<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1996
SECURITIES ACT FILE NO. 33-8058
INVESTMENT COMPANY ACT FILE NO. 811-4802
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 13 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 14 /X/
(Check appropriate box or boxes)
---------------------
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
OF MERRILL LYNCH MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
COPIES TO:
<TABLE>
<S> <C>
PHILIP L. KIRSTEIN, ESQ. COUNSEL FOR THE TRUST:
MERRILL LYNCH ASSET MANAGEMENT BROWN & WOOD
P.O. BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10048-0557
ATTENTION: THOMAS R. SMITH, JR., ESQ.
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX):
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF
BENEFICIAL INTEREST UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24f-2
UNDER THE INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR
THE REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON DECEMBER 26, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
OF MERRILL LYNCH MUNICIPAL SERIES TRUST
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
- ----------------------------------------------------- --------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page............................ Cover Page
Item 2. Synopsis.............................. Fee Table
Item 3. Condensed Financial Information....... Financial Highlights; Performance Data
Item 4. General Description of Registrant..... Cover Page; Investment Objective and
Policies; Additional Information
Item 5. Management of the Fund................ Fee Table; Investment Objective and
Policies; Portfolio Transactions;
Management of the Trust; Inside Back
Cover Page
Item 5A. Management's Discussion of Fund
Performance......................... Not Applicable
Item 6. Capital Stock and Other Securities.... Cover Page; Additional Information
Item 7. Purchase of Securities Being
Offered............................. Cover Page; Merrill Lynch Select
Pricing(SM) System; Fee Table; Purchase
of Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase.............. Merrill Lynch Select Pricing(SM) System;
Fee Table; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Proceedings............. Not Applicable
PART B
Item 10. Cover Page............................ Cover Page
Item 11. Table of Contents..................... Back Cover Page
Item 12. General Information and History....... Not Applicable
Item 13. Investment Objectives and Policies.... Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund................ Management of the Trust
Item 15. Control Persons and Principal Holders
of Securities....................... Management of the Trust; Additional
Information
Item 16. Investment Advisory and Other
Services............................ Management of the Trust; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other
Practices........................... Portfolio Transactions
Item 18. Capital Stock and Other Securities.... General Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered............ Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status............................ Distributions and Taxes
Item 21. Underwriters.......................... Purchase of Shares
Item 22. Calculation of Performance Data....... Performance Data
Item 23. Financial Statements.................. Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS
FEBRUARY 26, 1996
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. For more
information on each Fund's investment objectives and policies, please see
"Investment Objective and Policies" on page 11.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing(SM) System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers which have entered into 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 26, 1996 (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.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE> 4
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(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%(d) None None 1.0%(d)
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(e) 1.0% for one year 1.0% for one year None(e)
Exchange Fee....................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory 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)... 0.05% 0.07% 0.05% 0.04%
Other............................ 0.20% 0.20% 0.20% 0.20%
------ --- --- ----
Total Other Expenses........... 0.26% 0.28% 0.26% 0.25%
------ --- --- ----
Total Fund Operating Expenses+..... 0.81% 1.13% 1.11% 0.90%
====== === === ====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain investment programs. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares" -- page 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) Class C shares of the Fund will be offered only in exchange for Class C
shares of other MLAM-advised mutual funds. See "Shareholder
Services -- Exchange Privilege" -- page 33.
(d) 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.
(e) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not 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.
(f) See "Management of the Trust -- Management and Advisory
Arrangements" -- page 20.
(g) See "Purchase of Shares -- Distribution Plans" -- page 29.
(h) See "Management of the Trust -- Transfer Agency Services" -- page 22.
(+) As of October 31, 1995, the Distributor has voluntarily waived all Class C
distribution fees due from the Fund. Total Fund Operating Expenses in the
fee table above has been restated to assume the absence of such waiver,
because the Distributor may discontinue or reduce such waiver of fees at any
time without notice. During the fiscal year ended October 31, 1995, the
Distributor waived distribution fees totaling .10% for Class C shares after
which the Fund's total expense ratio was 1.01% for Class C shares.
2
<PAGE> 5
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 $36 $55 $109
Class B................................................... $ 22 $36 $62 $137
Class C................................................... $ 21 $35 $61 $135
Class D................................................... $ 19 $38 $59 $120
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 $36 $55 $109
Class B................................................... $ 12 $36 $62 $137
Class C................................................... $ 11 $35 $61 $135
Class D................................................... $ 19 $38 $59 $120
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission (the "Commission") regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL
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 PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) 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 Pricing(SM) 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 Management, L.P. ("FAM"). Funds
advised by MLAM or FAM are referred to herein as "MLAM-advised mutual funds".
3
<PAGE> 6
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 Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares".
4
<PAGE> 7
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE 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 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 was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an eight
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
(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".
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 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, as well as a CDSC if they are
redeemed within one year of purchase. Approximately ten years after
issuance, Class B shares of the Fund 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
5
<PAGE> 8
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. 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 Trust's Board of Trustees and
regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge, but if the initial sales charge is waived
such purchases may be subject to a CDSC of 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".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the 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
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,
6
<PAGE> 9
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> 10
FINANCIAL HIGHLIGHTS
The financial information in the tables below has been audited in
connection with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Audited financial statements for
the year ended October 31, 1995 and the independent auditors' report thereon are
included in the Statement of Additional Information. The following per share
data and ratios have been derived from information provided in such audited
financial statements. Further information about the performance of the Fund is
contained in the Fund's most recent annual report to shareholders which may be
obtained, without charge, by calling or by writing the Trust at the telephone
number or address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989+
------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 9.62 $ 10.39 $ 9.70 $ 9.61 $ 9.24 $ 9.29 $ 9.45
------- ------- ------- ------- ------- ------- ------
Investment income -- net................... .53 .52 .54 .59 .60 .59 .59
Realized and unrealized gain (loss) on
investments -- net....................... .38 (.77) .69 .09 .37 (.05) (.16)
------- ------- ------- ------- ------- ------- ------
Total from investment operations........... .91 (.25) 1.23 .68 .97 .54 .43
------- ------- ------- ------- ------- ------- ------
Less dividends:
Investment income -- net................... (.53) (.52) (.54) (.59) (.60) (.59) (.59)
------- ------- ------- ------- ------- ------- ------
Net asset value, end of period............. $ 10.00 $ 9.62 $ 10.39 $ 9.70 $ 9.61 $ 9.24 $ 9.29
======== ======== ======== ======== ======== ======== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share......... 9.68% (2.49)% 13.01% 7.16% 10.90% 5.99% 5.03%#
======== ======== ======== ======== ======== ======== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses................................... .81% .76% .75% .86% .85% .92% .90%*
======== ======== ======== ======== ======== ======== ======
Investment income -- net................... 5.36% 5.19% 5.35% 5.97% 6.34% 6.39% 6.50%*
======== ======== ======== ======== ======== ======== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)... $34,970 $27,653 $24,173 $14,068 $ 6,546 $ 2,233 $1,384
======== ======== ======== ======== ======== ======== ======
Portfolio turnover......................... 115.78% 52.56% 83.66% 74.20% 129.85% 236.07% 67.88%
======== ======== ======== ======== ======== ======== ======
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Class A shares commenced operations on October 31, 1988.
# Aggregate total investment return.
8
<PAGE> 11
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987+
-------- -------- -------- -------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period... $ 9.62 $ 10.39 $ 9.69 $ 9.61 $ 9.24 $ 9.29 $ 9.45 $ 9.04 $ 10.00
-------- -------- -------- -------- ------- -------- -------- -------- --------
Investment
income -- net......... .50 .49 .51 .56 .57 .57 .58 .56 .51
Realized and unrealized
gain (loss) on
investments -- net.... .38 (.77) .70 .08 .37 (.05) (.16) .41 (.96)
-------- -------- -------- -------- ------- -------- -------- -------- --------
Total from investment
operations............ .88 (.28) 1.21 .64 .94 .52 .42 .97 (.45)
-------- -------- -------- -------- ------- -------- -------- -------- --------
Less dividends:
Investment
income -- net......... (.50) (.49) (.51) (.56) (.57) (.57) (.58) (.56) (.51)
-------- -------- -------- -------- ------- -------- -------- -------- --------
Net asset value,
end of period......... $ 10.00 $ 9.62 $ 10.39 $ 9.69 $ 9.61 $ 9.24 $ 9.29 $ 9.45 $ 9.04
========= ========= ========= ========= ======== ========= ========= ========= =========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............. 9.34% (2.79)% 12.78% 6.72% 10.56% 5.68% 4.59% 10.95% (4.62)%#
========= ========= ========= ========= ======== ========= ========= ========= =========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
account maintenance
and
distribution fees..... .83% .77% .76% .86% .88% .92% .87% .78% .67%*
========= ========= ========= ========= ======== ========= ========= ========= =========
Expenses................ 1.13% 1.07% 1.06% 1.16% 1.18% 1.22% 1.17% 1.08% .97%*
========= ========= ========= ========= ======== ========= ========= ========= =========
Investment
income -- net......... 5.05% 4.87% 5.07% 5.68% 6.05% 6.09% 6.22% 6.03% 5.75%*
========= ========= ========= ========= ======== ========= ========= ========= =========
SUPPLEMENTAL DATA:
Net assets, end of
period
(in thousands)........ $181,640 $142,152 $158,061 $124,802 $97,998 $109,388 $132,368 $158,872 $186,064
========= ========= ========= ========= ======== ========= ========= ========= =========
Portfolio turnover...... 115.78% 52.56% 83.66% 74.20% 129.85% 236.07% 67.88% 119.78% 193.92%
========= ========= ========= ========= ======== ========= ========= ========= =========
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Class B shares commenced operations on November 26, 1986.
# Aggregate total investment return.
9
<PAGE> 12
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C CLASS D
------------------------------------ ------------------------------------
FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD
YEAR ENDED OCTOBER 21, 1994+ YEAR ENDED OCTOBER 21, 1994+
OCTOBER 31, TO OCTOBER 31, OCTOBER 31, TO OCTOBER 31,
1995 1994 1995 1994
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 9.62 $ 9.70 $ 9.62 $ 9.70
---------------- ----------------- ---------------- -----------------
Investment income -- net............................ .50 .01 .52 .01
Realized and unrealized gain (loss) on
investments -- net................................ .38 (.08) .38 (.08)
---------------- ----------------- ---------------- -----------------
Total from investment operations.................... .88 (.07) .90 (.07)
---------------- ----------------- ---------------- -----------------
Less dividends:
Investment income -- net............................ (.50) (.01) (.52) (.01)
---------------- ----------------- ---------------- -----------------
Net asset value, end of period...................... $ 10.00 $ 9.62 $ 10.00 $ 9.62
================= ================== ================= ==================
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. 9.36% (.71)%# 9.57% (.71)%#
================= ================== ================= ==================
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance and
distribution fees................................. .81% .88%* .80% .87%*
================= ================== ================= ==================
Expenses............................................ 1.01% 1.18%* .90% .97%*
================= ================== ================= ==================
Investment income -- net............................ 4.76% 4.92%* 5.12% 5.20%*
================= ================== ================= ==================
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $ 6,485 $ 1 $ 7,000 $ 70
================= ================== ================= ==================
Portfolio turnover.................................. 115.78% 52.56% 115.78% 52.56%
================= ================== ================= ==================
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
10
<PAGE> 13
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 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 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
11
<PAGE> 14
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. 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, 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
12
<PAGE> 15
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 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. An entity's creditworthiness and its
capacity to make timely payment of interest and repayment of principal on a
general obligation bond when due 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
13
<PAGE> 16
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.
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 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 if such investments, together with investments in other unseasoned
issuers, would exceed 10% of its total assets (taken at market value at the time
of each investment). 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. Normally, IDBs and private activity bonds are not secured by a pledge
of the taxing power of the issuer of such bonds. Therefore, an investor should
be aware that repayment of such bonds depends on the revenues of a private
entity and should 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, its 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, which are normally issued by special purpose authorities. If
an issuer of moral obligation bonds is unable to meet its obligations, repayment
of such bonds becomes a moral commitment, but not a legal obligation, of the
state or municipality in question.
The Fund may invest in Municipal Bonds the return on which is based on a
particular index of value or interest rates. For example, the Fund may invest in
Municipal Bonds that pay interest based on an index of Municipal Bond interest
rates or based on the value of gold or some other commodity. The principal
amount payable upon maturity of certain Municipal Bonds also may be based on the
value of 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
14
<PAGE> 17
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, 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
15
<PAGE> 18
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 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
16
<PAGE> 19
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 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 total assets.
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
17
<PAGE> 20
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 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 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
18
<PAGE> 21
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 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 fundamental restrictions, the
Fund may borrow amounts up to 33 1/3% of its total assets taken at market value
(including the amount borrowed) and up to an additional 5% of its total assets
for temporary purposes; however, as a non-fundamental policy, which may be
changed by the
19
<PAGE> 22
Board of Trustees without shareholder approval, the Fund may not borrow amounts
in excess of 20% of its total assets (including the amount borrowed), and then
only from banks as a temporary measure for extraordinary or emergency purposes .
Investors are referred to the Statement of Additional Information for a
complete description of such restrictions and policies.
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of 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 of the Manager and FAM; President and Director
of Princeton Services, Inc.; Executive Vice President of ML&Co.; 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.; 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 an affiliate of FAM and 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, 1996, the Manager and FAM had a total of approximately $202.8
billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Manager.
20
<PAGE> 23
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 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, 1995, the fee paid by the
Fund to the Manager was $955,580 (based on average net assets of approximately
$173.7 million). At January 31, 1996, the net assets of the Fund aggregated
approximately $237.0 million. At this asset level, the annual management fee
would aggregate approximately $1.3 million.
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, 1995, the Trust reimbursed
the Manager $45,626 for accounting services to the Fund.
For the year ended October 31, 1995, for the Class A shares, the ratio of
total expenses to average net assets was 0.81%; for the Class B shares, the
ratio of total expenses, excluding account maintenance and distribution fees, to
average net assets was 0.83%; for the Class C shares, the ratio of total
expenses, excluding account maintenance and distribution fees, to average net
assets was 0.81%; for the Class D shares, the ratio of total expenses, excluding
account maintenance fees, to average net assets was 0.80%.
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. William R. Bock is
responsible for the day-to-day management for the Fund. Mr. Bock has been
employed by the Manager since 1989 as Vice President and Portfolio Manager.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics pursuant to
Rule 17j-1 under 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 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
21
<PAGE> 24
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
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a wholly-owned subsidiary of ML & Co., acts as the Trust's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the 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, 1995, the total fee paid by the Fund to the Transfer
Agent, for each of the Class A, B, C and D shares, pursuant to the Transfer
Agency Agreement was $16,008, $97,308, $1,286 and $1,898, respectively. At
January 31, 1996, the Fund had 1,768 Class A shareholder accounts, 10,779 Class
B shareholder accounts, 929 Class C shareholder accounts and 407 Class D
shareholder accounts. At this level of accounts, the annual fee payable to the
Transfer Agent would aggregate $187,837, plus out-of-pocket expenses.
PURCHASE OF SHARES
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 offers 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 New York Stock
Exchange (the "NYSE") (generally, 4:00 P.M., New York time), which includes
orders received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined 15 minutes after
the close of business on the NYSE on that day, provided the Distributor in turn
receives the order from the securities dealer prior to 30 minutes after the
close of business on the NYSE on that day. If the purchase orders are not
received by the Distributor prior to 30 minutes after the close of business on
the NYSE, such
22
<PAGE> 25
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
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the Investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class B
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 CDSC, ongoing distribution fees and higher account maintenance fees. A
discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing(SM) System is
set forth under "Merrill Lynch Select Pricing(SM) System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
23
<PAGE> 26
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE 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 are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors".
(3) Reduced for purchases of $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 if redeemed within one
year.
(4) The conversion period for dividend reinvestment shares was modified. Also,
Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made have an eight year conversion period. If Class B
shares of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
(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> 27
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 AMOUNT AS PERCENTAGE* OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED THE OFFERING PRICE
- ---------------------------------------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
Less than $100,000............................ 1.00% 1.01% .95%
$100,000 but less than $250,000............... .75 .76 .70
$250,000 but less than $500,000............... .50 .50 .45
$500,000 but less than $1,000,000............. .30 .30 .27
$1,000,000 and over**......................... .00 .00 .00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Class A and Class D purchases of $1 million or more will be subject to a CDSC
of 0.20% if the shares are redeemed within one year after purchase. 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 of 1933,
as amended. During the fiscal year ended October 31, 1995, the Fund sold
1,647,907 Class A shares for aggregate net proceeds of $16,236,414. The gross
sales charges for the sale of Class A shares of the Fund for that year were
$3,255, of which $216 and $3,039 were received by the Distributor and Merrill
Lynch, respectively. For the fiscal year ended October 31, 1995, the Distributor
received $1,752 with respect to redemptions of Class A shares. During the fiscal
year ended October 31, 1995, the Fund sold 1,260,691 Class D shares for
aggregate net proceeds of $12,362,696. The gross sales charges for the sale of
Class D shares of the Fund for that year were $9,724, of which $655 and $9,069
were received by the Distributor and Merrill Lynch, respectively. For the fiscal
year ended October 31, 1995, the Distributor received no CDSCs with respect to
redemptions of Class D shares.
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 of the
Fund in a shareholder account are entitled to purchase additional Class A shares
in that account. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs provided that the program has $3
million or more initially invested in MLAM-advised mutual funds. Also eligible
to purchase Class A shares at net asset value are participants in certain
investment programs including 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 ("MFA") 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 in their initial
offerings who wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in shares of the Fund also may purchase Class A
shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met. In addition, Class A shares of the Fund and
certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. who wish to
reinvest the net
25
<PAGE> 28
proceeds from a sale of certain of their shares of common stock pursuant to a
tender offer conducted by Merrill Lynch Senior Floating Rate Fund, Inc. in
shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class A and Class D shares are offered at net asset value to certain
Employer Sponsored Retirement or Savings Plans and to Employee Access
Accounts(SM) available through employers which provide such plans.
Class D shares are offered at net asset value to an investor who has a
business relationship with a Merrill Lynch 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
Blueprint(SM) Program.
