enacted by the Legislature, as
well as actual results for the first half of the current fiscal year.
48
<PAGE>
The 1997-1998 Financial Plan projects General Fund receipts of $35.09
billion, an increase of approximately 6 percent from the previous fiscal year.
General Fund disbursements are projected at $34.60 billion, an increase of
approximately 5 percent from the previous fiscal year. Tax receipts are
projected to grow by approximately 5 percent in fiscal year 1997-1998. The
1997-1998 Financial Plan projects budget balance on a cash basis. The State
closed a previously projected budget gap of approximately $2.3 billion for the
1997-1998 fiscal year. Gap-closing actions include cost containment in State
Medicaid, the use of the $1.4 billion 1996-1997 fiscal year budget surplus to
finance current year spending, control on State agency spending and other
actions. Total non-recurring resources included in the 1997-1998 Financial Plan
are projected to be 0.7 percent of total General Fund receipts. There can be no
assurance that the cost containment and spending reduction programs can be
implemented as proposed.
On September 11, 1997, the State Comptroller released a report entitled "The
1997-98 Budget Fiscal Review and Analysis" in which he identified several risks
to the State Financial Plan and estimated that the State faces a potential
imbalance in receipts and disbursements of approximately $1.5 billion for the
State's 1998-1999 fiscal year and approximately $3.4 billion for the State's
1999-2000 fiscal year. In addition, the Comptroller identified risks in future
years from an economic slowdown and from spending and revenue actions enacted
as a part of the 1997-1998 budget that will add pressure to future budget
balance. The Governor is required to submit a balanced budget each year to the
State Legislature.
General Fund payments for Medicaid are projected to be $5.42 billion,
virtually unchanged from the level of $5.38 billion in 1996-1997. This slow
growth is due primarily to continuation of cost containment measures enacted in
1995-1996 and 1996-1997, new reforms included in the 1997-1998 adopted budget
and forecasts for slower underlying growth. Other social service spending is
forecast to increase by only $115 million to $3.15 billion in 1997-1998. This
slow growth stems from continued State efforts to reduce welfare fraud,
declining caseloads and changes produced by Federal welfare legislation enacted
in 1996.
The 1997-1998 adopted budget includes multi-year tax reductions, including a
State funded property and local income tax reduction program, estate tax
relief, utility gross receipts tax reductions, permanent reductions in the
State sales tax on clothing and elimination of assessments on medical
providers. The various elements of the State and local tax and assessment
reductions have little or no impact on the 1997-1998 Financial Plan, and do not
begin to materially affect the outyear projections until the State's 1999-2000
fiscal year.
The 1997-1998 Financial Plan projects a budget imbalance of up to $1.68
billion for the 1998-1999 fiscal year. The expected gap is smaller than the
three previous budget gaps closed by the State. The Governor is required to
submit a balanced budget to the State Legislature and has indicated that he
will close any potential imbalance primarily through General Fund expenditure
reductions and without increases in taxes or deferrals of scheduled tax
reductions. 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.
Certain actions taken in the State's 1997-1998 fiscal year, such as Medicaid
and welfare reforms, are expected to provide recurring savings in future fiscal
years. Continued controls on State agency spending will also provide recurring
savings. The availability of $530 million in reserves created as a part of the
1997-1998 adopted budget and included in the Financial Plan is expected to
benefit the 1998-1999 fiscal year. Sustained growth in the State's economy and
continued declines in welfare caseload and health care costs would also
49
<PAGE>
produce additional savings in the 1998-1999 Financial Plan. Finally, various
Federal actions, including the potential beneficial effect on State tax
receipts from changes to the Federal tax treatment of capital gains, could
potentially provide significant benefits to the State over the next several
years.
Certain actions taken in the 1997-1998 adopted budget add pressure to future
budget balance in New York State. For example, the fiscal effects of tax
reductions adopted in the 1997-1998 budget are projected to grow more
substantially beyond the 1998-1999 fiscal year with incremental costs averaging
in excess of $1.3 billion annually over the last three years of the tax
reduction program. These incremental costs reflect the phase-in of State-funded
school property tax and local income tax relief, the phase-out of the
assessments on medical providers and reductions in estate and gift levies,
utility gross receipts taxes and the State sales tax on clothing. The full
annual cost of the enacted tax reduction package is estimated at approximately
$4.8 billion when fully effective in State fiscal year 2001-2002. In addition,
the 1997-1998 budget included multi-year commitments for school aid and pre-
kindergarten early learning programs which could add as much as $1.4 billion in
costs when fully annualized in fiscal year 2001-2002. These spending
commitments are subject to annual appropriation.
On August 11, 1997 President Clinton exercised his line item veto powers to
cancel a provision in the Federal Balanced Budget Act of 1997 that would have
deemed New York State's health care provider taxes to be approved by the
Federal government. New York and several other states have used hospital rate
assessments and other provider tax mechanisms to finance various Medicaid and
health insurance programs since the early 1980s. The State's process of
taxation and redistribution of health care dollars was sanctioned by federal
legislation in 1987 and 1991. However, the Federal Health Care Financing
Administration (HCFA) regulations governing the use of provider taxes require
the State to seek waivers from HCFA that would grant explicit approval of the
provider taxing system now in place. The State filed the majority of these
waivers with HCFA in 1995 but has yet to receive final approval.
The Balanced Budget Act of 1997 provision passed by Congress was intended to
rectify the uncertainty created by continued inaction on the State's waiver
requests. A Federal disallowance of the State's provider tax system could
jeopardize up to $2.6 billion in Medicaid reimbursement received through
December 31, 1998. The President's veto message valued any potential
disallowance at $200 million. The 1997-1998 Financial Plan does not anticipate
any provider tax disallowance.
On October 9, 1997 the President offered a corrective amendment to the HCFA
regulations governing such taxes. The Governor has stated that this proposal
does not appear to address all of the State's concerns and negotiations are
ongoing between the State and HCFA. In addition, the City of New York and other
affected parties in the health care industry have filed a lawsuit challenging
the constitutionality of the President's line item veto.
The 1997-1998 Financial Plan is based upon forecasts of national and State
economic activity. Economic forecasts have frequently failed to predict
accurately the timing and magnitude of changes in the national and State
economies. Many uncertainties exist in forecasts of both the national and State
economies, including consumer attitudes toward spending, federal financial and
monetary policies, the availability of credit and the condition of the world
economy, any of 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 1997-1998 and subsequent fiscal years, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
50
<PAGE>
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 from a lower recurring receipts base and the spending required to
maintain State programs at mandated 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.
The 1996-1997 Fiscal Year. The State ended its 1996-1997 fiscal year on
March 31, 1997 in balance on a cash basis, with a 1996-1997 General Fund cash
surplus as reported by the State Division of the Budget of approximately $1.4
billion that has been used to finance the 1997-1998 Financial Plan. The
surplus results primarily from higher-than-expected revenues and lower-than-
expected spending for social service programs. The General Fund closing
balance was $433 million. General Fund receipts and transfers from other funds
for the 1996-1997 fiscal year totaled $33.04 billion, an increase of 0.7
percent from the 1995-1996 fiscal year (excluding deposits into the tax refund
reserve account). General Fund disbursements and transfers to other
funds totaled $32.90 billion for the 1996-1997 fiscal year, an increase of 0.7
percent from the 1995-1996 fiscal year.
