PROSPECTUS
FEBRUARY 28, 1995
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
MERRILL LYNCH MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
Merrill Lynch Municipal Intermediate Term Fund (the "Fund") of Merrill Lynch
Municipal Series Trust (the "Trust") is a mutual fund seeking to provide
shareholders with as high a level of income exempt from Federal income taxes as
is consistent with its investment policies and prudent investment management.
Under normal market conditions, the Fund invests primarily in a diversified
portfolio of investment grade obligations whose interest, in the opinion of bond
counsel to the issuer, is exempt from Federal income taxes, with a dollar
weighted average maturity of five to twelve years. At times, the Fund may seek
to hedge its portfolio through the use of futures and options transactions to
reduce volatility of the net asset value of Fund shares. There can be no
assurance that the investment objective of the Fund will be realized.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes is
most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 [(609)
282-2800], or from securities dealers which have entered into dealer agreements
with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50. Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions directly through the Fund's transfer agent are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares".
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be retained
for future reference. A statement containing additional information about the
Fund, dated February 28, 1995 (the "Statement of Additional Information"), has
been filed with the Securities and Exchange Commission and can be obtained,
without charge, by calling or by writing the Trust at the above telephone number
or address. The Statement of Additional Information is hereby incorporated by
reference into this Prospectus. The Fund is a separate series of the Trust, a
diversified, open-end management investment company organized as a Massachusetts
business trust.
-------------------
MERRILL LYNCH 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).................. 1.0%(c) None None 1.0% (c)
Sales Charge Imposed on Dividend
Reinvestments....................... None None None None
Deferred Sales Charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower)................. None(d) 1.0% for one year 1.0% for one year None (d)
Exchange Fee....................... None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)(E)
Management Fees(f)................. 0.55% 0.55% 0.55% 0.55%
12b-1 Fees(g):
Account Maintenance Fees......... None 0.20% 0.20% 0.10%
Distribution Fees................ None 0.10% 0.10% None
(Class B shares convert to
Class D shares automatically
after approximately ten
years, cease being subject to
distribution fees and become
subject to reduced account
maintenance fees)
Other Expenses:
Custodial Fees................... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(h)... 0.04% 0.05% 0.05% 0.04%
Other............................ 0.16% 0.16% 0.16% 0.16%
Total Other Expenses........... 0.21% 0.22% 0.22% 0.21%
Total Fund Operating Expenses...... 0.76% 1.07% 1.07% 0.86%
</TABLE>
- ------------
<TABLE>
<S> <C>
(a) Class A shares are sold to a limited group of investors including existing Class A
shareholders and investment programs. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares"--page 24.
(b) Class B shares convert to Class D shares automatically approximately ten years after
initial purchase. See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"--page 26.
(c) Reduced for purchases of $100,000 and over. Class A or Class D purchases of $1,000,000
or more may not be subject to an initial sales charge. See "Purchase of Shares--Initial
Sales Charge Alternatives--Class A and Class D Shares"--page 24.
(d) Class A and Class D shares are not subject to a contingent deferred sales charge
("CDSC"), except that purchases of $1,000,000 or more which may not be subject to an
initial sales charge may instead be subject to a CDSC of 0.20% of amounts redeemed
within the first year of purchase. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares"--page 24.
(e) Information for Class A and Class B shares is stated for the fiscal year ended October
31, 1994. Information under "Other Expenses" for Class C and Class D shares is estimated
for the fiscal year ending October 31, 1995.
(f) See "Management of the Fund--Management and Advisory Arrangements"--page 20.
(g) See "Purchase of Shares--Distribution Plans"--page 29.
(h) See "Management of the Fund--Transfer Agency Services"--page 22.
</TABLE>
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 $10.00 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total
Fund Operating Expenses for each class set forth above; (2)
a 5% annual return throughout the periods and (3) redemption
at the end of the period:
Class A................................................... $ 18 $34 $52 $103
Class B................................................... $ 21 $34 $59 $131
Class C................................................... $ 21 $34 $59 $131
Class D................................................... $ 19 $37 $57 $115
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of the
period:
Class A................................................... $ 18 $34 $52 $103
Class B................................................... $ 11 $34 $59 $131
Class C................................................... $ 11 $34 $59 $131
Class D................................................... $ 19 $37 $57 $115
</TABLE>
Class C shares of the Fund will be offered only in exchange for Class C
shares of MLAM-advised mutual funds. See "Shareholder Services--Exchange
Privilege"--page 33.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission (the "Commission") regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL
RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES 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 charges permitted under the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. (the "NASD"). Merrill Lynch may
charge its customers a processing fee (presently $4.85) for confirming purchases
and repurchases. Purchases and redemptions directly through the Fund's transfer
agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares".
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. Class A, Class B and Class D shares 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 are sold to investors choosing the deferred
sales charge alternative. Class C shares are not offered for sale by the Fund
but are available for exchange with Class C shares of other MLAM-advised mutual
funds. The Merrill Lynch Select PricingSM System is used by more than 50 mutual
funds advised by Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager")
or an affiliate of MLAM, Fund Asset
3
<PAGE>
Management, L.P. ("FAM"). Funds advised by MLAM or FAM are referred to herein as
"MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
the Class D shares, are imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM 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 PricingSM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares".
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 1.0% initial sales No No No
charge(2)(3)
B 1.0% CDSC for one year 0.20% 0.10% B shares convert to D shares
automatically after
approximately ten years(4)
C(5) 1.0% CDSC for one year 0.20% 0.10% No
D Maximum 1.0% initial sales 0.10% No No
charge(3)
</TABLE>
(Footnotes on following page)
4
<PAGE>
(Footnotes for preceding page)
(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 $100,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 0.20% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an eight
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
(5) Class C shares will be issued only upon exchange for Class C shares of
another MLAM-advised mutual fund. See "Shareholder Services--Exchange
Privilege".
<TABLE>
<S> <C>
Class A: Class A shares incur an initial sales charge when they are purchased and bear no
ongoing distribution or account maintenance fees. Class A shares are offered to a
limited group of investors and also will be issued upon reinvestment of dividends
on outstanding Class A shares. Investors that currently own Class A shares in a
shareholder account are entitled to purchase additional Class A shares in that
account. In addition, Class A shares will be offered to Merrill Lynch & Co., Inc.
("ML & Co.") and its subsidiaries (the term "subsidiaries", when used herein with
respect to ML & Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly-owned and controlled by ML & Co.) and their directors and
employees and to members of the Boards of MLAM-advised mutual funds. The maximum
initial sales charge is 1.0%, which is reduced for purchases of $100,000 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 will be subject
to a contingent deferred sales charge ("CDSC") of 0.20% if the shares are
redeemed within one year after purchase. Sales charges also are reduced under a
right of accumulation which takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased, but they are
subject to an ongoing account maintenance fee of 0.20% and an ongoing
distribution fee of 0.10% of the Fund's average net assets attributable to Class
B shares and a CDSC if they are redeemed within one year of purchase.
Approximately ten years after issuance, Class B shares will convert automatically
into Class D shares of the Fund, which are subject to lower account maintenance
fees than Class B shares 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
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
period for the shares exchanged will be tacked onto 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 Alternative--Class B Shares--Conversion of Class B
Shares to Class D Shares".
Class C: Class C shares of the Fund are not available for purchase but will be issued only
pursuant to the exchange privilege to holders of Class C shares of other
MLAM-advised mutual funds who elect to exchange Class C shares of such other
MLAM-advised mutual funds for Class C shares of the Fund. Class C shares are
subject to an ongoing account maintenance fee of 0.20% and an ongoing
distribution fee of 0.10% of the Fund's average net assets attributable to Class
C shares. Although Class C shares, like Class B shares, are subject to a 1.0%
CDSC for one year, Class C shares have no conversion feature and, accordingly, an
investor that acquires Class C shares will be subject to distribution fees that
will be imposed on Class C shares for an indefinite period subject to annual
approval by the Fund'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. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but if the
initial sales charge is waived such purchases will be subject to a CDSC of 0.20%
if the shares are redeemed within one year after purchase. The schedule of
initial sales charges and reductions for Class D shares is the same as the
schedule for Class A shares. Class D shares also will be issued upon conversion
of Class B shares as described above under "Class B". See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares".
</TABLE>
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B 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
6
<PAGE>
ongoing account maintenance and distribution fees on Class B or Class C shares
may exceed the initial sales charge and, in the case of Class D shares, the
account maintenance fee. Although some investors that previously purchased Class
A shares may no longer be eligible to purchase Class A shares of other
MLAM-advised mutual funds, those previously purchased Class A shares, together
with Class B, Class C and Class D share holdings, will count toward a right of
accumulation which may qualify the investor for reduced initial sales charges on
new initial sales charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and Class C shares
to have higher expense ratios, pay lower dividends and have lower total returns
than the initial sales charge shares. The ongoing Class D account maintenance
fees will cause Class D shares to have a higher expense ratio, pay lower
dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternative. Because no initial sales charges are
deducted at the time of purchase, Class B 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 alternative may be particularly appealing to investors who
do not qualify for a reduction in initial sales charges. Both Class B and Class
C shares are subject to ongoing account maintenance fees and distribution fees;
however, the ongoing account maintenance and distribution fees potentially may
be offset to the extent any return is realized on the additional funds initially
invested in Class B or Class C shares. In addition, Class B shares will be
converted into Class D shares of the Fund after a conversion period of
approximately ten years, and thereafter investors will be subject to lower
ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Although Class C
shareholders are subject to the same CDSC period and rate as Class B
shareholders, Class C shares have no conversion feature and therefore are
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares--Limitations on the Payment of Deferred
Sales Charges".
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Audited financial statements for the fiscal
year ended October 31, 1994 and the independent auditors' report are included in
the Statement of Additional Information. The following per share data and ratios
have been derived from information provided in the Fund's audited financial
statements. Financial information is not presented for Class A shares for the
period November 26, 1986 to October 30, 1988 since no shares of that class were
publicly issued prior to that period, and financial information is not presented
for Class C or Class D shares for the period November 26, 1986 to October 20,
1994 since no shares of those classes were publicly issued prior to that period.
Further information about the performance of the Fund is contained in the Fund's
most recent annual report to shareholders which may be obtained, without charge,
by calling or by writing the Fund at the telephone number or address on the
front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
---------------------------------------------------------
1994 1993 1992 1991 1990 1989+
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 10.39 $ 9.70 $ 9.61 $ 9.24 $ 9.29 $ 9.45
------- ------- ------- ------- ------- -------
Investment income--net........................ .52 .54 .59 .60 .59 .59
Realized and unrealized gain (loss) on
investments--net.............................. (.77) .69 .09 .37 (.05) (.16)
------- ------- ------- ------- ------- -------
Total from investment operations.............. (.25) 1.23 .68 .97 .54 .43
------- ------- ------- ------- ------- -------
Less dividends:
Investment income--net........................ (.52) (.54) (.59) (.60) (.59) (.59)
------- ------- ------- ------- ------- -------
Net asset value, end of year.................. $ 9.62 $ 10.39 $ 9.70 $ 9.61 $ 9.24 $ 9.29
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............ (2.49)% 13.01% 7.16% 10.90% 5.99% 5.03%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees......... .76% .75% .86% .85% .92% .90%*
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Expenses...................................... .76% .75% .86% .85% .92% .90%*
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Investment income--net........................ 5.19% 5.35% 5.97% 6.34% 6.39% 6.50%*
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)........ $27,653 $24,173 $14,068 $ 6,546 $ 2,233 $ 1,384
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Portfolio turnover............................ 52.56% 83.66% 74.20% 129.85% 236.07% 67.88%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
- ------------
+ Class A shares commenced operations on October 31, 1988.
++ Class B shares commenced operations on November 26, 1986.
++ Class C shares commenced operations on October 21, 1994.
++++ Class D shares commenced operations on October 21, 1994.
# Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads.
8
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS C CLASS D
- ----------------------------------------------------------------------------- ----------------- ------------------
FOR THE PERIOD FOR THE PERIOD
OCTOBER 21, OCTOBER 21,
FOR THE YEAR ENDED OCTOBER 31, 1994++ 1994++++
- ----------------------------------------------------------------------------- TO OCTOBER 31, TO OCTOBER 31,
1994 1993 1992 1991 1990 1989 1988 1987++ 1994 1994
- -------- -------- -------- ------- -------- -------- -------- -------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.39 $ 9.69 $ 9.61 $ 9.24 $ 9.29 $ 9.45 $ 9.04 $ 10.00 $ 9.70 $ 9.70
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
.49 .51 .56 .57 .57 .58 .56 .51 .01 .01
(.77) .70 .08 .37 (.05) (.16) .41 (.96) (.08) (.08)
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
(.28) 1.21 .64 .94 .52 .42 .97 (.45) (.07) (.07)
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
(.49) (.51) (.56) (.57) (.57) (.58) (.56) (.51) (.01) (.01)
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
$ 9.62 $ 10.39 $ 9.69 $ 9.61 $ 9.24 $ 9.29 $ 9.45 $ 9.04 $ 9.62 $ 9.62
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
(2.79)% 12.78% 6.72% 10.56% 5.68% 4.59% 10.95% (4.62)%# (.71)%# (.71)%#
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
.77% .76% .86% .88% .92% .87% .78% .67%* .88%* .87%*
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
1.07% 1.06% 1.16% 1.18% 1.22% 1.17% 1.08% .97%* 1.18%* .97%*
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
4.87% 5.07% 5.68% 6.05% 6.09% 6.22% 6.03% 5.75%* 4.92%* 5.20%*
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
$142,152 $158,061 $124,802 $97,998 $109,388 $132,368 $158,872 $186,064 $ 1 $ 70
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
52.56% 83.66% 74.20% 129.85% 236.07% 67.88% 119.78% 193.92% 52.56% 52.56%
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
- -------- -------- -------- ------- -------- -------- -------- -------- ------ ------
</TABLE>
- ------------
+ Class A shares commenced operations on October 31, 1988.
++ Class B shares commenced operations on November 26, 1986.
++ Class C shares commenced operations on October 21, 1994.
++++ Class D shares commenced operations on October 21, 1994.
# Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads.
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as high
a level of income exempt from Federal income taxes as is consistent with its
investment policies and prudent investment management. The Fund seeks to achieve
its objective by investing primarily in a diversified portfolio of obligations
issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
and instrumentalities, the payments from which, in the opinion of bond counsel
to the issuer, are exempt in their entirety from Federal income taxes
("Municipal Bonds"). The Fund at all times, except during temporary defensive
periods, will maintain at least 80% of its net assets invested in 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 may seek to hedge its portfolio through
the use of futures and options transactions to reduce volatility in the net
asset value of Fund shares. Certain Federal income tax requirements may limit
the Fund's ability to engage in hedging transactions. Gains from transactions in
futures and options contracts distributed to shareholders will be taxable as
capital gains to shareholders.
While there is no limit on the remaining maturity of individual Municipal
Bonds in the Fund's portfolio, depending on market conditions, an
intermediate-term dollar weighted average maturity of five to twelve years is
anticipated. Generally, as is the case with any investment grade fixed-income
obligations, Municipal Bonds with longer maturities tend to produce higher
yields. Under normal conditions, however, such yield-to-maturity increases tend
to decline in the longer maturities (i.e., the slope of the yield curve
flattens). At the same time, due to their longer exposure to interest rate risk,
prices of longer-term obligations are subject to greater market fluctuations as
a result of changes in interest rates. Based on the foregoing premises, the
Fund's manager, Merrill Lynch Asset Management, L.P. (the "Manager"), believes
that the yield and price volatility characteristics of an intermediate-term
portfolio generally offer an attractive trade-off between return and risk. There
may be market conditions, however, where an intermediate-term portfolio may be
less attractive due to the fact that the Municipal Bond yield curve changes from
time to time depending on supply and demand forces, monetary and tax policies
and investor expectations. As a result, there may be situations where
investments in individual Municipal Bonds with longer remaining maturities may
be more attractive than individual intermediate-term Municipal Bonds.
Nevertheless, the Fund anticipates maintaining a dollar weighted average
portfolio maturity of five to twelve years. In the event of any sustained market
conditions that make it less desirable to maintain such an intermediate-term
average portfolio maturity, the Trustees of the Trust may consider changing the
investment policies of the Fund with respect to average portfolio maturity.
Investment in shares of the Fund offers several benefits. The Fund offers
investors the opportunity to receive income exempt from Federal income taxes by
investing in a diversified, professionally managed portfolio of 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 are at least partially offset
by the expenses involved in operating an investment company. Such expenses
primarily consist of the management fee, the account
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maintenance and distribution fees in the case of Class B and Class C shares, the
account maintenance fee in the case of Class D shares and operational costs.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal income taxes. The Fund may 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 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 "Investment Company Act"). Other
Non-Municipal Tax-Exempt Securities could include trust certificates or other
derivative instruments evidencing interests in one or more Municipal Bonds.
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. Certain instruments
in which the Fund may invest may be characterized as derivative instruments. See
"Description of Municipal Bonds" and "Financial Futures and Options
Transactions".
Municipal Bonds may include several types of bonds. See "Description of
Municipal Bonds". The interest on such obligations may be payable at a fixed
rate or at a variable or floating rate. The Fund's investments may also include
variable rate demand obligations ("VRDOs") and VRDOs in the form of
participation interests ("Participating VRDOs") in variable rate tax-exempt
obligations held by a financial institution. The VRDOs in which the Fund will
invest are tax-exempt obligations which contain a floating or variable interest
rate adjustment formula and an unconditional right of demand on the part of the
holder thereof to receive payment of the unpaid principal balance plus accrued
interest on a short notice period not to exceed seven days. Participating VRDOs
provide the Fund with a specified undivided interest (up to 100%) of the
underlying obligation and the right to demand payment of the unpaid principal
balance plus accrued interest on the Participating VRDOs from the financial
institution on a specified number of days' notice, not to exceed seven days.
There is, however, the possibility that because of a 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 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,
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Aa, A, Baa for bonds, MIG-1, MIG-2, MIG-3, MIG-4 or VMIG-1, VMIG-2, VMIG-3,
VMIG-4 for notes and P-1, P-2, P-3 for commercial paper), Standard & Poor's
Ratings Group ("Standard & Poor's") (currently AAA, AA, A, BBB for bonds, SP-1,
SP-2 for notes and A-1, A-2 for commercial paper), or Fitch Investors Service,
Inc. ("Fitch") (currently AAA, AA, A, BBB for bonds, F-1, F-2 for notes and F-1,
F-2 for commercial paper) or, if unrated, such securities will possess
creditworthiness, in the opinion of the Manager of the Fund, comparable to
obligations in which the Fund may invest. Obligations ranked in the fourth
highest rating category, while considered "investment grade", may have certain
speculative characteristics and may be more likely to be downgraded than
securities rated in one of the three highest rating categories. See the Appendix
to the Statement of Additional Information for more information regarding
ratings of debt securities. The Manager considers the ratings assigned by
Moody's, Standard & Poor's or Fitch as one of several factors in its credit
analysis of issuers. 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 in the Fund's portfolio 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 and will
sell such security only if, in the Manager's judgment, it is advantageous to do
so.
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 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 the Appendix to 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.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including constructing and equipping a wide range of public
facilities (including water, sewer, gas, electricity, solid waste, health care,
transportation, education and housing facilities), refunding outstanding
obligations and obtaining funds for general operating expenses and loans to
other public institutions and facilities. In addition, certain types of bonds
are issued by or on behalf of public authorities to finance various privately
operated facilities, including certain facilities for the local furnishing of
electric energy or gas, sewage facilities, solid waste disposal facilities and
other specialized facilities. For purposes of this Prospectus, such obligations
are referred to as Municipal Bonds if the
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interest paid thereon is exempt from Federal income tax even though such bonds
may be "private activity bonds" as discussed below.
The two principal classifications of Municipal Bonds are "general
obligation" bonds 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 state constitutions or laws, and an entity's creditworthiness will
depend on many factors, including potential erosion of the tax base due to
population declines, natural disasters, declines in the state's industrial base
or inability to attract new industries, economic limits on the ability to tax
without eroding the tax base, state legislative proposals or voter initiatives
to limit ad valorem real property taxes and the extent to which the entity
relies on Federal or state aid, access to capital markets or other factors
beyond the state or entity's control. Accordingly, the capacity of the issuer of
a general obligation bond as to the timely payment of interest and the repayment
of principal when due is affected by the issuer's maintenance of its tax base.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as 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 will not invest more than 10% of its total
assets (taken at market value at the time of each investment) in industrial
revenue bonds where the entity supplying the revenues from which the issuer is
paid, including predecessors, has a record of less than three years of
continuous business operations. Investments involving entities with less than
three years of continuous business operations may pose somewhat greater risks
due to the lack of a substantial operating history for such entities. The
Manager believes, however, that the potential benefits of such investments
outweigh the potential risks, particularly given the Fund's limitations on such
investments.
The Fund may purchase IDBs and private activity bonds. IDBs and private
activity bonds are tax-exempt securities issued by states, municipalities or
public authorities 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. Neither IDBs nor private activity bonds are 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 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, governmental regulation and the entity's dependence on
revenues for the operation of the particular facility being financed. The Fund
may also invest in so-called "moral obligation" bonds. If an issuer of such
bonds is unable to meet its obligations, repayment of such bonds becomes a moral
commitment, but not a legal obligation, of the issuer.