Class D shares of the Fund are offered at net asset value to shareholders
of Merrill Lynch Municipal Strategy Fund, Inc. ("Municipal Strategy Fund") and
Merrill Lynch High Income Municipal Bond Fund, Inc. ("High Income Municipal Bond
Fund") who wish to reinvest the net proceeds from a sale of certain of their
shares of common stock of Municipal Strategy Fund and High Income Municipal Bond
Fund, respectively, in shares of the Fund.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE -- CLASS B AND CLASS C 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 the Fund. See "Shareholder
Services -- Exchange Privilege". 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
26
<PAGE> 29
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. 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> 30
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:
<TABLE>
<CAPTION>
CDSC
AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------------------------------------------------------- -----------------
<S> <C>
0-1................................................................ 2.0%
1-2................................................................ 1.5%
2-3................................................................ 1.0%
3-4................................................................ 0.5%
4 and thereafter................................................... None
</TABLE>
For the fiscal year ended October 31, 1995, the Distributor received CDSCs
of $219,856 and $1,574 with respect to redemptions of Class B and Class C
shares, respectively, all of which were paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
applicable rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over 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 Code) 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.
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
28
<PAGE> 31
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.
For the year ended October 31, 1995, the Fund paid the Distributor account
maintenance fees of $281,321, $1,962 and $3,486 under the Class B, Class C, and
Class D Distribution Plans, respectively, and distribution fees of $140,660 and
$981 under the Class B and Class C Distribution Plans, respectively.
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
29
<PAGE> 32
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, 1995, direct
cash revenues for the period since commencement of the offering of Class B and
Class C shares exceeded direct cash expenses by $3,004,336 and $3,738,
respectively (1.65% and 0.06% of Class B and Class C net assets, respectively,
at that date). As of December 31, 1994, the last date for which fully allocated
accrual data is available, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch with respect to Class B shares for the period
since commencement of operations exceeded fully allocated accrual revenues by
approximately $787,000 (0.61% of Class B net assets at that date). Information
about Class C shares as of December 31, 1994 is not available since Class C
shares were not offered publicly until October 31, 1994. As of October 31, 1995,
direct cash revenues for the period since commencement of the offering of Class
C shares exceeded direct cash expenses by $3 (0.03% of Class C net assets at
that date).
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 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
30
<PAGE> 33
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, Merrill Lynch Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Merrill Lynch Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Proper notice of redemption in the case of shares deposited with the Transfer
Agent may be accomplished by a written letter requesting redemption. Proper
notice of redemption in the case of shares for which certificates have been
issued may be accomplished by a written letter as noted above accompanied by
certificates for the shares to be redeemed. Redemption requests should not be
sent to the 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
31
<PAGE> 34
repurchase is received by the dealer prior to the regular close of business on
the NYSE 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 NYSE (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 NYSE, 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.
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
32
<PAGE> 35
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent.
Exchange Privilege. Shareholders of each class of shares of the Fund have
an exchange privilege with certain other MLAM-advised mutual funds. There is
currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
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.
33
<PAGE> 36
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the 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. Alternatively, a
Class A or Class D shareholder whose shares are held within a CMA(R) or CBA(R)
Account may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the CMA(R)/CBA(R) Systematic Redemption
Program, subject to certain conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, and
Class D shares may be made to an investor's Investment Account by pre-arranged
charges of $50 or more to his regular bank account. The Automatic Investment
Program is not available to shareholders whose shares are held in a brokerage
account with Merrill Lynch. Alternatively, investors who maintain CMA(R) or
CBA(R) accounts may arrange to have periodic investments made in the Fund in
their CMA(R) or CBA(R) accounts or in certain related accounts in amounts of
$100 or more through the CMA(R)/CBA(R) Automated Investment Program.
PORTFOLIO TRANSACTIONS
Subject to the policies established by the Trustees of 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
34
<PAGE> 37
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
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. The Trust has applied for an exemptive order permitting it to, among
other things, (i) purchase high quality tax-exempt securities from Merrill Lynch
when Merrill Lynch is a member of an underwriting syndicate and (ii) purchase
tax-exempt securities from and sell tax-exempt securities to Merrill Lynch in
secondary market transactions. An affiliated person of the Trust may serve as
its broker in over-the-counter transactions conducted by the Fund on an agency
basis only. For the fiscal years ended October 31, 1993 and 1994, the Fund paid
no brokerage commissions. For the fiscal year ended October 31, 1995, the Fund
paid total brokerage commissions of $10,635, none of which were paid to Merrill
Lynch.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily prior
to the determination of the net asset value which is calculated 15 minutes after
the close of business on the NYSE (generally, 4:00 P.M., New York time) on that
day. The net investment income of the Fund for dividend purposes consists of
interest earned on portfolio securities, less expenses, in each case computed
since the most recent determination of net asset value. Expenses of the Fund,
including the management 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.
35
<PAGE> 38
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.
TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Code. If it
so qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax to the extent that it distributes its net investment income and net
realized capital gains. The Trust intends to cause the Fund to distribute
substantially all of such income.
To the extent that the dividends distributed to the Fund's Class A, Class
B, Class C and Class D shareholders (together, the "shareholders") are derived
from interest income exempt from Federal income tax under Code Section 103(a)
and are properly designated as "exempt-interest dividends" by the Trust, they
will be excludable from a shareholder's gross income for Federal income tax
purposes. Exempt-interest dividends are included, however, in determining the
portion, if any, of a person's Social Security 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, from an excess of net long-term capital gains over net short-term
capital losses derived from the sale of securities or from certain transactions
in futures or options ("capital gain dividends") are taxable as long-term
capital gains for Federal income tax purposes, regardless of the length of time
the shareholder has owned Fund shares. 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.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any
36
<PAGE> 39
exempt-interest dividends received by the shareholder. In addition, any such
loss that is not disallowed under the rule stated above will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. If the Fund pays a dividend in January which was declared 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 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 its 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 an
alternative minimum tax on exempt-interest dividends paid by the Fund.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares 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.
37
<PAGE> 40
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
The 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, judicial 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 than average annual total return data since
the aggregate rates of
38
<PAGE> 41
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, 1995 was 4.33% for Class A shares,
4.05% for Class B shares, 4.13% for Class C shares and 4.23% for Class D shares
and the tax-equivalent yield for the same period (based on a Federal income tax
rate of 28%) was 6.01% for Class A shares, 5.63% for Class B shares, 5.74% for
Class C shares and 5.88% 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.
39
<PAGE> 42
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily 15 minutes after the close of business on the NYSE
(generally, 4:00 P.M., New York time), on each day during which the NYSE is open
for trading. The net asset value per share is computed by dividing the sum of
the value of the securities held by the Fund plus any cash or other assets 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 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
40
<PAGE> 43
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, 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:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this please call your Merrill Lynch
financial consultant or Merrill Lynch Financial Data Services, Inc. at
800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries 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.
41
<PAGE> 44
[THIS PAGE IS INTENTIONALLY LEFT BLANK]
42
<PAGE> 45
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 Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. ................................. 4. ....................................
2. ................................. 5. ....................................
3. ................................. 6. ....................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.............................................
................................................................................
(Zip Code)
<TABLE>
<CAPTION>
Occupation ......................................... Name and Address of Employer.................................................
<S> <C>
.............................................................................
.............................................................................
................................................... .............................................................................
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 MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor..........................................................
Signature of Depositor ......................................................
Date............................................................................
(if joint account, both must sign)
NOTE:If direct deposit to bank account is selected, your blank, unsigned check
marked "VOID" or a deposit slip from your savings account should accompany
this application.
43
<PAGE> 46
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 . . . .
Dear Sir/Madam: Date of initial purchase
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:
/ / $100,000 / / $250,000 / / $500,000 / / $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Municipal
Intermediate Term Fund Prospectus.
I agree to the terms and conditions of this 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
This form when completed should be mailed to:
Merrill Lynch Municipal Intermediate Term Fund
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
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
- --------- ------------
..............................
- --------- ------------ F/C Last Name
Branch-Code F/C No.
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
44
<PAGE> 47
MERRILL LYNCH MUNICIPAL INTERMEDIATE FUND -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
(PLEASE PRINT) ------------------------------------
Name of Owner.......................................................................
------------------------------------
Social Security No.
First Name Initial Last Name or Taxpayer Identification No.
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
....................................................................................
(Zip Code)
</TABLE>
(PLEASE PRINT)
Name of Owner...................................................................
First Name Initial Last Name
Address.........................................................................
................................................................................
(Zip Code)
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
................................................................................
(Zip Code)
- --------------------------------------------------------------------------------
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 N Quarterly on
the 24th day of March, June, September and December. If the 24th falls on a
weekend or holiday, the next succeeding business day will be utilized. Begin
systematic withdrawal on or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / / $
or / / % of the current value of / / Class A or / / Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of..........................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print)......................................................
Address.........................................................................
...........................................................................
Signature of Owner
..............................................................................
Date............................................................................
Signature of Co-Owner (if any)..................................................
(b) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name on your account............................................................
Bank Name.......................................................................
Bank Number .............................................................
Account Number..................................................................
Bank Address....................................................................
......................................................................
Signature of Depositor
..............................................................................
Date............................................................................
Signature of Depositor..........................................................
(if joint account, both must sign)
NOTE: If direct deposit is elected, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
45
<PAGE> 48
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND --
AUTHORIZATION FORM (PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class D
shares
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.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill 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 or as soon as thereafter as possible.
(month)
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, Merrill Lynch 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
MERRILL LYNCH 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 Merrill Lynch
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 Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
46
<PAGE> 49
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 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE> 50
- ------
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................... 2
Merrill Lynch Select Pricing(SM) System........ 3
Financial Highlights......................... 8
Investment Objective and Policies............ 11
Description of Municipal Bonds............. 13
When-Issued Securities and
Delayed Delivery Transactions............ 16
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 and Class C Shares............... 26
Distribution Plans......................... 29
Limitations on the Payment of
Deferred Sales Charges................... 30
Redemption of Shares......................... 31
Redemption................................. 31
Repurchase................................. 31
Reinstatement Privilege --
Class A and Class D Shares............... 32
Shareholder Services......................... 32
Portfolio Transactions....................... 34
Distributions and Taxes...................... 35
Distributions.............................. 35
Taxes...................................... 36
Performance Data............................. 38
Additional Information....................... 40
Determination of Net Asset Value........... 40
Organization of the Trust.................. 40
Shareholder Reports........................ 41
Shareholder Inquiries...................... 41
Authorization Form........................... 43
Code # 10435-0296
</TABLE>
PROSPECTUS
February 26, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
YZa(LOGO)
MERRILL LYNCH
MUNICIPAL INTERMEDIATE
TERM FUND
MERRILL LYNCH MUNICIPAL
SERIES TRUST
<PAGE> 51
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 Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated
February 26, 1996 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission and can be obtained, without charge, by calling or by
writing the 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 26, 1996.
<PAGE> 52
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, 1994 and 1995 the rates of portfolio
turnover were 52.56% and 115.78%, 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, housing, mass transportation, schools,
streets and water and sewer works. Other public purposes for which Municipal
Bonds may be
2
<PAGE> 53
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.
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,
3
<PAGE> 54
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 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.
4
<PAGE> 55
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. 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
5
<PAGE> 56
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
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
6
<PAGE> 57
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
total 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.
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
7
<PAGE> 58
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.
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.
8
<PAGE> 59
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 a decrease 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 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.
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<PAGE> 60
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.
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
10
<PAGE> 61
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 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,
11
<PAGE> 62
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
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 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.
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<PAGE> 63
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Trustees of the Fund has
otherwise determined to be liquid pursuant to applicable law.
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.
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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
Information about the Trustees, executive officers and the portfolio
managers of the Trust, including their ages and their principal occupations for
at least the last five years, is set forth below. Unless otherwise noted, the
address of each Trustee and executive officer is P.O. Box 9011, Princeton, New
Jersey 08543-9011.
ARTHUR ZEIKEL (63) -- President and Trustee(1)(2) -- President of the
Manager (which term, as used herein, includes the Manager's corporate
predecessors) since 1977; President of 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 & Co., Inc. ("ML & Co.") since 1990; Director of Merrill Lynch
Funds Distributor, Inc. (the "Distributor").
RONALD W. FORBES (55) -- 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.
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<PAGE> 65
CYNTHIA A. MONTGOMERY (43) -- 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 and Newell Co.
CHARLES C. REILLY (64) -- Trustee(2) -- 9 Hampton Harbor Road, Hampton
Bays, N.Y. 11946. Self-employed financial consultant since 1990; 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, The University of Pennsylvania, 1990; 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 since 1982; formerly taught on the faculties of
The University of Chicago, Stanford University and Ohio State University.
RICHARD R. WEST (57) -- Trustee(2) -- Box 604, Genoa, Nevada 89411.
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, 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), and Alexander's Inc. (real estate company).
TERRY K. GLENN (57) -- 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 (51) -- 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 (35) -- Vice President(1)(2) -- Vice President and Director
of Taxation of the Manager since 1990; employee of Deloitte & Touche LLP from
1982 to 1990.
KENNETH A. JACOB (44) -- Vice President(1)(2) -- Vice President of the
Manager since 1984.
WILLIAM R. BOCK (60) -- Vice President(1)(2) -- Vice President of the
Manager since 1989.
GERALD M. RICHARD (46) -- 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 thereof since 1984.
SUSAN B. BAKER (38) -- 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.
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<PAGE> 66
At February 1, 1996, 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.
COMPENSATION OF TRUSTEES
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 $15,897 for the year
ended October 31, 1995.
The following table sets forth for the fiscal year ended October 31, 1995
compensation paid by the Fund to the non-interested Trustees and for the
calendar year ended December 31, 1995 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
PENSION OR FROM TRUST AND
AGGREGATE RETIREMENT BENEFITS MLAM/FAM ADVISED
COMPENSATION ACCRUED AS PART FUNDS PAID
NAME OF TRUSTEE FROM TRUST OF TRUST'S EXPENSE TO TRUSTEES(1)
- -------------------------------------------- ---------------- ------------------- ----------------
<S> <C> <C> <C>
Ronald W. Forbes(1)......................... $2,900 None $147,100
Cynthia A. Montgomery(1).................... $2,900 None $147,100
Charles C. Reilly(1)........................ $2,900 None $269,600
Kevin A. Ryan(1)............................ $2,900 None $147,100
Richard R. West(1).......................... $3,900 None $294,600
</TABLE>
- ---------------
(1) In addition to the Trust, the Trustees serve on the boards of other MLAM/FAM
Advised Funds as follows: Mr. Forbes (37 boards); Ms. Montgomery (37
boards); Mr. Reilly (54 boards); Mr. Ryan (37 boards); and Mr. West (54
boards).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Trust.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Manager or 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.
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<PAGE> 67
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, 1993, 1994 and 1995, the fees paid by the Fund to the Manager
aggregated $891,237, $999,575 and $955,580, 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, 1993, 1994 and 1995, 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 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. 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. 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. For the fiscal year ended
October 31, 1995, the Fund paid the Manager $45,626 for accounting services. The
Trustees have determined that this is an appropriate method of allocation of
expenses. Certain expenses in connection with account maintenance and the
distribution of Class B, Class C and Class D shares 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. ML&Co. and Princeton Services are "controlling persons" of
the Manager as defined under the Investment
17
<PAGE> 68
Company Act because of their ownership of the Manager's voting securities or
their power to exercise a controlling influence over the Manager's management or
policies.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement will remain in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of 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
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B 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".
The Merrill Lynch Select Pricing(SM) 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, 1993 were $154,578, of which the Distributor received $10,639 and
Merrill Lynch received $143,939. The gross sales charges for
18
<PAGE> 69
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
gross sales charges for the sale of Class A shares for the year ended October
31, 1995 were $3,255, of which the Distributor received $216 and Merrill Lynch
received $3,039. 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 gross sales charges
for the sale of Class D shares for the year ended October 31, 1995 were $9,724,
of which the Distributor received $655 and Merrill Lynch received $9,069.
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 Pricing(SM) System commenced operations, and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible Class A shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ("Eligible Class D shares"), if the following conditions are met. First,
the sale of 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.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the fund in
connection with a tender offer conducted by the eligible fund and reinvest the
19
<PAGE> 70
proceeds immediately in the designated class of shares of the Fund. This
investment option is available only with respect to eligible shares as to which
no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
REDUCED INITIAL SALES CHARGES -- CLASS A AND CLASS D SHARES
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 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
20
<PAGE> 71
such Letter. An exchange from a MLAM-advised money market fund into the Fund
that creates a sales charge will count toward completing a new or existing
Letter of Intention from the Fund.
Employee Access Accounts(SM). Class A or Class D shares are offered at net
asset value to Employee Access Accounts(SM) available through employers that
provide employer sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500, except that the initial minimum for shares purchased for such accounts
pursuant to the Automatic Investment Program is $50.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
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; and 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.
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 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
21
<PAGE> 72
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 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.
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<PAGE> 73
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 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,
1995 with respect to the Class B and 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 for the
period November 26, 1986 (commencement of operations) to October 31, 1995.
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
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,
1995 (IN THOUSANDS):
Class B Shares (for the fiscal
period November 26, 1986
(commencement of public
offering) to October 31, 1995):
Under NASD Rule as Adopted....... $ 354,778 $ 22,174 $19,336 $41,510 $ 4,025 $ 37,485 $ 79
Under Distributor's Voluntary
Waiver......................... $ 354,778 $ 22,174 $ 1,774 $23,948 $ 4,025 $ 19,923 $ 79
FOR CLASS C SHARES -- DATA
CALCULATED AS OF OCTOBER 31,
1995 (NOT IN THOUSANDS):
Class C Shares (for the fiscal
period October 21, 1994
(commencement of public
offering) to October 31, 1995):
Under NASD Rule as Adopted........ $ 607,837 $ 37,990 $ 520 $38,510 $ 2,866 $ 35,644 $ 6,485
</TABLE>
23
<PAGE> 74
- ---------------
(1) Purchase price of all eligible Class B shares sold since November 26, 1986
(commencement of operations) other than shares acquired through dividend
reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. 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.