Prior Fiscal Years. The State ended its 1995-1996 fiscal year in balance, with
a reported 1995-1996 General Fund cash surplus of $445 million. General Fund
receipts and transfers from other funds totaled $32.81 billion, a decrease of
1.1 percent from the 1994-1995 levels. General Fund disbursements and transfers
to other funds totaled $32.68 billion for the 1995-1996 fiscal year, a decrease
of 2.2 percent from the 1994-1995 levels. Prior to adoption of the State's 1995-
1996 fiscal year budget, the State had projected a potential budget gap of
approximately $5 billion, which was closed primarily through spending
reductions, cost containment measures, State agency actions and local assistance
reforms.
The State ended its 1994-1995 fiscal year with the General Fund in balance.
General Fund receipts and transfers from other funds totaled $33.16 billion,
an increase of 2.9 percent from the 1993-1994 levels. General Fund
disbursements and transfers to other funds totaled $33.40 billion, an increase
of 4.7 percent from the 1993-1994 levels.
Local Government Assistance Corporation. In 1990, as part of a State fiscal
reform program, legislation was enacted creating the Local Government
Assistance Corporation (the "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 had 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, 1997, the total amount of outstanding general obligation
debt was approximately $5.028 billion, including $293.6 million in Bond
Anticipation Notes. The total amount of moral obligation debt was
approximately $4.069 billion, and $22.499 billion of bonds issued primarily in
connection with lease-purchase and contractual-obligation financing of State
capital programs were outstanding.
51
<PAGE>
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 incurring 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, 1996, there were 17 public authorities that had outstanding debt of $100
million or more, and the aggregate outstanding debt, including refunding bonds,
of all State public authorities was $75.4 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.
State General Obligation Bond Ratings. As of the date of this Statement of
Additional Information, Moody's, Standard & Poor's and Fitch rate the State's
outstanding general obligation bonds "A2," "A" and "A+," respectively. Standard
& Poor's revised its ratings upward from A- to A on August 28, 1997. Ratings
reflect only the respective views of such 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 a withdrawal of
such ratings may have an effect on the market price of the New York Municipal
Bonds in which the 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 in any given fiscal
year. There can be no assurance that an adverse decision in one or more legal
proceedings would not exceed the amount the State reserves for the payment of
judgments or materially impair the State's financial operations. In its audited
financial statements for the fiscal year ended March 31, 1997, the State
reported its estimated liability for awarded and anticipated unfavorable
judgments at $364 million.
Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1997-1998 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 1997-1998 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.
52
<PAGE>
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 categories which Moody's
believes possess the strongest credit attributes within those categories are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
53
<PAGE>
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 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 ability of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1 repayment
ability will often be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structure 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
ability 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, may 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 supporting institutions) have an acceptable ability
for repayment of short-term promissory obligations. The effect 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 may require 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 A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
("STANDARD & POOR'S") MUNICIPAL DEBT RATINGS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers or other
forms of credit enhancement on the obligation.
The issue credit rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
54
<PAGE>
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources it 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 based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I.
Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of obligation;
II.
Nature of and provisions of the obligation; and
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. The obligor's capacity to meet its financial commitment
on the obligation is extremely strong.
AA
Debt rated "AA" differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A
Debt rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still
strong.
BBB
Debt rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment to the obligation.
BB
B Debt rated "BB," "B," "CCC," "CC" and "C" is regarded as having
CCC significant speculative characteristics. "BB" indicates the
CC least degree of speculation and "C" the highest degree of
C speculation. While such bonds will likely have some quality and
protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
D
Debt rated "D" is in payment default. The "D" rating category is
used when payments on an obligation 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 or the taking of a similar
action if payments on an obligation 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.
55
<PAGE>
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 an adequate capacity for timely
payment. They are, however, 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.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUED CREDIT RATINGS
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
--Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1
Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus "+"
designation.
SP-2
Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3
Speculative capacity to pay principal and interest.
56
<PAGE>
DESCRIPTION OF FITCH IBCA, INC. ("FITCH") RATINGS
Fitch credit ratings are an opinion on the ability of an entity or of a
securities issue to meet financial commitments, such as interest-preferred
dividends, or repayment of principal, on a timely basis.
Credit ratings are used by investors as indications of the likelihood of
getting their money back in accordance with the terms on which they invested.
Thus, the use of credit ratings defines their function: "investment-grade"
ratings (international long-term "AAA'--"BBB' categories; short-term "F1'--
"F3') indicate a relatively low probability of default, while those in the
"speculative" or "non-investment grade" categories (international long-term
"BB'--"D'; short-term "B'--"D') either signal a higher probability of default
or that a default has already occurred. Ratings imply no specific prediction of
default probability.
Entities or issues carrying 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 credit and other 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 any payments of any security. The 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 or withdrawn
as a result of changes in, or the unavailability of, information or for other
reasons.
INTERNATIONAL CREDIT RATINGS
Fitch's international credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other corporate
entities and the securities they issue, as well as municipal and other public
finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these long- and short-
term ratings assess its general creditworthiness on a senior basis. When
applied to specific issues and programs, these ratings take into account the
relative preferential position of the holder of the security and reflect the
terms, conditions, and covenants attaching to that security.
ANALYTICAL CONSIDERATIONS
When assigning ratings, Fitch considers the historical and prospective
financial condition, quality of management, and operating performance of the
issuer and of any guarantor, any special features of a specific issue or
guarantee, the issue's relationship to other obligations of the issuer, as well
as developments in the economic and political environment that might affect the
issuer's financial strength and credit quality.
Investment-grade ratings reflect expectations of timeliness of payment.
However, ratings of different classes of obligations of the same issuer may
vary based on expectations of recoveries in the event of a default or
liquidation. Recovery expectations, which are the amounts expected to be
received by investors after a security defaults, are a relatively minor
consideration in investment-grade ratings, but Fitch does use "notching" of
particular issues to reflect their degree of preference in a winding up,
liquidation, or reorganization, as well as other factors. Recoveries do,
however, gain in importance at lower rating levels,
57
<PAGE>
because of the greater likelihood of default, and become the major
consideration at the "DDD' category. Factors that affect recovery expectations
include collateral and seniority relative to other obligations in the capital
structure.
Variable rate demand obligations and other securities which contain a demand
feature will have a dual rating, such as "AAA/F1+'. The first rating denotes
long-term ability to make principal and interest payments. The second rating
denotes ability to meet a demand feature in full and on time.
INTERNATIONAL LONG-TERM CREDIT RATINGS
Investment Grade
AAA Highest credit quality. "AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA' ratings denote a very low expectation of
credit risk. They indicate strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. "BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment grade category.
Speculative Grade
BB Speculative. "BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change overtime; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B Highly speculative. "B' ratings indicate that significant credit risk
is present, but a limit margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is
contingent upon a sustained, favorable business and economic
environment.
CCC CC C
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable
business or economic developments. A "CC' rating indicates that default
of some kind appears probable. "C' ratings signal imminent default.
DDD DD D Default. Securities are not meeting current obligations and are
extremely speculative. "DDD' designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, "DD' indicates expected recovery 50%-90% of
such outstandings, and "D' the lowest recovery potential, i.e. below
50%.
58
<PAGE>
INTERNATIONAL SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2
Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3
Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B
Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D
Default. Denotes actual or imminent payment default.
- --------
Notes:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA' long-term
rating category, to categories below "CCC', or to short-term ratings other
than "F1'.
"NR' indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingWatch: Ratings are placed on RatingWatch to notify investors that
there is a reasonable probability of a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may
be raised, lowered or maintained. RatingWatch is typically resolved over a
relatively short period.