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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. To the extent the Fund invests in these types of Municipal
Bonds, the Fund's return on such Municipal Bonds will be subject to the risk
with respect to the value of the particular index. Interest and principal
payable on the Municipal Bonds may also be based on relative changes among
particular indices. Also, the Fund may invest in so-called "inverse floating
obligations" or "residual interest bonds" on which the interest rates typically
decline as market rates increase and increase as market rates decline. To the
extent the Fund invests in these types of Municipal Bonds, the Fund's return on
such Municipal Bonds will be subject to risk with respect to the value of the
particular index, which may include reduced or eliminated interest payments and
losses of invested principal. Such securities have the effect of providing a
degree of investment leverage, since they may increase or decrease in value in
response to changes, as an illustration, in market interest rates at a rate
which is a multiple (typically two) of the rate at which fixed-rate long-term
tax exempt securities increase or decrease in response to such changes. As a
result, the market values of such securities will generally be more volatile
than the market values of fixed-rate tax exempt securities. To seek to limit the
volatility of these securities, the Fund may purchase inverse floating
obligations with shorter term maturities or which contain limitations on the
extent to which the interest rate may vary. The Manager believes that indexed
and inverse floating obligations represent flexible portfolio management
instruments for the Fund which allows the Fund to seek potential investment
rewards, hedge other portfolio positions or vary the degree of investment
leverage relatively efficiently under different market conditions. Certain
investments in such obligations may be illiquid. The Fund may not invest in such
illiquid obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's net assets (however, in accordance
with the provisions of certain state laws, the Fund currently will not invest in
excess of 10% of its net assets in illiquid securities).
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called "lease
obligations") relating to such equipment, land and/or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
lessee's unlimited taxing power is pledged, a lease obligation frequently is
backed by the lessee'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 lessee 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 net assets. The Fund, however, may 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,
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determines to be liquid. The Manager will deem lease obligations 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, among other things, also must review the creditworthiness
of the municipality obligated to make payment under the lease obligation and
make certain specified determinations based on such factors as the existence of
a rating or credit enhancement such as insurance, the frequency of trades or
quotes for the obligation and the willingness of dealers to make a market in the
obligation.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal income taxes. For temporary periods or to provide liquidity, the
Fund has the authority to invest as much as 20% of its total assets in taxable
money market obligations with maturities of one year or less (such short-term
obligations being referred to hereinafter as "Temporary Investments"). The
Temporary Investments, VRDOs and Participating VRDOs in which the Fund may
invest also 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 and 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 may invest in certain tax-exempt securities which are classified as
"private activity bonds" (in general, bonds that benefit non-governmental
entities) and which may subject certain investors to a Federal alternative
minimum tax. The percentage of the Fund's net assets invested in "private
activity bonds" will vary during the year. See "Distributions and Taxes". In
addition, the Fund reserves the right as a defensive measure to invest
temporarily a greater portion of its assets in Temporary Investments, when, in
the opinion of the Manager, prevailing market or financial conditions warrant.
The investment objective and policies of the Fund set forth in the first three
sentences of the first paragraph of this section 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
investment policies with respect to the maturities of portfolio investments and
the hedging strategies of the Fund, which are described in more detail under
"Financial Futures and Options Transactions", are not fundamental policies and
may be modified by the Trustees of the Trust without the approval of the Fund's
shareholders.
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.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase or sell Municipal Bonds on a delayed delivery basis or
on a when-issued basis at fixed purchase or sale 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 be reflected
thereafter 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
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custodian consisting of cash, cash equivalents or liquid Municipal Bonds having
a market value at all times at least equal to the amount of the forward
commitment.
CALL RIGHTS
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a mandatory
tender for the purchase of related Municipal Bonds, subject to certain
conditions. A Call Right that is not exercised prior to the maturity of the
related Municipal Bond will expire without value.
The economic effect of holding both the Call Right and the related Municipal
Bond is identical to holding a Municipal Bond as a non-callable security.
Certain investments in such obligations may be illiquid. The Fund may not invest
in such illiquid obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's net assets.
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 primary dealer or an affiliate
thereof in U.S. Government securities. Under such agreements, the bank or
primary dealer or an affiliate thereof agrees, upon entering into the contract,
to repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. In the
case of repurchase agreements, the prices at which the trades are conducted do
not reflect accrued interest on the underlying obligations. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In the case of a repurchase
agreement, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of default by the
seller under the 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 interst 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 in repurchase agreements maturing in more
than seven days if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's net assets.
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FINANCIAL FUTURES AND OPTIONS TRANSACTIONS
The Fund is authorized to purchase and sell certain exchange-traded
financial futures contracts ("financial futures contracts") and options thereon
solely for the purposes of hedging its investments in Municipal Bonds against
declines in value and hedging against increases in the cost of securities it
intends to purchase. However, any transactions involving financial futures
contracts or options thereon (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 financial 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 financial futures contracts.
Distributions, if any, of net long-term capital gains from certain transactions
in futures or options are taxable at long-term capital gains rates for Federal
income tax purposes, regardless of the length of time the shareholder has owned
Fund shares. See "Distributions and Taxes--Taxes".
The Fund deals in financial futures contracts traded on the Chicago Board of
Trade based on The Bond Buyer Municipal Bond Index, a price-weighted measure of
the market value of 40 large, recently issued tax-exempt bonds. There can be no
assurance, however, that a liquid secondary market will exist to terminate any
particular financial futures contract at any specific time. If it is not
possible to close a financial futures contract 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 contract
positions also could have an adverse impact on the Fund's ability to hedge
effectively. There is also the risk of loss by the Fund of margin deposits in
the event of bankruptcy of a broker with whom the Fund has an open position in a
financial futures contract. The Fund also may purchase and sell financial
futures contracts on U.S. Government securities and write and purchase put and
call options on such financial 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, U.S.
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, such as financial futures
contracts (and options thereon) on other municipal bond indexes which may become
available if the Manager and the Trustees of the Trust should
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<PAGE>
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 and options transactions involves the risk of
imperfect correlation in movements in the price of futures contracts or the
related options and movements in the price of the security which is the subject
of the hedge. If the price of the futures contract or the related option 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 or the related
options 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 or the related option. Also, in the case of The Bond Buyer Municipal
Bond Index, the underlying bonds must have a remaining maturity of 19 years or
more, while the Fund will maintain an intermediate-term maturity portfolio,
which may reduce the correlation. Finally, in the case of financial futures
contracts on U.S. Government securities and options on such financial 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, 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
financial futures contracts and options thereon (i) 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 do 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 or
options. (However, as stated above, the Fund intends to engage in futures and
options 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 financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
short-term high-grade fixed-income securities in a segregated account with the
Fund's custodian, so that the amount so segregated plus the amount of initial
and variation margin held in the account of its broker equals the market value
of the financial futures contract, thereby ensuring that the use of such
financial futures contract or option thereon is unleveraged. It is not
anticipated that transactions in financial futures contracts or options thereon
will have the effect of increasing portfolio turnover.
Although certain risks are involved in futures and options transactions, the
Manager believes that, because the Fund will engage in futures and options
transactions only for hedging purposes, the futures
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portfolio strategies of the Fund will not subject the Fund to certain risks
frequently associated with speculation in futures and options transactions. The
Fund must meet certain Federal income tax requirements under the Internal
Revenue Code of 1986, as amended (the "Code"), in order to qualify for the
special tax treatment afforded regulated investment companies, including a
requirement that less than 30% of its gross income be derived from the sale or
other disposition of securities held for less than three months. Additionally,
the Fund is required to meet certain diversification requirements under the
Code.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a financial 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 in the past have
reached or exceeded the daily limit on a number of consecutive trading days.
The successful use of futures and options transactions 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 financial futures contract or option
thereon 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 only will engage
in hedging activities from time to time and may not necessarily be engaging in
hedging activities when movements in interest rates occur.
Although it has no present intention to do so, the Fund reserves the
authority, subject to the approval of the Trustees, to purchase and sell options
on Municipal Bonds in which it may invest as an additional means of hedging its
portfolio. Because these options transactions involve certain considerations in
addition to those discussed above, the Fund will not enter into any such options
transactions without making appropriate disclosure with respect thereto in the
currently effective prospectus and statement of additional information of the
Fund.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts and certain options thereon.
INVESTMENT RESTRICTIONS
The Trust has adopted a number of restrictions and policies relating to the
investment of the Fund's assets and its activities, which are fundamental
policies of the Fund and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act. Among the more significant restrictions, the Fund may
not borrow amounts in excess of 33 1/3% of its total assets taken at market
value (including the amount borrowed), and an additional 5% of its total assets
for temporary purposes.
Investors are referred to the Statement of Additional Information for a
complete description of such restrictions and policies.
19
<PAGE>
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 Investment Company 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 of
investment companies by the Investment Company Act.
The Trustees are:
ARTHUR ZEIKEL*--President and Chief Investment Officer of the Manager and
FAM; Executive Vice President of ML & Co.; Executive Vice President of Merrill
Lynch; President and Director of Princeton Services, Inc. ("Princeton
Services"); and Director of the Distributor.
RONALD W. FORBES--Professor of Finance, School of Business, State University
of New York at Albany.
CYNTHIA A. MONTGOMERY--Professor of Finance, Harvard Business School.
CHARLES C. REILLY--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President of
Arnhold and S. Bleichroeder, Inc.; and Adjunct Professor, Columbia University
Graduate School of Business.
KEVIN A. RYAN--Professor of Education, Boston University; Founder and
current Director of the Boston University Center for the Advancement of Ethics
and Character.
RICHARD R. WEST--Professor of Finance and former Dean, New York University
Leonard N. Stern School of Business Administration.
- ------------
* Interested person, as defined in the Investment Company Act, of the Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, which is owned and controlled by ML & Co., a financial services
holding company and the parent of Merrill Lynch, acts as the manager for the
Fund and provides the Fund with management and investment advisory services. The
Manager or FAM acts as the investment adviser to more than 130 registered
investment companies. The Manager also provides investment advisory services to
individuals and institutional accounts. As of January 31, 1995, the Manager and
FAM had a total of approximately $166.5 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates of
the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Trustees of the Trust, 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, subject to
review by the Trustees. The
20
<PAGE>
Manager provides the portfolio manager for the Fund who considers analyses from
various sources (including brokerage firms with which the Fund does business),
makes the necessary decisions and places transactions accordingly. The Manager
also is obligated to provide administrative services necessary for the operation
of the Trust and the Fund and all of the office space, facilities, equipment and
necessary personnel for management of the Trust and the Fund.
As compensation for its services, the Manager receives from the Fund at the
end of each month a fee at the annual rate of 0.55% of the average daily net
assets of the Fund. For the year ended October 31, 1994, the fee paid by the
Fund to the Manager was $999,575 (based on average net assets of approximately
$181.8 million). At January 31, 1995, the net assets of the Fund aggregated
approximately $157.7 million. At this asset level, the annual management fee
would aggregate approximately $867,512.
The Management Agreement obligates the Trust to pay certain expenses
incurred in the Fund's operations including, among other things, the management
fee, legal and audit fees, registration fees, unaffiliated Trustees' fees and
expenses, custodian and transfer agency fees, accounting costs, the costs of
issuing and redeeming shares and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information
distributed to shareholders. 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 year ended October 31, 1994, the Trust reimbursed
the Manager $58,282 for accounting services.
For the year ended October 31, 1994, for the Class A shares, the ratio of
total expenses to average net assets was 0.76%; for the Class B shares, the
ratio of total expenses excluding distribution fees to average net assets was
0.77% and the ratio of total expenses including distribution fees to average net
assets was 1.07%; for the Class C shares, the annualized ratio of total expenses
excluding distribution fees to average net assets was 0.88% and the annualized
ratio of total expenses including distribution fees to average net assets was
1.18%; for the Class D shares, the annualized ratio of total expenses excluding
distribution fees to average net assets was 0.87% and the annualized ratio of
total expenses including distribution fees to average net assets was 0.97%.
Vincent R. Giordano and Kenneth A. Jacob are the Portfolio Managers for the
Fund. Vincent R. Giordano has been a portfolio manager of the Manager and FAM
since 1977 and Senior Vice President of the Manager and FAM since 1984. Kenneth
A. Jacob has been a Vice President of the Manager since 1984.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act 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
21
<PAGE>
procedures are designed to identify any substantive prohibition or limitation
applicable to the proposed investment. The substantive restrictions applicable
to all employees of the Manager include a ban on acquiring any securities in a
"hot" initial public offering and a prohibition from profiting on short-term
trading in securities. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Manager. Furthermore, the Codes provide for trading
"blackout periods" which prohibit trading by investment personnel of the Fund
within periods of trading by the Fund in the same (or equivalent) security (15
to 30 days depending upon the transaction).
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of ML & Co., acts as the Trust's transfer agent pursuant
to a transfer agency, dividend disbursing agency and shareholder servicing
agency agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer
Agency Agreement, the Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent receives
a fee of $11.00 per Class A or Class D shareholder account and $14.00 per Class
B or Class C shareholder account and is entitled to reimbursement for
out-of-pocket expenses incurred by it under the Transfer Agency Agreement. For
the year ended October 31, 1994, the total fee paid by the Fund to the Transfer
Agent, for the Class A and B shares, pursuant to the Transfer Agency Agreement
was $11,218 and $65,195, respectively. At January 31, 1995, the Fund had 565
Class A shareholder accounts, 4,180 Class B shareholder accounts, 4 Class C
shareholder accounts and 28 Class D shareholder accounts. At this level of
accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $65,099 plus out-of-pocket expenses.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both the Manager 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). Class A, Class
B and Class D 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. Class C shares of
the Fund are not available for purchase but will be issued only pursuant to the
exchange privilege to holders of Class C shares of other MLAM-advised mutual
funds who elect to exchange Class C shares of such other MLAM-advised mutual
funds for Class C shares of the Fund.
The Fund is offering its Class A, Class B and Class D shares 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
PricingSM 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
22
<PAGE>
New York Stock Exchange (generally, 4:00 P.M., New York time), which includes
orders received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined 15 minutes after
the close of business on the New York Stock Exchange on the day the order is
placed with the Distributor, provided the order is received by the Distributor
prior to 30 minutes after the close of business on the New York Stock Exchange
on that day. If the purchase orders are not received prior to 30 minutes after
the close of business on the New York Stock Exchange, such orders shall be
deemed received on the next business day. The Fund 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 thereafter may
resume such offering from time to time. Any order may be rejected by the
Distributor or the Fund. Neither the Distributor nor the dealers are permitted
to withhold placing orders to benefit themselves by a price change. Merrill
Lynch may charge its customers a processing fee (presently $4.85) to confirm a
sale of shares to such customers. Purchases directly through the Fund's Transfer
Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM 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 are sold
to investors choosing the deferred sales charge alternative. Investors should
determine whether under their particular circumstances it is more advantageous
to incur an initial sales charge or to have the entire initial purchase price
invested in the Fund with the investment thereafter being subject to a
contingent deferred sales charge and ongoing distribution fees. A discussion of
the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select PricingSM System is set forth
under "Merrill Lynch Select PricingSM System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B
23
<PAGE>
and Class C shares in that the sales charges applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, which are
eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 1.0% initial sales No No No
charge(2)(3)
B 1.0% CDSC for one year 0.20% 0.10% B shares convert to D shares
automatically after
approximately ten years(4)
C(5) 1.0% CDSC for one year 0.20% 0.10% No
D Maximum 1.0% 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. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $100,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 0.20% CDSC for one year.
(4) The conversion period for dividend reinvestment shares is modified. Also,
Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made have an eight year conversion period. If Class B
shares of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
(5) Class C shares will be issued only upon exchange for Class C shares of
another MLAM-advised mutual fund. See "Shareholder Services--Exchange
Privilege".
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.
24
<PAGE>
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS DISCOUNT TO
SALES LOAD AS PERCENTAGE* SELECTED DEALERS
PERCENTAGE OF OF THE NET AS PERCENTAGE
OFFERING AMOUNT OF THE OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
- ---------------------------------------------------- ------------- ------------- ----------------
<S> <C> <C> <C>
Less than $100,000.................................. 1.00% 1.01% 0.95%
$100,000 but less than $250,000..................... 0.75 0.76 0.70
$250,000 but less than $500,000..................... 0.50 0.50 0.45
$500,000 but less than $1,000,000................... 0.30 0.30 0.27
$1,000,000 and over**............................... 0.00 0.00 0.00
</TABLE>
- ------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994 (the date Class D shares
were initially offered to the public). If the sales charge is waived, such
purchases will be subject to a CDSC of 0.20% if the shares are redeemed
within one year after purchase. Class A purchases made prior to October 21,
1994 may be subject to a CDSC if the shares are redeemed within one year of
purchase at the following rates: 0.75% on purchases of $1,000,000 to
$2,500,000; 0.40% on purchases of $2,500,001 to $3,500,000; 0.25% on
purchases of $3,500,001 to $5,000,000; and 0.20% on purchases of more than
$5,000,000, in lieu of paying an initial sales charge. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or
the cost of the shares being redeemed.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. During
the fiscal year ended October 31, 1994, the Fund sold 1,950,875 Class A shares
for aggregate net proceeds of $19,905,075. The gross sales charges for the sale
of Class A shares of the Fund for that year were $131,803, of which $7,395 and
$124,408 were received by the Distributor and Merrill Lynch, respectively. For
the fiscal year ended October 31, 1994, the Distributor received CDSCs of
$10,543 with respect to redemptions of Class A shares, all of which were paid to
Merrill Lynch. During the fiscal year ended October 31, 1994, the Fund sold
7,265 Class D shares for aggregate net proceeds of $70,467. The Distributor and
Merrill Lynch did not receive any gross sales charges for the sale of Class D
shares of the Fund for that year. For the fiscal year ended October 31, 1994, no
Class D CDSCs were received by the Distributor and Merrill Lynch.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares in a shareholder
account are entitled to purchase additional Class A shares in that account.
Class A shares are available at net asset value to corporate warranty insurance
reserve fund programs provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
at net asset value are participants in certain investment
25
<PAGE>
programs including TMASM Managed Trusts to which Merrill Lynch Trust Company
provides discretionary trustee services and certain purchases made in connection
with the Merrill Lynch Mutual Fund Adviser program. In addition, Class A shares
are offered at net asset value to ML & Co. and its subsidiaries and their
directors and employees and to members of the boards of MLAM-advised investment
companies, including the Fund. Certain persons who acquired shares of certain
MLAM-advised closed-end funds who wish to reinvest the net proceeds from a sale
of their closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met. For example, Class A shares of the
Fund and certain other MLAM-advised mutual funds are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. who wish to
reinvest the net proceeds from a sale of certain of their shares of common stock
of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value 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 if
certain conditions set forth in the Statement of Additional Information are met.
Class D shares may be offered at net asset value in connection with the
acquisition of assets of other investment companies. Class D shares also are
offered at net asset value, without sales charge, to an investor who has a
business relationship with a Merrill Lynch financial consultant and who has (i)
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 or (ii)
invested in a mutual fund sponsored by a non-Merrill Lynch company for which
Merrill Lynch has not served as a selected dealer, if certain conditions set
forth in the Statement of Additional Information are met.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
BlueprintSM Program.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
The public offering price of Class B shares for investors choosing the
deferred sales charge alternative is the next determined net asset value per
share without the imposition of a sales charge at the time of purchase. Class C
shares of the Fund are not available for purchase but will be issued only
pursuant to the exchange privilege to holders of Class C shares of other
MLAM-advised mutual funds who elect to exchange Class C shares of such other
MLAM-advised mutual funds for Class C shares of
26
<PAGE>
the Fund. As discussed below, Class B and Class C shares are subject to a one
year 1.0% CDSC. 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 0.20% of net assets and a distribution
fee of 0.10% of net assets as discussed below under "Distribution Plans". The
proceeds from the account maintenance fees are used to compensate Merrill Lynch
for providing continuing account maintenance activities.
Class B 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 of
MLAM-advised mutual funds 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 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 onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder
Services--Exchange Privilege" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B and Class C Shares. Class B
shares purchased on or after October 21, 1994 and Class C shares which are
redeemed within one year after acquisition 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 CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
CDSC will be assessed on shares derived from reinvestment of dividends or
capital gains distributions.
27
<PAGE>
Class B shares purchased prior to October 21, 1994 and redeemed within four
years of purchase are subject to a CDSC at the rates set forth below:
CDSC
AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ----------------------------------------------------------- -----------------
0-1........................................................ 2.0%
1-2........................................................ 1.5%
2-3........................................................ 1.0%
3-4........................................................ 0.5%
4 and thereafter........................................... None
For the fiscal year ended October 31, 1994, the Distributor received CDSCs of
$162,923 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch. No Class C CDSCs were received by the Distributor and Merrill
Lynch for that year.
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 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.
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Internal Revenue Code of 1986, as amended) of a
shareholder. Additional information concerning the waiver of the Class B CDSC is
set forth in the Statement of Additional Information.
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, which is lower than the account
maintenance fee borne by Class B shares, and Class D shares 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.
28
<PAGE>
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.20% (in the case of Class B and Class C shares) or 0.10% (in the case of
Class D shares) of the average daily net assets of the Fund in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) in
connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.10% 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.