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 AND CLASS C 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, 1993, 1994
and 1995, the Distributor received CDSCs with respect to Class B shares of the
Fund of $51,987, $162,923 and $219,856, respectively, all of which was paid to
Merrill Lynch. For the year ended October 31, 1995, the Distributor received
CDSCs, with respect to Class C shares of the Fund of $1,574 all of which as paid
to Merrill Lynch.
The CDSC is also waived for any Class B shares that were acquired and held
at the time of redemption by Employee Access AccountsSM available through
employers that provide a retirement plan qualified under Section 401(k) of the
Code with a salary reduction feature offering a menu of investments to plan
participants. The initial minimum for such accounts is $500, except that the
initial minimum for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
24
<PAGE> 75
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, 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.
During the year ended October 31, 1995, the Fund engaged in two transactions
with Merrill Lynch aggregating $7,263,301. An affiliated person of the Trust may
serve as its broker in the over-the-counter transactions conducted on an agency
basis.
The Trust has applied for an exemptive order permitting it to, among other
things, (i) purchase high quality tax-exempt securities from Merrill Lynch as a
member of an underwriting syndicate and (ii) purchase tax-exempt securities from
and sell tax-exempt securities to Merrill Lynch in secondary market
transactions. Affiliated persons of the Trust may serve as its broker in
over-the-counter transactions conducted for the Fund on a agency basis only. 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
retention by the Fund of the securities of any issuer if the 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 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,
25
<PAGE> 76
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, 1993 and 1994, the Fund paid no
brokerage commissions. For the fiscal year ended October 31, 1995, the Fund paid
total brokerage commissions of $10,635.
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.
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 shares of all classes of the Fund is determined
by the Manager once daily, Monday through Friday 15 minutes after the close of
business on the NYSE (generally, 4:00 p.m., New York time), on each day during
which the NYSE is open for trading. The NYSE is not open on New Year's Day,
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
26
<PAGE> 77
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.
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
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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. The
Automatic Investment Plan is not available to shareholders whose shares are held
in brokerage accounts with Merrill Lynch. Alternatively, investors who maintain
CMA(R) or CBA(R) accounts may arrange to have periodic investments made in the
Fund in their CMA(R) or CBA(R)accounts or in certain related accounts in amounts
of $100 or more through the CMA(R)/CBA(R) Automated Investment Program.
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 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 NYSE (generally, 4:00 p.m., New
York time) on the 24th day of each month or the 24th day of the last month of
each quarter, whichever is applicable. If the 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.
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The Fund will not knowingly accept purchase orders for Class A or Class D shares
of the Fund from investors who maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held
within a CMA(R) or CBA(R) Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA(R)/CBA(R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to the
shareholder's account five business days after the date the shares are redeemed.
Monthly systematic redemptions will be made at net asset value on the first
Monday of each month, bimonthly systematic redemptions will be made at net asset
value on the first Monday of every other month, and quarterly, semiannual or
annual redemptions are made at net asset value on the first Monday of months
selected at the shareholder's option. If the first Monday of the month is a
holiday, the redemption will be processed at net asset value on the next
business day. The CMA(R)/CBA(R) Systematic Redemption Program is not available
if Fund shares are being purchased within the account pursuant to the Automatic
Investment Program. For more information on the CMA(R)/CBA(R) Systematic
Redemption Program, eligible shareholders should contact their Financial
Consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing(SM) System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund, 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 are also exchangeable for shares of certain MLAM-advised money market
funds specifically designated below as available for exchange by holders of
Class A, Class B, Class C or Class D shares. Shares with a net asset value of at
least $100 are required to qualify for the exchange privilege, and any shares
utilized in an exchange must have been held by the shareholder for 15 days. It
is contemplated that the exchange privilege may be applicable to other new
mutual funds whose shares may be distributed by the Distributor.
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
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<PAGE> 80
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 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 and Class C 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 or Class C shares
acquired through the use of the exchange privilege. In addition, Class B and
Class C shares of the Fund acquired through use of the exchange privilege will
be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B or Class C shares of the fund from which the
exchange has been made. For purposes of computing the sales 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-
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year CDSC period which the shareholder continued to hold for an additional three
and a half years, any subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds Issuing Class A, Class B, Class C and Class D Shares:
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC. ........ High current income consistent with a policy
of limiting the degree of fluctuation in
net asset value of fund shares resulting
from movements in interest rates, through
investment primarily in a portfolio of
adjustable rate securities.
MERRILL LYNCH AMERICAS INCOME
FUND, 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.
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MERRILL LYNCH ASSET GROWTH
FUND, INC..................... High total investment return, consistent with
prudent risk, from investment in United
States and foreign equity, debt and money
market securities the combination of which
will be varied both with respect to types
of securities and markets in response to
changing market and economic trends.
MERRILL LYNCH ASSET INCOME
FUND, INC. ................... A high level of current income through
investment primarily in United States fixed
income 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.
MERRILL LYNCH CAPITAL
FUND, INC. ................... The highest total investment return
consistent with prudent risk through a
fully managed investment policy utilizing
equity, debt and convertible securities.
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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 capital 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
investment in a portfolio primarily of
intermediate-term investment grade Florida
Municipal Bonds.
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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 and by certain
CBA(R) Accounts and CMA(R)
Sub-Accounts)................. A portfolio of Merrill Lynch Asset Builder
Program, Inc., a series fund, whose
objective is to provide capital
appreciation and income by investing in
securities, with at least 65% of the
portfolio's assets being invested in
equities.
MERRILL LYNCH 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.
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MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC. ................... High total return from investment primarily
in an interna-tionally diversified
portfolio of convertible debt securities,
convertible preferred stock and "synthetic"
convertible securities consisting of a
combination of debt securities or preferred
stock and warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS,
INC. (residents of Arizona
must meet investor suitability
standards).................... The highest total investment return
consistent with prudent risk through
worldwide investment in an internationally
diversified portfolio of securities.
MERRILL LYNCH GLOBAL OPPORTUNITY
PORTFOLIO (available only for
exchanges by certain
individual retirement accounts
for which Merrill Lynch acts
as custodian and by certain
CBA(R) Accounts and CMA(R)
Sub-Accounts)................. A portfolio of Merrill Lynch Asset Builder
Program, Inc., a series fund, whose
objective is to seek long-term growth of
capital by investing in a portfolio of
equity securities placing particular
emphasis on companies that have exhibited
above-average growth rates in earnings.
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.
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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 GROWTH
OPPORTUNITY PORTFOLIO
(available only for exchanges
by certain individual
retirement accounts for which
Merrill Lynch acts as
custodian and by
certain CBA(R) Accounts and
CMA(R) Sub-Accounts) ......... A portfolio of Merrill Lynch Asset Builder
Program, Inc., a series fund, whose
objective is to seek long-term growth of
capital by investing in a portfolio of
equity securities placing particular
emphasis on companies that have exhibited
above-average growth rates in earnings.
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.
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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 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.
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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 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.
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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.
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.
39
<PAGE> 90
MERRILL LYNCH QUALITY BOND
PORTFOLIO (available only for
exchanges by certain
individual retirement accounts
for which Merrill Lynch acts
as custodian and by certain
CBA(R) Accounts and CMA(R)
Sub-Accounts) ................ A portfolio of Merrill Lynch Asset Builder
Program, Inc., a series fund, whose
objective is to provide a high level of
current income through investment in a
diversified portfolio of debt obligations,
such as corporate bonds and notes,
convertible securities, preferred stocks
and governmental obligations.
MERRILL LYNCH SHORT-TERM GLOBAL
INCOME FUND, INC. ............ As high a level of current income as is
consistent with prudent investment
management from a global portfolio of high
quality debt securities denominated in
various currencies and multinational
currency units and having remaining
maturities not exceeding three years.
MERRILL LYNCH SPECIAL VALUE
FUND, 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.
40
<PAGE> 91
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.
MERRILL LYNCH U.S. GOVERNMENT
SECURITIES PORTFOLIO
(available only for exchanges
by certain individual
retirement accounts for which
Merrill Lynch acts as
custodian and by
certain CBA(R) Accounts and
CMA(R) Sub-Accounts).......... A portfolio of Merrill Lynch Asset Builder
Program, Inc., a series fund, whose
objective is to provide a high current
return through investments in U.S.
Government and government agency
securities, including GNMA mortgage-backed
certificates and other mortgage-backed
government securities.
MERRILL LYNCH WORLD
INCOME FUND, INC.............. High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies,
including multinational currencies.
Class A Share Money Market Funds:
MERRILL LYNCH READY
ASSETS TRUST.................. Preservation of capital, liquidity and the
highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in which
the fund invests.
MERRILL LYNCH RETIREMENT
RESERVES MONEY FUND (available
only 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.
41
<PAGE> 92
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.
Class B, Class C and Class D Share Money Market Funds:
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 obligations.
MERRILL LYNCH INSTITUTIONAL
FUND.......................... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high quality portfolio of
money market securities.
MERRILL LYNCH INSTITUTIONAL
TAX-EXEMPT FUND............... 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.
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.
42
<PAGE> 93
DISTRIBUTIONS AND TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but
not its shareholders) will not be subject to Federal income tax to the extent
that it distributes its net investment income and net realized capital gains.
The Trust intends to cause the Fund to distribute substantially all of such
income.
As discussed in the Fund's Prospectus, the Trust may establish other series
in addition to the Fund (together with the Fund, the "Series"). Each Series of
the Trust is treated as a separate corporation for Federal income tax purposes.
Each Series therefore is considered to be a separate entity in determining its
treatment under the rules for RICs described in the Prospectus. Losses in one
Series do not offset gains in another Series and the requirements (other than
certain organizational requirements) for qualifying for RIC status 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 rule 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 dividends
retain the exclusion under Code Section 103(a) if a shareholder would be treated
as a "substantial user" or "related person" under Code
43
<PAGE> 94
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, from an excess of net long-term capital gains over net short-term
capital losses derived from the sale of securities or from certain transactions
in futures or options ("capital gain dividends") are taxable as long-term
capital gains for Federal income tax purposes, regardless of the length of time
the shareholder has owned Fund shares. 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.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest dividends
received by the shareholder. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies to
interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as 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 constitutes an item of tax preference for alternative
minimum tax purposes. The Code further provides that corporations are subject to
an alternative minimum tax based, in part, on certain differences between
taxable income as adjusted for other tax preferences and the corporation's
"adjusted current earnings", which more closely reflect a corporation's economic
income. Because an exempt-interest dividend paid by the Fund will be included in
adjusted current earnings, a corporate shareholder may be required to pay
alternative minimum tax on exempt-interest dividends paid by the Fund.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
44
<PAGE> 95
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares 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,
unless extended. The Environmental Tax is imposed even if the corporation is not
required to pay an alternative minimum tax because the corporation's regular
income tax liability exceeds its minimum tax liability. The Code provides,
however, that a RIC, such as the Fund, is not subject to the Environmental Tax.
However, exempt-interest dividends paid by the Fund that create alternative
minimum taxable income for corporate shareholders (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
45
<PAGE> 96
"marked to market" for Federal income tax purposes at the end of each taxable
year, i.e., each such option or financial futures contract will be treated as
sold for its fair market value on the last day of the taxable year, and any gain
or loss attributable to Section 1256 contracts will be 60% long-term and 40%
short-term capital gain or loss. Application of these rules to Section 1256
contracts held by the Fund may alter the timing and character of distributions
to shareholders. The mark-to-market rules outlined above, however, will not
apply to certain transactions entered into by the Fund solely to reduce the risk
of changes in price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, the Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in financial futures contracts or
the related options.
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, judicial 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.
46
<PAGE> 97
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 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.
47
<PAGE> 98
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 CLASS B CLASS C CLASS D
--------------------------- --------------------------- --------------------------- ---------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT
$1,000 THE END OF $1,000 THE END OF $1,000 THE END OF $1,000 THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
- -------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One Year Ended
October 31,
1995........ 8.59% $1,085.90 8.34% $1,083.40 8.36% $1,083.60 8.48% $1,084.80
Five Years
Ended
October 31,
1995........ 7.29% $1,421.90 7.18% $1,414.40
Inception
(November 26,
1986) to
October 31,
1995........ 5.80% $1,654.40
Inception
(October 31,
1988) to
October 31,
1995........ 6.78% $1,582.90
Inception
(October 21,
1994) to
October 31,
1995........ 8.34% $1,085.80 7.50% $1,077.10
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year Ended
October 31,
1995........ 9.68% $1,096.80 9.34% $1,093.40 9.36% $1,093.60 9.57% $1,095.70
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
Inception
(October 21,
1994) to
October 31,
1994........ (0.71)% $ 992.90 (0.71)% $ 992.90
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception
(November 26,
1986) to
October 31,
1995........ 65.44% $1,654.40
Inception
(October 31,
1988) to
October 31,
1995........ 58.29% $1,582.90
Inception
(October 21,
1994) to
October 31,
1995........ 8.58% $1,085.80 7.71% $1,077.10
YIELD
30 days ended
October 31,
1995........ 4.33% 4.05% 4.13% 4.23%
TAX-EQUIVALENT YIELD*
30 days ended
October 31,
1995........ 6.01% 5.63% 5.74% 5.88%
</TABLE>
- ---------------
* Based upon a Federal income tax rate of 28%.
48
<PAGE> 99
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".
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 and
nonassessable and have no preemptive rights. Redemption and conversion rights
are discussed elsewhere
49
<PAGE> 100
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, 1995 is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net Assets........................... $34,970,380 $181,640,125 $6,484,942 $7,000,414
=========== ============ ====== =======
Number of Shares Outstanding......... 3,496,473 18,163,962 648,645 699,877
=========== ============ ====== =======
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)....................... $ 10.00 $ 10.00 $ 10.00 $ 10.00
Sales Charge (for Class A and Class D
shares: 1.00% of offering price
(1.01% of net asset value per
share))*........................... $ 0.10 $ ** $ ** $ 0.10
----------- ------------ ------ -------
Offering Price....................... $ 10.10 $ 10.00 $ 10.00 $ 10.10
----------- ------------ ------ -------
</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 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.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund's
Transfer Agent. The Transfer Agent is responsible for the
50
<PAGE> 101
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 Commission, Washington,
D.C., under the Securities Act 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, 1996.
51
<PAGE> 102
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.
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
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<PAGE> 103
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.
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.
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<PAGE> 104
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.
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.
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 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
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<PAGE> 105
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 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".
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<PAGE> 106
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.
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.
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<PAGE> 107
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". 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.
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<PAGE> 108
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
Improving arrow pointing up
Stable left--right across
[GRAPHIC]
Declining down arrows up,
Uncertain down across
Credit trend indicators are not predictions that any rating change will
occur, and have a longer-term time frame than issues placed on FitchAlert.
NR indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn: A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may
be raised or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
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<PAGE> 109
<TABLE>
<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.
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<PAGE> 110
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
<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>
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<PAGE> 111
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, 1995, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1995 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, 1995, the results of its operations, the changes in its net assets,
and the financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
December 11, 1995
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<PAGE> 112
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Alaska--1.6% AAA Aaa $ 2,575 Alaska State Housing Finance Corporation, Series A, 5.30%
due 6/01/2007 (d) $ 2,556
AAA Aaa 1,000 Alaska Student Loan Corporation, Student Assisted Loan
Revenue Bonds, AMT, Series A, 5.90% due 7/01/2003 (c) 1,043
Arizona NR* NR* 2,000 Mohave County, Arizona, IDA, IDR (North Star Steel Co.
- --0.9% Project), AMT, 6.70% due 3/01/2020 2,139
California A A1 4,010 California State, GO, 5.25% due 10/01/2013 3,800
- --12.0% AAA Aaa 3,000 Los Angeles, California, GO, UT, Series A, 5.70% due 9/01/2008 (e) 3,089
AAA Aaa 3,575 Oakland, California, Redevelopment Agency, Sub-Tax Allocation
Redevelopment Bonds (Central District), 5.30% due 9/01/2009 (d) 3,561
AAA Aaa 4,000 Oxnard, California, Financing Authority, Solid Waste
Revenue Bonds, AMT, 5.75% due 5/01/2010 (c) 4,013
AAA Aaa 4,000 Southern California Public Power Authority, Power Project
Revenue Bonds (San Juan Unit 3), Series A, 5.375% due
1/01/2010 (d) 3,970
AAA Aaa 3,000 Southern California Rapid Transportation District Revenue
Bonds (Special Benefit Assessment District), Series A1,
5.50% due 9/01/2009 (c) 3,018
NR* Aa 1,750 University of California, COP (UCLA Central Chiller
Cogeneration), 10.75% due 11/01/1998 2,058
A- NR* 1,610 University of California, Research Facilities Revenue Bonds,
Series B, 6.50% due 9/01/2003 1,706
AAA Aaa 3,000 West & Central Basin, California, Financing Authority, Revenue
Refunding Bonds (West Basin Project), Series A, 5% due
8/01/2010 (c) 2,855
</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 at right.