59
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch New York Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch New York Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust as of September 30, 1997, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
September 30, 1997 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, 1997, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
November 7, 1997
60
<PAGE>
Merrill Lynch New York Municipal Bond Fund September 30, 1997
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C>
New York -- 98.6%
AAA Aaa $4,205 Albany County, New York, Airport Authority, Airport Revenue Bonds,
RITR, AMT, Series RI-97-7, 7.42% due 12/15/2023 (g)(h) $4,647
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) 15,995
AAA Aaa 2,000 Buffalo, New York, Municipal Water Finance Authority, Water System
Revenue Bonds, 5% due 7/01/2025 (b) 1,891
AAA Aaa 4,000 Buffalo, New York, Sewer Authority Revenue Bonds, Series F, 6% due
7/01/2013 (b) 4,423
AA+ Aa1 6,000 Hornell, New York, IDA, IDR (Crowley Foods, Inc.), 7.75% due
12/01/2016 6,307
Metropolitan Transportation Authority, New York, Commuter Facilities
Revenue Bonds:
AAA Aaa 5,235 RITR, Series 9, 7.72% due 7/01/2026 (h) 6,001
NR* NR* 3,000 RITR, Series 20, 5% due 7/01/2017 (c)(h) 3,611
AAA Aaa 5,200 Series B, 5.125% due 7/01/2024 (a) 4,998
AAA Aaa 13,325 Metropolitan Transportation Authority, New York, Dedicated Tax Fund,
Series A, 5.25% due 4/01/2026 (c) 13,036
AAA Aaa 2,950 Monroe County, New York, Airport Authority Revenue Bonds (Greater
Rochester International Airport), AMT, 7.25% due 1/01/2009 (c) 3,171
BBB+ Baa 9,225 Monroe County, New York, COP, 8.05% due 1/01/2011 9,895
Municipal Assistance Corporation, New York City, New York, VRDN (e):
A1+ NR* 300 Sub-Series K-1, 4.05% due 7/01/2008 300
A1+ NR* 5,800 Sub-Series K-2, 3.65% due 7/01/2008 5,800
New York City, New York, GO, UT:
BBB+ Baa1 3,295 Refunding, Series A, 6.25% due 8/01/2020 3,474
BBB+ Aaa 2,725 Series B, 7% due 6/01/2001 (d) 3,022
BBB+ Baa1 275 Series B, 7% due 6/01/2016 298
BBB+ Aaa 1,440 Series C, 7.25% due 8/15/2001 (d) 1,598
BBB+ Baa1 3,870 Series C, 7.25% due 8/15/2024 4,210
A1+ Aa2 5,800 New York City, New York, Health and Hospital Corporation, Health
System Revenue Bonds, VRDN, Series A, 4% due 2/15/2026 (e) 5,800
New York City, New York, IDA, Civic Facilities Revenue Bonds:
NR* NR* 2,000 (New York Blood Center Inc. Project), 7.20% due 5/01/2004 (d) 2,304
NR* NR* 6,895 (New York Blood Center Inc. Project), 7.25% due 5/01/2004 (d) 7,962
AAA Aaa 4,690 (USTA National Tennis Center Project), 6.60% due 11/15/2011 (g) 5,288
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch New York Municipal Bond Fund's
portfolio holdings in the Schedule of Investments, we have abbreviated
the names of many of the securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
UT Unlimited Tax
VRDN Variable Rate Demand Notes
61
<PAGE>
Merrill Lynch New York Municipal Bond Fund September 30, 1997
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Issue Value
Ratings Ratings Amount (Note 1a)
<S> <C> <C> <C> <C>
New York (continued)
New York City, New York, IDA, Special Facilities Revenue Bonds, AMT:
BBB- Baa2 2,030 (1990 AMR/American Airlines Inc. Project), 7.75% due 7/01/2019 2,135
BB Ba2 5,300 (Northwest Airlines Inc.), 6% due 6/01/2027 5,413
A A 5,000 RITR, Series RI-5, 7.395% due 1/01/2024 (h) 5,463
New York City, New York, Municipal Water Finance Authority, Water and
Sewer System Revenue Bonds:
A- A2 6,960 RITR, Series 21, 7.12% due 6/15/2029 (h) 7,264
A-1 VMIG1+ 14,600 RITR, Series RI-2, 7.125% due 6/15/2025 (h) 15,932
A- A2 5,000 Refunding, Series A, 5.125% due 6/15/2021 4,759
AAA Aaa 1,000 Series A-1994, 7% due 6/15/2015 (b) 1,096
A1+ VMIG1+ 300 VRDN, Series G, 4% due 6/15/2024 (b)(e) 300
AAA Aaa 3,750 New York City, New York, Trust for Cultural Resources Revenue Bonds
(American Museum of Natural History), Series A, 6.90% due 4/01/2001
(c)(d) 4,146
A1+ VMIG1+ 800 New York City, New York, VRDN, UT, Series B, Sub-Series B-5, 4% due
8/15/2022 (c)(e) 800
New York State Dormitory Authority Revenue Bonds:
AAA Aaa 6,500 (Consolidated City University System), Series A, 5.625% due 7/01/2016
(g) 6,876
AAA Aaa 18,200 (Mental Health Services Facilities), Series B, 5.125% due 8/15/2021 (c) 17,650
AAA Aaa 11,200 (Mental Health Services Facilities), Series B, 5.375% due 2/15/2026 (g) 11,079
AAA Aaa 2,825 (Mental Health Services Facilities), Series C, 5.125% due 2/15/2021 (c) 2,741
BBB+ Baa1 12,000 Refunding (State University Educational Facilities), Series B, 7% due
5/15/2016 12,938
AA Aa 10,150 Refunding (Vassar College), 5% due 7/01/2025 9,709
BBB+ Baa1 6,750 (State University Educational Facilities), 5.50% due 5/15/2026 6,663
AAA Aaa 3,500 (State University Educational Facilities), Series A, 5.50% due
5/15/2019 (g) 3,635
New York State Energy Research and Development Authority, Facilities
Revenue Bonds:
AAA Aaa 7,820 (Consolidated Edison Company Inc.), AMT, Series A, 6.75% due 1/15/2027
(c) 8,363
AAA Aaa 3,200 RITR, Series 19, 8.07% due 8/15/2020 (h) 3,608
AAA Aaa 4,750 New York State Energy Research and Development Authority, Gas
Facilities Revenue Refunding Bonds (Brooklyn Union Gas Company),
Series A, 5.50% due 1/01/2021 (c) 4,764
A- Aa2 4,250 New York State Environmental Facilities Corporation, PCR, State Water
Revolving Fund (New York City Municipal Water Financing Authority
Project), AMT, Series E, 6.875% due 6/15/2014 4,847
AAA Aaa 2,750 New York State Environmental Facilities Corporation, Special Obligation
Revenue Bonds (Riverbank State Park), 7.25% due 4/01/2002 (d) 3,133
New York State Local Government Assistance Corporation:
AAA Aaa 10,000 Refunding, Series E, 5% due 4/01/2021 (c) 9,638
A1+ VMIG1+ 2,400 VRDN, Series B, 3.90% due 4/01/2025 (e) 2,400
New York State Medical Care Facilities Finance Agency Revenue Bonds:
A- Baa1 825 (Mental Health Services), Series B, 7.625% due 8/15/2001 (d) 937
A- Baa1 365 (Mental Health Services), Series B, 7.625% due 8/15/2017 409
AAA Aaa 695 (Mental Health Services), Series C, 7.30% due 8/15/2001 (d) 784
A- Baa1 375 (Mental Health Services), Series C, 7.30% due 2/15/2021 416
A- Baa1 3,665 (Mental Health Services), Series D, 7.40% due 2/15/2002 (d) 4,170
A- Baa1 1,405 (Mental Health Services), Series D, 7.40% due 2/15/2018 1,574
AAA Aaa 6,140 (Saint Francis Hospital Project), Series A, 7.625% due 11/01/2021 (b) 6,489
BBB+ Baa 12,200 (Security Hospital), Series A, 7.40% due 8/15/2021 13,553
New York State Mortgage Agency Revenue Bonds:
NR* Aaa 3,000 RITR, AMT, Series 24, 6.97% due 10/01/2028 (h) 3,049
NR* Aa2 4,900 Series 41-A, 6.45% due 10/01/2014 5,265
</TABLE>
62
<PAGE>
Merrill Lynch New York Municipal Bond Fund September 30, 1997
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Issue Value
Ratings Ratings Amount (Note 1a)
<S> <C> <C> <C> <C>
New York (concluded)
AA- Aa2 17,705 New York State Power Authority, Revenue and General Purpose Bonds,
Series Y, 6.75% due 1/01/2018 19,231
AAA VMIG1+ 600 New York State Thruway Authority, General Revenue Bonds, VRDN, 3.95%