29
<PAGE>
Prior to July 6, 1993, the Fund paid the Distributor an ongoing distribution
fee, accrued daily and paid monthly, at the annual rate of 1.0% of average daily
net assets of the Class B shares of the Fund under a distribution plan
previously adopted by the Fund (the "Prior Plan") to compensate the Distributor
and Merrill Lynch for providing account maintenance and distribution-related
activities and services to Class B shareholders. The fee rate payable and the
services provided under the Prior Plan are identical to the aggregate fee rate
payable and the services provided under the Class B Distribution Plan, the
difference being that the account maintenance and distribution services have
been unbundled.
For the year ended October 31, 1994, the Fund paid the Distributor account
maintenance fees of $151,213 and distribution fees of $302,427 under the Class B
Distribution Plan. From October 21, 1994 (commencement of operations) to October
31, 1994, the Fund did not pay any account maintenance fees and distribution
fees to the Distributor under the Class C Distribution Plan. For the same
period, the Fund did not pay any account maintenance fees to the Distributor
under the Class D Distribution Plan.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Trustees for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, 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 October 31,
1994, direct cash revenues for the period since commencement of the offering of
Class B and Class C shares exceeded direct cash expenses by $2,505,668 and $3,
respectively (1.769% and 0.03% of Class B and Class C net assets, respectively,
at that date). As of December 31, 1993, the last date for which fully allocated
accrual data is available, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch with respect to Class B shares for the period
since commencement of operations exceeded fully allocated accrual revenues by
approximately $957,500 (0.61% of Class B net assets at that date). As of
December 31, 1993, direct cash revenues for the period since commencement of the
offering of Class B shares exceeded direct cash expenses by $2,172,010 (1.4% of
Class B net assets at that date). Information about Class C shares as of
December 31, 1993 is not available since Class C shares were not offered
publicly until October 21, 1994.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the
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
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separately to each class. As applicable to the Fund, the maximum sales charge
rule limits the aggregate of distribution fee payments and CDSCs payable by the
Fund to (1) 6.25% of eligible gross sales of Class B shares and Class C shares,
computed separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges), plus (2) interest on the unpaid balance for the
respective class, computed separately, at the prime rate plus 1% (the unpaid
balance being the maximum amount payable minus amounts received from the payment
of the distribution fee and the CDSC). In connection with the Class B shares,
the Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
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 or 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
Alternative--Class B Shares--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 which may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends declared through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Trust's Transfer Agent, Financial Data Services, Inc., Transfer
Agency Mutual Fund Operations, P.O. Box
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45289, Jacksonville, Florida 32232-5289. Redemption requests delivered other
than by mail should be delivered to Financial Data Services, Inc., Transfer
Agency Mutual Fund Operations, 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited with the
Transfer Agent may be accomplished by a written letter requesting redemption.
Proper notice of redemption in the case of shares for which certificates have
been issued may be accomplished by a written letter as noted above accompanied
by certificates for the shares to be redeemed. Redemption requests should not be
sent to the Trust or to the Fund. A redemption request 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 or on the certificate,
as the case may be. The signature(s) on the redemption request must be
guaranteed by an "eligible guarantor institution" as such is defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended, the existence and
validity of which may be verified by the Transfer Agent through the use of
industry publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents such as, but not
limited to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payments will be mailed within seven
days of receipt of a proper notice of redemption.
At various times, the Trust may be requested to redeem Fund shares for which
it has not yet received good payment (e.g., cash, Federal funds or certified
check drawn on a United States bank). The Trust may delay or cause to be delayed
the mailing of a redemption check until such time as it has assured itself that
good payment has been collected for the purchase of such shares. Normally, this
delay will not exceed 10 days.
REPURCHASE
The Trust also will repurchase Fund shares through a shareholder's listed
securities dealer. The Trust normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after receipt of the order by the dealer, provided that the
request for repurchase is received by the dealer prior to the regular close of
business on the New York Stock Exchange on the day received and is received by
the Trust from such dealer not later than 30 minutes after the close of business
on the New York Stock Exchange (generally, 4:00 P.M., New York time) on the same
day.
Dealers have the responsibility of submitting such repurchase requests to
the Trust not later than 30 minutes after the close of business on the New York
Stock Exchange, in order to obtain that day's closing price. These repurchase
arrangements are for the convenience of shareholders and do not involve a charge
by the Trust (other than any applicable CDSC). Securities firms which do not
have selected dealer agreements with the Distributor, however, may impose a
charge on the shareholder for transmitting the notice of repurchase to the
Trust. Merrill Lynch may charge its customers a processing fee (currently $4.85)
to confirm a repurchase of shares. Redemptions directly through the Fund's
Transfer Agent are not subject to the processing fee. The Trust reserves the
right to reject any order for repurchase, which right of rejection might affect
adversely shareholders seeking redemption through the repurchase procedure. A
shareholder whose order for repurchase is rejected by the Trust, however, may
redeem Fund shares as set forth above.
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REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement privilege is a one-time privilege and
may be exercised by the Class A or Class D shareholder only the first time such
shareholder makes a redemption.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to each
of such services, copies of the various plans described below and instructions
as to how to participate in the various plans and services, or information on
changing options with respect thereto, can be obtained from the Trust by calling
the telephone number on the cover page hereof or from the Distributor or Merrill
Lynch. Included in such services are the following:
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an investment account ("Investment Account") and will
receive, at least quarterly, statements from the Transfer Agent showing any
automatic investment purchases and reinvestments of dividends and capital gain
distributions, and any other activity in the account since the preceding
statement. Shareholders also will receive separate confirmations for each
purchase or sale transaction other than automatic investment purchase and the
reinvestment of dividends and capital gain distributions. A shareholder may make
additions to his Investment Account at any time by mailing a check directly to
the Transfer Agent. Shareholders also may 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 will be
opened automatically, without charge, at the Transfer Agent. Shareholders
considering transferring their Class A or Class D shares from Merrill Lynch to
another brokerage firm or financial institution should be aware that, if the
firm to which the Class A or Class D shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A or
Class D shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new brokerage
firm to maintain such shares in an account registered in the name of the
brokerage firm for the benefit of the shareholder at the Transfer Agent.
Exchange Privilege. Shareholders of each class of shares of the Fund have an
exchange privilege with certain other MLAM-advised mutual funds. There is
currently no limitation on the number of
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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 PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of the Fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is "tacked" to the holding period of the newly acquired shares of the other
funds.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information.
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The Fund's exchange privilege is modified with respect to purchases of Class
A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("MFA")
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D shares
of a MLAM-advised mutual fund for Class A or Class D shares of the Fund will be
made solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
Automatic Reinvestment of Dividends and Capital Gain Distributions. Unless
specific instructions are given as to the method of payment of dividends and
capital gains distributions, all dividends and capital gain distributions are
reinvested automatically in full and fractional shares of the Fund, without a
sales charge, at the net asset value per share next determined on the payable
date of such dividend or distribution. A shareholder may at any time, by
notifying the Transfer Agent in writing or by telephone (1-800-MER-FUND), elect
to have subsequent dividends or both dividends and capital gain distributions
paid in cash, rather than reinvested, in which event payment will be mailed on
or about the payment date. Cash payments can also be directly deposited to the
shareholder's bank account. No CDSC will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gain
distributions.
Systematic Withdrawal Plans. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his or her Investment Account in the
form of payments by check or through automatic payment by direct deposit to his
or her bank account on either a monthly or quarterly basis. A Class A or Class D
shareholder whose shares are held within a CMA(R) or CBA(R) Account may elect to
have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual
basis through the CMA(R)/CBA(R) Systematic Redemption Program, subject to
certain conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
or 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. Investors who
maintain CMA(R) or CBA(R) accounts may arrange to have periodic investments made
in the Fund in their CMA(R) or CBA(R) accounts or in certain related accounts in
amounts of $100 or more through the CMA(R)/CBA(R) Automated Investment Program.
PORTFOLIO TRANSACTIONS
Subject to the policies established by the Trustees or the Trust, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions. 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.
The 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 the price
(including the applicable dealer spread or commission), the size, type and
difficulty of the transaction involved, the firm's general execution and
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<PAGE>
operations facilities, and the firm's risk in positioning the securities
involved and the provision of supplemental investment research by the firm.
While reasonably competitive spreads or commissions are sought, the Fund will
not necessarily be paying the lowest spread or commission available. The sale of
shares 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 net 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 Investment Company Act, persons affiliated with the Trust,
including Merrill Lynch, 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. 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. In addition, the Trust may not purchase securities,
including Municipal Bonds, for the Fund during the existence of any underwriting
syndicate of which Merrill Lynch is a member except pursuant to procedures
approved by the Trustees of the Trust which comply with rules adopted by the
Commission. An affiliated person of the Trust may serve as its broker in
over-the-counter transactions conducted by the Fund on an agency basis only. For
the fiscal years ended October 31, 1992, 1993 and 1994, the Fund paid no
brokerage commissions.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily prior
to the determination of the net asset value which is calculated 15 minutes after
the close of business on the New York Stock Exchange (generally, 4:00 P.M., New
York time) on that day. The net investment income of the Fund for dividend
purposes consists of interest earned on portfolio securities, less expenses, in
each case computed since the most recent determination of net asset value.
Expenses of the Fund, including the management and any account maintenance
and/or distribution fees, are accrued daily. Dividends of net investment income
are declared daily and reinvested monthly in the form of additional full and
fractional shares of the Fund at net asset value unless the shareholder elects
to receive such dividends in cash. Shares will accrue dividends as long as they
are issued and outstanding. Shares are issued and outstanding as of the
settlement date of a purchase order to the day prior to the settlement date of a
redemption order.
All net realized long-or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders annually after the close of the Fund's
fiscal year. 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--Automatic Reinvestment of Dividends and Capital
Gain Distributions" 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 Fund shares or received in cash.
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<PAGE>
TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Trust
intends to cause the Fund to distribute substantially all of such income.
To the extent that the dividends distributed to the Fund's Class A, Class B,
Class C and Class D shareholders (together, the "shareholders") are derived from
interest income exempt from Federal income tax under Code Section 103(a) and are
properly designated as "exempt-interest dividends" by the Trust, they will be
excludable from a shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends are included, however, in determining the portion, if
any, of a person's Social Security benefits and railroad retirement benefits
subject to Federal income tax. The Trust will inform shareholders annually as to
the portion of the Fund's distributions which constitutes "exempt-interest
dividends". Interest on indebtedness incurred or continued to purchase or carry
Fund shares is not deductible for Federal 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 advisers before purchasing Fund shares.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal income tax purposes. Distributions, if
any, of net long-term capital gains from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares. Distributions by the Fund,
whether from exempt-interest income, ordinary income or capital gains, are not
eligible for the dividends received deduction allowed to corporations under the
Code. Under the Revenue Reconciliation Act of 1993, all or a portion of the
Fund's gain from the sale or redemption of tax-exempt obligations purchased at a
market discount will be treated as ordinary income rather than capital gain.
This rule may increase the amount of ordinary income dividends received by
shareholders. Distributions in excess of the Fund's earnings and profits first
will reduce the adjusted tax basis of a holder's shares and, after such adjusted
tax basis is reduced to zero, will constitute capital gains to such holder
(assuming the shares are held as a capital asset). Any loss upon the sale or
exchange of Fund shares held for six months or less will be treated as long-term
capital loss to the extent of any capital gain dividends received by the
shareholder. In addition, such loss will be disallowed to the extent of any
exempt-interest dividends received by the shareholder. If the Fund pays a
dividend in January which was declared 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 having been paid by the
Fund and received by its shareholders on December 31 of the year in which the
dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This 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
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purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference", which could subject investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund will purchase
such "private activity bonds", and the Trust will report to shareholders within
60 days after the Fund's taxable year-end the portion of its dividends declared
during the year which are a tax preference item 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 an
alternative minimum tax on exempt-interest dividends paid by the Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax brackets
of 36% and 39.6% for individuals and has created a graduated structure of 26%
and 28% for the alternative minimum tax applicable to individual taxpayers.
These rate increases may affect an individual investor's after-tax return from
an investment in the Fund as compared with such investor's return from taxable
investments.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
such shares, then the
loss the shareholder can recognize on the exchange will be reduced (or the gain
increased) to the extent the sales charge paid to the Fund reduces any sales
charge 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.
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The exemption from Federal income tax for exempt-interest dividends does not
necessarily result in an exemption for such dividends under the income or other
tax laws of any state or local taxing authority. Shareholders are advised to
consult their own tax advisers concerning state and local tax matters.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return,
yield and tax equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return, yield and tax equivalent yield are computed
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such as
in the case of Class B and Class C shares and the maximum sales charge in the
case of Class A and Class D shares. Dividends paid by the Fund with respect 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
39
<PAGE>
than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time. In advertisements distributed
to investors whose purchases are subject to reduced sales charges in the case of
Class A and Class D shares or waiver of the CDSC in the case of Class B and
Class C 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/net asset
value 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 Commission standardized
yield for the 30-day period ended October 31, 1994 was 4.74% for Class A shares
and 4.47% for Class B shares and the tax equivalent yield for the same period
(based on a Federal income tax rate of 28%) was 6.58% for Class A shares and
6.21% for Class B shares. The Commission standardized yield for the 30-day
period ended December 31, 1994 was 5.16% for Class A shares, 4.91% for Class B
shares, 4.94% for Class C shares and 5.11% for Class D shares and the tax
equivalent yield for the same period (based on a Federal income tax rate of 28%)
was 7.17% for Class A shares, 6.82% for Class B shares, 6.86% for Class C shares
and 7.10% 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 New York
Stock Exchange (generally, 4:00 P.M., New York time), on each day during which
the New York Stock Exchange is open for trading. The net asset
40
<PAGE>
value per share is computed by dividing the sum of the value of the securities
held by the Fund plus any cash or other assets minus all liabilities by the
total number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the management fees payable to the Manager and any account
maintenance and/or distribution fees payable to the Distributor, are accrued
daily.
The net asset value per share of Class A shares generally will be higher
than the net asset value per share 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 net asset value per share of Class D
shares generally will be higher than the net asset value per share of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
fees and higher account maintenance and 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 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.
ORGANIZATION OF THE TRUST
The Trust is an unincorporated business trust organized on August 14, 1986
under the laws of Massachusetts. It is a diversified, open-end management
investment company comprised of separate series ("Series"), each of which is a
separate portfolio offering shares to selected groups of purchasers. At the date
of this Prospectus, the Fund is the only existing Series of the Trust. The
Trustees are authorized to create an unlimited number of Series and, with
respect to each Series, to issue an unlimited number of full and fractional
shares of beneficial interest of $.10 par value of different classes.
Shareholder approval is not required for the authorization of additional Series
or classes of a Series of the Trust. The shares of the Fund are divided into
Class A, Class B, Class C and Class D shares. Class A, Class B, Class C and
Class D shares represent an interest in the same assets of the Fund and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions except that Class B, Class C and Class D shares bear certain expenses
related to the account maintenance associated with such shares, and Class B and
Class C shares bear certain expenses related to the distribution of such shares.
Each class has exclusive voting rights with respect to matters relating to
account maintenance and distribution expenditures, as applicable. See "Purchase
of Shares". The Trust has received an order from the Commission permitting the
issuance and sale of multiple classes of shares. The Trustees of the Trust may
classify and reclassify the shares of any Series into additional classes at a
future date.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to the
extent hereinafter provided) and on other matters submitted to the vote of
shareholders. 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, each class shares of a Series will have
exclusive voting rights with respect to matters relating to the account
maintenance and distribution expenses being borne solely by such class. There
normally will be no 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,
41
<PAGE>
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 Investment Company Act to seek
approval of new management and advisory arrangements, of a material increase in
account maintenance or distribution fees or of a change in the fundamental
policies, objectives or restrictions of a Series. Except as set forth above, the
Trustees shall continue to hold office and appoint successor Trustees. Each
issued and outstanding share is entitled to participate equally in dividends and
distributions declared by the respective Series and in net assets of such Series
upon liquidation or dissolution remaining after satisfaction of outstanding
liabilities except, 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.
The Declaration of Trust establishing the Trust, dated August 14, 1986, a
copy of which together with all amendments thereto (the "Declaration") is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch 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" (as defined in the Declaration) only shall be liable.
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
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this please call your Merrill Lynch financial
consultant or Financial Data Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries with respect to the Fund may be addressed to the Trust
at the address or telephone number set forth on the cover page of this
Prospectus.
42
<PAGE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM 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 D shares
of Merrill Lynch Municipal Intermediate Term Fund and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $ ......... payable to Financial Data Services,
Inc., as an initial investment (minimum $1,000). I understand that this purchase
will be executed at the applicable offering price next to be determined after
this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that would
qualify for the right of accumulation as outlined in the Statement of Additional
Information: (Please list all funds. Use a separate sheet of paper if
necessary.)
<TABLE>
<S> <C>
1............................................ 4............................................
2............................................ 5............................................
3............................................ 6............................................
</TABLE>
Name ...........................................................................
First Name Initial Last
Name
Name of Co-Owner (if any) ......................................................
First Name Initial Last
Name
Address ........................................................................
...............................................................................
(Zip Code)
<TABLE>
<S> <C>
Occupation................................... Name and Address of Employer.................
............................................. .............................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(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
<TABLE>
<S> <C>
Ordinary Income Dividends Long-term Capital Gains
Select / / Reinvest Select / / Reinvest
One: / / Cash One: / / Cash
</TABLE>
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 Municipal Intermediate Term Fund Authorization
Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE): / / checking / / savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number .......................... Account Number .........................
Bank Address....................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING THIS
SERVICE.
Signature of Depositor..........................................................
Signature of Depositor .................................................
Date....................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY
THIS APPLICATION.
43
<PAGE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM 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.
<TABLE>
<S> <C>
............................................... ...............................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND 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 Municipal Intermediate Term Fund or any other investment company with an
initial sales charge or deferred sales charge for which the Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
<TABLE>
<S> <C> <C> <C>
/ / $100,000 / / $250,000 / / $500,000 / / $1,000,000
</TABLE>
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Municipal
Intermediate Term 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 Municipal Intermediate Term Fund held as security.
<TABLE>
<S> <C>
By............................................. ...............................................
Signature of Owner Signature of Co-Owner (If registered in joint
names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name....................................... (2) Name.......................................
Account Number................................. Account Number.................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
<TABLE>
<S> <C>
We hereby authorize Merrill Lynch Funds Distributor, Inc. to
act as our agent in connection with transactions under
this authorization form and agree to notify the Distributor of
any purchases made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the Shareholder's signature.
...........................
Dealer Name and Address
By..........................
Authorized Signature of Dealer
This form, when completed, should be mailed to:
Merrill Lynch Municipal Intermediate Term Fund
c/o Financial Data Services, Inc. .........................
Transfer Agency Mutual Fund Operations Branch Code F/C No. F/C Last Name
P.O. Box 45289
Jacksonville, Florida 32232-5289
Dealer's Customer Account No.
</TABLE>
44
<PAGE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM 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 Taxpayer Identification Number
Name of Co-Owner (if any)....................
Address......................................Account Number.....................
(if existing account)
............................................
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Municipal
Intermediate Term Fund at cost or current offering price. Withdrawals to be made
either (check one) / / Monthly on the 24th day of each month, or / / Quarterly
on the 24th day of March, June, September and December. If the 24th falls on a
weekend or holiday, the next succeeding business day will be utilized. Begin
systematic withdrawal on ________ (month) or as soon as possible thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE):
/ / $_______ or / / ____% of the current value of
/ / Class A or / / Class D shares in the account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of.........................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print).....................................................
Address.........................................................................
...........................................................................
Signature of Owner.........................................Date ................
Signature of Co-Owner (if any)..................................................
(b) I hereby authorize payment by direct deposit to my bank account and, if
necessary, debit entries and adjustments for any credit entries made to my
account. I agree that this authorization will remain in effect until I provide
written notification to Financial Data Services, Inc. amending or terminating
this service.
Specify type of account (check one): / / checking / / savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number .......................... Account Number .........................
Bank Address....................................................................
...............................................................................
Signature of Depositor.....................................Date ................
Signature of Depositor..........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
45
<PAGE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND--
AUTHORIZATION FORM (PART 2)--(CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below each
month to purchase: (choose one)
<TABLE>
<S> <C> <C> <C>
/ / Class A shares / / Class B shares / / Class D shares
</TABLE>
of Merrill Lynch Municipal Intermediate Term 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.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Municipal Intermediate Term Fund as indicated below:
Amount of each ACH debit $.....................................................
Account No.....................................................................
Please date and invest ACH debits on the 20th of each month
beginning ................ (month) or as soon
thereafter as possible.
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund 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 presentation, Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
.................... .............................
Date Signature of Depositor
.............................
Signature of Depositor
(If joint account, both must
sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .................................... State ....................... Zip Code
As a convenience to me, I hereby request and authorize you to pay and charge
to my account ACH debits drawn on my account by and payable to Financial Data
Services, Inc. I agree that your rights in respect to each such debit shall be
the same as if it were a check drawn on you and signed personally by me. This
authority is to remain in effect until revoked by me in writing. Until you
receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under
no liability.
.................... .............................
Date Signature of Depositor
.................... .............................