ACES SM Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
62
<PAGE> 113
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Colorado--6.5% Arapahoe County, Colorado, Capital Improvement Trust Fund,
Highway Revenue Bonds, Series A (d):
AAA Aaa $ 1,315 5.65% due 8/31/2009 $ 1,351
AAA Aaa 1,390 5.75% due 8/31/2010 1,428
AAA Aaa 1,000 Colorado Springs, Colorado, Utilities Revenue Improvement
Bonds, Series A, 9.875% due 11/15/2000 (b) 1,253
Colorado Student Obligation Bond Authority, Student Loan
Revenue Bonds, AMT, Series C:
NR* A 1,000 6.80% due 9/01/2000 1,062
NR* A 1,300 6.90% due 9/01/2001 1,395
A+ A 2,000 Denver, Colorado, City and County Revenue Bonds, COP (School
District Number 001), UT, Series B, 10% due 12/01/1999 2,393
A NR* 1,225 Denver, Colorado, Urban Renewal Authority, Tax Increment
Revenue Bonds (Downtown Denver), AMT, Series A, 7.25% due
9/01/2017 1,314
NR* A 1,470 Larimer County, Colorado, COP (School District Number R-1),
10% due 12/01/2001 1,881
AAA NR* 3,000 Westminster, Colorado, M/F Revenue Refunding Bonds (Oasis
Wexford Apartments Project), 5.35% due 12/01/2025 (i) 3,005
Connecticut Connecticut State, Special Tax Obligation Revenue Bonds
- --3.0% (Transportation Infrastructure), Series B:
AAA Aaa 5,230 5.10% due 10/01/2008 (e) 5,187
AAA AAA 1,400 6.125% due 9/01/2012 (d) 1,494
Florida--3.9% AAA Aaa 3,500 Dade County, Florida, Educational Facilities Authority,
Exchangeable Revenue Bonds (University of Miami), 7.65%
due 4/01/2010 (d) 3,975
AAA Aaa 2,500 Florida HFA (Antigua Club Apartments), AMT, Series A-1,
6.875% due 8/01/2026 (c) 2,645
AAA Aaa 2,000 Florida State Municipal Power Agency Revenue Bonds
(Stanton II Project), 6.50% due 10/01/2002 (b) (c) 2,267
Georgia--3.2% A1 VMIG1++ 5,600 Berke County, Georgia, Development Authority, PCR (Georgia
Power Co.--Plant Vogtle Project), VRDN, 3rd Series, 3.90%
due 7/01/2024 (a) 5,600
A+ A 1,250 Georgia Municipal Electric Authority, Special Obligation
Bonds, Fifth Crossover Series (Project One), 6.40% due 1/01/2009 1,351
A1 VMIG1++ 400 Monroe County, Georgia, Development Authority, PCR (Georgia
Power Co.--Scherer), VRDN, 1st Series, 4% due 7/01/2025 (a) 400
Hawaii--1.9% AAA Aaa 4,000 Hawaii Department of Budget and Finance, Special Purpose
Mortgage Revenue Bonds (Hawaiian Electric Company), AMT,
Series C, 7.375% due 12/01/2020 (d) 4,453
Illinois AAA Aaa 2,000 Chicago, Illinois, O'Hare International Airport, Revenue
- --10.9% Refunding Bonds (General Airport), Second Lien, Series A,
6.375% due 1/01/2012 (d) 2,131
Cook County, Illinois, Revenue Bonds, COP (Community College
District No. 508), UT (e):
AAA Aaa 2,000 8.10% due 1/01/1999 2,216
AAA Aaa 1,000 8.50% due 1/01/2002 1,204
Illinois Health Facilities Authority Revenue Bonds, VRDN (a):
A1+ VMIG1++ 1,700 (Northwest Community Hospital), 4% due 7/01/2025 1,700
NR* VMIG1++ 1,200 (Resurrection Health Care System), 4.05% due 5/01/2011 1,200
</TABLE>
63
<PAGE> 114
<TABLE>
<S> <S> <S> <C> <S> <C>
AAA Aaa 2,500 Illinois Health Facilities Authority, Revenue Refunding Bonds
(Lutheran General Health), Series C, 7% due 4/01/2008 (h) 2,868
Illinois State GO:
AA- A1 2,000 6.60% due 6/01/2009 2,186
AA- A1 3,095 UT, 5.70% due 8/01/2008 3,193
A+ A1 2,500 Illinois Student Assistance Community, Student Loan
Revenue Bonds, AMT, Series M, 6.60% due 3/01/2007 2,676
AAA Aaa 3,000 Sangamon County, Illinois, School District No. 186, Revenue
Refunding Bonds (Springfield School), UT, 6.50% due 3/01/2008 (e) 3,342
AAA Aaa 2,045 University of Illinois, COP, Series A, 7.25% due 8/15/2000 (f) 2,240
Indiana--0.5% A+ NR* 1,000 Indianapolis, Indiana, Local Public Improvement Refunding
Bonds, Series D, 6.50% due 2/01/2006 1,087
Iowa--0.5% AAA Aaa 1,145 Woodbury County, Iowa, Health System Revenue Refunding
Bonds (Saint Luke's Obligation Group), Series A, 5.20%
due 9/01/2007 (d) 1,138
Kansas--1.8% AAA Aaa 4,000 Kansas City, Kansas, Improvement Bonds, UT, Series B, 5.625%
due 9/01/2009 (d) 4,098
Kentucky--0.1% A1+ VMIG1++ 200 Carroll County, Kentucky, Solid Waste Disposal Facilities
Revenue Bonds (Kentucky Utilities Co. Project), VRDN, AMT,
Series A, 4.05% due 11/01/2024 (a) 200
Louisiana-- A1+ P1 2,100 Louisiana State Offshore Terminal Authority, Deepwater
2.0% Port Revenue Refunding Bonds (Loop Inc.--First Stage),
ACES, 3.90% due 9/01/2006 (a) 2,100
AAA Aaa 2,190 New Orleans, Louisiana, Revenue Refunding Bonds, 6.25% due
10/01/2006 (c) 2,417
Maine--2.5% NR* A 3,080 Maine Educational Loan Marketing Corporation, Student Loan
Revenue Refunding Bonds, AMT, 6.90% due 11/01/2003 3,360
Maine State Turnpike Authority, Turnpike Revenue Bonds (d):
AAA Aaa 1,000 7.125% due 7/01/2008 1,177
AAA Aaa 1,000 7.50% due 7/01/2009 1,211
Massachusetts BBB+ Aaa 1,745 Massachusetts Municipal Wholesale Electric Company, Power
- --8.6% Supply System Revenue Bonds, Series B, 6.75% due 7/01/2002 (b) 1,989
A+ A1 1,500 Massachusetts State GO, UT, Series B, 9.25% due 7/01/2000 1,795
AAA Aaa 1,575 Massachusetts State HFA, Revenue Refunding Bonds, Series A,
5.25% due 12/01/2006 (d) 1,575
AAA Aaa 2,060 Massachusetts State, Revenue Refunding Bonds (Lowell Building
Authority), Fifth Series A, 5.625% due 11/01/2008 (c) 2,130
A+ A1 5,000 Massachusetts State, Revenue Refunding Bonds, Series C, 5%
due 8/01/2007 4,934
AA- Aa 1,850 Massachusetts State Water Pollution Abatement Trust, Revenue
Secured Loan Program, Series A, 6.375% due 2/01/2015 1,933
AAA Aaa 5,000 Massachusetts State Water Resource Authority, Series A,
6.50% due 7/15/2002 (b) 5,632
Michigan--2.5% NR* A 1,000 Michigan Higher Education, Student Loan Authority Revenue
Bonds, AMT, Series XIV-A, 6.75% due 10/01/2006 1,093
Michigan State Hospital Finance Authority, Revenue
Refunding Bonds, Series A:
A A 1,000 (Detroit Medical Center Obligation Group), 6.375% due
8/15/2009 1,027
NR* A1 3,280 (McLaren Obligation Group), 5.75% due 10/15/2003 3,360
NR* P1 300 Michigan State Strategic Fund, PCR, Refunding (Consumers
Power Project), VRDN, Series A, 3.90% due 4/15/2018 (a) 300
</TABLE>
64
<PAGE> 115
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Minnesota- Minneapolis and St. Paul, Minnesota, Housing and Redevelopment
- -4.4% Authority, Health Care System, Revenue Refunding Bonds, Series A:
AAA Aaa $ 1,370 (Children's Healthcare), 5.45% due 8/15/2010 (f) $ 1,370
AAA Aaa 1,660 (Children's Healthcare), 5.55% due 8/15/2011 (f) 1,667
AAA Aaa 4,800 (Healthspan), 5% due 11/15/2006 (c) 4,772
AA+ Aa 2,250 Minnesota HFA, S/F Mortgage Revenue Bonds, Series E, 6.65%
due 7/01/2013 2,381
Mississippi NR* P1 1,300 Jackson County, Mississippi, PCR, Refunding (Chevron USA,
- --2.4% Inc. Project), VRDN, 3.90% due 12/01/2016 (a) 1,300
Mississippi Higher Education Assistance Corporation,
Student Loan Revenue Refunding Bonds, AMT, Series C:
A NR* 2,370 6.40% due 1/01/2003 2,469
A NR* 1,440 6.50% due 7/01/2004 1,500
Nevada--0.5% AAA Aaa 1,000 Clark County, Nevada, School District Revenue
Bonds, Series A, 9.75% due 6/01/2000 (d) 1,213
New AAA Aaa 1,570 New Jersey State Housing and Mortgage Finance Agency
Jersey--0.7% Revenue Bonds, AMT, Series F, 7.80% due 10/01/2010 (d) 1,673
New Mexico AAA Aaa 4,210 Las Cruces, New Mexico, Revenue Bonds, AMT, 5.35%
- --1.8% due 12/01/2007 (d) 4,240
New York A- Baa1 2,000 New York City, New York, GO, UT, Series A, 8% due
- --2.9% 11/01/1998 (g) 2,213
A1+ NR* 200 New York City, New York, IDA, IDR (Japan Airlines
Company Ltd. Project), VRDN, AMT, 4% due 11/01/2015 (a) 200
AAA VMIG1++ 500 New York City, New York, Municipal Water Finance
Authority, Water and Sewer System Revenue Bonds, VRDN,
Series A, 4% due 6/15/2025 (a)(e) 500
BBB+ Baa1 3,825 New York City, New York, Revenue Refunding Bonds,
Series E, 5.40% due 2/15/2003 3,791
North A1+ NR* 5,100 Raleigh-Durham, North Carolina, Airport Authority, Special
Carolina--2.2% Facility Revenue Bonds, VRDN, Series A, 3.85% due
11/01/2015 (a) 5,100
North NR* Aa 1,000 North Dakota State, Student Loan Revenue Refunding Bonds,
Dakota--0.4% Series A, 5.90% due 7/01/1998 1,032
Ohio--1.4% AAA Aaa 1,000 Lakota, Ohio, Local School District Revenue Bonds, UT,
7% due 12/01/2007 (c) 1,171
AA Aa 1,860 Ohio State Infrastructure Improvement Revenue Bonds, GO,
UT, 6.20% due 8/01/2012 1,986
Pennsylvania AAA NR* 2,500 Pennsylvania State Higher Education Assistance Agency, Student
- --1.1% Loan Revenue Bonds, Series A, 4.625% due 12/01/2000 2,500
South Carolina NR* P1 100 Charleston County, South Carolina, Industrial Revenue
- --0.9% Refunding Bonds (Massey Coal Terminal Corp.), VRDN,
3.95% due 1/01/2007 (a) 100
AAA Aaa 2,020 Greenville County, South Carolina, Public Facilities Corp.,
COP (Courthouse and Detention Center Project), 5.25% due
4/01/2007 (c) 2,032
Tennessee--1.3% A+ A1 2,960 Tennessee HDA, Mortgage Financing Revenue Refunding Bonds,
Series A, 5.65% due 1/01/2007 2,988
Texas--10.6% NR* A 690 Brazos, Texas, Higher Education Authority, Student Loan
Revenue Refunding Bonds, AMT, Series A, 6.70% due 9/01/2001 735
NR* A 2,455 Central Texas, Higher Education Authority, Student Loan
Revenue Refunding Bonds, AMT, Sub-Series B, 5.50% due
12/01/2005 2,462
</TABLE>
65
<PAGE> 116
<TABLE>
<S> <S> <S> <C> <S> <C>
AAA Aaa 3,000 Houston, Texas, Hotel Occupancy Tax Revenue Refunding
Bonds (Senior Lien), 5.25% due 7/01/2008 (h) 2,983
AAA Aaa 3,645 Irving, Texas, Hospital Authority, Hospital Revenue Bonds
(Irving Healthcare System), Series B, 5.75% due 7/01/2005 (f) 3,838
AAA Aaa 3,000 Lower Colorado River Authority, Texas, Revenue Refunding
Bonds (Junior Lien), 5.40% due 1/01/2007 (h) 3,047
AA Aa 1,375 San Antonio, Texas, GO, Improvement Bonds, 8.625% due 8/01/1999 1,573
AA Aa 2,700 Texas State Public Financing Authority Revenue Bonds,
Series C, 9% due 10/01/1999 3,144
AAA Aaa 1,950 Trinity River Authority, Texas, Regional Wastewater System
Revenue Bonds, 5.30% due 8/01/2007 (c) 1,980
AA+ Aaa 3,545 University of Texas, Revenue Refunding Bonds (Permanent
University Fund), 9.50% due 7/01/2000 4,277
Vermont--2.1% AAA Aaa 4,385 Vermont Municipal Bond Bank, Revenue Refunding Bonds,
Series 2, 6% due 12/01/2006 (c) 4,758
Virginia--2.4% Virginia State HDA, Commonwealth Mortgage Revenue Bonds:
AA+ Aa1 2,585 Series H, 6.50% due 7/01/2007 2,732
AA+ Aa1 1,365 Series J, Sub-Series J-2, 6.45% due 1/01/2010 1,419
AA+ Aa1 1,300 Series J, Sub-Series J-2, 6.50% due 1/01/2011 1,357
Washington AAA Aaa 1,000 King and Snohomish Counties, Washington, School District
- --3.6% No. 417 (Northshore), 5.30% due 12/01/2008 (e) 1,007
AAA Aaa 1,500 Snohomish County, Washington, Public Utilities Electric
Revenue Bonds (District No. 001), Series B, 9.75% due
1/01/1999 (e) 1,732
AAA Aaa 1,000 Snohomish County, Washington, School District No. 006,
Revenue Refunding Bonds (Mukilteo), UT, 5.50% due
12/01/2006 (e) 1,043
AA Aa 2,400 Washington State, GO, Series A, 6.70% due 2/01/2006 2,732
AA Aa 1,500 Washington State Public Power Supply System, Revenue
Refunding Bonds (Nuclear Project No. 3), Series B, 7.375%
due 7/01/2004 1,666
Wisconsin AAA Aaa 3,130 Wisconsin State Health & Educational Facilities Authority
- --2.2% Revenue Bonds (Waukesha Memorial Hospital), Series A, 5.25%
due 8/15/2012 (c) 2,969
AA Aa 2,000 Wisconsin State Housing and Economic Development Authority,
Home Ownership Revenue Bonds, AMT, Series F, 7.40% due
7/01/2013 (j) 2,149
Total Investments (Cost--$231,221)--103.3% 237,575
Liabilities in Excess of Other Assets--(3.3%) (7,479)
--------
Net Assets--100.0% $230,096
========
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at October 31, 1995.
(b)Prerefunded.
(c)AMBAC Insured.
(d)MBIA Insured.
(e)FGIC Insured.
(f)CGIC Insured.
(g)Escrowed to Maturity.
(h)FSA Insured.
(i)FNMA Collateralized.
(j)FHA Insured.
*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>
66
<PAGE> 117
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of October 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$231,220,561)(Note 1a) $237,574,569
Cash 108,063
Receivables:
Securities sold $ 12,141,879
Interest 3,568,459
Beneficial interest sold 311,590 16,021,928
------------
Prepaid registration fees and other assets (Note 1e) 78,731
------------
Total assets 253,783,291
------------
Liabilities: Payables:
Securities purchased 22,813,645
Beneficial interest redeemed 422,736
Dividends to shareholders (Note 1f) 234,174
Investment adviser (Note 2) 103,130
Distributor (Note 2) 46,039 23,619,724
------------
Accrued expenses and other liabilities 67,706
------------
Total liabilities 23,687,430
------------
Net Assets: Net assets $230,095,861
============
Net Assets Class A Shares of beneficial interest, $.10 par value,
Consist of: unlimited number of shares authorized $ 349,647
Class B Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 1,816,396
Class C Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 64,865
Class D Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 69,988
Paid-in capital in excess of par 235,195,764
Accumulated realized capital losses on investments--net
(Note 5) (13,754,807)
Unrealized appreciation on investments--net 6,354,008
------------
Net assets $230,095,861
============
Net Asset Class A--Based on net assets of $34,970,380 and 3,496,473
Value: shares of beneficial interest outstanding $ 10.00
============
Class B--Based on net assets of $181,640,125 and 18,163,962
shares of beneficial interest outstanding $ 10.00
============
Class C--Based on net assets of $6,484,942 and 648,645 shares
of beneficial interest outstanding $ 10.00
============
Class D--Based on net assets of $7,000,414 and 699,877
shares of beneficial interest outstanding $ 10.00
============
See Notes to Financial Statements.
</TABLE>
67
<PAGE> 118
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended October 31, 1995
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 10,711,523
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 955,580
Account maintenance and distribution fees--Class B (Note 2) 421,981
Transfer agent fees--Class B (Note 2) 97,308
Professional fees 97,080
Printing and shareholder reports 94,458
Registration fees (Note 1e) 77,498
Accounting services (Note 2) 45,626
Transfer agent fees--Class A (Note 2) 16,008
Trustees' fees and expenses 15,897
Pricing fees 10,090
Custodian fees 8,874
Account maintenance fees--Class D (Note 2) 3,486
Account maintenance and distribution fees--Class C (Note 2) 2,943
Transfer agent fees--Class D (Note 2) 1,898
Transfer agent fees--Class C (Note 2) 1,286
Other 8,940
------------
Total expenses 1,858,953
------------
Investment income--net 8,852,570
------------
Realized & Realized loss on investments--net (5,179,687)
Unrealized Gain Change in unrealized appreciation/depreciation on investments--net 11,774,800
(Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 15,447,683
- --Net (Notes 1b, ============
1d & 3):
See Notes to Financial Statements.