due 1/01/2024 (b)(e) 600
BBB+ Baa1 7,840 New York State Thruway Authority, Service Contract, Local Highway and
Bridge Revenue Refunding Bonds, 5% due 4/01/2017 7,428
New York State Urban Development Corporation Revenue Bonds:
BBB+ Baa1 1,500 (Alfred Technology Resource Inc. Project), 7.875% due 1/01/2000 (d) 1,647
BBB+ Baa1 1,685 Refunding (Clarkson Center Advance Materials), 5.50% due 1/01/2020 1,700
AAA Aaa 8,470 Refunding (Correctional Facilities), Series A, 5.50% due 1/01/2014 (a) 8,869
BBB+ Baa1 9,475 Refunding (State Facilities), 5.70% due 4/01/2020 9,805
BBB+ Baa1 3,500 Refunding (University Facility Grant), 5.50% due 1/01/2019 3,535
BBB+ Aaa 4,000 (State Facilities), 7.50% due 4/01/2001 (d) 4,503
Orange County, New York, GO, UT, Series A:
NR* Aa2 1,365 5.125% due 9/01/2019 1,329
NR* Aa2 2,750 5.125% due 9/01/2020 2,668
NR* Aa2 2,890 5.125% due 9/01/2021 2,795
NR* Aa2 3,355 5.125% due 9/01/2024 3,238
Port Authority of New York and New Jersey, Consolidated Bonds:
AA- A1 8,000 69th Series, 7.125% due 6/01/2025 8,639
AA- A1 9,000 73rd Series, AMT, 6.75% due 4/15/2026 9,662
AA- A1 7,995 76th Series, AMT, 6.50% due 11/01/2026 8,572
AAA Aaa 4,000 Port Authority of New York and New Jersey, RITR, AMT, Series FR-108,
7.135% due 1/15/2017 (g)(h) 4,355
Triborough Bridge and Tunnel Authority, New York, General Purpose
Revenue Bonds:
A+ Aa 4,000 Refunding, Series Y, 6.125% due 1/01/2021 4,472
AAA Aaa 6,000 Refunding, Series Y, 6.125% due 1/01/2021 (f) 6,682
A+ Aa 5,000 Series X, 6.50% due 1/01/2019 5,457
A- A1 13,050 Triborough Bridge and Tunnel Authority, New York, Special Obligation
Refunding Bonds, Series B, 6.875% due 1/01/2015 14,199
NR* A3 2,795 United Nations Development Corporation of New York, Revenue Refunding
Bonds, Series C, 5.50% due 7/01/2017 2,795
AAA Aaa 2,000 Upper Mohawk Valley, New York, Regional Water Finance Authority, Water
Systems Revenue Refunding Bonds, Series A, 5.125% due 10/01/2026 (g) 1,923
---------
<CAPTION>
<S> <C>
Total Investments (Cost -- $414,780) -- 98.6% 440,133
Other Assets Less Liabilities -- 1.4% 6,467
---------
Net Assets -- 100.0% $446,600
=========
(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, 1997.
(f) CAPMAC Insured.
(g) FSA Insured.
(h) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at September 30, 1997.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues have not been audited by Deloitte & Touche LLP.
</TABLE>
See Notes to Financial Statements.
63
<PAGE>
Merrill Lynch New York Municipal Bond Fund September 30, 1997
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of September 30, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $414,779,695) (Note 1a) $440,133,377
Cash 2,295
Receivables:
Interest $7,647,474
Securities sold 502,759
Beneficial interest sold 85,933 8,236,166
------------
Prepaid registration fees and other assets (Note 1e) 96,889
------------
Total assets 448,468,727
------------
Liabilities: Payables:
Beneficial interest redeemed 916,215
Dividends to shareholders (Note 1f) 481,196
Investment adviser (Note 2) 200,187
Distributor (Note 2) 128,212 1,725,810
------------
Accrued expenses and other liabilities 143,400
------------
Total liabilities 1,869,210
------------
Net Assets: Net assets $446,599,517
============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $194,570
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 2,440,515
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 43,909
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 1,217,811
Paid-in capital in excess of par 429,320,746
Accumulated realized capital losses on investments -- net (Note 5) (11,971,716)
Unrealized appreciation on investments -- net 25,353,682
------------
Net assets $446,599,517
============
Net Asset Value: Class A -- Based on net assets of $22,300,544 and 1,945,698 shares
of beneficial interest outstanding $11.46
============
Class B -- Based on net assets of $279,753,850 and 24,405,156 shares
of beneficial interest outstanding $11.46
============
Class C -- Based on net assets of $5,034,327 and 439,094 shares
of beneficial interest outstanding $11.47
============
Class D -- Based on net assets of $139,510,796 and 12,178,109 shares
of beneficial interest outstanding $11.46
============
See Notes to Financial Statements.
</TABLE>
64
<PAGE>
Merrill Lynch New York Municipal Bond Fund September 30, 1997
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (continued)
Statement of Operations
For the Year Ended
September 30, 1997
<S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $29,214,080
(Note 1d): Other 851
------------
Total income 29,214,931
------------
Expenses: Investment advisory fees (Note 2) 2,697,119
Account maintenance and distribution fees -- Class B (Note 2) 1,693,589
Transfer agent fees -- Class B (Note 2) 171,534
Account maintenance fees -- Class D (Note 2) 124,649
Registration fees (Note 1e) 70,089
Accounting services (Note 2) 64,284
Professional fees 52,494
Transfer agent fees -- Class D (Note 2) 50,869
Printing and shareholder reports 48,289
Account maintenance and distribution fees -- Class C (Note 2) 26,560
Trustees' fees and expenses 26,357
Custodian fees 24,999
Pricing fees 10,100
Transfer agent fees -- Class A (Note 2) 9,369
Transfer agent fees -- Class C (Note 2) 2,326
Other 8,219
------------
Total expenses 5,080,846
------------
Investment income -- net 24,134,085
------------
Realized & Realized gain on investments -- net 10,472,445
Unrealized Change in unrealized appreciation on investments -- net 4,297,287
Gain on ------------
Investments -- Net Net Increase in Net Assets Resulting from Operations $38,903,817
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
65
<PAGE>
Merrill Lynch New York Municipal Bond Fund September 30, 1997
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
For the Year Ended
September 30,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $24,134,085 $27,863,197
Realized gain on investments -- net 10,472,445 3,915,290
Change in unrealized appreciation on investments -- net 4,297,287 338,186
-------------- --------------
Net increase in net assets resulting from operations 38,903,817 32,116,673
-------------- --------------
Dividends & Investment income -- net:
Distributions to Class A (1,209,169) (1,204,108)
Shareholders Class B (16,235,504) (23,330,565)
(Note 1f): Class C (207,495) (202,740)
Class D (6,481,917) (3,125,784)
Realized gain on investments -- net:
Class A (8,764) --
Class B (155,517) --
Class C (1,632) --
Class D (46,847) --
-------------- --------------
Net decrease in net assets resulting from dividends and distributions
to shareholders (24,346,845) (27,863,197)
-------------- --------------
Beneficial Interest Net decrease in net assets derived from beneficial interest transactions (91,594,619) (75,010,943)
Transactions -------------- --------------
(Note 4):
Net Assets: Total decrease in net assets (77,037,647) (70,757,467)
Beginning of year 523,637,164 594,394,631
-------------- --------------
End of year $446,599,517 $523,637,164
============== ==============
See Notes to Financial Statements.