Bank Account Number Signature of Depositor
(If joint account, both must
sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
Attn: TAMFO
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
OTHER INFORMATION 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
PAGE
----
Fee Table............................... 2
Merrill Lynch Select PricingSM System... 3
Financial Highlights.................... 8
Investment Objective and Policies....... 10
Description of Municipal Bonds......... 12
When-Issued Securities and Delayed
Delivery Transactions................... 15
Call Rights............................ 16
Repurchase Agreements.................. 16
Financial Futures and Options
Transactions............................ 17
Investment Restrictions................ 19
Management of the Trust................. 20
Trustees............................... 20
Management and Advisory Arrangements... 20
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 Alternative--
Class B 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....................... 33
Shareholder Services.................... 33
Portfolio Transactions.................. 35
Distributions and Taxes................. 36
Distributions.......................... 36
Taxes.................................. 37
Performance Data........................ 39
Additional Information.................. 40
Determination of Net Asset Value....... 40
Organization of the Trust.............. 41
Shareholder Reports.................... 42
Shareholder Inquiries.................. 42
Authorization Form...................... 43
Code # 10435-0295
[LOGO]
MERRILL LYNCH
MUNICIPAL INTERMEDIATE
TERM FUND
MERRILL LYNCH MUNICIPAL
SERIES TRUST
PROSPECTUS
February 28, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
MERRILL LYNCH MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
-------------------
Merrill Lynch Municipal Intermediate Term Fund (the "Fund"), formerly
Merrill Lynch Municipal Income Fund, is presently the only series of Merrill
Lynch Municipal Series Trust (the "Trust"), a diversified, 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 taxes as is consistent with its investment policies
and prudent investment management. There can be no assurance that the investment
objective of the Fund will be realized.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes is
most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
-------------------
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 February
28, 1995 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Trust at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
-------------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
-------------------
The date of this Statement of Additional Information is February 28, 1995.
<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 taxes as is consistent with its
investment policies and prudent investment management. The Fund seeks to achieve
its objective by investing primarily in a diversified portfolio of obligations
issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
and instrumentalities, the payments from which, in the opinion of bond counsel
to the issuer, are exempt in their entirety from Federal income taxes
("Municipal Bonds"). The Fund at all times, except during temporary defensive
periods, will maintain at least 80% of its net assets invested in Municipal
Bonds. At times, the Fund may seek to hedge its portfolio through the use of
futures and options 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.
While there is no limit on the remaining maturity of individual Municipal
Bonds in the Fund's portfolio, depending on market conditions, an
intermediate-term dollar weighted average maturity of five to twelve years is
anticipated. Generally, as is the case with any investment grade fixed-income
obligations, Municipal Bonds with longer maturities tend to produce higher
yields. Under normal conditions, however, such yield-to-maturity increases tend
to decline in the longer maturities (i.e., the slope of the yield curve
flattens). At the same time, due to their longer exposure to interest rate risk,
prices of longer-term obligations are subject to greater market fluctuations as
a result of changes in interest rates. Based on the foregoing premises, the
Fund's manager, Merrill Lynch Asset Management, L.P. (the "Manager"), believes
that the yield and price volatility characteristics of an intermediate-term
portfolio generally offer an attractive trade-off between return and risk. There
may be market conditions, however, where an intermediate-term portfolio may be
less attractive due to the fact that the Municipal Bond yield curve changes from
time to time depending on supply and demand forces, monetary and tax policies
and investor expectations. As a result, there may be situations where
investments in individual Municipal Bonds with longer remaining maturities may
be more attractive than individual intermediate-term Municipal Bonds.
Nevertheless, the Fund anticipates maintaining a dollar weighted average
portfolio maturity of five to twelve years. In the event of any sustained market
conditions that make it less desirable to maintain such an intermediate-term
average portfolio maturity, the Trustees of the Trust may consider changing the
investment policies of the Fund with respect to average portfolio maturity.
For the years ended October 31, 1993 and 1994 the rates of portfolio
turnover were 83.66% and 52.56%, respectively.
Set forth below is a detailed description of the Municipal Bonds and
short-term taxable obligations (such obligations being referred to herein as
"Temporary Investments") in which the Fund may invest. A more complete
discussion concerning futures 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
the 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
such as airports, bridges, highways,
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housing, mass transportation, schools, streets and water and sewer works. Other
public purposes for which Municipal Bonds may be issued include the refunding of
outstanding obligations and the obtaining of funds for general operating
expenses or for loans to public or private institutions for the construction of
facilities such as educational, hospital and housing facilities. In addition,
certain types of private activity bonds or industrial development bonds may be
issued by or on behalf of public authorities to finance various privately owned
or operated facilities, including pollution control facilities, and certain
facilities for the local furnishing of water, gas, electricity or sewage or
solid waste disposal and other specialized facilities. Such obligations are
included within the term Municipal Bonds if the interest paid thereon is exempt,
in the opinion of bond counsel to the issuer, from Federal income tax. Other
types of private activity bonds or industrial development bonds, the proceeds of
which are used for the construction, equipment, repair or improvement of
privately owned or operated industrial or commercial facilities, may constitute
Municipal Bonds, although the current Federal tax laws place substantial
limitations on the size of such issues.
The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of faith, credit and taxing power for the payment of
principal and interest. The taxing power of any governmental entity may be
limited, however, by provisions of state constitutions or laws, and an entity's
credit will depend on many factors, including potential erosion of the tax base
due to population declines, natural disasters, declines in the state's
industrial base, the 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.
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. The Fund also may invest in "moral
obligation" bonds, which normally are 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.
Private activity bonds issued after April 15, 1986 and industrial
development 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 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 tax-exempt money market securities in which the Fund may invest may
include municipal notes, municipal commercial paper, Municipal Bonds with a
remaining maturity of less than one year, variable rate demand obligations
("VRDOs") and participation interests therein ("Participating VRDOs"). Municipal
notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes and project 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.
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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 on 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 may not be honored. The interest rates
are adjustable at intervals ranging from daily to up to six months 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 set at
a rate determined by the remarketing agent or based upon the prime rate of a
bank or some other appropriate interest rate adjustment index. The Fund may
invest in all types of tax-exempt instruments currently outstanding or to be
issued in the future which satisfy the maturity and quality standards of the
Fund.
The Fund also may invest in VRDOs in the form of 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 on a specified number of
days' notice, not to exceed seven days. In addition, each 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, if any, and issuing the repurchase commitment.
The Fund has been advised by its counsel that the Fund should be entitled to
treat the income received on Participating VRDOs as interest from tax-exempt
obligations.
VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed to be illiquid securities. A VRDO with a demand notice
period exceeding seven days therefore will 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 may invest up to 20% of its total assets in Municipal Bonds which
are rated below Baa by Moody's Investors Service, Inc. ("Moody's") or below BBB
by Standard & Poor's Ratings Group ("Standard & Poor's") or Fitch Investors
Service, Inc. ("Fitch") or which, in the Manager's judgment, possess similar
credit characteristics ("high-yield securities"). See Appendix--"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
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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 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 of high-yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. During periods of economic recession, 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.
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 generally are 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.
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Factors adversely affecting the market value of high-yield securities are likely
to affect adversely 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.
Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the issuer, the general conditions of the money market
and of the municipal bond market, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. The ability of the Fund
to achieve its investment objective also is dependent on the continuing ability
of the issuers of the bonds in which the Fund invests to meet their obligations
for the payment of interest and principal when due. There are variations in the
risks involved in holding Municipal Bonds, both within a particular
classification and between classifications, depending on numerous factors.
Furthermore, the rights of owners of Municipal Bonds and the obligations of the
issuer of such Municipal Bonds may be subject to applicable bankruptcy,
insolvency and similar laws and court decisions affecting the rights of
creditors generally.
Municipal Bonds at times may 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 obligations and
the interest rate are each fixed at the time the buyer enters into the
commitment. The Fund only will make 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 actually may 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 or liquid Municipal
Bonds (valued on a daily basis) equal at all times to the amount of the
when-issued commitment.
DESCRIPTION OF TEMPORARY INVESTMENTS
As Temporary Investments, the Fund may invest in short-term taxable
securities subject to the limitations set forth under "Investment Objective and
Policies" in the Prospectus. 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 remaining maturity not in excess of one year from the
date of purchase.
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, F-1 through F-3 by Fitch, or Prime-1 through Prime-3 by Moody's or, if
not rated, issued by companies having an outstanding debt issue rated at least A
by Standard & Poor's, Moody's or Fitch. 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,
Moody's or Fitch. 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
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Moody's or F-1 through F-3 by Fitch. Temporary Investments, if not rated, must
be, in the opinion of the Manager, of comparable quality to securities rated in
the above rating categories. 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 the Fund's total assets may be invested in
certificates of deposit of smaller institutions if such certificates are fully
insured by the FDIC.
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 primary dealer or an affiliate
thereof in U.S. Government securities. Under such agreements, the bank or
primary dealer or an affiliate thereof agrees, on entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. In the
case of repurchase agreements, the prices at which the trades are conducted do
not reflect accrued interest on the underlying obligation. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In the case of a repurchase
agreement, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a repurchase
agreement, instead of the contractual fixed rate of return, the rate of return
to the Fund shall be dependent on 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 in repurchase agreements maturing in more
than seven days if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's net assets (however, in accordance
with the provisions of certain state laws, the Fund currently will not invest in
excess of 10% of its net assets in illiquid securities).
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold". Therefore,
amounts earned under such agreements will not be considered tax-exempt interest.
FINANCIAL FUTURES AND OPTIONS TRANSACTIONS
Reference is made to the discussion concerning futures and options
transactions under "Investment Objective and Policies" in the Prospectus. Set
forth below is additional information concerning these transactions.
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As described in the Prospectus, the Fund may purchase and sell financial
futures contracts ("financial futures contracts") or options thereon 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
contracts or options (or puts and calls associated therewith) will be in
accordance with the Fund's investment policies and limitations. See "Investment
Objective and Policies--Investment Restrictions" in the Prospectus. To hedge its
portfolio, the Fund may take an investment position in a financial futures
contract or the related option 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
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 and options transactions.
Description of Financial Futures Contracts. A financial futures contract is
an agreement between two parties to buy and sell a security or, in the case of
an index-based financial futures contract, to make and accept a cash settlement
for a set price on a future date. A majority of transactions in financial
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. Financial futures contracts
have been designed by boards of trade which have been designated "contract
markets" by the Commodity Futures Trading Commission (the "CFTC").
The purchase or sale of a financial 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 financial 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 financial futures
contract fluctuates making the long and short positions in the financial futures
contract more or less valuable, a process known as "mark to the market". At any
time prior to the settlement date of the financial futures contract, the
position may be closed out by taking an opposite position which will operate to
terminate the position in the financial 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 (the "CBT") and The Bond
Buyer (the "Municipal Bond Index"). Financial futures contracts based on the
Municipal Bond Index began trading on June 11, 1985. The Municipal Bond Index is
comprised of 40 tax-exempt municipal revenue bonds and general obligation bonds.
Each bond included in the Municipal Bond Index must be rated A or higher by
Moody's, Standard & Poor's or Fitch 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.
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The Municipal Bond Index financial futures contract is traded only on the
CBT. Like other contract markets, the CBT assures performance under financial
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, U.S. 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 financial 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 financial futures contract transactions such as financial futures
contracts on other municipal bond indexes which may become available if the
Manager and the Trustees of the Trust should determine that there is normally a
sufficient correlation between the prices of such financial 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 financial 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 financial 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
financial futures contracts as a hedge against any increase in the cost of
Municipal Bonds, resulting from an increase in interest rates or otherwise, that
may occur before such purchases can be effected. Subject to the degree of
correlation between Municipal Bonds and the financial 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 financial futures contracts will be closed out. Due to
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changing market conditions and interest rate forecasts, however, a futures
position may be terminated without a corresponding purchase of portfolio
securities.
Call Options on Financial Futures Contracts. The Fund also may 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 financial 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
financial 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 financial futures contract or underlying debt securities. Like the purchase
of a financial futures contract, the Fund will purchase a call option on a
financial futures contract to hedge against a market advance when the Fund is
not fully invested.
The writing of a call option on a financial futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the financial 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 Financial Futures Contracts. The purchase of a put option on
a financial futures contract is analogous to the purchase of a protective put
option on a portfolio security. The Fund will purchase a put option on a
financial futures contract to hedge the Fund's portfolio against the risk of
rising interest rates.
The writing of a put option on a financial futures contract constitutes a
partial hedge against increasing prices of the securities which are deliverable
upon exercise of the financial 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 financial 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 financial
futures contract involves risks similar to those relating to financial futures
contracts.
-------------------
The Trust has received an order from the Securities and Exchange Commission
(the "Commission") exempting it from the provisions of Section 17(f) and Section
18(f) of the Investment Company Act of 1940, as amended (the "Investment Company
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 Investment Company 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 financial futures
contract may be a "senior security" under the Investment Company Act.
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Restrictions on the Use of Futures and Options Transactions. Under
regulations of the CFTC, the futures trading activities described herein will
not result in the Fund being deemed a "commodity pool," as defined under such
regulations, provided that the Fund adheres to certain restrictions. In
particular, the Fund may purchase and sell financial futures contracts and
options thereon (i) 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 do 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 transactions. (However, the Fund
intends to engage in futures and options 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 financial futures contracts or a call option or
writes a put option, an amount of cash, cash equivalents or short-term
high-grade fixed income securities will be deposited in a segregated account
with the Fund's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the financial futures contract, thereby ensuring that the use of
such futures is unleveraged.
Risk Factors in Futures and Options Transactions. Investment in financial
futures contracts involves the risk of imperfect correlation between movements
in the price of the financial 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 financial futures contract moves more than the
price of the hedged security, the Fund will experience either a loss or gain on
the financial 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 financial 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 financial futures contracts.
Conversely, the Fund may purchase or sell fewer financial futures contracts if
the volatility to the price of the hedged securities is historically less than
that of the financial 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 price movements of the
Municipal Bonds held by the Fund. The correlation may be affected by disparities
in the average maturity, ratings, geographic 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 financial 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 financial futures contracts and the prices of
Municipal Bonds held by the Fund may be greater.
The Fund expects to liquidate a majority of the financial futures contracts
it enters into through offsetting transactions on the applicable contract
market. There can be no assurance, however, that a
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liquid secondary market will exist for any particular financial futures contract
at any specific time. Thus, it may not be possible to close out a financial
futures contract 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 financial
futures contract 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 financial futures contract position only if, in the judgment of the
Manager, there appears to be an actively traded secondary market for such
financial 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 financial futures
contract or option is held by the Fund or such rates move in a direction
opposite to that anticipated, the Fund may realize a loss on the hedging
transaction which is not fully or partially offset by an increase in the value
of portfolio securities. As a result, the Fund's total return for such period
may be less than if it had not engaged in the hedging transaction.
Because of low initial margin deposits made upon the opening of a financial
futures contract position, futures transactions involve substantial leverage. As
a result, relatively small movements in the price of the financial futures
contract can result in substantial unrealized gains or losses. Because the Fund
will engage in the purchase and sale of financial 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
financial 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 also entails the risk that changes in the value of the
underlying financial futures contract will not be fully reflected in the value
of the option purchased.
Municipal Bond Index financial futures contracts were approved for trading
in 1986. Trading in such financial futures contracts may tend to be less liquid
than that in other financial futures contracts. The trading of financial futures
contracts also is subject to certain market risks, such as inadequate trading
activity, which could at times make it difficult or impossible to liquidate
existing positions.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Trust has adopted a number of restrictions and policies relating to the
investment of its assets and its activities which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the Fund's shares present
at a meeting at which more than 50% of the
12
<PAGE>
outstanding shares of the Fund are represented or (ii) more than 50% of the
Fund's outstanding shares). The Fund may not:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its total
assets (including the amount borrowed), (ii) the Fund may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) the Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (iv) the Fund may purchase
securities on margin to the extent permitted by applicable law. The Fund may
not pledge its assets other than to secure such borrowings or, to the extent
permitted by the Fund's investment policies as set forth in its Prospectus
and Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and the
Fund's Prospectus and Statement of Additional Information, as they may be
amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
13
<PAGE>
Under the proposed non-fundamental investment restrictions, the Fund may
not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Trustees of the Fund has otherwise determined
to be liquid pursuant to applicable law. Notwithstanding the 15% limitation
herein, to the extent the laws of any state in which the Fund's shares are
registered or qualified for sale require a lower limitation, the Fund will
observe such limitation. As of the date hereof, therefore, the Fund will not
invest more than 10% of its total assets in securities which are subject to
this investment restriction (c).
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed 2%
of the Fund's net assets, are warrants which are not listed on the New York
Stock Exchange or American Stock Exchange or a major foreign exchange. For
purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more than
5% of the Fund's total assets would be invested in such securities. This
restriction shall not apply to mortgage-backed securities, asset-backed
securities or obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those individual
officers and trustees of the Trust, the officers and general partner of the
Manager, the directors of such general partner or the officers and directors
of any subsidiary thereof each owning beneficially more than one-half of one
percent of the securities of such issuer own in the aggregate more than 5%
of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
14
<PAGE>
i. Notwithstanding fundamental investment restriction (7) above, borrow
amounts in excess of 20% of its total assets taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes.
In addition, to comply with tax requirements for qualification as a
"regulated investment company", the Fund's investments will be limited in a
manner such that, at the close of each quarter of each fiscal year, (a) no more
than 25% of the Fund's total assets are invested in the securities of a single
issuer, and (b) with regard to at least 50% of the Fund's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
[For purposes of this restriction, the Fund will regard each state and each
political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public authority
which issues securities on behalf of a private entity as a separate issuer,
except that if the security is backed only by the assets and revenues of a
non-government entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer.] These
tax-related limitations may be changed by the Trustees of the Trust to the
extent necessary to comply with changes to the Federal tax requirements.
-------------------
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Trust, the Trust is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to an exemptive
order under the Investment Company Act. See "Portfolio Transactions". Without
such an exemptive order, the Trust is prohibited from engaging in portfolio
transactions with Merrill Lynch or its affiliates acting as principal and from
purchasing securities in public offerings which are not registered under the
Securities Act or are not municipal securities, as defined in the Securities
Exchange Act of 1934, in which such firm or any of its affiliates participates
as an underwriter or dealer.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust and their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each Trustee and executive officer is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (62)--President and Trustee(1)(2)--President of the Manager
(which term, as used herein, includes the Manager's corporate predecessors)
since 1977 and Chief Investment Officer since 1976; President and Chief
Investment Officer of FAM (which term, as used herein, includes FAM's corporate
predecessors) since 1977; President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; Executive Vice President of Merrill Lynch
since 1990 and a Senior Vice President thereof from 1985 to 1990; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor").
15
<PAGE>
RONALD W. FORBES (54)--Trustee(2)--1400 Washington Avenue, Albany, New York
12222. Professor of Finance, School of Business, State University of New York at
Albany since 1989 and Associate Professor prior thereto; Member, Task Force on
Municipal Securities Markets, Twentieth Century Fund.
CYNTHIA A. MONTGOMERY (42)--Trustee(2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 20163. Professor, Harvard Business School
since 1989; Associate Professor, J.L. Kellogg Graduate School of Management,
Northwestern University from 1985 to 1989; Assistant Professor, Graduate School
of Business Administration, the University of Michigan from 1979 to 1985;
Director, UNUM Corporation.
CHARLES C. REILLY (63)--Trustee(2)--9 Hampton Harbor Road, Hampton Bays,
N.Y. 11946. President and Chief Investment Officer of Verus Capital, Inc. from
1979 to 1990; Senior Vice President of Arnhold and S. Bleichroeder, Inc. from
1973 to 1990; Adjunct Professor, Columbia University Graduate School of Business
since 1990; Adjunct Professor, Wharton School, University of Pennsylvania, 1990;
Director, Harvard Business School Alumni Association; Director, Small Cities
CableVision.
KEVIN A. RYAN (63)--Trustee(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder, current Director and Professor of The Boston
University Center for the Advancement of Ethics and Character; Professor of
Education at Boston University from 1982 until 1994; formerly taught on the
faculties of the University of Chicago, Stanford University and Ohio State
University.
RICHARD R. WEST (57)--Trustee(2)--482 Tepi Drive, Southbury, Connecticut
06488. Professor of Finance and Dean from 1984 to 1993, New York University
Leonard N. Stern School of Business Administration; Professor of Finance from
1976 to 1984 and Dean from 1976 to 1983, the Amos Tuck School of Business
Administration; Director of Vornado, Inc. (real estate investment trust), Bowne
& Co., Inc. (financial printer), Smith Corona Corporation (manufacturer of
typewriters and word processors), Alexander's Inc. (real estate company) and Re
Capital Corp. (reinsurance holding company).
TERRY K. GLENN (54)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991.
VINCENT R. GIORDANO (50)--Senior Vice President(1)(2)--Portfolio Manager of
the Manager and FAM since 1977 and Senior Vice President of the Manager and FAM
since 1984; Senior Vice President of Princeton Services since 1993; Vice
President of the Manager from 1980 to 1984.
DONALD C. BURKE (34)--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager since 1990; employee of Deloitte & Touche LLP from 1981
to 1990.
KENNETH A. JACOB (43)--Vice President(1)(2)--Vice President of the Manager
since 1984.
FREDRICK K. STUEBE (44)--Vice President(1)(2)--Vice President of the Manager
since 1989 and Vice President of Old Republic Insurance Company from 1985 to
1989.