</TABLE>
68
<PAGE> 119
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 8,852,570 $ 8,954,704
Realized gain (loss) on investments--net (5,179,687) 1,875,751
Change in unrealized appreciation/depreciation on
investments--net 11,774,800 (15,766,315)
------------ ------------
Net increase (decrease) in net assets resulting from
operations 15,447,683 (4,935,860)
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (1,507,705) (1,583,774)
(Note 1f): Class B (7,096,365) (7,370,849)
Class C (70,020) (1)
Class D (178,480) (80)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (8,852,570) (8,954,704)
------------ ------------
Beneficial Net increase in net assets derived from beneficial interest
Interest transactions 53,625,113 1,531,744
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets 60,220,226 (12,358,820)
Beginning of year 169,875,635 182,234,455
------------ ------------
End of year $230,095,861 $169,875,635
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have
been derived from information provided in the
financial statements. Class A
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.62 $ 10.39 $ 9.70 $ 9.61 $ 9.24
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .53 .52 .54 .59 .60
Realized and unrealized gain (loss) on
investments--net .38 (.77) .69 .09 .37
-------- -------- -------- -------- --------
Total from investment operations .91 (.25) 1.23 .68 .97
-------- -------- -------- -------- --------
Less dividends from investment
income--net (.53) (.52) (.54) (.59) (.60)
-------- -------- -------- -------- --------
Net asset value, end of year $ 10.00 $ 9.62 $ 10.39 $ 9.70 $ 9.61
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 9.68% (2.49%) 13.01% 7.16% 10.90%
Return:* ======== ======== ======== ======== ========
</TABLE>
69
<PAGE> 120
<TABLE>
<S> <S> <C> <C>
Ratios to Average Expenses .81% .76% .75% .86% .85%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.36% 5.19% 5.35% 5.97% 6.34%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 34,970 $ 27,653 $ 24,173 $ 14,068 $ 6,546
Data: ======== ======== ======== ======== ========
Portfolio turnover 115.78% 52.56% 83.66% 74.20% 129.85%
======== ======== ======== ======== ========
<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: 1995 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.62 $ 10.39 $ 9.69 $ 9.61 $ 9.24
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .50 .49 .51 .56 .57
Realized and unrealized gain (loss) on
investments--net .38 (.77) .70 .08 .37
-------- -------- -------- -------- --------
Total from investment operations .88 (.28) 1.21 .64 .94
-------- -------- -------- -------- --------
Less dividends from investment income--net (.50) (.49) (.51) (.56) (.57)
-------- -------- -------- -------- --------
Net asset value, end of year $ 10.00 $ 9.62 $ 10.39 $ 9.69 $ 9.61
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 9.34% (2.79%) 12.78% 6.72% 10.56%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses, excluding account maintenance
Net Assets: and distribution fees .83% .77% .76% .86% .88%
======== ======== ======== ======== ========
Expenses 1.13% 1.07% 1.06% 1.16% 1.18%
======== ======== ======== ======== ========
Investment income--net 5.05% 4.87% 5.07% 5.68% 6.05%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $181,640 $142,152 $158,061 $124,802 $ 97,998
Data: ======== ======== ======== ======== ========
Portfolio turnover 115.78% 52.56% 83.66% 74.20% 129.85%
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effect of sales loads.
See Notes to Financial Statements.
</TABLE>
70
<PAGE> 121
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class C Class D
For the For the
The following per share data and ratios have been For the Period For the Period
derived from information provided in the financial Year Oct. 21, Year Oct. 21,
statements. Ended 1994++ to Ended 1994++ to
Oct. 31, Oct. 31, Oct. 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1995 1994 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.62 $ 9.70 $ 9.62 $ 9.70
Operating -------- ------- -------- --------
Performance: Investment income--net .50 .01 .52 .01
Realized and unrealized gain (loss) on
investments--net .38 (.08) .38 (.08)
-------- ------- -------- --------
Total from investment operations .88 (.07) .90 (.07)
-------- ------- -------- --------
Less dividends from investment income--net (.50) (.01) (.52) (.01)
-------- ------- -------- --------
Net asset value, end of period $ 10.00 $ 9.62 $ 10.00 $ 9.62
======== ======= ======== ========
Total Investment Based on net asset value per share 9.36% (.71%)+++ 9.57% (.71%)+++
Return:** ======== ======= ======== ========
Ratios to Expenses, excluding account maintenance and
Average distribution fees .81% .88%* .80% .87%*
Net Assets: ======== ======= ======== ========
Expenses 1.01% 1.18%* .90% .97%*
======== ======= ======== ========
Investment income--net 4.76% 4.92%* 5.12% 5.20%*
======== ======= ======== ========
Supplemental Net assets, end of period (in thousands) $ 6,485 $ 1 $ 7,000 $ 70
Data: ======== ======= ======== ========
Portfolio turnover 115.78% 52.56% 115.78% 52.56%
======== ======= ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
71
<PAGE> 122
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Municipal Intermediate Term Fund (the "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 Shares also bear
certain expenses related to the distribution of such shares. Each
class has exclusive voting rights with respect to matters relating
to its account maintenance and distribution expenditures. The
following is a summary of significant accounting policies followed
by the Fund.
(a) Valuation of investments--Municipal bonds and other portfolio
securities 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 value. Securities and
assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the
direction of the Board of Trustees of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may
utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of
the Fund under the general supervision of the Board of Trustees.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
72
<PAGE> 123
NOTES TO FINANCIAL STATEMENTS (continued)
(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"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
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 Fund's 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 the distribution plans ("the Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The Distributor
voluntarily did not collect any Class C distribution fees for the
year ended October 31, 1995. 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, 1995, 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 $216 $3,039
Class D $655 $9,069
For the year ended October 31, 1995, MLPF&S received contingent
deferred sales charges of $219,856 and $1,574 relating to
transactions in Class B and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of MLAM, PSI, MLFD, MLFDS, MLPF&S, and/or
ML & Co.
73
<PAGE> 124
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1995 were $249,072,917 and
$192,376,387, respectively.
Net realized and unrealized gains (losses) as of October 31, 1995,
were as follows:
Realized Unrealized
Losses Gains
Long-term investments $ (3,446,639) $ 6,354,008
Short-term investments (50,054) --
Financial futures contracts (1,682,994) --
------------ -----------
Total $ (5,179,687) $ 6,354,008
============ ===========
As of October 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $6,354,008, of which $6,756,179
related to appreciated securities and $402,171 related to
depreciated securities. The aggregate cost of investments at October
31, 1995 for Federal income tax purposes was $231,220,561.
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest
transactions was $53,625,113 and $1,531,744 for the years ended
October 31, 1995 and October 31, 1994, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 1,647,907 $ 16,236,414
Shares issued to shareholders
in reinvestment of dividends 77,636 757,875
------------ ------------
Total issued 1,725,543 16,994,289
Shares redeemed (1,103,835) (10,743,665)
------------ ------------
Net increase 621,708 $ 6,250,624
============ ============
Class A Shares for the Year Dollar
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 B Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 7,623,095 $ 75,241,383
Shares issued to shareholders
in reinvestment of dividends 351,003 3,428,515
------------ ------------
Total issued 7,974,098 78,669,898
Shares redeemed (4,590,100) (44,465,318)
------------ ------------
Net increase 3,383,998 $ 34,204,580
============ ============
Class B Shares for the Year Dollar
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 C Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 692,677 $ 6,861,453
Shares issued to shareholders
in reinvestment of dividends 5,294 52,387
------------ ------------
Total issued 697,971 6,913,840
Shares redeemed (49,436) (489,048)
------------ ------------
Net increase 648,535 $ 6,424,792
============ ============
74
<PAGE> 125
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 Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 1,260,691 $ 12,362,696
Shares issued to shareholders
in reinvestment of dividends 9,765 95,915
------------ ------------
Total issued 1,270,456 12,458,611
Shares redeemed (577,845) (5,713,494)
------------ ------------
Net increase 692,611 $ 6,745,117
============ ============
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, 1995, the Fund had a net capital loss carryforward of
approximately $11,887,000, of which $6,982,000 expires in 1996,
$456,000 expires in 1997, $795,000 expires in 1998, and $3,654,000
expires in 2003. This amount will be available to offset like
amounts of any future taxable gains. Expired capital loss
carryforward in the amount of $1,037,858 has been reclassified to
paid-in capital in excess of par.
75
<PAGE> 126
- ------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies....... 2
Description of Municipal Bonds........ 2
Description of Temporary
Investments......................... 6
Repurchase Agreements................. 6
Financial Futures and
Options Transactions................ 7
Investment Restrictions................. 12
Management of the Trust................. 14
Trustees and Officers................. 14
Compensation of Trustees.............. 16
Management and Advisory
Arrangements........................ 16
Purchase of Shares...................... 18
Initial Sales Charge
Alternatives -- Class A and Class D
Shares.............................. 18
Reduced Initial Sales Charges -- Class
A and Class D Shares................ 20
Distribution Plans.................... 22
Limitations on the Payment of Deferred
Sales Charges....................... 23
Redemption of Shares.................... 24
Deferred Sales Charges -- Class B and
Class C Shares...................... 24
Portfolio Transactions.................. 25
Determination of Net Asset Value........ 26
Shareholder Services.................... 27
Investment Account.................... 27
Automatic Investment Plans............ 27
Automatic Reinvestment of Dividends
and Capital Gain Distributions...... 28
Systematic Withdrawal Plans -- Class A
and Class D Shares.................. 28
Exchange Privilege.................... 29
Distributions and Taxes................. 43
Environmental Tax..................... 45
Tax Treatment of Futures and Options
Transactions........................ 45
Performance Data........................ 47
General Information..................... 49
Description of Series and Shares...... 49
Computation of Offering Price Per
Share............................... 50
Independent Auditors.................. 50
Custodian............................. 50
Transfer Agent........................ 50
Legal Counsel......................... 51
Reports to Shareholders............... 51
Additional Information................ 51
Appendix -- Ratings of Municipal
Bonds................................. 52
Independent Auditors' Report............ 61
Financial Statements.................... 62
Code # 10706-0296
</TABLE>
STATEMENT OF
ADDITIONAL
INFORMATION
February 26, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
YZa(LOGO)
MERRILL LYNCH
MUNICIPAL INTERMEDIATE
TERM FUND
MERRILL LYNCH MUNICIPAL
SERIES TRUST
<PAGE> 127
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
</TABLE>
<PAGE> 128
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the periods in the nine-year period
ended October 31, 1995.
Contained in Part B:
Financial Statements:
Schedule of Investments as of October 31, 1995.
Statement of Assets and Liabilities as of October 31, 1995.
Statement of Operations for the year ended October 31, 1995.
Statement of Changes in Net Assets for the years ended October 31,
1995 and 1994.
Financial Highlights for each of the years in the five-year period
ended October 31, 1995.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------------------------
<S> <C>
1(a)-- Declaration of Trust of the Registrant, dated August 14, 1986.(a)
(b)-- Instrument establishing Merrill Lynch Municipal Income Fund (now Merrill Lynch
Municipal Intermediate Term Fund) (the "Fund") as a series of the Registrant.(a)
(c)-- Amendment of Declaration of Trust of the Registrant, dated October 3, 1988.(a)
(d)-- Instrument establishing Class A shares and Class B shares of the Registrant.(a)
(e)-- Certificate of Amendment to Series Designation, changing the name of the Fund to
Merrill Lynch Municipal Intermediate Term Fund, dated November 15, 1993.(b)
(f)-- Amendment to Declaration of Trust and Establishment and Designation of Classes, dated
October 17, 1994.(a)
2(a)-- By-Laws of the Registrant.(c)
3 -- None.
4 -- Portion of the Declaration of Trust, Establishment and Designation and By-Laws of the
Registrant defining the rights of holders of shares of the Fund as a series of the
Registrant.(d)
5(a)-- Form of Management Agreement between the Registrant and Merrill Lynch Investment
Management, Inc. (now known as Merrill Lynch Asset Management, L.P.).(c)
(b)-- Supplement to Management Agreement between the Registrant and Merrill Lynch Asset
Management, L.P.(e)
6(a)-- Class B Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc.(c)
(b)-- Form of Class A Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers Agreement).(e)
(c)-- Letter Agreement between the Fund and Merrill Lynch Funds Distributor, Inc., dated
September 15, 1993, in connection with the Merrill Lynch Mutual Fund Adviser
program.(b)
(d)-- Form of Class C Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers Agreement).(e)
(e)-- Form of Class D Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers Agreement).(e)
</TABLE>
C-1
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------------------------
<S> <C>
7 -- None.
8 -- Form of Custody Agreement between the Registrant and State Street Bank and Trust
Company.(e)
9 -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Merrill Lynch Financial Data Services.(c)
10 -- None.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
13 -- Certificate of Merrill Lynch Investment Management, Inc. (now known as Merrill Lynch
Asset Management, L.P.).(c)
14 -- None.
15(a)-- Amended and Restated Class B Distribution Plan of the Registrant.(b)
(b)-- Form of Class C Distribution Plan and Class C Distribution Plan Sub-Agreement of the
Registrant.(e)
(c)-- Form of Class D Distribution Plan and Class D Distribution Plan Sub-Agreement of the
Registrant.(e)
16(a)-- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 (relating to Class A shares).(c)
(b)-- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 (relating to Class B shares).(c)
(c)-- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 (relating to Class C shares).(a)
(d)-- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 (relating to Class D shares).(a)
17(a)-- Financial Data Schedule for Class A Shares.
(b)-- Financial Data Schedule for Class B Shares.
(c)-- Financial Data Schedule for Class C Shares.
(d)-- Financial Data Schedule for Class D Shares.
18 -- Merrill Lynch Select Pricing(SM) System Plan pursuant to Rule 18f-3.(f)
</TABLE>
- ---------------
(a) Filed on February 28, 1995 as an exhibit to Post-Effective Amendment No.
12 to the Registrant's Registration Statement under the Securities Act of
1933, as amended (the "1933 Act"), on Form N-1A.
(b) Filed on February 24, 1994 as an exhibit to Post-Effective Amendment No. 9
to the Registrant's Registration Statement under the 1933 Act on Form
N-1A.
(c) Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") phase-in requirements.
(d) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's Declaration of Trust, previously filed as
Exhibit 1(a) to the Registration Statement referred to in paragraph (a)
above as amended by the Amendments to Declaration of Trust, dated October
3, 1988 and October 17, 1994, filed as Exhibits (1)(c) and (f) to the
Registration Statement; to the Certificates of Establishment and
Designation establishing the Fund as a series of the Registrant and
establishing Class A and Class B shares of beneficial interest of the
Fund, filed as Exhibits 1(b) and 1(d), respectively, to the Registration
Statement; to the Certificate of Amendment to Series Designation changing
the name of the Fund to Merrill Lynch Municipal Intermediate Term Fund,
filed as Exhibit 1(e) to the Registration Statement; to the section of the
Amendment to the
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<PAGE> 130
Declaration of Trust, dated October 17, 1994, filed as Exhibit 1(f) to the
Registration Statement establishing Class C and Class D shares of
beneficial interest of the Fund; and to Articles I, V and VI of the
Registrant's By-Laws, previously filed as Exhibit 2 to the Registration
Statement.
(e) Filed on October 13, 1994 as an exhibit to Post-Effective Amendment No. 11
to the Registrant's Registration Statement under the of 1933 Act on Form
N-1A.
(f) Incorporated by reference to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A of Merrill Lynch New York Municipal
Bond Fund of Merrill Lynch Multi-State Municipal Series Trust filed on
January 25, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS JANUARY 31, 1996*
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Class A shares of beneficial interest, par value $0.10 per share............. 1,768
Class B shares of beneficial interest, par value $0.10 per share............. 10,779
Class C shares of beneficial interest, par value $0.10 per share............. 929
Class D shares of beneficial interest, par value $0.10 per share............. 407
</TABLE>
- ---------------
* The number of holders shown above includes holders of record plus beneficial
owners, whose shares are held of record by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch").
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees
and agents (including persons who serve at its request as directors,
officers or trustees of another organization in which it has any interest
as a shareholder, creditor or otherwise) against all liabilities and
expenses (including amounts paid in satisfaction of judgments, in
compromise, as fines and penalties, and as counsel fees) reasonably
incurred by him in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, in which he
may be involved or with which he may be threatened, while in office or
thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall
have been adjudicated to have acted in bad faith, willful misfeasance,
gross negligence or reckless disregard of his duties; provided, however,
that as to any matter disposed of by a compromise payment by such person,
pursuant to a consent decree or otherwise, no indemnification either for
said payment or for any other expenses shall be provided unless the Trust
shall have received a written opinion from independent legal counsel
approved by the Trustees to the effect that if either the matter of willful
misfeasance, gross negligence or reckless disregard of duty, or the matter
of good faith and reasonable belief as to the best interests of the Trust,
had been adjudicated, it would have been adjudicated in favor of such
person. The rights accruing to any Person under these provisions shall not
exclude any other right to which he may be lawfully entitled; provided that
no Person may satisfy any right of indemnity or reimbursement granted
herein or in Section 5.1 or to which he may be otherwise entitled except
out of the property of the Trust, and no Shareholder shall be personally
liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in
connection with indemnification under this Section 5.3, provided that the
indemnified person shall have given a written undertaking to reimburse the
Trust in the event it is subsequently determined that he is not entitled to
such indemnification."
Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended, may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement;
C-3
<PAGE> 131
(ii) advances may be made only upon receipt of a written promise by, or on
behalf of, the recipient to repay that amount of the advance which exceeds the
amount which it is ultimately determined that he is entitled to receive from the
Registrant by reason of indemnification; and (iii)(a) such promise must be
secured by a surety bond, other suitable insurance or an equivalent form of
security which assures that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance, or (b) a majority of a quorum
of the Registrant's disinterested, non-party Trustees, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be found
entitled to indemnification.
In Section 9 of the Distribution Agreements relating to the securities
being offered hereby, the Registrant agrees to indemnify the Distributor and
each person, if any, who controls the Distributor within the meaning of the 1933
Act, against certain types of civil liabilities arising in connection with the
Registration Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and, therefore is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Asset Management, L.P. (the "Manager") acts as manager for
the following open-end investment companies: Merrill Lynch Adjustable Rate
Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch
Asset Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill
Lynch Asset Income Fund, Inc., Merrill Lynch Balanced Fund for Investment and
Retirement, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing
Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund for
Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
Bond Fund for Investment and Retirement, Merrill Lynch Global Convertible Fund,
Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust,
Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund,
Inc., Merrill Lynch Growth Fund for Investment and Retirement, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Institutional Intermediate Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill
Lynch Puerto Rico Tax-Exempt Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income
Fund, Inc. and Merrill Lynch Variable Series Funds, Inc.; and the following
closed-end investment companies: Convertible Holdings, Inc., Merrill Lynch High
Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund,
Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as
the investment adviser for the following open-end investment companies: CBA
Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities Trust,
Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal Series
Trust, Merrill
C-4
<PAGE> 132
Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., MuniAssets
Fund, Inc.; and The Municipal Fund Accumulation Program, Inc.; and the following
closed-end investment companies: Apex Municipal Fund, Inc., Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers Fund, Inc.,
Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc., MuniAsset Fund, Inc., MuniEnhanced
Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured
Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II, Inc.,
Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus
MuniNewYork Holdings, Inc. and WorldWide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for
Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Manager, FAM, Princeton Services, Inc. ("Princeton Services"), and Princeton
Administrators, L.P. is P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is P.O. Box 9081,
Princeton, New Jersey 08543-9081. The address of Merrill Lynch and Merrill Lynch
& Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey
Street, New York, New York 10281. The address of Merrill Lynch Financial Data
Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
November 1, 1993 for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President and Director
or Trustee, Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President
of substantially all of the investment companies described in the preceeding
paragraphs and also hold the same positions with all or substantially all of the
investment companies advised by FAM as they do with those advised by the
Manager. Messrs. Giordano, Harvey, Hewitt, Kirstein and Monagle are directors,
trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH PROFESSION, VOCATION OR
NAME THE MANAGER EMPLOYMENT
- --------------------------------- ------------------------------- ------------------------------
<S> <C> <C>
ML&Co............................ Limited Partner Financial Services Holding
Company; Limited Partner of
FAM
Princeton Services............... General Partner General Partner of FAM
Arthur Zeikel.................... President President of FAM; President
and Director of Princeton
Services; Director of MLFD;
Executive Vice President of
ML&Co.