</TABLE>
66
<PAGE>
Merrill Lynch New York Municipal Bond Fund September 30, 1997
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (continued)
Financial Highlights
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,
1997 1996 1995 1994 1993
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $11.12 $11.04 $10.88 $12.46 $11.77
Operating --------- --------- --------- --------- ---------
Performance: Investment income -- net .60 .59 .61 .64 .70
Realized and unrealized gain (loss) on
investments -- net .34 .08 .16 (1.25) .80
--------- --------- --------- --------- ---------
Total from investment operations .94 .67 .77 (.61) 1.50
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net (.60) (.59) (.61) (.64) (.70)
Realized gain on investments -- net --** -- -- (.11) (.11)
In excess of realized gain
on investments -- net -- -- -- (.22) --
--------- --------- --------- --------- ---------
Total dividends and distributions (.60) (.59) (.61) (.97) (.81)
--------- --------- --------- --------- ---------
Net asset value, end of year $11.46 $11.12 $11.04 $10.88 $12.46
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 8.69% 6.19% 7.37% (5.17%) 13.24%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses .65% .66% .67% .63% .64%
Net Assets: ========= ========= ========= ========= =========
Investment income -- net 5.30% 5.31% 5.67% 5.52% 5.80%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $22,301 $21,762 $23,304 $28,301 $31,976
Data: ========= ========= ========= ========= =========
Portfolio turnover 97.22% 114.78% 181.21% 107.96% 38.31%
========= ========= ========= ========= =========
* Total investment returns exclude the effects of sales loads.
** Amount is less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
67
<PAGE>
Merrill Lynch New York Municipal Bond Fund September 30, 1997
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
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,
1997 1996 1995 1994 1993
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $11.12 $11.04 $10.88 $12.46 $11.77
Operating --------- --------- --------- --------- ---------
Performance: Investment income -- net .54 .54 .56 .58 .64
Realized and unrealized gain (loss) on
investments -- net .34 .08 .16 (1.25) .80
--------- --------- --------- --------- ---------
Total from investment operations .88 .62 .72 (.67) 1.44
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net (.54) (.54) (.56) (.58) (.64)
Realized gain on investments -- net --** -- -- (.11) (.11)
In excess of realized gain on
investments -- net -- -- -- (.22) --
--------- --------- --------- --------- ---------
Total dividends and distributions (.54) (.54) (.56) (.91) (.75)
--------- --------- --------- --------- ---------
Net asset value, end of year $11.46 $11.12 $11.04 $10.88 $12.46
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 8.14% 5.66% 6.82% (5.66%) 12.67%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses 1.16% 1.16% 1.18% 1.14% 1.14%
Net Assets: ========= ========= ========= ========= =========
Investment income -- net 4.79% 4.80% 5.16% 5.02% 5.32%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $279,754 $403,403 $564,963 $645,341 $733,981
Data: ========= ========= ========= ========= =========
Portfolio turnover 97.22% 114.78% 181.21% 107.96% 38.31%
========= ========= ========= ========= =========
* Total investment returns exclude the effects of sales loads.
** Amount is less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
68
<PAGE>
Merrill Lynch New York Municipal Bond Fund September 30, 1997
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
Class C Class D
For the For the
Period Period
For the Oct. 21, For the Oct. 21,
The following per share data and ratios have been derived Year Ended 1994+ to Year Ended 1994+ to
from information provided in the financial statements. September 30, Sept. 30, September 30, Sept. 30,
1997 1996 1995 1997 1996 1995
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $11.12 $11.04 $10.76 $11.11 $11.03 $10.76
Operating --------- --------- --------- --------- --------- ---------
Performance:
Investment income -- net .53 .52 .51 .58 .58 .56
Realized and unrealized gain on
investments -- net .35 .08 .28 .35 .08 .27
--------- --------- --------- --------- --------- ---------
Total from investment operations .88 .60 .79 .93 .66 .83
--------- --------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net (.53) (.52) (.51) (.58) (.58) (.56)
Realized gain on investments -- net --++ -- -- --++ -- --
--------- --------- --------- --------- --------- ---------
Total dividends and distributions (.53) (.52) (.51) (.58) (.58) (.56)
--------- --------- --------- --------- --------- ---------
Net asset value, end of period $11.47 $11.12 $11.04 $11.46 $11.11 $11.03
========= ========= ========= ========= ========= =========
Total Investment Based on net asset value per share 8.13% 5.55% 7.57%++++ 8.68% 6.09% 7.99%++++
Return:** ========= ========= ========= ========= ========= =========
Ratios to Average Expenses 1.26% 1.27% 1.27%* .75% .76% .76%*
Net Assets: ========= ========= ========= ========= ========= =========
Investment income -- net 4.69% 4.70% 4.91%* 5.20% 5.21% 5.46%*
========= ========= ========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $5,034 $4,175 $3,556 $139,511 $94,297 $2,572
========= ========= ========= ========= ========= =========
Portfolio turnover 97.22% 114.78% 181.21% 97.22% 114.78% 181.21%
========= ========= ========= ========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Amount is less than $.01 per share.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
69
<PAGE>
Merrill Lynch New York Municipal Bond Fund September 30, 1997
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 settlement
prices 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.
[bullet] 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.
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
70
<PAGE>
Merrill Lynch New York Municipal Bond Fund September 30, 1997
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.
Pursuant to 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
Maintenance Distribution
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, and Smith Incorporated ("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, 1997, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on the sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $946 $7,764
Class D $2,411 $20,275
For the year ended September 30, 1997, MLPF&S received contingent
deferred sales charges of $474,062 and $1,035 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, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended September 30, 1997 were $453,725,623 and
$554,248,850, respectively.
Net realized and unrealized gains (losses) as of September 30, 1997
were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $12,368,349 $25,353,682
Financial futures contracts (1,895,904) --
------------ ------------
Total $10,472,445 $25,353,682
============ ============
As of September 30, 1997, net unrealized appreciation for Federal
income tax purposes aggregated $25,340,298, all of which was related
to appreciated securities. The aggregate cost of investments at
September 30, 1997 for Federal income tax purposes was $414,793,079.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest
transactions was $91,594,619 and $75,010,943 for the years ended
September 30, 1997 and September 30, 1996, respectively.