16
<PAGE>
GERALD M. RICHARD (45)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Manager and FAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Vice President of the Distributor since 1981 and
Treasurer since 1984.
SUSAN B. BAKER (37)--Secretary(1)(2)--Vice President of the Manager since
1993; attorney associated with the Manager since 1987.
- -------------------
(1) Interested person, as defined in the Investment Company 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 its affiliate, FAM, acts as
investment adviser or manager.
At February 1, 1995, the Trustees and officers of the Trust as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of Common
Stock of ML & Co. and owned an aggregate of less than 1% of the outstanding
shares of the Fund.
The Trust pays to each Trustee not affiliated with the Manager a fee of $800
per year plus $400 per meeting attended, together with such Trustee's actual
out-of-pocket expenses relating to attendance at meetings. The Trust also pays
members of its Audit and Nominating Committee, which consists of all of the
non-affiliated Trustees, a fee of $500 per year; the Chairman of the Audit and
Nominating Committee receives an additional fee of $1,000 per year. Fees and
expenses paid to the non-affiliated Trustees aggregated $16,132 for the year
ended October 31, 1994.
COMPENSATION OF TRUSTEES
The following table sets forth for the fiscal year ended October 31, 1994
compensation paid by the Fund to the non-interested Trustees and for the
calendar year ended December 31, 1994 the aggregate compensation paid by all
investment companies advised by MLAM and its affiliate, FAM ("MLAM/FAM Advised
Funds") to the non-interested Trustees.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM FUND AND
AGGREGATE PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS FUNDS PAID TO
NAME OF TRUSTEE FROM FUND PART OF FUND EXPENSE TRUSTEES(1)
- ------------------------------- ---------------- ---------------------- ----------------------
<S> <C> <C> <C>
Ronald W. Forbes(1)............ $3,300 None $157,400
Cynthia A. Montgomery(1)....... $3,300 None $125,533
Charles C. Reilly(1)........... $3,300 None $278,900
Kevin A. Ryan(1)............... $3,300 None $157,400
Richard R. West(1)............. $4,300 None $296,900
</TABLE>
- ------------
(1) The Trustees served on the boards of other MLAM/FAM Advised Funds as
follows:
Mr. Forbes (23 boards); Ms. Montgomery (23 boards); Mr. Reilly (40 boards);
Mr. Ryan (23 boards); and Mr. West (40 boards).
17
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Trust.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Manager or FAM.
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 the Manager or FAM acts 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 FAM during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there may
be an adverse effect on price.
The Trust has entered into a management agreement on behalf of the Fund (the
"Management Agreement") with the Manager. As discussed in the Prospectus, the
Manager receives for its services to the Fund monthly compensation at an annual
rate of 0.55% of the average daily net assets of the Fund. For the years ended
October 31, 1992, 1993 and 1994, the fees paid by the Fund to the Manager
aggregated $621,450, $891,237 and $999,575, respectively.
The State of California imposes limitations on the expenses of the Fund.
These annual expense limitations require that the Manager reimburse the Fund in
an amount necessary to prevent the aggregate ordinary operating expenses of the
Fund (excluding interest, taxes, brokerage fees and commissions, distribution
fees and extraordinary charges such as litigation costs) from exceeding in a
fiscal year 2.5% of the Fund's first $30 million of average daily net assets,
2.0% of the next $70 million of average daily net assets and 1.5% of the
remaining average daily net assets. The Manager's obligation to reimburse the
Fund is limited to the amount of the management fee. No payment will be made to
the Manager during any fiscal year which will cause such expenses to exceed the
most restrictive expense limitation applicable at the time of such payment. For
each of the years ended October 31, 1992, 1993 and 1994, respectively, no
reimbursement was required pursuant to the applicable expense limitation
provisions discussed above.
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, if
other series should be added ("Series"), a portion of the Trust's general
administrative expenses will be allocated on the basis of the asset size of the
respective Series. Expenses that will be borne directly by the Series include
redemption expenses, expenses of portfolio transactions, expenses of registering
Series 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
18
<PAGE>
the Distributor as described below), fees for legal and auditing services,
Commission fees, interest, certain taxes, and other expenses attributable to a
particular Series. Expenses which will be allocated on the basis of asset size
of the respective Series include fees and expenses of unaffiliated Trustees,
state franchise taxes, costs of printing proxies and other expenses related to
shareholder meetings, and other expenses properly payable by the Trust. The
organizational expenses of the Trust were paid by the Trust, and if additional
Series are added to the Trust, the organizational expenses will be allocated
among the Series in a manner deemed equitable by the Trustees. Accounting
services are provided to the Trust by the Manager and the Trust reimburses the
Manager for its costs in connection with such services on a semi-annual basis.
Depending on the nature of a lawsuit, litigation costs may be assessed to the
specific Series to which the lawsuit relates or allocated on the basis of the
asset size of the respective Series. The Trustees have determined that this is
an appropriate method of allocation of expenses. Certain expenses will be
financed by the Trust pursuant to the distribution plans in compliance with Rule
12b-1 under the Investment Company Act. See "Purchase of Shares--Distribution
Plans".
The Manager is a limited partnership, the partners of which are ML & Co. and
Princeton Services.
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 outstanding shares
of the Fund and (b) by a majority of the Trustees who are not parties to such
contract or interested persons (as defined in the Investment Company Act) of any
such party. Such contracts are not assignable and may be terminated without
penalty on 60 days' written notice at the option of either party 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
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B are sold to
investors choosing the deferred sales charge alternative. Class C shares of the
Fund are not available for purchase but will be issued only pursuant to the
exchange privilege to holders of Class C shares of other MLAM-advised mutual
funds who elect to exchange Class C shares of such other MLAM-advised mutual
funds for Class C shares of the Fund. Each Class A, Class B, Class C and 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 of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred sales
charge arrangements. Class B, Class C and Class D shares each have exclusive
voting rights with respect to the Rule 12b-1 distribution plan adopted with
respect to such class pursuant to which account maintenance and/or distribution
fees are paid. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege".
19
<PAGE>
The Merrill Lynch Select PricingSM System is used by more than 50 mutual
funds advised by the Manager or its affiliate, FAM. Funds advised by the Manager
or FAM are referred to herein as "MLAM-advised mutual funds".
The Fund has entered into 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 Investment Advisory Agreement
described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the year ended
October 31, 1992 were $87,202, of which the Distributor received $8,173 and
Merrill Lynch received $79,029. The gross sales charges for the sale of Class A
shares for the year ended October 31, 1993 were $154,578, of which the
Distributor received $10,639 and Merrill Lynch received $143,939. The gross
sales charges for the sale of Class A shares for the year ended October 31, 1994
were $131,803, of which the Distributor received $7,395 and Merrill Lynch
received $124,408. The Distributor and Merrill Lynch did not receive any gross
sales charges for the sale of Class D shares for the period from October 21,
1994 (commencement of operations) to October 31, 1994.
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by a "company", as that
term is defined in the Investment Company Act, but does not include purchases by
any such company which has not been in existence for at least six months or
which has no purpose other than the purchase of shares of the Fund or shares of
other registered investment companies at a discount; provided, however, that it
shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders of
a company, policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or FAM
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
20
<PAGE>
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 the closed-end
fund shares must be made through Merrill Lynch, and the net proceeds therefrom
must be immediately reinvested in Eligible Class A or Class D shares. Second,
the closed-end fund shares must either have been acquired in the initial public
offering or be shares representing dividends from shares of common stock
acquired in such offering. Third, the closed-end fund shares must have been
continuously maintained in a Merrill Lynch securities account. Fourth, there
must be a minimum purchase of $250 to be eligible for the investment option.
Class A shares of the Fund are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior Floating Rate Fund") who
wish to reinvest the net proceeds from a sale of certain of their shares of
common stock of Senior Floating Rate Fund in shares of the Fund. In order to
exercise this investment option, Senior Floating Rate Fund shareholders must
sell their Senior Floating Rate Fund shares to the Senior Floating Rate Fund in
connection with a tender offer conducted by the Senior Floating Rate Fund and
reinvest the proceeds immediately in the Fund. This investment option is
available only with respect to the proceeds of Senior Floating Rate Fund shares
as to which no Early Withdrawal Charge (as defined in the Senior Floating Rate
Fund prospectus) is applicable. Purchase orders from Senior Floating Rate Fund
shareholders wishing to exercise this investment option will be accepted only on
the day that the related Senior Floating Rate Fund tender offer terminates and
will be effected at the net asset value of the Fund at such day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the 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 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 $100,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides plan
participant record keeping 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
21
<PAGE>
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 $100,000), 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 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
for accumulation, the purchaser will be entitled on that purchase and subsequent
purchases to that further reduced percentage sales charge but there will be no
retroactive reduction of the sales charges 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.
TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at net
asset value.
Purchase Privilege of Certain Persons. Trustees of the Trust, members of the
Boards of other MLAM-advised investment companies, ML & Co. and its subsidiaries
(the term "subsidiaries", when used herein with respect to ML & Co., includes
MLAM, FAM and certain other entities directly or indirectly wholly-owned and
controlled by ML & Co.) and their directors and employees, and any trust,
pension, profit-sharing or other benefit plan for such persons may purchase
Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of 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. Second, the investor also 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.
22
<PAGE>
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis. Second, such purchase of Class D shares must be made within
90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: First, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
other mutual funds and that such shares have been outstanding for a period of no
less than six months. Second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must be
maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse consequences to the Fund which
might result from an acquisition of assets having net unrealized appreciation
which is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
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
Investment Company Act (each a "Distribution Plan") with respect
23
<PAGE>
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 Investment Company 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 fees 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 related class of 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 Investment Company 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 a reasonable
likelihood that such 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 shareholder, and all material amendments are required to be
approved by the vote of the Trustees, including a majority of the Independent
Trustees who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such report, the first two years in an easily
accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the contingent
deferred sales charge ("CDSC") borne by the Class B and Class C shares but not
the account maintenance fee. The maximum sales charge rule is applied separately
to each class. As applicable to the Fund, the maximum sales charge rule limits
the aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the
24
<PAGE>
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 October 31,
1994 with respect to the Class B shares and as of November 30, 1994 with respect
to the Class C shares indicating the maximum allowable payments that can be made
under the NASD maximum sales charge rule and, with respect to Class B shares,
the Distributor's voluntary maximum.
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
ELIGIBLE GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES (1) CHARGES BALANCE (2) PAYABLE DISTRIBUTOR (3) BALANCE LEVEL (4)
-------------- --------- ----------- ------- --------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR CLASS B SHARES--DATA
CALCULATED AS OF OCTOBER 31,
1994
(IN THOUSANDS):
Class B Shares (for the fiscal
period November 26, 1986
(commencement of public
offering) to October 31,
1994):
Under NASD Rule as Adopted..... $340,822 $21,301 $15,891 $37,192 $ 3,664 $33,528 $142
Under Distributor's Voluntary
Waiver......................... $340,822 $21,301 $ 1,704 $23,005 $ 3,664 $19,341 $142
FOR CLASS C SHARES--DATA
CALCULATED AS OF NOVEMBER 30,
1994
(NOT ROUNDED):
Class C Shares (for the fiscal
period October 21, 1994
(commencement of public
offering) to October 31,
1994):
Under NASD Rule as Adopted..... $97 $0 $0 $0 $0 $7 $10
</TABLE>
- ------------
(1) Purchase price of all eligible Class B shares sold since November 26, 1986
(commencement of the public offering of Class B shares) other than shares
acquired through dividend reinvestment and the exchange privilege. Purchase
price of all eligible Class C shares sold since October 21, 1994
(commencement of the public offering of Class C shares) 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. With
respect to Class B shares, of the distribution fee payments made prior to
July 6, 1993 at the 0.30% rate, 0.20% of average daily net assets has been
treated as a distribution fee and 0.10% of average daily net assets has been
deemed to have been a service fee and not subject to the NASD
maximum sales charge rule. See "Purchase of Shares--Distribution Plans" in
the Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
25
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the New
York Stock Exchange is restricted as determined by the Commission or such
Exchange is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists as defined by the Commission as a result
of which disposal of portfolio securities or determination of the net asset
value of the Fund is not reasonably practicable, and for such other periods as
the Commission by order may permit for the protection of shareholders of the
Fund.
DEFERRED SALES CHARGES--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternative-- Class B Shares", while Class B shares redeemed within one
year of purchase are subject to a CDSC under most circumstances, the charge is
waived on redemptions of Class B shares following the death or disability of a
Class B shareholder. Redemptions for which the waiver applies are any partial or
complete redemption following the death or disability (as defined in the
Internal Revenue Code of 1986, as amended (the "Code")) of a Class B shareholder
(including one who owns the Class B shares as joint tenant with his or her
spouse), provided the redemption is requested within one year of the death or
initial determination of disability. For the years ended October 31, 1992, 1993
and 1994, the Distributor received CDSCs with respect to Class B shares of the
Fund of $37,040, $51,987 and $162,923, respectively, all of which was paid to
Merrill Lynch.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies" and "Portfolio
Transactions" in the Prospectus.
Under the Investment Company Act, persons affiliated with the Trust are
prohibited from dealing with the Trust as principals in the purchase and sale of
securities for the Fund unless such trading is permitted by an exemptive order
issued by the Commission. Since over-the-counter transactions are usually
principal transactions, affiliated persons of the Trust, including Merrill
Lynch, may not serve as dealers in connection with transactions for the Fund.
The Trust has obtained an exemptive order permitting it to engage in certain
principal transactions with Merrill Lynch involving high-quality short-term
Municipal Bonds, subject to certain conditions. During the year ended October
31, 1992, the Fund engaged in no transactions pursuant to such order. During the
year ended October 31, 1993, the Fund engaged in four principal transactions
with Merrill Lynch aggregating $8,600,000. During the year ended October 31,
1994, the Fund engaged in three principal transactions with Merrill Lynch
aggregating $2,300,000. An affiliated person of the Trust may serve as its
broker in the over-the-counter transactions conducted on an agency basis.
26
<PAGE>
The Trustees have considered the possibility of recapturing for the benefit
of the Fund dealer spreads and other expenses of possible portfolio
transactions, such as underwriting commissions, by conducting such portfolio
transactions through affiliated entities, including Merrill Lynch. After
considering all factors deemed relevant, the Trustees made a determination not
to seek such recapture. The Trustees will reconsider this matter from time to
time.
As a non-fundamental restriction, the Trust will prohibit the purchase or
retenton by the Fund of the securities of any issuer if the officers and/or
trustees of the Trust, the officers and general partner of the Manager, the
directors of such general partner or the officers and directors of any
subsidiary thereof each owning beneficially more than one-half of one percent of
the securities of such issuer own in the aggregate more than five percent of the
securities of that issuer. In addition, under the Investment Company Act, the
Trust may not purchase municipal bonds for the Fund from any underwriting
syndicate of which Merrill Lynch is a member except pursuant to an exemptive
order or rules adopted by the Commission. Rule 10f-3 under the Investment
Company Act sets forth conditions under which the Trust may purchase municipal
bonds in such transactions. The rule sets forth requirements relating to, among
other things, the terms of an issue of municipal bonds purchased by the Trust,
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 Trust 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 for the Fund. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Manager under its Management Agreement and the expense of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information. The Trust has no obligation to deal with any broker in the
execution of transactions for the Fund's portfolio securities. In addition,
consistent with the Rules of Fair Practice of the NASD and policies established
by the Trust's Trustees, the Manager may consider sales of shares of the Trust
as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Trust.
For the fiscal years ended October 31, 1992, 1993 and 1994, the Fund paid no
brokerage commissions.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the national securities exchanges from executing exchange
transactions for their affiliates and institutional accounts which they manage
unless the member (i) has obtained prior express authorization from the account
to effect such transactions, (ii) at least annually furnishes the account with
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.
27
<PAGE>
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value.
The net asset value of the Fund is determined by the Manager once daily,
Monday through Friday 15 minutes after the close of business on the New York
Stock Exchange (generally, 4:00 P.M., New York time), on each day during which
the New York Stock Exchange is open for trading. The New York Stock Exchange is
not open on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Net asset value
per share is computed by dividing the sum of the value of the securities held by
the Fund plus any cash or other assets minus all liabilities by the total number
of shares outstanding at such time, rounded to the nearest cent. Expenses,
including the management fees and any account maintenance and/or distribution
fees, are accrued daily. The net asset value per share of the Class B, Class C
and Class D shares generally will be lower than the net asset value per share of
the Class A shares reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to the Class B and Class C shares and the daily expense accruals of the
account maintenance fees applicable with respect to the Class D shares;
moreover, the net asset value per share of Class B and Class C shares generally
will be lower than the net asset value per share of Class D shares reflecting
the daily expense accruals of the distribution fees and higher account
maintenance and transfer agency fees applicable with respect to Class B and
Class C shares. It is expected, however, that the net asset value per share of
the four classes eventually will tend to converge (although not necessarily
meet) immediately after the payment of dividends, which will differ by
approximately the amount of the expense accrual differentials between the
classes.
The Municipal Bonds and other portfolio securities in which the Fund invests
are traded primarily in over-the-counter municipal bond and money markets and
are valued at the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers that make
markets in the securities. One bond is the "yield equivalent" of another bond
when, taking into account market price, maturity, coupon rate, credit rating and
ultimate return of principal, both bonds will theoretically produce an
equivalent return to the bondholder. Financial futures contracts, which are
traded on exchanges, are valued at their last sale price as of the close of such
exchanges. Options on financial futures contracts on U.S. Government securities,
which are traded on exchanges, are valued at their last bid price in the case of
options purchased by the Fund and their last asked price in the case of options
written by the Fund. Short-term investments with a remaining maturity of 60 days
or less are valued on an amortized cost basis which approximates market value.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Trustees of the Trust, including valuations furnished by a pricing service
retained by the Trust, which may utilize a matrix system for valuations. The
procedures of the pricing service and its valuations are reviewed by the
officers of the Trust under the general supervision of the Trustees.
28
<PAGE>
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
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, at least quarterly, statements from the
Transfer Agent showing any automatic investment purchases and reinvestments of
dividends and capital gain distributions activity in the account since the
previous statement. Shareholders also will receive separate confirmations for
each purchase or sale transaction other than automatic investment purchases and
the reinvestment of dividends and capital gain distributions. 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 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. 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.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if an eligible Class A investor as described in the
Prospectus) or Class B or Class D shares at the applicable public offering price
either through the shareholder's securities dealer, or by mail directly to the
Transfer Agent, acting as agent for such securities dealer. Voluntary
accumulation also can be made through a service known as the Fund's Automatic
Investment Plan whereby the Trust 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. Investors who maintain CMA(R) or
CBA(R) accounts may arrange to have periodic investments made in the Fund in
their CMA(R) or CBA(R) accounts or in certain related accounts in amounts of
$100 or more through the CMA(R)/CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gain distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of business
on
29
<PAGE>
the payment date for such dividends and distributions. Shareholders may elect in
writing to receive either their income dividends or capital gain distributions,
or both, in cash, in which event payment will be mailed or direct deposited on
or about the payment date.
Shareholders, at any time, may notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or capital gain distributions reinvested in shares of the Fund or vice versa
and, commencing ten days after the receipt by the Transfer Agent of such notice,
those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D shares of the Fund having a value, based on cost or the
current offering price, of $5,000 or more, and monthly withdrawals are available
for shareholders who have acquired Class A or Class D shares with a value of
$10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his or her Class A or
Class D shares. Redemptions will be made at net asset value as determined 15
minutes after the close of business on the New York Stock Exchange (generally,
4:00 P.M., New York time) on the 24th day of each month or the 24th day of the
last month of each quarter, whichever is applicable. If the Exchange is not open
for business on such date, the Class A or Class D shares will be redeemed at the
close of business on the following business day. The check for the withdrawal
payment will be mailed, or the direct deposit of the withdrawal payment will be
made, on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends and distributions on all Class A or
Class D shares in the Investment Account are reinvested automatically in Fund
Class A or Class D shares, respectively. A shareholder's Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Fund's Transfer Agent or the Distributor. Withdrawal
payments should not be considered as dividends, yield or income. Each withdrawal
is a taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced correspondingly.
Purchases of additional Class A or Class D shares concurrent with withdrawals
are ordinarily disadvantageous to the shareholder because of sales charges and
tax liabilities. The Fund will not knowingly accept purchase orders for Class A
or Class D shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA(R) or
CBA(R) Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R)/CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset
30
<PAGE>
value on the first Monday of every other month, and quarterly, semiannual or
annual redemptions are made at net asset value on the first Monday of months
selected at the shareholder's option. If the first Monday of the month is a
holiday, the redemption will be processed at net asset value on the next
business day. The Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R)/CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Financial Consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Select
Pricing System, Class A shareholders may exchange Class A shares of the Fund for
Class A shares of a second MLAM-advised mutual fund if the shareholder holds any
Class A shares of the second fund in his account in which the exchange is made
at the time of the exchange or is otherwise eligible to purchase Class A shares
of the second fund. If the Class A shareholder wants to exchange Class A shares
for shares of a second MLAM-advised mutual fund, but does not hold Class A
shares of the second fund in his account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the shareholder
will receive Class D shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the shareholder
holds Class A shares of the second fund in the account in which the exchange is
made or is otherwise eligible to purchase Class A shares of the second fund.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds. For purposes of computing the CDSC
that may be payable upon a disposition of the shares acquired in the exchange,
the holding period for the previously owned shares of the Fund is "tacked" to
the holding period of the newly acquired shares of the other fund as more fully
described below. Class A, Class B, Class C and Class D shares also are
exchangeable for shares of certain MLAM-advised money market funds specifically
designated below as available for exchange by holders of Class A, Class B, Class
C or Class D shares. Shares with a net asset value of at least $100 are required
to qualify for the exchange privilege, and any shares utilized in an exchange
must have been held by the shareholder for 15 days. It is contemplated that the
exchange privilege may be applicable to other new mutual funds whose shares may
be distributed by the Distributor.