Terry K. Glenn................... Executive Vice President Executive Vice President of
FAM; Executive Vice President
and Director of Princeton
Services; President and
Director of MLFD; President
of Princeton Administrators
</TABLE>
C-5
<PAGE> 133
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH PROFESSION, VOCATION OR
NAME THE MANAGER EMPLOYMENT
- --------------------------------- ------------------------------- ------------------------------
<S> <C> <C>
Vincent R. Giordano.............. Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Elizabeth Griffin................ Senior Vice President Senior Vice President of FAM
Norman R. Harvey................. Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
N. John Hewitt................... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Philip L. Kirstein............... Senior Vice President, General Senior Vice President, General
Counsel and Secretary Counsel and Secretary of
FAM; Senior Vice President,
General Counsel, Director
and Secretary of Princeton
Services; Director of MLFD
Ronald M. Kloss.................. Senior Vice President and Senior Vice President and
Controller Controller of FAM; Senior
Vice President and
Controller of Princeton
Services
Stephen M.M. Miller.............. Senior Vice President Executive Vice President of
Princeton Administrators,
L.P.
Joseph T. Monagle, Jr. .......... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Richard L. Reller................ Senior Vice President First Vice President of FAM;
First Vice President of
Princeton Services
Gerald M. Richard................ Senior Vice President and Senior Vice President and
Treasurer Treasurer of FAM; Senior
Vice President and Treasurer
of Princeton Services; Vice
President and Treasurer of
MLFD
Ronald L. Welburn................ Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Anthony Wiseman.................. Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
the ten series of CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund,
CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation
Program, Inc., and MLFD also acts as the principal underwriter for the following
closed-end investment
C-6
<PAGE> 134
companies: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
- ------------------------------- --------------------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn................. President and Director Executive Vice President
Arthur Zeikel.................. Director President and Trustee
Philip L. Kirstein............. Director None
William E. Aldrich............. Senior Vice President None
Robert W. Crook................ Senior Vice President None
Kevin P. Boman................. Vice President None
Michael J. Brady............... Vice President None
William M. Breen............... Vice President None
Sharon Creveling............... Vice President and Assistant Treasurer None
Mark A. DeSario................ Vice President None
James T. Fatseas............... Vice President None
Debra W. Landsman-Yaros........ Vice President None
Michelle T. Lau................ Vice President None
Gerald M. Richard.............. Vice President and Treasurer Treasurer
Salvatore Venezia.............. Vice President None
William Wasel.................. Vice President None
Robert Harris.................. Secretary None
</TABLE>
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder will be maintained at the offices of the Registrant, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, and its transfer agent, MLFDS, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Trust -- Management and Advisory Arrangements" in the Prospectus constituting
Part A of the Registration Statement and under "Management of the
Trust -- Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, the Registrant is
not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-7
<PAGE> 135
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
Township of Plainsboro and the State of New Jersey on the 23rd day of February,
1996.
MERRILL LYNCH MUNICIPAL SERIES TRUST
(Registrant)
By: /s/ TERRY K. GLENN
------------------------------------
(TERRY K. GLENN, EXECUTIVE VICE
PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE(S)
- ----------------------------------- ----------------------------------- ------------------
<S> <C> <C>
ARTHUR ZEIKEL* President and Trustee (Principal
- ----------------------------------- Executive Officer)
(ARTHUR ZEIKEL)
GERALD M. RICHARD* Treasurer (Principal Financial and
- ----------------------------------- Accounting Officer)
(GERALD M. RICHARD)
RONALD W. FORBES* Trustee
- -----------------------------------
(RONALD W. FORBES)
CYNTHIA A. MONTGOMERY* Trustee
- -----------------------------------
(CYNTHIA A. MONTGOMERY)
CHARLES C. REILLY* Trustee
- -----------------------------------
(CHARLES C. REILLY)
KEVIN A. RYAN* Trustee
- -----------------------------------
(KEVIN A. RYAN)
RICHARD R. WEST* Trustee
- -----------------------------------
(RICHARD R. WEST)
*By /s/ TERRY K. GLENN February 23, 1996
- -----------------------------------
(TERRY K. GLENN, ATTORNEY-IN-FACT)
</TABLE>
C-8
<PAGE> 136
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S> <C>
2(a)-- By-laws of the Registrant.(a)
5(a)-- Form of Management Agreement between the Registrant and Merrill Lynch
Investment Management, Inc. (now known as Merrill Lynch Asset Management,
L.P.)(a)
6(a)-- Class B Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(a)
9 -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Merrill Lynch Financial
Data Services, Inc.(a)
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant
13 -- Certificate of Merrill Lynch Investment Management, Inc. (now known as
Merrill Lynch Asset Management, L.P.)(a)
16(a)-- Schedule of computation of each performance quotation provided in the
Registration Statement in response to Item 22 (relating to Class A
shares)(a)
(b)-- Schedule of computation of each performance quotation provided in the
Registration Statement in response to Item 22 (relating to Class B
shares)(a)
17(a)-- Financial Data Schedule for Class A shares
(b)-- Financial Data Schedule for Class B shares
(c)-- Financial Data Schedule for Class C shares
(d)-- Financial Data Schedule for Class D shares
</TABLE>
- ---------------
(a) Refiled pursuant to the EDGAR phase-in requirements.
<PAGE> 1
EX-99.2(a)
-----------------------------------------------------
BY-LAWS
OF
MERRILL LYNCH MUNICIPAL SERIES TRUST
-----------------------------------------------------
<PAGE> 2
MERRILL LYNCH MUNICIPAL SERIES TRUST
BY-LAWS
These By-Laws are made and adopted pursuant to Section 2.6 of the
Declaration of Trust establishing MERRILL LYNCH MUNICIPAL SERIES TRUST, dated
August 14, 1986, as from time to time amended (hereinafter called the
"Declaration"). All words and terms capitalized in these By-Laws shall have
the meaning or meanings set forth for such words or terms in the Declaration.
ARTICLE I
Shareholder Meetings
Section 1.1. Chairman. The Chairman, if any, shall act as chairman at all
meetings of the Shareholders; in his absence, the President shall act as
chairman; and in the absence of the Chairman and President, the Trustee or
Trustees present at each meeting may elect a temporary chairman for the
meeting, who may be one of themselves.
Section 1.2. Proxies; Voting. Shareholders may vote either in person or
by duly executed proxy and each full share represented at the meeting shall
have one vote, all as provided in Article X of the Declaration. No proxy shall
be valid after
1.
<PAGE> 3
eleven (11) months from the date of its execution, unless a longer period is
expressly stated in such proxy.
Section 1.3. Closing of Transfer Books and Fixing Record Dates. For the
purpose of determining the Shareholders who are entitled to notice of or to
vote or act at any meeting, including any addjournment thereof, or who are
entitled to participate in any dividends, or for any other proper purpose, the
Trustees may any dividends, or for any other proper purpose, the Trustees may
from time to time close the transfer books or fix a record date 7 in the manner
provided in Section 10.4 of the Declaration. If the Trustees do not prior to
any meeting of Shareholders so a record date or close the transfer books,
then the date of mailing notice of the meeting or the date upon which the
dividend resolution is adopted, as the case may be, shall be the record date.
Section 1.4 Inspectors of Election. In advance of any meeting of
Shareholders, the Trustees may appoint Inspectors of Election to act at the
meeting or any adjournment thereof. If Inspectors oil Election are not so
appointed, the Chairman, if any, of any meeting of Shareholders may, and on the
request of any Shareholder or his proxy shall, appoint Inspectors of Election
of the meeting. The number of Inspectors shall be either one or three. If
appointed at the meeting on the request of one or more Shareholders or proxies,
a majority of Shares present shall determine whether one or three inspectors
are to be appointed, but failure to a llow such determination by the Share-
2.
<PAGE> 4
holders shall be affect the validity of the appointment of Inspectors of
Election. In case any person appointed as Inspector fails to appear or fails
or refuses to act, the vacancy may be filled by appointment made by the
Trustees in advance of the convening of the meeting or at the meeting by the
person acting as Chairman. The Inspectors of Election shall determine the
number of SHares outstanding, the Shares represented at the meeting, the
existence of a quorum, the authenticity, validity and proxies, shall receive
votes, ballots or consents shall mean and determine all challenges and
questions in any way arising in connection with the right to vote, shall count
and tabulate all votes or consents, determine the results, and do such other
acts as may be proper to conduct the election or vote with fairness to all
Shareholders. IF there are three Inspectors of Election, the decision, act or
certificate of a majority is effective in all respects as the decision, act or
certificate of a majority is all. On request of the Chariman, if any, of the
meeting , or of any Shareholder or his proxy, the Inspectors of Election shall
make a report in writting of any challenge or question or matter determined by
them and shall execute a certificate of any facts. found by them.
Section 1.5. Resords at Shareholder Meetings. At each meeting of the
Shareholders there shall be open for inspection the minutes of the last
previous Shareholder Meeting of the Trust and a list of the Shareholders of the
Trust, certified to be the
3.
<PAGE> 5
and correct by the Secretary or other proper agent of the Trust, the record
date of the meeting or the date of closing of as of transfer books, as the case
may be. Such list of Shareholders shall contain the name of each Shareholder
in alphabetical order and the address and number of Shares owned by such
Shareholder. Shareholders shall have such other rights and procedures of
inspection of the books and records of the Trust as are granted to shareholders
of a Massachusetts business corporation.
ARTICLE II
Trustees
Section 2.1. Annual and Regular Meetings. The Trustees shall hold an
annual meeting for the election of officers and the transaction of other
business which may come before such meeting, on such date as shall be fixed by
the Trustees from time to time. Regular meetings of the Trustees may be held
without call or notice at such place or places and times as the Trustees may by
resolution provide from time to time.
Section 2.2. Special Meetings. Special Meetings of the Trustees shall be
held upon the call of the Chairman, if any, the President, the Secretary or any
two Trustees, at such time, on such day, and at such place, as shall be
designated in the notice of the meeting.
Section 2.3. Notice. Notice of a meeting shall be given by mail or by
telegram (which term shall include a cablegram) or
4.
<PAGE> 6
delivered personally. If notice is given by mail, it shall be mailed not
later than 48 hours preceding the meeting and if given. by telegram or
personally, such telegram shall be sent or delivery made no later than 48
hours preceding the meeting. Notice by telephone shall constitute personal
delivery for these purposes. Notice of a meeting of Trustees may be waived
before or after any meeting by signed written waiver. Neither the business to
be transacted at, nor the purpose of, any meeting of the Board of Trusees need
be stated in the notice or waiver of notice of such meeting, and no notice need
be given of action proposed to be taken by unanimous written consent. The
attendance of a Trustee at a meeting shall constitute a waiver of notice of
such meeting except where a Trustee attends a meeting for the express purpose
of objecting to the transaction of any business on the ground, that the meeting
has not been lawfully called or convened.
Section 2.4. Chairman; Records. The Chairman, if any, shall act as
chairman at all meetings of the Trustees; in his absence the President shall
act as chairman; and, in the absence of the Chairman and the President, the
Trustees present shall elect one of their number to act as temporary chairman.
The results of all actions taken at a meeting of the Trustees, or by unanimous
written consent of the Trustees, shall be recorded by the Secretary.
5.
<PAGE> 7
ARTICLE III
officers
Section 3.1. officers of the Trust. The officers of the Trust shall
consist of a Chairman, if any, a President, a Secretary, a Treasurer and such
other officers or assistant officers, including Vice-Presidents, as may be
elected by the Trustees. Any two or more of the offices may be held by the
same person, except that the same person may not be both president and Secre-
tary. The Trustees may designate a Vice-President as an Executive
Vice-President and may designate the order in which the other Vice-Presidents
may act. The Chairman and the President shall be Trustees, but no other
officer of the Trust need be a Trustee.
Section 3.2. Election and enure. At the initial organization meeting
and thereafter at each annual meeting of the Trustees, the Trustees shall
elect the Chairman, if any, President, Secretary, Treasurer and such other
officers as the Trustees shall deem necessary or appropriate in order to carry
out the business of the Trust. Such officers shall hold office until the next
annual meeting of the Trustees and until their successors have been duly
elected and qualified. The Trustees may fill any vacancy in office or add any
additional officers at any time.
Section 3.3. Removal Of Officers. Any officer may be removed at any time,
with or without cause, by action of a majority of the Trustees. This provision
shall not prevent the making
6.
<PAGE> 8
of a contract of employment for a definite term with any officer and shall
have no effect upon any cause of action which any officer may have as a result
of removal in breach of a contract of employment. Any officer may resign at
any time by notice in writing signed by such officer and delivered or mailed to
the Chairman, if any, President, or Secretary, and such resignation shall take
effect immediately upon receipt by the Chairman, if any, President, or
Secretary, or at a later date according to the terms of such notice in writing.
Section 3.4. Bonds and Surety. Any officer may be by the Trustees to be
bonded for the faithful performance of his duties in such amount and with such
sureties as the Trustees may determine.
Section 3.5. Chairman, President, and Vice-Presidents. The Chairman, if
any, shall, if present, president at all meetings of the Shareholders and of
the Trustees and shall exercise and perform such other powers and duties as may
be from time to time assigned to him by the Trustees. Subject to such
supervisory powers, if any, as may be given by the Trustees to the Chairman, if
any, the President shall be the chief executive officer of the Trust and,
subject to the control of the Trustees, shall have general supervisicn,
direction and control of the business of the Trust and of its empployees and
shall exercise such general powers of management as are usually vested in the
office of President of a corporation. The absence of the Chairman, if any, the
7.
<PAGE> 9
President shall preside at all meetings of the Shareholders and of the
Trustees. The President shall be ex officio, a member all standing committees,
except as otherwise provided in the resolutions or instruments creating any
such committees. Subject to direction of the Trustees, the Chairman, if any
and the President shall each have power in the name and on behalf of the Trust
to execute any and all loan documents, contracts, agreements, deeds,
mortgages, and other instruments in writing, and to employ and discharge
employees and agents of the Trust. Unless otherwise directed by the Trustees,
the Chairman, if any, and the President shall each have full authority and
power, on behalf of all of the Trustees, to attend and to act and to vote, on
behalf of the Trust at any meetings of business organizations in which the
Trust holds an interest, or to confer such powers upon any other persons, by
executing any proxies duly authorizing such persons. The Chairman, if any, and
the President shall have such further authorities and duties as the Trustees
shall from time to time determine. In the absence or disability of the
President, the Vice-Presidents in order of their rank as fixed by the Trus-
tees or, if more than one and not ranked, the Vice-President designated by the
Trustees, shall perform all of the duties of the President, and when so acting
shall have all the powers of and be subject to all of the restrictions upon the
President. Subject to the direction of the Trustees, and of the President,
each Vice-President shall have the power in the name and on
8.
<PAGE> 10
behalf of the Trust to execute any and all loan documents, contracts,
agreements, deeds, mortgages and other instruments in writing, and, in
addition, shall have such other duties and powers as shall be designated from
time to time by the Trustees or by the President.
Section 3.6. Secretary. The Secretary shall keep the minutes of all
meetings of, and record-all votes of, Shareholders, Trustees and the
Executive Committee, if any. He shall be custodian of the seal of the Trust,
if any, and he (and any other person so authorized by the Trustees) shall affix
the seal or, if permitted, a facsimile thereof, to any instrument executed by
the Trust which would be sealed by a Massachusetts corporation executing the
same or a similar instrument and shall attest the seal and the signature or
signatures of the officer or officers execution such instrument on behalf of
the Trust. The Secretary shall also perform any other duties commonly incident
to such office in a Massachusetts business corporation, and shall have such
other authorities and duties as the Trustees shall from time to time determine.
Section 3.7. Treasurer. Except as otherwise directed by the Trustees,
the Treasurer shall have the general supervision of the monies, funds,
securities, notes receivable and other valuable papers and documents of the
Trust, and shall have and exercise under the supervision of the Trustees and
of the President powers and duties normally incident to his office. He may
9.
<PAGE> 11
endorse for deposit or collection all notes, checks and other instruments
payableavable to the Trust or to its order. He shall deposit all funds of the
Trust in such depositories as the Trustees shall designate. He shall be
responsible for such disbursement of the funds of the Trust as may be ordered
by the Trustees or the President. He shall keep accurate account of the books
of the Trust's transactions which shall be the property of the Trust, and which
together with all other property of the Trust in his possession, shall be
subject at all times to the inspection and control of the Trustees. Unless the
Trustees shall otherwise determine, the Treasurer shall be the principal
accounting officer of the Trust and shall also be the principal financial
office of the Trust. He shall have such other Duties and authorities as the
Trustees shall from time to time determine. Notwithstanding anything to the
contrary herein contained, the Trustees may authorize any adviser,
administrator, manager or transfer agent to maintain bank accounts and deposit
and disburse funds of any Series of the Trust on behalf of such Series.
Section 3.8. Other Officers and Duties. The Trustees may elect such other
officers and assistant officers as they shall from time to time determine
to be necessary or desirable in order to conduct the business of the Trust.
Assistant officers shall act generally in, the absence of the officer whom they
assist and share assist that officer in the duties of his office. Each
officers employeeand agent of the Trust shall have such other
10.
<PAGE> 12
duties and authority as may be conferred upon him by the Trustees or delegated
to him by the President.