71
<PAGE>
Merrill Lynch New York Municipal Bond Fund September 30, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended September 30, 1997 Shares Amount
Shares sold 723,895 $8,125,178
Shares issued to share-
holders in reinvestment of
dividends and distributions 69,712 784,169
-------------- --------------
Total issued 793,607 8,909,347
Shares redeemed (805,206) (9,082,759)
-------------- --------------
Net decrease (11,599) $(173,412)
============== ==============
Class A Shares for the Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 128,499 $1,441,274
Shares issued to share-
holders in reinvestment
of dividends 67,175 749,799
-------------- --------------
Total issued 195,674 2,191,073
Shares redeemed (349,477) (3,907,947)
-------------- --------------
Net decrease (153,803) $(1,716,874)
============== ==============
Class B Shares for the Year Dollar
Ended September 30, 1997 Shares Amount
Shares sold 2,299,603 $25,854,529
Shares issued to share-
holders in reinvestment of
dividends and distributions 716,880 8,060,157
-------------- --------------
Total issued 3,016,483 33,914,686
Automatic conversion
of shares (5,665,372) (63,552,853)
Shares redeemed (9,222,928) (103,822,066)
-------------- --------------
Net decrease (11,871,817) $(133,460,233)
============== ==============
Class B Shares for the Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 3,354,839 $37,442,180
Shares issued to share-
holders in reinvestment
of dividends 996,711 11,135,115
-------------- --------------
Total issued 4,351,550 48,577,295
Automatic conversion
of shares (9,079,555) (101,502,036)
Shares redeemed (10,168,261) (113,251,056)
-------------- --------------
Net decrease (14,896,266) $(166,175,797)
============== ==============
Class C Shares for the Year Dollar
Ended September 30, 1997 Shares Amount
Shares sold 273,731 $3,075,432
Shares issued to share-
holders in reinvestment of
dividends and distributions 15,508 174,536
-------------- --------------
Total issued 289,239 3,249,968
Shares redeemed (225,581) (2,531,885)
-------------- --------------
Net increase 63,658 $718,083
============== ==============
Class C Shares for the Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 273,667 $3,058,759
Shares issued to shareholders
in reinvestment of dividends 12,253 136,646
-------------- --------------
Total issued 285,920 3,195,405
Shares redeemed (232,545) (2,583,517)
-------------- --------------
Net increase 53,375 $611,888
============== ==============
Class D Shares for the Year Dollar
Ended September 30, 1997 Shares Amount
Shares sold 156,140 $1,754,784
Automatic conversion
of shares 5,668,755 63,552,853
Shares issued to share-
holders in reinvestment of
dividends and distributions 235,665 2,650,220
-------------- --------------
Total issued 6,060,560 67,957,857
Shares redeemed (2,367,253) (26,636,914)
-------------- --------------
Net increase 3,693,307 $41,320,943
============== ==============
Class D Shares for the Year Dollar
Ended September 30, 1996 Shares Amount
Shares sold 225,462 $2,508,549
Automatic conversion
of shares 9,085,219 101,502,036
Shares issued to shareholders
in reinvestment of dividends 105,564 1,172,385
-------------- --------------
Total issued 9,416,245 105,182,970
Shares redeemed (1,164,545) (12,913,130)
-------------- --------------
Net increase 8,251,700 $92,269,840
============== ==============
5. Capital Loss Carryforward:
At September 30, 1997, the Fund had a net capital loss carryforward of
approximately $7,502,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable gains.
72
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Description of Municipal Bonds and Temporary Investments................... 5
Description of Municipal Bonds............................................ 5
Description of Temporary Investments...................................... 7
Repurchase Agreements..................................................... 8
Financial Futures Transactions and Options................................ 9
Investment Restrictions.................................................... 13
Management of the Trust.................................................... 15
Trustees and Officers..................................................... 15
Compensation of Trustees.................................................. 16
Management and Advisory Arrangements...................................... 17
Purchase of Shares......................................................... 18
Initial Sales Charge Alternatives--Class A and Class D Shares............. 19
Reduced Initial Sales Charges............................................. 21
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............................................... 29
Exchange Privilege........................................................ 30
Distributions and Taxes.................................................... 32
Tax Treatment of Options and Futures Transactions......................... 36
Performance Data........................................................... 36
General Information........................................................ 39
Description of Series and Shares.......................................... 39
Computation of Offering Price Per Share................................... 41
Independent Auditors...................................................... 41
Custodian................................................................. 41
Transfer Agent............................................................ 42
Legal Counsel............................................................. 42
Reports to Shareholders................................................... 42
Additional Information.................................................... 42
Appendix I--Economic Conditions in New York................................ 43
Appendix II--Ratings of Municipal Bonds.................................... 53
Independent Auditors' Report............................................... 60
Financial Statements....................................................... 61
</TABLE>
Code #10343-1297
[LOGO] MERRILL LYNCH
Merrill Lynch
New York Municipal
Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
December 29, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A)FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the years in the ten-year period
ended September 30, 1997.
Contained in Part B:
Schedule of Investments as of September 30, 1997.
Statement of Assets and Liabilities as of September 30, 1997.
Statement of Operations for the year ended September 30, 1997.
Statements of Changes in Net Assets for each of the years in the two-
year period ended September 30, 1997.
Financial Highlights for each of the years in the five-year period
ended September 30, 1997.
(B)EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) --Declaration of Trust of the Registrant, dated August 2, 1985.(f)
(b) --Amendment to Declaration of Trust, dated September 18, 1987.(a)
(c) --Amendment to Declaration of Trust, dated December 21, 1987.(a)
(d) --Amendment to Declaration of Trust, dated October 3, 1988.(f)
(e) --Amendment to Declaration of Trust, dated October 17, 1994 and
instrument establishing Class C and Class D shares of beneficial
interest.(f)
(f) --Instrument establishing Merrill Lynch New York Municipal Bond Fund
(the "Fund") as a series of Registrant.(f)
(g) --Instrument establishing Class A and Class B shares of beneficial
interest of the Fund.(f)
2 --By-Laws of Registrant.(a)
3 --None.
4 --Portions of the Declaration of Trust, Establishment and Designation
and By-Laws of the Registrant defining the rights of holders of the
Fund as a series of the Registrant.(b)
5(a) --Form of Management Agreement between Registrant and Fund Asset
Management, L.P.(a)
(b) --Supplement to Management Agreement between Registrant and Fund Asset
Management, L.P.(e)
6(a) --Form of Revised Class A Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc. (including Form
of Selected Dealers Agreement).(e)
(b) --Form of Class B Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(a)
(c) --Form of Class C Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(e)
(d) --Form of Class D Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(e)
(e) --Letter Agreement between the Fund and Merrill Lynch Funds
Distributor, Inc., dated September 15, 1993, in connection with the
Merrill Lynch Mutual Fund Advisor program.(c)
7 --None.
8 --Form of Custody Agreement between Registrant and State Street Bank &
Trust Company.(d)
9 --Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc.(g)
10 --None.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --None.
13 --Certificate of Fund Asset Management, L.P.(a)
14 --None.
15(a) --Amended and Restated Class B Shares Distribution Plan of the
Registrant and Amended and Restated Class B Shares Distribution Plan
Sub-Agreement. (c)
(b) --Form of Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of Registrant.(e)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
(c) --Form of Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of Registrant.(e)
16(a) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class A
Shares.(a)
(b) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class B
Shares.(a)
(c) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class C
Shares. (f)
(d) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class D
Shares. (f)
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
18 --Merrill Lynch Select Pricing SM System Plan pursuant to Rule 18f-
3.(h)
</TABLE>
- --------
(a) Filed on January 25, 1996 as an Exhibit to Post-Effective Amendment No. 13
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended (File No. 2-99473) (the "Registration Statement")
relating to shares of the Fund.