Exchange of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another 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,
dividend reinvestment Class A and Class D shares 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
31
<PAGE>
paid. Based on this formula, Class A and Class D shares of the Fund generally
may be exchanged into the Class A or Class D shares of the other funds or into
shares of the Class A and Class D 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 the 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 shares of the
fund from which the exchange has been made. For purposes of computing the sales
charge 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 for the new Class B or Class C shares. For
example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Fund's Class B shares for six months. The 1% CDSC that generally would apply
to a redemption would not apply to the exchange. Three and a half years later
the investor may decide to redeem the Class B shares of Special Value Fund and
receive cash. There will be no CDSC due on this redemption, since by "tacking"
the six month holding period of Fund Class B shares to the three and a half year
holding period for the Special Value Fund Class B shares, the investor will be
deemed to have held the new Class B shares for four years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
towards satisfaction of the holding period requirement for purposes of reducing
the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund which were acquired as
a result of an exchange for Class B or Class C shares of 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 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 ("Institutional
Fund") after having held the Fund Class B shares for six months and three years
later decide to redeem the shares of Institutional Fund for cash. At the time of
this redemption, the 1% CDSC that would have been due had the Class B shares of
the Fund been redeemed for cash rather than exchanged for shares of
Institutional Fund will be payable. If, instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund with a four-year
CDSC period which the shareholder continues to hold for an additional three and
a half years, any subsequent redemption will not incur a CDSC.
32
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Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds Issuing Class A, Class B, Class C and Class D Shares:
<TABLE>
<S> <C>
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC. ............... High current income consistent with a policy of
limiting the degree of fluctuation in net asset
value of fund shares resulting from movements in
interest rates, through investment primarily in a
portfolio of adjustable rate securities.
MERRILL LYNCH AMERICAS INCOME FUND,
INC. ................................ A high level of current income, consistent with
prudent investment risk, through investment
primarily in debt securities denominated in a
currency of a country located in the Western
Hemisphere (i.e., North and South America and the
surrounding waters).
MERRILL LYNCH ARIZONA LIMITED
MATURITY MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Arizona income
taxes as is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment grade
Arizona Municipal Bonds.
MERRILL LYNCH ARIZONA MUNICIPAL BOND
FUND................................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Arizona income taxes as is consistent
with prudent investment management.
MERRILL LYNCH ARKANSAS MUNICIPAL BOND
FUND................................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Arkansas income taxes as is consistent
with prudent investment management.
MERRILL LYNCH ASSET GROWTH FUND,
INC. ................................ High total investment return, consistent with
prudent risk, from investment in United States and
foreign equity,
</TABLE>
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<TABLE>
<S> <C>
debt and money market securities the combination
of which will be varied both with respect to types
of securities and markets in response to changing
market and economic trends.
MERRILL LYNCH ASSET INCOME FUND,
INC. ................................ A high level of current income through investment
primarily in United States fixed income securities.
MERRILL LYNCH BALANCED FUND FOR
INVESTMENT AND RETIREMENT, INC....... As high a level of total investment return as is
consistent with a relatively low level of risk
through investment in common stocks and other
types of securities, including fixed income
securities and convertible securities.
MERRILL LYNCH BASIC VALUE FUND,
INC. ................................ Capital appreciation and, secondarily, income,
through investment in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.
MERRILL LYNCH CALIFORNIA INSURED
MUNICIPAL BOND FUND.................. A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and California income taxes as is
consistent with prudent investment management
through investment in a portfolio primarily of
insured California Municipal Bonds.
MERRILL LYNCH CALIFORNIA LIMITED
MATURITY MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and California income
taxes as is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment grade
California Municipal Bonds.
MERRILL LYNCH CALIFORNIA MUNICIPAL
BOND FUND............................ A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and California income taxes as is
consistent with prudent investment management.
</TABLE>
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<TABLE>
<S> <C>
MERRILL LYNCH CAPITAL FUND, INC. .... The highest total investment return consistent with
prudent risk through a fully managed investment
policy utilizing equity, debt and convertible
securities.
MERRILL LYNCH COLORADO MUNICIPAL BOND
FUND................................. A portfolio of Merrill Lynch Multi-State Municipal
Trust, a series fund, whose objective is to provide
as high a level of income exempt from Federal and
Colorado income taxes as is consistent with
prudent investment management.
MERRILL LYNCH CONNECTICUT MUNICIPAL
BOND FUND............................ A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Connecticut income taxes as is
consistent with prudent investment management.
MERRILL LYNCH CORPORATE BOND FUND,
INC. ................................ Current income from three separate diversified
portfolios of fixed income securities.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC. .................. Long-term appreciation through investment in
securities, principally equities, of issuers in
countries having smaller capital markets.
]MERRILL LYNCH DRAGON FUND, INC...... Capital appreciation primarily through investment in
equity and debt securities of issuers domiciled in
developing countries located in Asia and the
Pacific Basin.
MERRILL LYNCH EUROFUND............... Capital appreciation primarily through investment in
equity securities of corporations domiciled in
Europe.
MERRILL LYNCH FEDERAL SECURITIES
TRUST................................ High current return through investments in U.S.
Government and Government agency securities,
including GNMA mortgage-backed certificates and
other mortgage-backed Government securities.
MERRILL LYNCH FLORIDA LIMITED
MATURITY MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal income taxes as is
consistent with prudent investment management
while seeking to offer shareholders the
opportunity to own securities exempt from Florida
intangible personal property taxes through
</TABLE>
35
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<TABLE>
<S> <C>
investment in a portfolio primarily of
intermediate-term investment grade Florida
Municipal Bonds.
MERRILL LYNCH FLORIDA MUNICIPAL BOND
FUND................................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal income taxes as is consistent with prudent
investment management while seeking to offer
shareholders the opportunity to own securities
exempt from Florida intangible personal property
taxes.
MERRILL LYNCH FUNDAMENTAL GROWTH
FUND, INC. .......................... Long-term growth of capital through investment in a
diversified portfolio of equity securities placing
particular emphasis on companies that have
exhibited an above-average growth rate in
earnings.
MERRILL LYNCH FUNDAMENTAL VALUE
PORTFOLIO (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as custodian)... A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide capital appreciation and
income by investing in securities, with at least
65% of the portfolio's assets being invested in
equities.
MERRILL LYNCH FUND FOR TOMORROW,
INC. ................................ Long-term growth through investment in a portfolio
of good quality securities, primarily common stock,
potentially positioned to benefit from demographic
and cultural changes as they affect consumer
markets.
MERRILL LYNCH GLOBAL ALLOCATION FUND,
INC. ................................ High total investment return, consistent with
prudent risk, through a fully managed investment
policy utilizing United States and foreign equity,
debt and money market securities, the combination
of which will be varied from time to time both
with respect to the types of securities and
markets in response to changing market and
economic trends.
MERRILL LYNCH GLOBAL BOND FUND FOR
INVESTMENT AND RETIREMENT............ High total investment return from investment in a
global portfolio of debt instruments denominated in
various currencies and multinational currency
units.
</TABLE>
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<TABLE>
<S> <C>
MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC. .......................... High total return from investment primarily in an
internationally diversified portfolio of convertible
debt securities, convertible preferred stock and
"synthetic" convertible securities consisting of a
combination of debt securities or preferred stock
and warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS, INC.
(residents of Arizona must meet
investor suitability standards)...... The highest total investment return consistent with
prudent risk through worldwide investment in an
internationally diversified portfolio of
securities.
MERRILL LYNCH GLOBAL OPPORTUNITY
PORTFOLIO (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as custodian)... A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide a high total investment
return through an investment policy utilizing
United States and foreign equity, debt and money
market securities, the combination of which will
vary depending upon changing market and economic
trends.
MERRILL LYNCH GLOBAL RESOURCES
TRUST................................ Long-term growth and protection of capital from
investment in securities of domestic and foreign
companies that possess substantial natural
resource assets.
MERRILL LYNCH GLOBAL SMALLCAP FUND,
INC. ................................ Long-term growth of capital by investing primarily
in equity securities of companies with relatively
small market capitalizations located in various
foreign countries and in the United States.
MERRILL LYNCH GLOBAL UTILITY FUND,
INC. ................................ Capital appreciation and current income through
investment of at least 65% of its total assets in
equity and debt securities issued by domestic and
foreign companies which are primarily engaged in
the ownership or operation of facilities used to
generate, transmit or distribute electricity,
telecommunications, gas or water.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT............ Growth of capital and, secondarily, income from
investment in a diversified portfolio of equity
securities placing principal emphases on those
securities which management of the Fund believes
to be undervalued.
MERRILL LYNCH HEALTHCARE FUND, INC.
(residents of Wisconsin must meet
investor suitability standards)...... Capital appreciation through worldwide investment in
equity securities of companies that derive or are
expected to derive a substantial portion of their
sales from products and services in healthcare.
MERRILL LYNCH INTERNATIONAL EQUITY
FUND................................. Capital appreciation and, secondarily, income
through investment in a diversified portfolio of
equity securities of issuers located in countries
other than the United States.
MERRILL LYNCH LATIN AMERICA
FUND, INC. ........................ Capital appreciation through investment primarily in
Latin American equity and debt securities.
MERRILL LYNCH MARYLAND MUNICIPAL BOND
FUND................................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide investors with as high a level of income
exempt from Federal and Maryland income taxes as
is consistent with prudent investment management.
MERRILL LYNCH MASSACHUSETTS LIMITED
MATURITY MUNICIPAL BOND FUND....... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Massachusetts
income taxes as is consistent with prudent
investment management through investment in a
portfolio primarily of intermediate-term
investment grade Massachusetts Municipal Bonds.
MERRILL LYNCH MASSACHUSETTS MUNICIPAL
BOND FUND............................ A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
a level of income exempt from Federal and
Massachusetts income taxes as is consistent with
prudent investment management.
MERRILL LYNCH MICHIGAN LIMITED
MATURITY MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Michigan income
taxes as is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment grade
Michigan Municipal Bonds.
MERRILL LYNCH MICHIGAN MUNICIPAL BOND
FUND................................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Michigan income taxes as is consistent
with prudent investment management.
MERRILL LYNCH MINNESOTA MUNICIPAL
BOND FUND............................ A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Minnesota personal income taxes as is
consistent with prudent investment management.
MERRILL LYNCH MUNICIPAL BOND FUND,
INC. ................................ Tax-exempt income from three separate diversified
portfolios of municipal bonds.
MERRILL LYNCH NEW JERSEY LIMITED
MATURITY MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and New Jersey income
taxes as is consistent with prudent investment
management through a portfolio primarily of
intermediate-term investment grade New Jersey
Municipal Bonds.
MERRILL LYNCH NEW JERSEY MUNICIPAL
BOND FUND............................ A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high
</TABLE>
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<TABLE>
<S> <C>
a level of income exempt from Federal and New
Jersey income taxes as is consistent with prudent
investment management.
MERRILL LYNCH NEW MEXICO MUNICIPAL
BOND FUND............................ A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and New Mexico income taxes as is
consistent with prudent investment management.
MERRILL LYNCH NEW YORK LIMITED
MATURITY MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal, New York State and New
York City income taxes as is consistent with
prudent investment management through investment
in a portfolio primarily of intermediate-term
investment grade New York Municipal Bonds.
MERRILL LYNCH NEW YORK MUNICIPAL BOND
FUND................................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal, New York State and New York City income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH NORTH CAROLINA
MUNICIPAL BOND FUND.................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and North Carolina income taxes as is
consistent with prudent investment management.
MERRILL LYNCH OHIO MUNICIPAL BOND
FUND................................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Ohio income taxes as is consistent
with prudent investment management.
</TABLE>
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<TABLE>
<S> <C>
MERRILL LYNCH OREGON MUNICIPAL BOND
FUND................................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Oregon income taxes as is consistent
with prudent investment management.
MERRILL LYNCH PACIFIC FUND, INC. .... Capital appreciation by investing in equity
securities of corporations domiciled in Far Eastern
and Western Pacific countries, including Japan,
Australia, Hong Kong and Singapore.
MERRILL LYNCH PENNSYLVANIA LIMITED
MATURITY MUNICIPAL BOND FUND....... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Pennsylvania income
taxes as is consistent with prudent investment
management through investment in a portfolio of
intermediate-term investment grade Pennsylvania
Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA MUNICIPAL
BOND FUND............................ A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Pennsylvania income taxes as is
consistent with prudent investment management.
MERRILL LYNCH PHOENIX FUND, INC. .... Long-term growth of capital by investing in equity
and fixed income securities, including tax-exempt
securities, of issuers in weak financial condition
or experiencing poor operating results believed to
be undervalued relative to the current or
prospective condition of such issuer.
MERRILL LYNCH QUALITY BOND PORTFOLIO
(available only for exchanges by
certain individual retirement
accounts for which Merrill Lynch
acts as custodian)................... A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide a high level of current
income through investment
</TABLE>
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<TABLE>
<S> <C>
in a diversified portfolio of debt obligations,
such as corporate bonds and notes, convertible
securities, preferred stocks and governmental
obligations.
MERRILL LYNCH SHORT-TERM GLOBAL
INCOME FUND, INC. ................... As high a level of current income as is consistent
with prudent investment management from a global
portfolio of high quality debt securities
denominated in various currencies and
multinational currency units and having remaining
maturities not exceeding three years.
MERRILL LYNCH SPECIAL VALUE
FUND, INC. ........................ Long-term growth of capital from investments in
securities, primarily common stocks, of relatively
small companies believed to have special
investment value and emerging growth companies
regardless of size.
MERRILL LYNCH STRATEGIC
DIVIDEND FUND...................... Long-term total return from investment in dividend
paying common stocks which yield more than Standard
& Poor's 500 Composite Stock Price Index.
MERRILL LYNCH TECHNOLOGY
FUND, INC. ........................ Capital appreciation through worldwide investment in
equity securities of companies that derive or are
expected to derive a substantial portion of their
sales from products and services in technology.
MERRILL LYNCH TEXAS MUNICIPAL BOND
FUND................................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal income taxes as is consistent with prudent
investment management by investing primarily in a
portfolio of long-term, investment grade
obligations issued by the State of Texas, its
political subdivisions, agencies and
instrumentalities.
MERRILL LYNCH UTILITY INCOME FUND,
INC. ................................ High current income through investment in equity and
debt securities issued by companies which are
primarily engaged in the ownership or operation of
facilities used to generate, transmit or
distribute electricity, telecommunications, gas or
water.
</TABLE>
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<TABLE>
<S> <C>
MERRILL LYNCH U.S. GOVERNMENT
SECURITIES PORTFOLIO (available
only for exchanges by certain
individual retirement accounts for
which Merrill Lynch acts as
custodian)........................... A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide a high current return
through investments in U.S. Government and
government agency securities, including GNMA
mortgage-backed certificates and other
mortgage-backed government securities.
MERRILL LYNCH WORLD INCOME
FUND, INC. ........................ High current income by investing in a global
portfolio of fixed income securities denominated in
various currencies, including multinational
currencies.
</TABLE>
Class A Share Money Market Funds:
<TABLE>
<S> <C>
MERRILL LYNCH READY ASSETS TRUST..... Preservation of capital, liquidity and the highest
possible current income consistent with the
foregoing objectives from the short-term money
market securities in which the Trust invests.
MERRILL LYNCH RETIREMENT RESERVES
MONEY FUND (available only for
exchanges within certain retirement
plans)............................... Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund, whose
objectives are current income, preservation of
capital and liquidity available from investing in
a diversified portfolio of short-term money market
securities.
MERRILL LYNCH U.S.A. GOVERNMENT
RESERVES............................. Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and repurchase
agreements relating to such securities.
MERRILL LYNCH U.S. TREASURY MONEY
FUND................................. Preservation of capital, liquidity and current
income through investment exclusively in a
diversified portfolio of short-term marketable
securities which are direct obligations of the
U.S. Treasury.
</TABLE>
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Class B, Class C and Class D Share Money Market Funds:
<TABLE>
<S> <C>
MERRILL LYNCH GOVERNMENT FUND........ A portfolio of Merrill Lynch Funds of Institutions
Series, a series fund, whose objective is to provide
current income consistent with liquidity and
security of principal from investment in
securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities and
in repurchase agreements secured by such obli-
gations.
MERRILL LYNCH INSTITUTIONAL FUND..... A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
maximum current income consistent with liquidity
and the maintenance of a high quality portfolio of
money market securities.
MERRILL LYNCH INSTITUTIONAL TAX-
EXEMPT FUND.......................... A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
current income exempt from Federal income taxes,
preservation of capital and liquidity available
from investing in a diversified portfolio of
short-term, high quality municipal bonds.
MERRILL LYNCH TREASURY FUND.......... A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
current income consistent with liquidity and
security of principal from investment in direct
obligations of the U.S. Treasury and up to 10% of
its total assets in repurchase agreements secured
by such obligations.
</TABLE>
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Trust of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Trust 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 Trust 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 at any time and may thereafter resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
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<PAGE>
DISTRIBUTIONS AND TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Trust
intends to cause the Fund to distribute substantially all of such income.
As discussed in the Fund's Prospectus, the Trust may establish other series
in addition to the Fund (together with the Funds, 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 are
determined at the Series level rather than at the Trust level.
The Code requires each 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 continue to qualify the Fund to pay "exempt-interest
dividends" as defined in Section 852(b)(5) of the Code. Under such section if,
at the close of each quarter of the Fund's taxable year, at least 50% of the
value of its total assets consists of obligations exempt from Federal income tax
("tax-exempt obligations") under Section 103(a) of the Code (relating generally
to obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its Class A, Class B, Class C and
Class D shareholders (together, the "shareholders"). Exempt-interest dividends
are dividends or any part thereof paid by the Fund which are attributable to
interest on tax-exempt obligations and designated by the Trust as
exempt-interest dividends in a written notice mailed to the Fund's shareholders
within 60 days after the close of the Fund's taxable year. For this purpose, the
Fund will allocate interest from tax-exempt obligations (as well as ordinary
income, capital gains and tax preference items, discussed below) among the Class
A, Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission's exemptive order permitting the
issuance and sale of multiple classes of shares) that is based on the gross
income allocable to 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 shareholders'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 benefits and
railroad retirement benefits subject to Federal income tax. 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 to the extent attributable to
exempt-interest dividends. Shareholders are advised to consult their tax
advisers with respect to whether exempt-interest
45
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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.
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. Distributions, if
any, of net long-term capital gains from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares. Distributions by the Fund,
whether from exempt-interest income, ordinary income or capital gains, are not
eligible for the dividends received deduction allowed to corporations under the
Code. Under the Revenue Reconciliation Act of 1993, all or a portion of the
Fund's gain from the sale or redemption of tax-exempt obligations purchased at a
market discount will be treated as ordinary income rather than capital gain.
This rule may increase the amount of ordinary income dividends received by
shareholders. Distributions in excess of the Fund's earnings and profits first
will reduce the adjusted tax basis of a holder's shares and, after such adjusted
tax basis is reduced to zero, will constitute capital gains to such holder
(assuming the shares are held as a capital asset). Any loss upon the sale or
exchange of Fund shares held for six months or less will be treated as long-term
capital loss to the extent of any capital gain dividends received by the
shareholder. In addition, such loss will be disallowed to the extent of any
exempt-interest dividends received by the shareholder. If the Fund pays a
dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies to
interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference", which could subject investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund will purchase
such "private activity bonds", and the Trust will report to shareholders within
60 days after the Fund's taxable year-end the portion of the Fund's dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that corporations
are subject to an alternative minimum tax based, in part, on certain differences
between taxable income as adjusted for other tax preferences and the
corporation's "adjusted current earnings", which more closely reflect a
corporation's economic income. Because an exempt-interest dividend paid by the
Fund will be included in adjusted current earnings, a corporate shareholder may
be required to pay alternative minimum tax on exempt-interest dividends paid by
the Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax brackets
of 36% and 39.6% for individuals and has created a graduated structure of 26%
and 28% for the alternative minimum tax applicable to individual taxpayers.
These rate increases may affect an individual investor's after-tax
46
<PAGE>
return from an investment in the Fund as compared with such investor's return
from taxable investments.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent the sales charge paid to the Fund
reduces any sales charge 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 advisers concerning the applicability of the United States withholding
tax.
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.
ENVIRONMENTAL TAX
The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed without
regard to the alternative tax net operating loss deduction and the deduction for
the Environmental Tax) at a rate of $12 per $10,000 (0.12%) of alternative
minimum taxable income in excess of $2,000,000. The Environmental Tax is imposed
for taxable years beginning after December 31, 1986 and before January 1, 1996.