ARTITCLE IV
Miscellaneous
Section 4.1. Depositories. In accordance with Section 7.1 of. the
Declaration, the funds of the Trust shall be deposited in such depositories as
the Trustees shall designate and shall be drawn out on checks, drafts or other
orders signed by such officer, officers, agent or agents (including any
adviser, administrator or manager), as the Trustees may from time to time
authorize.
Section 4.2. Signatures. All contracts and other instruments shall be
executed on behalf of the Trust by such officer, officers, agent or agents, as
provided in these By-Laws or as the Trustees may from time to time by
resolution provide.
Section 4.3. Seal. The seal of the Trust, if any, or any Series of the
Trust, if any, may be affixed to any document, and the seal and its attestation
may be lithographed, engraved or otherwise printed on any document with the
same force and effect as if it had been imprinted and attested manually in the
same manner and with the same effect as if done by a Massachusetts business
corporation.
11.
<PAGE> 13
ARTICLE V
Stock Transfers
Section 5.1. Certificates. Certificates representing Shares of any
Secretaries of the Trust shall not be issued.
Section 5.2. Transfer Agents, Registrars and the Like. As provided in
Section 6.7 of the Declaration, the Trustees shall have authority to employ and
compensate such transfer agents and registrars with respect to the Shares of
the various Series of the Trusts the Trustees shall deem necessary or
desirable. In addition, the Trustees shall have power to employ and compensate
such dividend disbursing agents, warrant agents and agents for the reinvestment
of dividends as they shall deem necessary or desirable. Any of such agents
shall have such power and,authority as is delegated to any of them by the
Trustees.
Section 5.3. Transfer of Shares. The Shares of the Trust shall be
transferable on the books of the Trust only upon delivery to the Trustees or
a transfer agent of the Trust of proper documentation as provided in Section
6.8 of the Declaration. The Trust, or its transfer agents, shall be authorized
to refuse any transfer unless and until presentation of such evidence as may be
reasonably required to show that the requested transfer is proper.
Section 5.4. Registered Shareholders. The Trust may deem and treat the
holder of record of any Share as the absolute owner
12.
<PAGE> 14
thereof for all purposes and shall not be required to take any notice of any
right or claim of right of any other person.
ARTICLE VI
Amendment of By-Laws
Section 6.1. Amendment and Repeal of BY-Laws. In accordance with
Section 2.6 of the Declaration, the Trustees shall have the power to alter,
amend or repeal the By-Laws or adopt new By-Laws at any time. Action by the
Trustees with respect to the By-Laws shall be taken by an affirmative vote of
a majority of the Trustees. The Trustees shall in no event adopt By-Laws which
are in conflict with the Declaration, and any apparent inconsistency shall be
construed in favor of the related provisions in the Declaration.
The Declaration of Trust establishing Merrill Lynch Municipal Series
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 Merrill Lynch Municipal Series Trust shall be
held to any personal liability, nor shall resort be had to their private
property for the satis-
13.
<PAGE> 15
faction of any obligation or claim or otherwise in connection with the affairs
of said Merrill Lynch Municipal Series Trust but the Trust Property only shall
be liable.
14.
<PAGE> 1
EX-99.5(a)
MANAGEMENT AGREEMENT
AGREEMENT made this 16th day of September, 1986, by and
between MERRILL LYNCH MUNICIPAL SERIES TRUST, a Massachusetts
business trust (hereinafter. referred to as the "Trust"), and
MERRILL LYNCH ASSET MANAGEMENT, INC., a Delaware corporation
(hereinafter referred to as the "Manager").
WITNESSETH:
WHEREAS, the Trust is engaged in business as a diversified
open-end investment company registered under the Investment
Company Act of 1940, as amended (hereinafter referred to as the
"Investment Company Act"); and
WHEREAS, the Trustees of the Trust (the "Trustees") are
authorized to establish separate series relating to separate
portfolios of securities, each of which will offer a separate
class of shares; and
WHEREAS, the Trustees have established-and designated the
MERRILL LYNCH MUNICIPAL INCOME FUND (the "Fund") as the initial
series of the Trust; and
WHEREAS, the Manager is engaged principally in rendering
management and investment advisory services and is registered as
an investment adviser under the Investment Advisers Act of 1940;
and
<PAGE> 2
WHEREAS, the Trust desires to retain the Manager to render
management and investment advisory services to the Trust and Fund
in the manner and on the terms hereinafter set forth; and
WHEREAS, the Manager is willing to provide management and
investment advisory services to the Trust and the Fund on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the
covenants hereinafter contained, the Trust and the Manager hereby
agree as follows:
ARTICLE I
Duties of the Manager
The Trust hereby employs the Manager to act as an investment
manager and investment adviser of the Fund and to furnish, or
arrange for affiliates to furnish, the management and investment
advisory services described below, subject to policies of, review
by and overall control of the Trustees, for the period and on the
terms and conditions set forth in this Agreement. The Manager
hereby accepts such employment and agrees during such period, at
its own expense, to render,. or arrange for the rendering of, such
services and to assume the obligations herein set forth for the
compensation provided for herein. The Manager and its affiliates
shall for all purposes herein be deemed to be an independent
contractor and shall, unless otherwise expressly provided or
authorized, have no authority to act for or represent the Trust or
2.
<PAGE> 3
the Fund in any way or otherwise be deemed an agent of the Trust
or the Fund.
(a) Management Services. The Manager shall perform (or
arrange for the performance by affiliates of) the management and
administrative services necessary for the operation of the Trust
and the Fund including administering shareholder accounts and
handling shareholder relations. The Manager shall provide the
Trust and the Fund with office space, equipment and facilities and
such other services as the Manager, subject to review by the
Trustees, shall from time to time determine to be necessary or
useful to perform its obligations under this Agreement. The
Manager shall also, on behalf of the Trust and the Fund, conduct
relations with custodians, depositories, transfer agents, dividend
disbursing agents, other shareholder service agents, accountants,
attorneys, underwriters, brokers and dealers, corporate
fiduciaries, insurers, banks, and such other persons in any such
other capacity deemed to be necessary or desirable. The Manager
shall generally monitor the Trust's and the Fund's compliance with
investment policies and restrictions as set forth in the currently
effective prospectus and statement of additional information
relating to the shares of the Fund under the Securities Act of
1933, as amended (the "Prospectus" and "Statement of Additional
Information", respectively). The Manager shall make reports to
the Trustees of its performance of obligations hereunder and
furnish advice and recommendations with respect to such other
3.
<PAGE> 4
aspects of the business and affairs of the Trust and the Fund as
it shall determine to be desirable.
(b) Investment Advisory Services. The Manager shall provide
the Trust with such investment research, advice and supervision as
the latter may from time to time consider necessary for the proper
supervision of the assets of the Fund, shall furnish continuously
an investment program for the Fund and shall determine from time
to time which securities shall be purchased, sold or exchanged and
what portion of the assets of the Fund shall be held in the
various money market securities or cash, subject always to the
restrictions of the Declaration of Trust and By-Laws of the Trust,
as amended from time to time, the provisions of the Investment
Company Act and the statements relating to the Trust's investment
objectives, investment policies and investment restrictions, as
the same are set forth in the Prospectus and Statement of
Additional Information. The Manager shall also make decisions for
the Trust as to the manner in which voting rights, rights to
consent to corporate action and any other rights pertaining to the
Trust's portfolio securities shall be exercised. Should the
Trustees at any time, however, make any definite determination as
to investment policy and notify the Manager thereof in writing,
the Manager shall be bound by such determination for the period,
if any, specified in such notice or until similarly notified that
such determination has been revoked. The Manager shall take, on
behalf of the Fund, all actions which it deems necessary to
4.
<PAGE> 5
implement the investment policies determined as provided above,
and in particular to place all orders for the purchase or sale of
portfolio securities for the Fund's account with brokers or
dealers selected by it, and to that end, the Manager is authorized
as the agent of the Trust to give instructions to the Custodian of
the Fund as to deliveries of securities and payments of cash for
the account of the Fund. In connection with the selection of such
brokers or dealers and the-placing of such orders with respect to
assets of the Fund, the Manager is directed at all times to seek
to obtain execution and price within the policy guidelines
determined by the Trustees as set forth in the Prospectus and
Statement of Additional Information. Subject to this requirement
and the provisions of the Investment Company Act, the Securities
Exchange Act of 1934, as amended, and other applicable provisions
of law, the Manager may select brokers or dealers with which it or
the Trust is affiliated.
ARTICLE II
Allocation of Charges and Expenses
(a) The Manager. The Manager assumes and shall pay for
maintaining the staff and personnel necessary to perform its
obligations under this Agreement, and shall at its own expense
provide the office space, equipment and facilities which it is
obligated to provide under Article I hereof, and shall pay all
5.
<PAGE> 6
compensation of officers of the Trust and all Trustees who are
affiliated persons of the Manager.
(b) The Trust. The Trust assumes and shall pay or cause to
be paid all other expenses of the Trust and the Fund (except for
the expenses incurred by the Distributor), including, without
limitation: redemption expenses, expenses of portfolio
transactions, expenses of registering 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,
Securities and Exchange Commission fees, interest, taxes, fees and
actual out-of-pocket expenses of Trustees who are not affiliated
persons of the Manager, fees for legal and auditing services,
litigation expenses, costs' of printing proxies and other expenses
related to shareholder meetings, and other expenses properly
payable by the Trust and the Fund. It is also understood that the
Trust will reimburse the manager for its costs in providing
accounting services to the Trust and the Fund. The Distributor
will pay certain of the expenses of the Fund incurred in
connection with the continuous offering of Fund shares.
ARTICLE III
Compensation of the Manager
(a) Investment Management Fee. For the services rendered,
the facilities furnished and expenses assumed by the Manager, the
6.
<PAGE> 7
Trust shall pay to the Manager at the end of each calendar month a
fee based upon the average daily value of the net assets of the
Fund, as determined and computed in accordance with the
description of the determination of net asset value contained in
the Prospectus and Statement of Additional Information, at the
annual rate of 0.55 of 1.0% (.55%) of the average daily net assets
of the Fund, commencing on the day following effectiveness hereof.
If this Agreement becomes -effective subsequent to the first day of
a month or shall terminate before the last day of a month,
compensation for that part of the month this Agreement is in
effect shall be prorated in a manner consistent with the
calculation of the fee as set forth above. Subject to the
provisions of subsection (b) hereof, payment of the Manager's
compensation for the preceding month shall be made as promptly as
possible after completion of the computations contemplated by
subsection (b) hereof. During any period when the determination
of net asset value is suspended by the Trustees, the net asset
value of a share as of the last business day prior to such
suspension shall for this purpose be deemed to be the net asset
value at the close of each succeeding business day until it is
again determined.
(b) Expense Limitations. In the event the operating
expenses of the Fund, including amounts payable to the Manager
pursuant to subsection (a) hereof, for any fiscal year ending on a
date on which this Agreement is in effect exceed the expense
7.
<PAGE> 8
limitations applicable to the Fund imposed by applicable state
securities laws or regulations thereunder, as such limitations may
be raised or lowered from time to time, the Manager shall reduce
its management fee by the extent of such excess and, if required
pursuant to any such laws or regulations, will reimburse the Fund
in the amount of such excess; provided, however, to the extent
permitted by law, there shall be excluded from such expenses the
amount of any interest, taxes, brokerage commissions and
extraordinary expenses (including but not limited to legal claims
and liabilities and litigation costs and any indemnification
related thereto) paid or payable by the Fund. Whenever the
expenses of the Fund exceed a pro rata portion of the applicable
annual expense limitations, the estimated amount of reimbursement
under such limitations shall be applicable as an offset against
the monthly payment of the fee due to the Manager. Should two or
more such expense limitations be applicable as at the end of the
last business day of the month, that expense limitation which
results in the largest reduction in the Manager's fee shall be
applicable.
ARTICLE IV
Limitation of Liability of the Management
The Manager shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or
for any act or omission in the management of the Trust and the
8.
<PAGE> 9
Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As
used in this Article IV, the term "Manager" shall include any
affiliates of the manager performing services for the Trust or the
Fund contemplated hereby, and directors, officers and employees of
the Manager and such affiliates.
ARTICLE V
Activities of the Manager
The services of the Manager to the Trust and the Fund are not
to be deemed to be exclusive, and the Manager and any person
controlled by or under common control with the Manager .(for
purposes of Article V referred to as "affiliates") is free to
render services to others. It is understood that Trustees,
officers, employees and shareholders of the Trust and the Fund are
or may become interested in the Manager and its affiliates, as
directors, officers, employees and shareholders or otherwise, that
directors, officers, employees and shareholders of the Manager and
its affiliates are or may become similarly interested in the Trust
and the Fund, and that the Manager may become interested in the
Trust and the Fund as shareholder or otherwise.
9.
<PAGE> 10
ARTICLE VI
Duration and Termination of this Contract
This Agreement shall become effective as of the date first
above written and shall remain in force until August 31, 1988 and
thereafter, but only so long as such continuance is specifically
approved at least annually by (i) the Trustees, or by the vote of
a majority of the outstanding voting securities of the Fund, and
(ii) a majority of those Trustees who are not parties to this
Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Trustees or by vote of a majority
of the outstanding voting securities of the Fund, or by the
Manager, on sixty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its
assignment.
ARTICLE VII
Amendment of this Agreement
This Agreement may be amended by the parties only if such
amendment is specifically approved by (i) the vote of a majority
of outstanding voting securities of the Fund, and (ii) a majority
of those Trustees who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
10.
<PAGE> 11
ARTICLE VIII
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act and the Rules and
Regulations thereunder, subject, however, to such exemptions as
may be granted by the Securities and Exchange Commission under the
Investment Company Act.
ARTICLE IX
Govern no Law
This Agreement shall be construed in accordance with laws of
the State of New York and the applicable provisions of the
Investment Company Act. To the extent that the laws of the State
of New York, as applicable to any of the provisions herein,
conflict with the applicable provisions of the Investment Company
Act, the latter shall control.
ARTICLE X
Personal Liability
The Declaration of Trust establishing Merrill Lynch Municipal
Series 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,
11.
<PAGE> 12
provides that the name "Merrill Lynch Municipal Series Trust, IT
refers to the trustees under the Declaration collectively as
Trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of Merrill Lynch Municipal
Series Trust shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of
any obligation or claim or otherwise in connection with the
affairs of said Merrill Lynch Municipal Series Trust, but the
"Trust Property" only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement of the date first above written.
MERRILL MUNICIPAL SERIES TRUST
By
MERRILL LYNCH ASSET MANAGEMENT, INC.
By
12.
<PAGE> 1
EX-99.6(a)
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 16th day of September, 1986 between
MERRILL LYNCH MUNICIPAL SERIES TRUST, a Massachusetts business
trust (the "Trust"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a
Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Trust is registered under the Investment
Company Act of 1940, as amended to date (the "Investment Company
Act"), as a diversified open-end investment company and it is
affirmatively in the interest of the Trust to offer its shares
for sale continuously; and
WHEREAS, the Trustees of the Trust (the "Trustees") are
authorized to establish separate series ("Series") relating to
separate portfolios of securities, each of which will offer a
separate class of shares of beneficial interest, par value $0.10
per share (collectively referred to as "shares") to selected
groups of purchasers; and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either
directly to purchasers or through other securities dealers; and
WHEREAS, the Trust and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the shares of the various Series, as the same are organized
from time to time, each offering to commence after the
effectiveness of the registration statement covering the shares
<PAGE> 2
of a particular Series filed pursuant to the Securities Act of
1933, as amended (the "Securities Act").
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Trust
hereby appoints the Distributor as the principal underwriter and
distributor of the Trust to sell shares of beneficial interest of
each Series which may be established by the Trust (sometimes
herein referred to as "shares') to the public and hereby agrees
during the term of this Agreement to sell shares of the Trust to
the Distributor upon the terms and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Trust to act as
principal underwriter and distributor, except that:
(a) The Trust may, upon written notice to the Distributor,
from time to time designate other principal underwriters and
distributors of shares of each Series with respect to areas other
than the United States as to which the Distributor may have
expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor
under this Agreement to sell shares in the areas so designated
shall terminate, but this Agreement shall remain otherwise in
full effect until terminated in accordance with the other
provisions hereof.
(b) The exclusive rights granted to the Distributor to
purchase shares from the Trust shall not apply to shares of any
2.
<PAGE> 3
Series of the Trust issued in connection with the merger or
consolidation of any other investment company or personal holding
company with the Trust or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the
outstanding shares of any such company by the Trust.
(c) Such exclusive rights shall also not apply to shares
issued by the Trust pursuant to reinvestment of dividends or
capital gains distributions.
(d) Such exclusive rights shall also not apply to shares
issued by the Trust pursuant to the reinstatement privilege
afforded redeeming' shareholders.
Section 3. Purchase of Shares from the Trust.
(a) Prior to the continuous offering of the shares of a
particular Series, commencing on a date agreed upon by the Trust
and the Distributor, it is contemplated that the Distributor will
solicit subscriptions for shares during a subscription period
which shall last for such period as may be agreed upon by the
parties hereto. The subscriptions will be payable within six
business days after the termination of the subscription period,
at which time the Trust will commence operations.
(b) After the Trust commences operations, the Trust will
commence an offering of its shares and thereafter the Distributor
shall have the right to buy from the Trust the shares needed, but
not more than the shares needed (except for clerical errors in
transmission) to fill unconditional orders for shares of the
<PAGE> 4
Trust placed with the Distributor by investors or securities
dealers. The price which the Distributor shall pay for the
shares of any Fund so purchased from the Trust shall be the net
asset value, determined as set forth in Section 3(e) hereof, used
in determining the public offering price on which such orders
were based.
(c) The shares are to be resold by the Distributor to
investors at net asset value, as set forth in Section 3(d)
hereof, or to securities dealers having agreements with the
Distributor upon the terms and conditions set forth in Section 7
hereof.
(d) The net asset value of shares of each Fund-shall be
determined by the Trust or any agent of the Trust in accordance
with the method set forth in the prospectus and statement of ad-
ditional information of each series of the Trust and guidelines
established by the Trustees.