(b) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's Declaration of Trust, as amended, filed as
Exhibits 1(b) and 1(c) with Post-Effective Amendment No. 13 to the
Registration Statement and as Exhibits 1(a), 1(d) and 1(e) with Post-
Effective Amendment No. 12 to the Registration Statement; to the
Certificates of Establishment and Designation establishing the Fund as a
series of the Registrant and establishing Class A and Class B shares of
beneficial interest of the Fund, filed as Exhibits 1(f) and 1(g),
respectively, with Post-Effective Amendments No. 13 and No. 12,
respectively, to the Registration Statement; and to Articles I, V and VI of
the Registrant's By-Laws, filed as Exhibit 2 with Post-Effective Amendment
No. 13 to the Registration Statement.
(c) Filed on January 28, 1994 as an Exhibit to Post-Effective Amendment No. 10
to the Registration Statement.
(d) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933, filed on October 14, 1994, relating to shares of Merrill Lynch
Minnesota Municipal Bond Fund series of the Registrant (File No. 33-44734).
(e) Filed on October 18, 1994 as an Exhibit to Post-Effective Amendment No. 11
to the Registration Statement.
(f) Filed on January 31, 1995 as an Exhibit to Post-Effective Amendment No. 12
to the Registration Statement.
(g) Incorporated by reference to Exhibit 9 to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933, filed on October 20, 1995, relating to shares of Merrill Lynch
Arizona Municipal Bond Fund series of the Registrant (File No. 33-41311).
(h) Filed on January 25, 1996 as an Exhibit to Post-Effective Amendment No. 13
to the Registration Statement.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS AT
TITLE OF CLASS NOVEMBER 30, 1997*
-------------- ------------------
<S> <C>
Class A Shares of beneficial interest, par value
$0.10 per share..................................... 902
Class B Shares of beneficial interest, par value
$0.10 per share..................................... 7,980
Class C Shares of beneficial interest, par value
$0.10 per share..................................... 180
Class D Shares of beneficial interest, par value
$0.10 per share..................................... 4,921
</TABLE>
- --------
* The number of holders includes holders of record plus beneficial owners whose
shares are held of record by Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
C-2
<PAGE>
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a shareholder,
creditor or otherwise) against all liabilities and expenses (including amounts
paid in satisfaction of judgments, in compromise, as fines and penalties and as
counsel fees) reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he may be involved or with which he may be threatened, while in office
or thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as to
any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of good faith and reasonable belief
as to the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no person may satisfy any right in indemnity or
reimbursement granted herein or in Section 5.1 or to which he may be otherwise
entitled except out of the property of the Trust, and no Shareholder shall be
personally liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in
connection with indemnification under this Section 5.3, provided that the
indemnified person shall have given a written undertaking to reimburse the
Trust in the event it is subsequently determined that he is not entitled to
such indemnification."
Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended, may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount which it is ultimately determined he is
entitled to receive from the Registrant by reason of indemnification; and (iii)
(a) such promise must be secured by a surety bond, other suitable insurance or
an equivalent form of security which assures that any repayments may be
obtained by the Registrant without delay or litigation, which bond, insurance
or other form of security must be provided by the recipient of the advance, or
(b) a majority of a quorum of the Registrant's disinterested, non-party
Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts that the recipient of
the advance ultimately will be found entitled to indemnification.
In Section 9 of the Distribution Agreements relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the "1933 Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or Prospectus
and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is
C-3
<PAGE>
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Manager" or "FAM") acts as the investment
adviser for the following open-end registered investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc. and The
Municipal Fund Accumulation Program, Inc.; and the following closed-end
registered investment companies: Apex Municipal Fund, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Debt Strategies Fund,
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings Florida Insured Fund, MuniHoldings Fund, Inc., MuniHoldings New
York Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield New York Insured Fund III,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Taurus
MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and Worldwide
DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the Manager,
acts as the investment adviser for the following open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund
For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill Lynch
Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury
Money Fund, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc.; and Hotchkis and Wiley Funds (advised by Hotchkis and
Wiley, a division of MLAM); and the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill
Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-advisor to Merrill
Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio,
two investment portfolios of EQ Advisor Trust.
C-4
<PAGE>
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646. The
address of the Manager, MLAM, Princeton Services, Inc. ("Princeton Services")
and Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281. The address of the Fund's transfer agent, Merrill Lynch
Financial Data Services, Inc. ("MLFDS"), is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
October 1, 1995 for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Glenn is
Executive Vice President and Mr. Richard is Treasurer of substantially all of
the investment companies described in the first two paragraphs of this Item 28
and Messrs. Giordano, Harvey, Kirstein and Monagle are directors, trustees or
officers of one or more of such companies.
Officers and partners of FAM are set forth as follows:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------------- ----------------------------------
<C> <C> <S>
ML & Co. ............... Limited Partner Financial Services Holding
Company; Limited Partner of
MLAM
Princeton Services...... General Partner General Partner of MLAM
Arthur Zeikel........... Chairman Chairman of MLAM since
December 10, 1997; President
of MLAM and FAM from 1977 to
December 10, 1997; President
and Director of Princeton
Services from 1993 to
December 10, 1997; Executive
Vice President of ML & Co.
Jeffrey M. Peek......... President President of MLAM since
December 10, 1997; President
and Director of Princeton
Services since December 10,
1997; Executive Vice
President of ML & Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of
President MLAM; Executive Vice
President and Director of
Princeton Services;
President and Director of
MLFD; Director of MLFDS;
President of Princeton
Administrators, L.P.
Linda L. Federici....... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Elizabeth A. Griffin.... Senior Vice President Senior Vice President of MLAM
Norman R. Harvey........ Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Michael J. Hennewinkel.. Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President,
President, General General Counsel and
Counsel and Secretary of MLAM; Senior
Secretary Vice President, General
Counsel, Secretary and
Director of Princeton
Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------------- ----------------------------------
<C> <C> <S>
Ronald M. Kloss......... Senior Vice President Senior Vice President and
and Controller Controller of MLAM; Senior
Vice President and
Controller of Princeton
Services
Debra Landsman-Yaros.... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services; Vice
President of MLFD
Stephen M.M. Miller..... Senior Vice President Executive Vice President of
Princeton Administrators,
L.P.; Senior Vice President
of Princeton Services
Joseph T. Monagle, Jr. . Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Michael L. Quinn........ Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services;
Managing Director and First
Vice President of Merrill
Lynch from 1989 to 1995
Richard L. Reller....... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services;
Director of MLFD
Gerald M. Richard....... Senior Vice President Senior Vice President and
and Treasurer Treasurer of MLAM; Senior
Vice President and
Treasurer of Princeton
Services; Vice President
and Treasurer of MLFD
Gregory Upah............ Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Ronald L. Welburn....... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., MuniAssets Fund, Inc. and The
Municipal Fund Accumulation Program, Inc. and MLFD also acts as the principal
underwriter for the following closed-end investment companies: Merrill Lynch
High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICES POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- ----------------------- -----------------------
<S> <C> <C>
Terry K. Glenn................ President and Director Executive Vice President
Richard L. Reller............. Director None
Thomas J. Verage.............. Director None
William E. Aldrich............ Senior Vice President None
Robert W. Crook............... Senior Vice President None
Michael J. Brady.............. Vice President None
William M. Breen.............. Vice President None
Michael G. Clark.............. Vice President None
James T. Fatseas.............. Vice President None
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICES POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- ----------------------- -----------------------
<S> <C> <C>
Debra W. Landsman-Yaros... Vice President None
Michelle T. Lau........... Vice President None
Gerald M. Richard......... Vice President and Treasurer Treasurer
Salvatore Venezia......... Vice President None
William Wasel............. Vice President None
Robert Harris............. Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and Merrill Lynch Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Trust--
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Trust--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a Prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the Township of Plainsboro, and the State of New Jersey, on the 26th day of
December, 1997.