The Environmental Tax is imposed even if the corporation is not required to pay
an alternative minimum tax because the corporation's regular income tax
liability exceeds its minimum tax liability. The Code provides, however, that a
RIC, such as the Fund, is not subject to the Environmental Tax. However, exempt-
interest dividends paid by the Fund that create alternative minimum taxable
income for corporate
47
<PAGE>
shareholders (as described above) may subject corporate shareholders of the Fund
to the Environmental Tax.
TAX TREATMENT OF FUTURES AND OPTIONS TRANSACTIONS
The Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). The Fund also may 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 financial 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 having been sold for its
fair market value on the last day of the taxable year and any gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. Application of these rules to Section 1256 contracts held
by the Fund may alter the timing and character of distributions to shareholders.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in financial futures contracts and related
options. Under Section 1092, the Fund may be required to postpone recognition
for tax purposes of losses incurred in certain closing transactions in financial
futures contracts or the related options.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option or financial futures contract.
The exemption from Federal income tax for exempt-interest dividends does not
necessarily result in an exemption for such dividends under the income or other
tax laws of any state or local taxing authority. Shareholders are advised to
consult their own tax advisers concerning state and local tax matters.
-------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding 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 Publications Inc.
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
48
<PAGE>
intended to indicate future performance. Average annual total return, yield and
tax-equivalent yield are determined separately for Class A, Class B, Class C and
Class D shares in accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B 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.
Set forth 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
---------------------------------- ----------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS A HYPOTHETICAL EXPRESSED AS A HYPOTHETICAL
PERCENTAGE BASED $1,000 PERCENTAGE BASED $1,000
ON A HYPOTHETICAL INVESTMENT AT ON A HYPOTHETICAL INVESTMENT AT
$1,000 THE END OF $1,000 THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
- ----------------------------------- ----------------- ------------- ----------------- -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended October 31, 1994.... (3.47)% $ 965.30 (3.71)% $ 962.90
Five Years Ended October 31,
1994............................... 6.56% $1,374.00 6.45% $1,367.00
Inception (November 26, 1986) to
October 31, 1994................... 5.36% $1,513.00
Inception (October 31, 1988) to
October 31, 1994................... 6.30% $1,443.10
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------- -----------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS A HYPOTHETICAL EXPRESSED AS A HYPOTHETICAL
PERCENTAGE BASED $1,000 PERCENTAGE BASED $1,000
ON A HYPOTHETICAL INVESTMENT AT ON A HYPOTHETICAL INVESTMENT AT
$1,000 THE END OF $1,000 THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
- -------------------------------- ----------------- ------------- ----------------- -------------
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended October 31, 1994..... (2.49)% $ 975.10 (2.79)% $ 972.10
1993............................ 13.01% $1,130.10 12.78% $1,127.80
1992............................ 7.16% $1,071.60 6.72% $1,067.20
1991............................ 10.90% $1,109.00 10.56% $1,105.60
1990............................ 5.99% $1,059.90 5.68% $1,056.80
1989............................ 5.03% $1,050.30 4.59% $1,045.90
1988............................ 10.95% $1,109.50
Inception (November 26, 1986) to
October 31, 1987................ (4.62)% $ 953.80
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (November 26, 1986) to
October 31, 1994................ 51.30% $1,513.00
Inception (October 31, 1988) to
October 31, 1994................ 44.31% $1,443.10
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended October 31,
1994............................ 4.74% 4.47%
30 days ended December 31,
1994............................ 5.16% 4.91%
<CAPTION>
TAX-EQUIVALENT YIELD*
<S> <C> <C> <C> <C>
30 days ended October 31,
1994............................ 6.58% 6.21%
30 days ended December 31,
1994............................ 7.17% 6.82%
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------------- -------------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS A HYPOTHETICAL EXPRESSED AS A HYPOTHETICAL
PERCENTAGE BASED $1,000 PERCENTAGE BASED $1,000
ON A HYPOTHETICAL INVESTMENT AT ON A HYPOTHETICAL INVESTMENT AT
$1,000 THE END OF $1,000 THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
- ------------------------------- ----------------- ---------------- ----------------- ----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994) to
October 31, 1994............... (46.54)% $ 983.00 (46.53)% $ 983.00
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994) to
October 31, 1994............... (0.71)% $ 992.90 (0.71)% $ 992.90
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994) to
October 31, 1994............... (1.70)% $ 983.00 (1.70)% $ 983.00
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended December 31,
1994........................... 4.94% 5.11%
<CAPTION>
TAX-EQUIVALENT YIELD*
<S> <C> <C> <C> <C>
30 days ended December 31,
1994........................... 6.86% 7.10%
</TABLE>
- -------------------
* Based upon a Federal income tax rate of 28%.
50
<PAGE>
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 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 comprise separate
Series, each of which will consist of a separate portfolio which will issue
separate shares. The Trustees are authorized to create an unlimited number of
Series and, with respect to each Series, to issue an unlimited number of full
and fractional shares of beneficial interest, par value $.10 per share, of
different classes and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
in the Series. Shareholder approval is not necessary for the authorization of
additional Series or classes of a Series of the Trust. At the date of this
Statement of Additional Information, the Fund is the only Series of the Trust.
Also 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. All class
shares represent interests in the same assets of the Fund and have identical
voting, dividend, liquidation and other rights and the same terms and conditions
except that the Class B, Class C and Class D shares bear certain expenses
related to the account maintenance and/or distribution of such shares and have
exclusive voting rights with respect to matters relating to such account
maintenance and/or distribution expenditures. See "Purchase of Shares". The
Trust has received an order from the Commission permitting the issuance and sale
of multiple classes of shares.
All shares of the Trust have equal voting rights, except that only shares of
the respective Series are entitled to vote on matters concerning only that
Series and, as noted above, a class of shares of a Series will have exclusive
voting rights with respect to matters relating to the account maintenance and/or
distribution expenses being borne solely by such class. Each issued and
outstanding share is entitled to one vote and to participate equally in
dividends and distributions declared by the respective Series and in net assets
of such Series upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities except that, as noted above, expenses related to the
account maintenance and/or distribution of the shares of a class of a Series are
borne solely by such class. There normally will be no meetings of shareholders
for the purpose of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders, at
which time the Trustees then in office will call a shareholders' meeting for the
election of Trustees. Shareholders, in accordance with the terms of the
Declaration of Trust, may 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 Investment Company Act to seek approval of new management
and advisory arrangements, of a material increase in account maintenance and
distribution fees or of 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
51
<PAGE>
and nonassessable and have no preemptive rights. Redemption and conversion
rights are discussed elsewhere herein and in the Prospectus. Shares do not have
cumulative voting rights and the holders of more than 50% of the shares of the
Trust voting for the election of Trustees can elect all of the Trustees if they
choose to do so and in such event the holders of the remaining shares would not
be able to elect any Trustees. No amendments may be made to the Declaration of
Trust without the affirmative vote of a majority of the outstanding shares of
the Trust.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the initial offering price for Class
A, Class B, Class C and Class D shares of the Fund based on the current offering
period value of the Fund's net assets and number of shares outstanding on
October 31, 1994 is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------- -------- --------
<S> <C> <C> <C> <C>
Net Assets................... $ 27,652,527 $ 142,152,159 $ 1,058 $ 69,891
------------ ------------- -------- --------
------------ ------------- -------- --------
Number of Shares
Outstanding.................. 2,874,765 14,779,964 110 7,266
------------ ------------- -------- --------
------------ ------------- -------- --------
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)................. $ 9.62 $ 9.62 $ 9.62 $ 9.62
------------ ------------- -------- --------
Sales Charge (1.00% of
offering price (1.01% of
net asset value per
share))*..................... $ 0.10 $ ** $ ** $ 0.10
------------ ------------- -------- --------
Offering Price............... $ 9.72 $ 9.62 $ 9.62 $ 9.72
------------ ------------- -------- --------
</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. See "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares" in the Prospectus.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6619,
have been selected as the independent auditors of the Trust. The selection of
independent auditors is subject to ratification by the Trust's shareholders. In
addition, the employment of such auditors may be terminated without any penalty
by the vote of a majority of the outstanding shares of the Trust at a meeting
called for the purpose of terminating such employment. The independent auditors
are responsible for auditing the annual financial statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101, acts as the Custodian of the Trust's assets with respect to the Fund. The
Custodian is responsible for safeguarding and controlling the Fund's cash and
securities, handling the delivery of securities and collecting interest on the
Fund's investments.
52
<PAGE>
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening,
maintenance and servicing of shareholder accounts. See "Management of the
Trust--Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Trust sends
to shareholders of the Fund 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 of the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act, to which reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the Trust the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Trust at any time or to grant the use of such
name to any other company, and the Trust has granted Merrill Lynch, under
certain conditions, the use of any other name it might assume in the future,
with respect to any corporation organized by Merrill Lynch.
-------------------
The Declaration of Trust establishing the Trust dated August 14, 1986, a
copy of which, together with all amendments thereto (the "Declaration"), is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch 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" (as defined in the Declaration) only shall be liable.
To the knowledge of the Trust, no person or entity owned beneficially 5% or
more of the Fund's shares on February 1, 1995.
53
<PAGE>
APPENDIX
RATINGS OF MUNICIPAL BONDS
DESCRIPTIONS OF MOODY'S INVESTORS SERVICE, INC.'S ("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 generally are 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 payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B-Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa-Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca-Bonds which are rated "Ca" represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C-Bonds which are rated "C" are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
54
<PAGE>
Conditional Rating: Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operations experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Rating Refinements: Moody's may apply numerical modifiers 1, 2 and 3 in each
generic rating classification from Aa through B in its municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Short-term Notes: The four ratings of Moody's for short-term notes are
MIG-1/VMIG-1, MIG-2/VMIG-2, MIG-3/VMIG-3 and MIG-4/VMIG-4; MIG-1/VMIG-1 denotes
"best quality . . . strong protection by established cash flows"; MIG-2/VMIG-2
denotes "high quality" with ample margins of protection; MIG-3/VMIG-3 denotes
"favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades"; MIG-4/VMIG-4 denotes "adequate quality . . . [p]rotection
commonly regarded as required of an investment security is present . . . there
is specific risk."
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa--judged
to be the best quality, carry the smallest degree of investment risk; Aa--judged
to be of high quality by all standards; A--possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity normally will be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and well established access to a
range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This normally will
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
55
<PAGE>
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP ("STANDARD & POOR'S") MUNICIPAL
DEBT RATINGS
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from sources Standard & Poor's considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations.
<TABLE>
<C> <S>
I. Likelihood of default--capacity and willingness of the obligor as to the timely payment
of interest and repayment of principal in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
</TABLE>
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher-rated categories.
BB, B, CCC, CC, C Debt rated "BB", "CCC", "CC" and "C" is regarded, on
balance, as predominately speculative with respect to capacity to pay interest
and repay principal in accordance
56
<PAGE>
with the terms of the obligations. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major exposures to adverse conditions.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used when
interest payments 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. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion for the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
DESCRIPTION OF STANDARD & POOR'S CORPORATE BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree. Debt rated "A" has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt of a higher rated category. Debt rated "BBB" is regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
The ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four
57
<PAGE>
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Ratings are applicable to both taxable and tax-exempt commercial paper.
The four categories are as follows:
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with the designation 1, 2 or 3 to indicate the relative degree of
safety as follows:
A-1 This designation indicates that the degree of safety regarding
timely payment is very strong. Issues that possess overwhelming safety
characteristics are given a "+" designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
A Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less likely will receive a
note rating. Notes maturing beyond 3 years most likely will receive a long-term
debt rating. The following criteria will be used in making that assessment:
. Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
. Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given a "+"
designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
Standard & Poor's may continue to rate note issues with a maturity greater
than three years in accordance with the same rating scale currently employed for
municipal bond ratings.
58
<PAGE>
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date information to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA".
59
<PAGE>
Because bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these insurers
is generally rated "F-1+".
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
Improving
Stable
Declining
Uncertain
Credit trend indicators are not predictions that any rating change will
occur, and have a longer-term time frame than issues placed on FitchAlert.
NR indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn: A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may
be raised or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for
60
<PAGE>
bond issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
<TABLE>
<CAPTION>
<S> <C>
BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service
requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD and D Bonds are in default on interest and/or principal payments. Such bonds
are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor.
"DDD" represents the highest potential for recovery on these bonds, and
"D" represents the lowest potential for recovery.
</TABLE>
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD", "DD", or "D" categories.
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
61
<PAGE>
Fitch short-term ratings are as follows:
<TABLE>
<S> <C>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+".
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not
as great as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
however, near-term adverse changes could cause these securities to be
rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or imminent payment
default.
LOC The symbol "LOC" indicates that the rating is based on a letter of credit
issued by a commercial bank.
INS The symbol "INS" indicates that the rating is based on an insurance
policy or financial guaranty issued by an insurance company.
</TABLE>
62
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND OF
MERRILL LYNCH MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Municipal Intermediate Term Fund
of Merrill Lynch Municipal Series Trust as of October 31, 1994, the related
statements of operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended. These
financial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Municipal Intermediate Term Fund of Merrill Lynch Municipal Series Trust as of
October 31, 1994, the results of its operations, the changes in its net assets,
and the financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
December 5, 1994
63
<PAGE>
<TABLE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND, OCTOBER 31, 1994
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Rating Amount Issue (Note 1a)
<C> <C> <C> <S> <C>
STATE
Alaska--2.1%
AAA Aaa $1,000 Alaska Student Loan Corporation, Student Assistance, Student Loan Revenue Bonds,
AMT, Series A, 5.90% due 7/01/2003 (c) $ 974
North Slope Boro, Alaska, Revenue Bonds, UT, Series B (d):
AAA Aaa 2,000 6.06%* due 1/01/2002 1,304
AAA Aaa 2,000 6.16%* due 1/01/2003 1,218
Arizona--2.7%
AA- Aa 3,000 Maricopa County, Arizona, United School District No. 48 Revenue Bonds (Scottsdale
Improvement), UT, 4.40% due 7/01/2013 2,237
Tucson, Arizona, Street and Highway User Revenue Bonds, Series B (g):
A+ NR** 1,000 9.25% due 7/01/2000 1,181
A+ NR** 1,000 9.25% due 7/01/2002 1,216
California--9.5%
NR** MIG1+ 7,185 Fresno County, California, TRAN, 4.25% due 7/13/1995 7,171
AA Aa 6,710 Los Angeles, California, Department of Water and Power Waterworks, Revenue Refunding
Bonds, 4.50% due 5/15/2011 5,114
San Francisco, California, City and County, GO, UT (d):
AAA Aaa 740 (Correctional Facilities Improvement), Series C, 10% due 12/15/2000 913
AAA Aaa 680 (Fire Protection Improvement), Series B, 10% due 12/15/2000 839
NR** NR** 1,750 University of California, COP (UCLA Central Chiller Cogeneration),
10.75% due 11/01/1998 (g) 2,095
Colorado--5.2%
A1 Aa3 1,000 Colorado HFA, M/F Revenue Bonds (Central Park Coven & Greenwood), VRDN, 3.35% due
5/01/1997 (a) 1,000
AAA Aaa 1,000 Colorado Springs, Colorado, Utility Revenue Improvement Bonds, Series A,
9.875% due 11/15/2000 (b) 1,233
Colorado Student Obligation Bond Authority, Student Loan Revenue Bonds, AMT, Series C:
NR** A 1,000 6.80% due 9/01/2000 1,034
NR** A 1,300 6.90% due 9/01/2001 1,332
A+ A 2,000 Denver, Colorado, City and County Revenue Bonds, COP (School District Number 001), UT,
Series B, 10% due 12/01/1999 2,389
NR** A 1,470 Larimer County, Colorado, GO, COP (Poudre School District Number R-1),
10% due 12/01/2001 1,845
Connecticut--4.3%
Connecticut State Clean Water Fund Revenue Bonds:
AA+ Aa 1,015 6.375% due 6/01/2004 1,055
AA+ Aa 1,805 6.375% due 12/01/2005 1,871
AA+ Aa 1,840 6.375% due 12/01/2006 1,897
AA- A1 3,000 Connecticut State, Special Tax Obligation, Revenue Refunding Bonds (Transportation
Infrastructure), Series B, 4.30% due 10/01/2003 2,558
District of
Columbia--1.1%
A- Baa 2,000 District of Columbia, Revenue Refunding Bonds, UT, Series A, 5.50% due 6/01/2001 1,919
Florida--1.7%
Hillsborough County, Florida, Capital Improvement Revenue Bonds (County Center
Project), Second Series:
A A 940 6% due 7/01/2000 960
A A 895 6.20% due 7/01/2004 909
A1+ VMIG1 200 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa Electric Company Project),
VRDN, 3.55% due 5/15/2018 (a) 200
64
<PAGE>
A1 VMIG1 800 Pinellas County, Florida, Health Facilities Authority, Revenue Refunding Bonds,
DATES (Pooled Hospital Loan Project), 3.70% due 12/01/2015 (a) 800
Georgia--5.7%
AA+ Aaa 2,275 Georgia GO, Revenue Refunding Bonds, UT, Series A, 5.80% due 3/01/2000 2,331
AA+ Aaa 2,500 Georgia GO, UT, Series D, 6.70% due 8/01/2010 2,632
A+ A 1,250 Georgia Municipal Electric Authority, Georgia Special Obligation Bonds, Fifth
Crossover Series (Project One), 6.40% due 1/01/2009 1,226
AA Aa1 1,000 Gwinnett County, Georgia, School District Refunding Bonds, Series B,
6.35% due 2/01/2005 1,037
AAA Aaa 2,180 Henry County, Georgia, School District Revenue Bonds, UT, 7.50% due 8/01/2004 (d) 2,439
Illinois--7.3%
Cook County, Illinois, Revenue Bonds, COP, UT (Community College District No. 508) (e):
AAA Aaa 2,000 8.10% due 1/01/1999 2,199
AAA Aaa 1,000 8.50% due 1/01/2002 1,161
A+ A 2,500 Illinois Health Facility Authority, Revenue Refunding Bonds (Lutheran General
Health), Series C, 7% due 4/01/2008 2,550
A+ A1 2,500 Illinois Student Assistance, Community Student Loan Revenue Bonds, AMT, Series M,
6.60% due 3/01/2007 2,469
AAA Aaa 1,575 Kane County, Illinois, Community Unit School District No. 304-Geneva, UT,
6.05% due 6/01/2005 (e) 1,574
AAA Aaa 2,325 University of Illinois, COP, Series A, 7.25% due 8/15/2000 (f) 2,441
Indiana--0.6%
A+ NR** 1,000 Indianapolis, Indiana, Local Public Improvement Bank Refunding Bonds, Series D,
6.50% due 2/01/2006 1,010
Iowa--2.1%
A1+ NR** 3,600 Iowa Finance Authority, Solid Waste Disposal Revenue Bonds (Cedar River Paper Company
Project), VRDN, Series A, 3.80% due 7/01/2023 (a) 3,600
Kentucky--1.4%
AAA Aaa 3,090 University of Kentucky, Revenue Refunding Bonds (Community College Education),
Second Series, 4.60% due 5/01/2011 (c) 2,427
Maine--3.1%
NR** A 3,080 Maine Educational Loan Marketing Corporation, Student Loan Revenue Refunding Bonds,
AMT, 6.90% due 11/01/2003 3,117
Maine State Turnpike Authority, Turnpike Revenue Bonds (d):
AAA Aaa 1,000 7.125% due 7/01/2008 1,078
AAA Aaa 1,000 7.50% due 7/01/2009 1,108
Massachusetts--1.1%
A+ A 1,500 Massachusetts GO, UT, Series B, 9.25% due 7/01/2000 1,774
</TABLE>
Portfolio
Abbreviations
To simplify the listings of Merrill Lynch Municipal
Intermediate Term Fund's portfolio holdings in the
Schedule of Investments, we have abbreviated the
names of many of the securities according to the list
below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DATES Daily Adjustable Tax-Exempt Securities
GO General Obligation Bonds
HFA Housing Finance Authority
IDA Industrial Development Authority
M/F Multi-Family
PCR Pollution Control Revenue Bonds
S/F Single-Family
TRAN Tax Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
65
<PAGE>
<TABLE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND, OCTOBER 31, 1994
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Rating Amount Issue (Note 1a)
<C> <C> <C> <S> <C>
STATE
Michigan--5.2%
BBB Baa1 $2,500 Dickinson County, Michigan, Economic Development Corporation, Solid Waste Disposal
Revenue Refunding Bonds (Champion International), 6.55% due 3/01/2007 $ 2,420
AA Aa 1,730 Lansing, Michigan, Board of Water and Light, Water Supply, Electric Utility System
Revenue Bonds, Series A, 5% due 7/01/2012 1,402
NR** A 1,000 Michigan Higher Education, Student Loan Authority Revenue Bonds, AMT, Series XIV-A,
6.75% due 10/01/2006 1,033
Michigan State Hospital Finance Authority, Revenue Refunding Bonds, Series A:
A- A 1,000 (Detroit Medical Center), 6.375% due 8/15/2009 964
NR** A1 3,280 (McLaren Obligation Group), 5.75% due 10/15/2003 3,094
Minnesota--1.3%
AA+ Aa 2,250 Minnesota HFA, S/F Mortgage Revenue Bonds, Series E, 6.65% due 7/01/2013 2,200
Mississippi--2.3%
Mississippi Higher Education Assistance Corporation, Student Loan Revenue Refunding
Bonds, AMT, Series C:
A NR** 2,370 6.40% due 1/01/2003 2,404
A NR** 1,440 6.50% due 7/01/2004 1,507
Nevada--2.8%
AAA Aaa 2,905 Clark County, Nevada, Airport, GO, 10% due 6/01/2001 (e) 3,606
AAA Aaa 1,000 Clark County, Nevada, School District Revenue Bonds, Series A, 9.75% due 6/01/2000 (d) 1,203
New Jersey--3.8%
AA+ Aa1 1,000 New Jersey GO, 7% due 4/01/1999 1,067
AAA Aaa 3,000 New Jersey Housing and Mortgage Finance Agency Revenue Bonds, AMT, Series F, 7.80%
due 10/01/2010 (d) 3,037
New Jersey Transportation Trust Fund Revenue Bonds, Series A:
A+ Aa 1,000 6% due 6/15/2000 1,024
A+ Aa 1,350 6% due 6/15/2001 1,380
New York--4.1%
New York City, New York, GO, UT:
A- Baa1 2,000 Series A, 8% due 11/01/1998 (g) 2,200
A- Baa1 1,605 Series F, 8.10% due 11/15/1999 1,752
A1+ NR** 3,000 New York State Energy Research and Development Authority, PCR (Niagara Power
Corporation Project), VRDN, AMT, Series B, 3.70% due 7/01/2027 (a) 3,000
North Carolina--2.2%
AAA Aaa 1,005 Mecklenburg County, North Carolina, Public Improvement Bonds, UT, Series A and B,
6.10% due 4/01/2001 1,048
A- A 2,500 North Carolina Eastern Municipal Power Agency, Power System Revenue Refunding Bonds,
Series B, 7.25% due 1/01/2007 2,580
NR** P1 100 Wake County, North Carolina, Industrial Facilities and Pollution Control Finance
Authority Revenue Bonds (Carolina Power and Light Company Project), DATES,
3.65% due 3/01/2017 (a) 100
North Dakota--0.6%
NR** Aa 1,000 North Dakota State, Student Loan Revenue Refunding Bonds, Series A, 5.90% due
7/01/1998 1,011
Ohio--2.1%
AAA Aaa 1,000 Lakota, Ohio, Local School District Revenue Bonds, UT, 7% due 12/01/2007 (c) 1,071
Ohio State Public Facilities Commission, Park and Recreation Capital Facilities
Revenue Bonds, Series II-A:
A+ A1 1,600 4.60% due 12/01/2006 1,314
A+ A1 1,500 4.60% due 12/01/2007 1,210
66
<PAGE>
Rhode Island--0.6%
AAA Aaa 1,000 Rhode Island State, Refunding Bonds, Series A, 6.20% due 6/15/2004 (e) 1,025
South Carolina--2.3%
A- A3 4,000 Georgetown County, South Carolina, PCR, Refunding (International Paper Company
Project), 6.25% due 6/15/2005 3,936
Texas--14.7%
Austin, Texas, Public Improvement Bonds:
AA Aa 1,605 4.75% due 9/01/2011 1,281
AA Aa 1,955 4.75% due 9/01/2012 1,544
AA Aa 2,055 4.75% due 9/01/2013 1,607
Austin, Texas, Utility Systems Revenue Bonds (b):
AAA Aaa 2,355 10.75% due 5/15/2000 2,932
AAA Aaa 3,205 Series A, 9.50% due 5/15/2015 3,811
NR** A 760 Brazos, Texas, Higher Education Authority Incorporated, Student Loan Revenue
Refunding Bonds, AMT, Series A, 6.70% due 9/01/2001 781
A1+ VMIG1 200 Harris County, Texas, Health Facilities Development Corporation, Special Facilities
Revenue Bonds (Texas Medical Center Project), VRDN, 3.70% due 2/15/2022 (a) (d) 200
AAA Aaa 2,250 Harris County, Texas, Toll Road Tax and Sub-Lien Revenue Bonds, UT,
10.375% due 2/01/1998 (b) 2,588
AAA Aaa 1,950 San Antonio, Texas, Electric and Gas Revenue Refunding Bonds, Series A,
5.91%* due 2/01/2002 (c) 1,278
AA Aa 1,375 San Antonio, Texas, GO, General Improvement Revenue Bonds, 8.625% due 8/01/1999 1,561
AA Aa 2,700 Texas State Public Financing Authority Revenue Bonds, Series C, 9% due 10/01/1999 3,123
AA+ Aa1 3,545 University of Texas, Revenue Refunding Bonds (Permanent University Fund),
9.50% due 7/01/2000 4,252
Virginia--3.1%
Virginia State Housing Development Authority, Commonwealth Mortgage Revenue Bonds:
AA+ Aa 2,585 Series H, 6.50% due 7/01/2007 2,558
NR** Aa 1,365 Series J, Subseries J-2, 6.45% due 1/01/2010 1,333
NR** Aa 1,300 Series J, Subseries J-2, 6.50% due 1/01/2011 1,266
Washington--7.1%
AAA Aaa 1,500 Snohomish County, Washington, Public Utilities Electric Revenue Bonds (District
No. 001), Series B, 9.75% due 1/01/1999 (e) 1,737
AAA Aaa 5,000 Tacoma, Washington, Electric System Revenue Bonds, 5.90% due 1/01/2005 (c) 4,899
AA Aa 2,400 Washington GO, Revenue Bonds, Series A, 6.70% due 2/01/2006 2,542
Washington Public Power Supply System (Nuclear Project No. 3), Revenue Refunding
Bonds, Series B:
AA Aa 1,500 7.375% due 7/01/2004 1,614
AA Aa 1,070 7% due 7/01/2009 1,114
Total Investments (Cost--$175,467)--100.1% 170,046
Liabilities in Excess of Other Assets--(0.1%) (170)
--------
Net Assets--100.0% $169,876
========
<FN>
(a)The interest rate is subject to change periodically based upon prevailing market rates.
The interest rates shown are the rates in effect at October 31, 1994.
(b)Prerefunded.
(c)AMBAC Insured.
(d)MBIA Insured.
(e)FGIC Insured.
(f)Capital Guaranty.
(g)Escrowed to maturity.
*Represents the yield to maturity on this zero coupon issue.
**Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
67
<PAGE>
<TABLE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND, OCTOBER 31, 1994
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of October 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$175,466,813) (Note 1a) $170,046,021
Cash 79,200
Receivables:
Interest $ 3,432,605
Securities sold 2,024,422
Beneficial interest sold 482,445
Other 10,938 5,950,410
------------
Prepaid registration fees and other assets (Note 1e) 120,667
------------
Total assets 176,196,298
------------
Liabilities: Payables:
Securities purchased 4,908,338
Beneficial interest redeemed 1,024,598
Dividends to shareholders (Note 1f) 164,810
Investment adviser (Note 2) 75,370
Distributor (Note 2) 34,308 6,207,424
------------
Accrued expenses and other liabilities 113,239
------------
Total liabilities 6,320,663
------------
Net Assets: Net assets $169,875,635
============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number
Consist of: of shares authorized $ 287,477
Class B Shares of beneficial interest, $.10 par value, unlimited number
of shares authorized 1,477,996
Class C Shares of beneficial interest, $.10 par value, unlimited number
of shares authorized 11
Class D Shares of beneficial interest, $.10 par value, unlimited number
of shares authorized 727
Paid-in capital in excess of par 183,143,194
Accumulated realized capital losses--net (Note 5) (9,612,978)
Unrealized depreciation on investments--net (5,420,792)
------------
Net assets $169,875,635
============
Net Asset Value: Class A--Based on net assets of $27,652,527 and 2,874,765 shares of
beneficial interest outstanding $ 9.62
============
Class B--Based on net assets of $142,152,159 and 14,779,964 shares of
beneficial interest outstanding $ 9.62
============
Class C--Based on net assets of $1,058 and 110 shares of beneficial
interest outstanding $ 9.62
============
Class D--Based on net assets of $69,891 and 7,266 shares of beneficial
interest outstanding $ 9.62
============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended October 31, 1994
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount $10,798,795
Income (Note 1d):
68
<PAGE>
Expenses: Investment advisory fees (Note 2) 999,575
Distribution fees--Class B (Note 2) 453,640
Printing and shareholder reports 84,287
Registration fees (Note 1e) 69,060
Transfer agent fees--Class B (Note 2) 65,195
Accounting services (Note 2) 58,282
Professional fees 47,393
Custodian fees 22,187
Trustees' fees and expenses 16,132
Pricing fees 11,350
Transfer agent fees--Class A (Note 2) 11,218
Other 5,772
------------
Total expenses 1,844,091
------------
Investment income--net 8,954,704
------------
Realized & Unreal- Realized gain on investments 1,875,751
ized Gain (Loss) on Change in unrealized appreciation/depreciation on investments--net (15,766,315)
Investments--Net ------------
(Notes 1d & 3): Net Decrease in Net Assets Resulting from Operations $ (4,935,860)
============
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 8,954,704 $ 8,269,632
Realized gain on investments--net 1,875,751 2,843,168
Change in unrealized appreciation/depreciation on investments--net (15,766,315) 8,068,558
------------ ------------
Net increase (decrease) in net assets resulting from operations (4,935,860) 19,181,358
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (1,583,774) (1,005,826)
(Note 1f): Class B (7,370,849) (7,263,806)
Class C (1) --
Class D (80) --
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (8,954,704) (8,269,632)
------------ ------------
Beneficial Interest Net increase in net assets derived from beneficial interest transactions 1,531,744 32,452,759
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (12,358,820) 43,364,485
Beginning of year 182,234,455 138,869,970
------------ ------------
End of year $169,875,635 $182,234,455
============ ============
See Notes to Financial Statements.
</TABLE>
69
<PAGE>
<TABLE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND, OCTOBER 31, 1994
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.39 $ 9.70 $ 9.61 $ 9.24 $ 9.29
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .52 .54 .59 .60 .59
Realized and unrealized gain (loss) on investments--net (.77) .69 .09 .37 (.05)
-------- -------- -------- -------- --------
Total from investment operations (.25) 1.23 .68 .97 .54
-------- -------- -------- -------- --------
Less dividends:
Investment income--net (.52) (.54) (.59) (.60) (.59)
-------- -------- -------- -------- --------
Net asset value, end of year $ 9.62 $ 10.39 $ 9.70 $ 9.61 $ 9.24
======== ======== ======== ======== ========
Total Investment Based on net asset value per share (2.49%) 13.01% 7.16% 10.90% 5.99%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses .76% .75% .86% .85% .92%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.19% 5.35% 5.97% 6.34% 6.39%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 27,653 $ 24,173 $ 14,068 $ 6,546 $ 2,233
Data: ======== ======== ======== ======== ========
Portfolio turnover 52.56% 83.66% 74.20% 129.85% 236.07%
======== ======== ======== ======== ========
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.39 $ 9.69 $ 9.61 $ 9.24 $ 9.29
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .49 .51 .56 .57 .57
Realized and unrealized gain (loss) on investments--net (.77) .70 .08 .37 (.05)
-------- -------- -------- -------- --------
Total from investment operations (.28) 1.21 .64 .94 .52
-------- -------- -------- -------- --------
Less dividends:
Investment income--net (.49) (.51) (.56) (.57) (.57)
-------- -------- -------- -------- --------
Net asset value, end of year $ 9.62 $ 10.39 $ 9.69 $ 9.61 $ 9.24
======== ======== ======== ======== ========
Total Investment Based on net asset value per share (2.79%) 12.78% 6.72% 10.56% 5.68%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses, excluding distribution fees .77% .76% .86% .88% .92%
Net Assets: ======== ======== ======== ======== ========
Expenses 1.07% 1.06% 1.16% 1.18% 1.22%
======== ======== ======== ======== ========
Investment income--net 4.87% 5.07% 5.68% 6.05% 6.09%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $142,152 $158,061 $124,802 $ 97,998 $109,388
Data: ======== ======== ======== ======== ========
Portfolio turnover 52.56% 83.66% 74.20% 129.85% 236.07%
======== ======== ======== ======== ========
70
<PAGE>
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. October 21, 1994++ to
October 31, 1994
Increase (Decrease) in Net Asset Value: Class C Class D
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 9.70 $ 9.70
Operating -------- --------
Performance: Investment income--net .01 .01
Realized and unrealized loss on investments--net (.08) (.08)
-------- --------
Total from investment operations (.07) (.07)
-------- --------
Less dividends:
Investment income--net (.01) (.01)
-------- --------
Net asset value, end of period $ 9.62 $ 9.62
======== ========
Total Investment Based on net asset value per share (.71%)+++ (.71%)+++
Return:* ======== ========
Ratios to Average Expenses, excluding distribution fees .88%** .87%**
Net Assets: ======== ========
Expenses 1.18%** .97%**
======== ========
Investment income--net 4.92%** 5.20%**
======== ========
Supplemental Net assets, end of period (in thousands) $ 1 $ 70
Data: ======== ========
Portfolio turnover 52.56% 52.56%
======== ========
<FN>
*Total investment returns exclude the effects of sales loads.
**Annualized.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
71
<PAGE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND, OCTOBER 31, 1994
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Municipal Intermediate Term Fund (the "Fund"),
formerly Merrill Lynch Municipal Income Fund, is presently the
only series of Merrill Lynch 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 Pricing SM System. Shares of Class A and Class D are
sold with a front-end sales charge. Shares of Class B and Class C
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 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 in which the Fund invests are traded primarily in the
over-the-counter municipal bond and money markets and are valued
at the last available bid price in the over-the-counter market or
on the basis of yield equivalents as obtained by the Fund's
pricing service from one or more dealers that make markets in the
securities. Financial futures contracts, which are traded on
exchanges, are valued at their last sale price as of the close of
such exchanges. Options on financial futures contracts on US
Government securities, which are traded on exchanges, are valued
at their last bid price in the case of options purchased and
their last asked price in the case of options written. Short-term
investments with a remaining maturity of sixty days or less are
valued at amortized cost, which approximates market. 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 Fund.
(b) Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts. 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
Merrill Lynch Asset Management, L.P. ("MLAM"). Effective
January 1, 1994, the investment advisory business of MLAM was
reorganized from a corporation to a limited partnership. Both
prior to and after the reorganization, ultimate control of MLAM
was vested with Merrill Lynch & Co., Inc. ("ML & Co."). The
general partner of MLAM is Princeton Services, Inc. ("PSI"), an
indirect wholly-owned subsidiary of ML & Co. The limited partners
are ML & Co. and Merrill Lynch Investment Management, Inc.
("MLIM"), which is also an indirect wholly-owned subsidiary of
ML & Co. The Fund has also entered into a Distribution Agreement
and a Distribution Plan with Merrill Lynch Funds Distributor,
Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of MLIM.
72
<PAGE>
MLAM 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 of 0.55% on the
average daily value of the net assets.
The Investment Advisory Agreement obligates MLAM to reimburse the
Fund to the extent that expenses (excluding interest, taxes,
distribution fees, brokerage fees and commissions, and
extraordinary items) exceed 2.5% of the Fund's first $30 million
of average daily net assets, 2.0% of the Fund's next $70 million
of average daily net assets, and 1.5% of the average daily net
assets in excess thereof. MLAM's obligation to reimburse the Fund
is limited to the amount of the management fee. No fee payment
will be made to MLAM during any fiscal year which will cause such
expenses to exceed the expense limitation applicable at the time
of such payment.
Pursuant to a distribution plan (the "Distribution Plan")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.20% 0.10%
Class C 0.20% 0.10%
Class D 0.10% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to
the Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services
to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for
providing shareholder and distribution-related services to Class
B and Class C shareholders.
For the year ended October 31, 1994, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $7,395 $124,408
Class D -- --
MLPF&S received contingent deferred sales charges of $162,923
relating to transactions in Class B Shares for the year ended
October 31, 1994.
Financial Data Services, Inc. ("FDS"), an indirect wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of MLAM, MLIM, PSI, MLFD, FDS, MLPF&S and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securi-
ties, for the year ended October 31, 1994 were $88,091,724 and
$95,116,223, respectively.
Net realized and unrealized gains (losses) as of October 31, 1994
were as follows:
Realized
Gains Unrealized
(Losses) Losses
Long-term investments $ (494,354) $(5,382,042)
Short-term investments (2,189) (38,750)
Financial futures contracts 2,372,294 --
---------- -----------
Total $1,875,751 $(5,420,792)
========== ===========
As of October 31, 1994, net unrealized depreciation for Federal
income tax purposes aggregated $5,420,792, of which $1,077,600
related to appreciated securities and $6,498,392 related to
depreciated securities. The aggregate cost of investments at
October 31, 1994 for Federal income tax purposes was $175,466,813.
73
<PAGE>
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest
transactions was $1,531,744 and $32,452,759 for the years ended
October 31, 1994 and October 31, 1993, respectively.
Transactions in shares of beneficial interest for each class were
as follows:
Class A Shares for the Dollar
Year Ended October 31, 1994 Shares Amount
Shares sold 1,950,875 $19,905,075
Shares issued to shareholders in
reinvestment of dividends 84,928 849,553
----------- -----------
Total issued 2,035,803 20,754,628
Shares redeemed (1,486,841) (14,764,667)
----------- -----------
Net increase 548,962 $ 5,989,961
=========== ===========
Class A Shares for the Dollar
Year Ended October 31, 1993 Shares Amount
Shares sold 1,779,848 $18,096,496
Shares issued to shareholders in
reinvestment of dividends 50,519 512,910
----------- -----------
Total issued 1,830,367 18,609,406
Shares redeemed (955,351) (9,742,886)
----------- -----------
Net increase 875,016 $ 8,866,520
=========== ===========
Class B Shares for the Dollar
Year Ended October 31, 1994 Shares Amount
Shares sold 4,312,670 $43,164,248
Shares issued to shareholders in
reinvestment of dividends 355,440 3,565,166
----------- -----------
Total issued 4,668,110 46,729,414
Shares redeemed (5,098,388) (51,259,175)
----------- -----------
Net decrease (430,278) $(4,529,761)
=========== ===========
Class B Shares for the Dollar
Year Ended October 31, 1993 Shares Amount
Shares sold 4,450,599 $44,989,012
Shares issued to shareholders in
reinvestment of dividends 354,024 3,587,137
----------- -----------
Total issued 4,804,623 48,576,149
Shares redeemed (2,468,378) (24,989,910)
----------- -----------
Net increase 2,336,245 $23,586,239
=========== ===========
Class C Shares for the Period
October 21, 1994++ to Dollar
October 31, 1994 Shares Amount
Shares sold 110 $ 1,067
----------- -----------
Total issued 110 $ 1,067
=========== ===========
[FN]
++Commencement of Operations.
Class D Shares for the Period
October 21, 1994++ to Dollar
October 31, 1994 Shares Amount
Shares sold 7,265 $ 70,467
Shares issued to shareholders
in reinvestment of dividends 1 10
----------- -----------
Total issued 7,266 $ 70,477
=========== ===========
[FN]
++Commencement of Operations.
5. Capital Loss Carryforward:
At October 31, 1994, the Fund had a net capital loss carryforward
of approximately $9,270,000, of which $1,038,000 expires in 1995,
$6,982,000 expires in 1996, $455,000 expires in 1997, and
$795,000 expires in 1998. This amount will be available to offset
like amounts of any future taxable gains.
74
<PAGE>
[LOGO]
MERRILL LYNCH
MUNICIPAL INTERMEDIATE
TERM FUND
-------------------
TABLE OF CONTENTS
PAGE
----
Investment Objective and Policies....... 2
Description of Municipal Bonds......... 2
Description of Temporary Investments... 6
Repurchase Agreements.................. 7
Financial Futures and Options
Transactions......................... 7
Investment Restrictions................. 12
Management of the Trust................. 15
Trustees and Officers.................. 15
Compensation of Trustees............... 17
Management and Advisory Arrangements... 18
Purchase of Shares...................... 19
Initial Sales Charge
Alternatives--Class A and Class D
Shares............................... 20
Reduced Initial Sales Charges.......... 21
Distribution Plans..................... 23
Limitations on the Payment of Deferred
Sales Charges........................... 24
Redemption of Shares.................... 26
Deferred Sales Charges--Class B
Shares............................... 26
Portfolio Transactions.................. 26
Determination of Net Asset Value........ 28
Shareholder Services.................... 29
Investment Account..................... 29
Automatic Investment Plans............. 29
Automatic Reinvestment of Dividends and
Capital Gain Distributions.............. 29
Systematic Withdrawal Plans--Class A
and Class D Shares................... 30
Exchange Privilege..................... 31
Distributions and Taxes................. 45
Environmental Tax...................... 47
Tax Treatment of Futures and Options
Transactions......................... 48
Performance Data........................ 48
General Information..................... 51
Description of Series and Shares....... 51
Computation of Offering Price Per
Share................................... 52
Independent Auditors................... 52
Custodian.............................. 52
Transfer Agent......................... 53
Legal Counsel.......................... 53
Reports to Shareholders................ 53
Additional Information................. 53
Appendix
Ratings of Municipal Bonds............. 54
Independent Auditors' Report............ 63
Code #10706-0295
STATEMENT OF
ADDITIONAL
INFORMATION
February 28, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