Merrill Lynch Multi-State Municipal
Series Trust
(Registrant)
/s/ Gerald M. Richard
By: _________________________________
(GERALD M. RICHARD, TREASURER)
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date(s) indicated.
SIGNATURE TITLE DATE
President and
Arthur Zeikel* Trustee
- ------------------------------------- (Principal Executive Officer)
(ARTHUR ZEIKEL)
Treasurer (Principal Financial
/s/ Gerald M. Richard and Accounting
Officer)
December 26,
- ------------------------------------- 1997
(GERALD M. RICHARD)
Trustee
James H. Bodurtha*
- -------------------------------------
(JAMES H. BODURTHA)
Trustee
Herbert I. London*
- -------------------------------------
(HERBERT I. LONDON)
Trustee
Robert R. Martin*
- -------------------------------------
(ROBERT R. MARTIN)
Trustee
Joseph L. May*
- -------------------------------------
(JOSEPH L. MAY)
Trustee
Andre F. Perold*
- -------------------------------------
(ANDRE F. PEROLD)
/s/ Gerald M. Richard December 26,
*By: ________________________________ 1997
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
17(a) --Financial Data Schedule for Class A shares.
(b) --Financial Data Schedule for Class B shares.
(c) --Financial Data Schedule for Class C shares.
(d) --Financial Data Schedule for Class D shares.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 414779695
<INVESTMENTS-AT-VALUE> 440133377
<RECEIVABLES> 8236166
<ASSETS-OTHER> 99184
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 448468727
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1869210
<TOTAL-LIABILITIES> 1869210
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 433217551
<SHARES-COMMON-STOCK> 1945698
<SHARES-COMMON-PRIOR> 1957297
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11971716)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25353682
<NET-ASSETS> 22300544
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 29214080
<OTHER-INCOME> 851
<EXPENSES-NET> (5080846)
<NET-INVESTMENT-INCOME> 24134085
<REALIZED-GAINS-CURRENT> 10472445
<APPREC-INCREASE-CURRENT> 4297287
<NET-CHANGE-FROM-OPS> 38903817
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1209169)
<DISTRIBUTIONS-OF-GAINS> (8764)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 723895
<NUMBER-OF-SHARES-REDEEMED> (805206)
<SHARES-REINVESTED> 69712
<NET-CHANGE-IN-ASSETS> (77037647)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (12552733)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (9678668)
<GROSS-ADVISORY-FEES> 2697119
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5080846
<AVERAGE-NET-ASSETS> 22811000
<PER-SHARE-NAV-BEGIN> 11.12
<PER-SHARE-NII> .60
<PER-SHARE-GAIN-APPREC> .34
<PER-SHARE-DIVIDEND> (.60)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.46
<EXPENSE-RATIO> .65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 414779695
<INVESTMENTS-AT-VALUE> 440133377
<RECEIVABLES> 8236166
<ASSETS-OTHER> 99184
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 448468727
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1869210
<TOTAL-LIABILITIES> 1869210
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 433217551
<SHARES-COMMON-STOCK> 24405156
<SHARES-COMMON-PRIOR> 36276973
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11971716)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25353682
<NET-ASSETS> 279753850
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 29214080
<OTHER-INCOME> 851
<EXPENSES-NET> (5080846)
<NET-INVESTMENT-INCOME> 24134085
<REALIZED-GAINS-CURRENT> 10472445
<APPREC-INCREASE-CURRENT> 4297287
<NET-CHANGE-FROM-OPS> 38903817
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (16235504)
<DISTRIBUTIONS-OF-GAINS> (155517)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2299603
<NUMBER-OF-SHARES-REDEEMED> (14888300)
<SHARES-REINVESTED> 716880
<NET-CHANGE-IN-ASSETS> (77037647)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (12552733)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (9678668)
<GROSS-ADVISORY-FEES> 2697119
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5080846
<AVERAGE-NET-ASSETS> 338717870
<PER-SHARE-NAV-BEGIN> 11.12
<PER-SHARE-NII> .54
<PER-SHARE-GAIN-APPREC> .34
<PER-SHARE-DIVIDEND> (.54)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.46
<EXPENSE-RATIO> 1.16
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND - CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 414779695
<INVESTMENTS-AT-VALUE> 440133377
<RECEIVABLES> 8236166
<ASSETS-OTHER> 99184
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 448468727
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1869210
<TOTAL-LIABILITIES> 1869210
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 433217551
<SHARES-COMMON-STOCK> 439094
<SHARES-COMMON-PRIOR> 375436
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11971716)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25353682
<NET-ASSETS> 5034327
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 29214080
<OTHER-INCOME> 851
<EXPENSES-NET> (5080846)
<NET-INVESTMENT-INCOME> 24134085
<REALIZED-GAINS-CURRENT> 10472445
<APPREC-INCREASE-CURRENT> 4297287
<NET-CHANGE-FROM-OPS> 38903817
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (207495)
<DISTRIBUTIONS-OF-GAINS> (1632)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 273731
<NUMBER-OF-SHARES-REDEEMED> (225581)
<SHARES-REINVESTED> 15508
<NET-CHANGE-IN-ASSETS> (77037647)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (12552733)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (9678668)
<GROSS-ADVISORY-FEES> 2697119
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5080846
<AVERAGE-NET-ASSETS> 4426768
<PER-SHARE-NAV-BEGIN> 11.12
<PER-SHARE-NII> .53
<PER-SHARE-GAIN-APPREC> .35
<PER-SHARE-DIVIDEND> (.53)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.47
<EXPENSE-RATIO> 1.26
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND - CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 414779695
<INVESTMENTS-AT-VALUE> 440133377
<RECEIVABLES> 8236166
<ASSETS-OTHER> 99184
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 448468727
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1869210
<TOTAL-LIABILITIES> 1869210
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 433217551
<SHARES-COMMON-STOCK> 12178109
<SHARES-COMMON-PRIOR> 8484802
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11971716)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25353682
<NET-ASSETS> 139510796
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 29214080
<OTHER-INCOME> 851
<EXPENSES-NET> (5080846)
<NET-INVESTMENT-INCOME> 24134085
<REALIZED-GAINS-CURRENT> 10472445
<APPREC-INCREASE-CURRENT> 4297287
<NET-CHANGE-FROM-OPS> 38903817
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6481917)
<DISTRIBUTIONS-OF-GAINS> (46847)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5824895
<NUMBER-OF-SHARES-REDEEMED> (2367253)
<SHARES-REINVESTED> 235665
<NET-CHANGE-IN-ASSETS> (77037647)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (12552733)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (9678668)
<GROSS-ADVISORY-FEES> 2697119
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5080846
<AVERAGE-NET-ASSETS> 124648890
<PER-SHARE-NAV-BEGIN> 11.11
<PER-SHARE-NII> .58
<PER-SHARE-GAIN-APPREC> .35
<PER-SHARE-DIVIDEND> (.58)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.46
<EXPENSE-RATIO> .75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch New York Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We consent to the use in Post-Effective Amendment No. 15 to Registration
Statement No. 2-99473 of our report dated November 7, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
Princeton, New Jersey
December 29, 1997