(e) The Trust shall have the right to suspend the sale of
its shares at times when redemption is suspended pursuant to the
conditions set forth in Section 4(b) hereof. The Trust shall
also have the right to suspend the sale of its shares if trading
on the New York Stock Exchange shall have been suspended, if a
banking moratorium shall have been declared by Federal or New
York authorities, or if there shall have been some other event,
which, in the judgment of the Trust, makes it impracticable or
inadvisable to sell the shares.
4.
<PAGE> 5
(f) The Trust, or any agent of the Trust designated in
writing by the Trust, shall be promptly advised of all purchase
orders for shares received by the Distributor. Any order may be
rejected by the Trust; provided, however, that the Trust will not
arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of shares. The Trust (or its
agent) will confirm orders upon their receipt, will make
appropriate book entries and upon receipt by the Trust (or its
agent) of payment therefor-,, will deliver deposit receipts or
certificates for such shares pursuant to the instructions of the
Distributor. Payment shall be made to the Trust in New York
Clearing House funds. The Distributor agrees to cause such
payment and such instructions to be delivered promptly to the
Trust (or its agent).
Section 4. Repurchase or Redemption of Shares by the Trust.
(a) Any of the outstanding shares may be tendered for
redemption at any time, and the Trust agrees to repurchase or
redeem the shares so-tendered in accordance with its obligations
as set forth in Article VIII of its Declaration of Trust, as
amended from time to time, and in accordance with the applicable
provisions set forth in the prospectus and statement of
additional information of the Trust. The price to be paid to
redeem or repurchase the shares shall be equal to the net asset
value calculated in accordance with the provisions of Section
3(e) hereof, less the redemption fee or other charge, if any, set
<PAGE> 6
forth in the prospectus and statement of additional information
of the Trust. All payments by the Trust hereunder shall be made
in the manner set forth below.
The Trust shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
the Distributor on or before the seventh business day subsequent
to its having received the notice of redemption in proper form.
The proceeds of any redemption of shares shall be paid by each
Series as follows: (i) any-applicable contingent deferred sales
charge shall be paid to the Distributor and (ii) the balance
shall be paid to or for the account of the shareholders, in each
case in accordance with the applicable provisions of the prospec-
tus and statement of additional information of each Series.
(b) Redemption of shares or payment may be suspended at
times when the New York Stock Exchange is closed, when trading
on said Exchange is closed, when trading on said Exchange is
restricted, when an emergency exists as a result of which dis-
posal by the Trust of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Trust
fairly to determine the value of the net assets of its Series, or
during any other period when the Securities and Exchange
Commission, by order, so permits.
<PAGE> 7
Section S. Duties of the Trust.
(a) The Trust I shall furnish to the Distributor copies of
all information, financial statements and other papers which the
Distributor may reasonably request for use in connection with the
distribution of shares of the Trust, and this shall include one
certified copy, upon request by the Distributor, of all financial
statements of each Series prepared for the Trust by independent
public accountants. The Trust shall make available to the
Distributor such number of -copies of the prospectus and statement
of additional information for each Series as the Distributor
shall reasonably request.
(b) The Trust shall take, from time to time, but subject to
the necessary approval of the shareholders, all necessary action
to fix the number of authorized shares of each Series and such
steps as may be necessary to register the same under the
Securities Act, to the end that there will be available for sale
such number of shares as the Distributor reasonably may be
expected to sell.
(c) The Trust shall use its best efforts to qualify and
maintain the qualification of an appropriate number of shares of
each Series for sale under the securities laws of such states as
the Distributor and the Trust may approve. Any such
qualification may be withheld, terminated or withdrawn by the
Trust at any time in its discretion. As provided in Section 8(c)
hereof, the expense of qualification and maintenance of
7.
<PAGE> 8
qualification shall be borne by the Trust. The Distributor shall
furnish such information and other material relating to its
affairs and activities as may be required by the Trust in
connection with such qualification.
(d) The Trust will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of each Series.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable-time and effort
to effect sales of shares of the Trust, but shall not be
obligated to sell any specific number of shares. The services of
the Distributor to the Trust hereunder are not to be deemed
exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other
investment companies so long as the performance of its
obligations hereunder is not impaired thereby.
(b) In selling the shares of the Trust, the Distributor
shall use its best efforts in all respects duly to conform with
the requirements of all Federal and state laws relating to the
sale of such securities. Neither the Distributor nor any
selected dealer nor any other person is authorized by the Trust
to give any information or to make any representations, other
than those contained in the registration statement or related
prospectus and statement of additional information for each
<PAGE> 9
Series and any sales literature specifically approved by the
Trust for use with respect to a particular Series.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Trust, for the confirmation of
sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales,
and the cancellation of unsettled transactions, as may be
necessary to comply with the -requirements of the National
Association of Securities Dealers, Inc. (the "NASD"), as such
requirements may from time to time exist.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into
selected dealers agreements with securities dealers of its choice
selected dealers') for the sale of shares; provided that the
Trust shall approve the forms of agreements with dealers. Shares
sold to selected dealers shall be for resale by such dealers only
at net asset value determined as set forth in Section 3(d)
hereof. The form of agreement with selected dealers to be used
during the subscription period described in Section 3(a) with
respect to shares of the first Series of the Trust, designated
Merrill Lynch Municipal Income Fund is attached hereto as Exhibit
A and the initial form of agreement with selected dealers to be
used in the continuous offering of such shares is attached hereto
as Exhibit B.
<PAGE> 10
(b) Within the United States, the Distributor shall offer
and sell shares only to such selected dealers as are members in
good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Trust shall bear all costs and expenses of the
Trust, including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any
required registration statements and/or prospectuses and
statements of additional information under the Investment Company
Act, the Securities Act, and all amendments and supplements
thereto,and preparing and mailing annual and interim reports and
proxy materials to shareholders (including but not limited to the
expense of setting in type any such registration statements,
prospectuses, statements of additional information, annual or
interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to account execu-
tives. In addition, after the prospectuses, statements of
additional information and annual and interim reports have-been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of shares to
selected dealers or investors pursuant to this Agreement. The
Distributor shall bear the costs and expenses of preparing,
10.
<PAGE> 11
printing and distributing any other literature used by the
Distributor or furnished by it for use by selected dealers in
connection with the offering of the shares for sale to the public
and any expenses of advertising incurred by the Distributor in
connection with such offering. It is understood and agreed that,
so long as the Trust's Distribution Plan pursuant to Rule 12b-1
under the Investment Company Act remains in effect, any expenses
incurred by the Distributor hereunder may be paid from amounts
recovered by it from the Fund under such Plan.
(c) The Trust shall bear the cost and expenses of qualifi-
cation of the shares for sale pursuant to this Agreement, and, if
necessary or advisable in connection therewith, of-qualifying the
Trust as a broker or dealer, in such states of the United States
or other jurisdictions as shall be selected by the Trust and the
Distributor pursuant to Section 5(c) hereof and the cost and
expenses payable to each such state for continuing qualification
therein until the Trust decides to discontinue such qualification
pursuant to Section 5(c) hereof.-
Section 9. Indemnification.
(a) The Trust shall indemnify and hold harmless the
Distributor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), arising by reason of any
11.
<PAGE> 12
person acquiring any shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the
ground that the registration statement or related prospectus and
statement of additional information, as from time to time amended
and supplemented, or an annual or interim report to shareholders
of any Series of the Trust, includes an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements
therein not misleading, unless such statement or omission was
made in reliance upon, and in conformity with, information
furnished to the Trust in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the
indemnity of the Trust in favor of the Distributor and any such
controlling persons to be deemed to protect such Distributor or
any such controlling persons thereof against any liability to the
Trust or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the
performance of their duties or by reason of the reckless
disregard of their obligations and duties under this Agreement;
or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made
against the Distributor or any such controlling persons, unless
the Distributor or such controlling persons, as the case may be,
shall have notified the Trust in writing within a reasonable time
12.
<PAGE> 13
after the summons or other first legal process giving information
of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor
or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Trust
of any such claim shall not relieve it from any liability which
it may have to the person against whom such action is brought
otherwise than on account of its indemnity agreement contained in
this paragraph. The Trust will be entitled to participate at its
own expense in the defense, or, if it so elects, to assume the
defense of any suit brought to enforce any such liability', but if
the Trust elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory :to the
Distributor or such controlling person or persons, defendant or
defendants in the suit. In the event the Trust elects to assume
the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or
defendants in the suit, shall bear the fees and expenses of any
additional counsel retained by them, but, in case the Trust does
not elect to assume the defense of any such suit, it will
reimburse the Distributor or such controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Trust shall
promptly notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or
13.
<PAGE> 14
trustees in connection with the issuance or sale of any of the
shares.
(b) The Distributor shall indemnify and hold harmless the
Trust and each of its trustees and officers and each person, if
any, who controls the Trust against any loss, liability, claim,
damage or expense described in the foregoing indemnity contained
in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity
with, information furnished to the Trust in writing by or on
behalf of the Distributor for use in connection with the
registration statement or related prospectus and statement of
additional information, as from time to time amended, or the
annual or interim reports to shareholders. In case any action
shall be brought against the Trust or any person so indemnified,
in respect of which indemnity may be sought against the
Distributor, the Distributor shall have the rights and duties
given to the Trust, and the Trust and each person so indemnified
shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
Section 10. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until August 31, 1988 and
thereafter, but only so long as such continuance is specifically
approved at least annually by (i) the Trustees, or by the vote of
a majority of the outstanding voting securities of each Series,
14.
<PAGE> 15
and (ii) by the vote of a majority of those Trustees who are not
parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on
such approval.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Trustees or by vote of a majority
of the outstanding voting securities of the Trust, or by the
Distributor, on sixty days written notice to the other party.
This Agreement shall automatically terminate in the event of its
assigment.
The terms "vote of a majority of the outstanding voting
securities", "assignment". "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 11. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specific-
ally approved by (i) the Trustees, or by the vote of a majority
of outstanding voting securities of each Series, and (ii) by the
vote of a majority of those Trustees who are not parties to this
Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
Section 12. Governing Law. The provisions of this
Agreement shall be construed and interpreted in accordance with
the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the
15.
<PAGE> 16
extent that the applicable law of the State of New York, or any
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
Section 13. Personal Liability. The Declaration of Trust
establishing Merrill Lynch Municipal Series 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 said Trust shall be held to any persona
liability, nor shall resort be had to their private property for
the satisfaction of any obligation or claim or otherwise in con-
nection with the affairs of said Trust, but the "Trust Property"
only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH MUNICIPAL SERIES TRUST
By /s/
MERRIL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/
16.
<PAGE> 1
EX-99.6(b)
EXHIBIT A
MERRILL LYNCH MUNICIPAL INCOME FUND
Merrill Lynch Municipal Series Trust
SHARES OF BENEFICIAL INTEREST
SELECTED DEALERS AGREEMENT
FOR SUBSCRIPTION PERIOD
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has
an agreement with Merrill Lynch Municipal Series Trust, a Massa-
chusets business trust (the "Trust"), pursuant to which it acts as
the distributor for the sale of shares of beneficial interest, par
value $0.10 per share (the "Shares"), of Merrill Lynch Municipal
Income Bond Fund (the "Fund"), a series of the Trust, and as such
has the right to distribute shares for resale. The Trust is a
diversified open-end investment company registered under the
Investment Company Act of 1940, as amended, and the shares being
offered to the public are registered under the Securities Act of
1933, as amended. Such shares and certain of the terms on which
they are being offered are more fully described in the enclosed
Prospectus and Statement of Additional Information. You have
received a copy of the Distribution Agreement between ourselves and
the Trust and reference is made herein to certain provisions of
such Distribution Agreement. This Agreement relates solely to the
subscription period described in Section 3(a) of such Distribution
Agreement. Subject to the foregoing, as principal, we offer to
sell to you, as a member of the Selected Dealers Group, shares of
the Fund upon the following terms and conditions:
1. The subscription period referred to in Section 3(a) of the
Distribution Agreement will continue through November -, 1986.
The subscription period may be extended upon agreement between the
Trust and the Distributor. Subject to the provisions of such Sec-
tion and the conditions contained herein, we will sell to you on
the fifth business day following the termination of the subscrip-
tion period, or such other date as we may advise (the "Closing
Date"), such number of shares as to which you have placed orders
with us not later than 5:00 P.M. on the second full business day
preceding the Closing Date.
2. In all sales of these shares to the public you shall act
as dealer for your own account, and in no transaction shall you
have any authority to act as agent for the Trust, for us or for
any other member of the Selected Dealers Group.
<PAGE> 2
3. You shall not place orders for any of the shares unless
you have already received purchase orders for such shares at the
applicable public offering prices and subject to the terms hereof
and of the Distribution Agreement. All orders are subject to
acceptance by the Distributor or the Trust in the sole discretion
of either. The minimum initial and subsequent purchase
requirements are as set forth in the Prospectus, as amended from
time to time. You agree that you will not offer or sell any of
the shares except under circumstances that will result in
compliance with the applicable Federal and state securities laws
and that in connection with sales and offers to sell shares you
will furnish to each person to whom any such sale or offer is -
made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will
not furnish to any person any information relating to the shares
which is inconsistent in any respect with the information
contained in the Prospectus and Statement of Additional
Information (as then amended or supplemented) or cause any
advertisement to be published in any newspaper or posted in any
public place without our consent and the consent of the Trust.
4. Payment for shares purchased by you is to be made by
certified or official bank check mailed to Merrill Lynch Funds
Distributor, Inc., P.O. Box 9011, Princeton, N.J. 08543-9011, at
the settlement price as provided above, on such date as we may
advise, in New York Clearing House funds payable to the order of
Merrill Lynch Funds Distributor, Inc. against delivery by us of
non-negotiable share deposit receipts ("Receipts") issued by
First Jersey National Bank, as shareholder servicing agent,
acknowledging the deposit with it of the shares so purchased by
you. You agree that as promptly as practicable after the
delivery of such shares you will issue appropriate written
transfer instructions to the Trust or to the shareholder
servicing agent as to the purchasers to whom you sold the shares.
5. No person is authorized to make any representations
concerning shares of the issuer except those contained in the
current Prospectus and Statement of Additional Information of the
Fund and in such printed information subsequently issued by us or
the Trust as information supplemental to such Prospectus and
Statement of Additional Information. In purchasing shares
through us you shall rely solely on the representations contained
in the Prospectus and Statement of Additional Information and
supplemental information above mentioned. Any printed
information which we furnish you other than the Fund's Prospectus
and Statement of Additional Information, periodic reports and
proxy solicitation material are our sole responsibility and not
the responsibility of the Trust, and you agree that the Trust
shall have no liability or responsibility to you in these
respects unless expressly assumed in connection therewith.
2.
<PAGE> 3
6. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to
the time of offering or sale and you agree thereafter to deliver
to such purchasers copies of the annual and interim reports and
proxy solicitation materials of the Trust. You further agree to
endeavor to obtain Proxies from such purchasers. Additional
copies of the Prospectus and Statement of Additional Information,
annual or interim reports and proxy solicitation materials of the
Trust will be supplied to you in reasonable quantities upon
request.
7. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of shares entirely.
Each party hereto has the right to cancel this agreement upon
notice to the other party.
8. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering. We shall be under no liability to you
except for lack of good faith and for obligations expressly
assumed by us herein. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of
compliance with any provision of the Securities Act of 1933, as
amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
9. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association.
10. Upon application to us, we will inform you as to the.
states in which we believe the shares have been qualified for
sale under, or are exempt from the requirements of, the
respective securities laws of such states, but we assume no
responsibility or obligation as to your right to sell shares in
any jurisdiction. We will file with the Department of State in
New York a Further State Notice with respect to the shares, if
necessary.
11. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or
telegraphed to you at the address specified by you below.
12. You agree that you will not sell any shares of the Trust
to any account over which you exercise discretionary authority.
3.
<PAGE> 4
13. This Agreement shall terminate at the close of business
on the Closing Date, unless earlier terminated, provided,
however, this Agreement shall continue after termination for the
purpose of Section 7 hereof and for the purpose of settlement of
accounts hereunder.
MERRILL LYNCH FUNDS DISTRIBUTOR
By
(Authotized signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
P.O. Box 9011
Princeton, N.J. 08543-9011
Accepted:
By
Address:
Date:
4.
<PAGE> 5
EXHIBIT B
MERRILL LYNCH MUNICIPAL INCOME FUND
Merrill Lynch Municipal Series Trust
SHARES OF BENEFICIAL INTEREST
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with Merrill Lynch Municipal Series Trust, a
Massachusets business trust (the "Trust"), pursuant to which it
acts as the distributor for the sale of shares of beneficial
interest, par value $0.10 per share (the "Shares"), of the
Merrill Lynch Municipal Income Fund (the "Fund"), a series of the
Trust, and as such has the right to distribute shares for resale.
The Trust is a diversified open-end investment company registered
under the Investment Company Act of 1940, as amended, and the
shares being offered to the public are registered under the
Securities Act of 1933, as amended. You have received a copy of
the Distribution Agreement between ourselves and the Trust and
reference is made herein to certain provisions of such Distribu-
tion Agreement. The terms "Prospectus" and "Statement of Addi-
tional Information" as used herein refer to the prospectus and
statement of additional information, respectively, on file with
the Securities and Exchange Commission which is part of the most
recent effective registration statement pursuant to the Securi-
ties Act of 1933, as amended. As principal, we offer to sell to
you, as a member of the Selected Dealers Group, shares of the
Fund upon the following terms and conditions:
1. In all sales of these shares to the public you shall act
as dealer for your own account, and in no transaction shall you
have any authority to act as agent for the Trust, for us or for
any other member of the Selected Dealers Group.
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
information of the Fund. The procedure relating to the handling
of orders shall be subject to Section 5 hereof and instructions
which we or the Trust shall forward from time to time to you.
All orders are subject to acceptance or rejection by the Distrib-
utor or the Trust in the sole discretion of either. The minimum
initial and subsequent purchase requirements are as set forth in
<PAGE> 6
the current Prospectus and Statement of Additional Information of
the Fund.
3. You shall not place orders for any of the shares unless
you have already received purchase orders for such shares at the
applicable public offering prices and subject to the terms hereof
and of the Distribution Agreement. You agree that you will not
offer or sell any of the shares except under circumstances that
will result in compliance with the applicable Federal and state
securities laws and that in connection with sales and offers to
sell shares you will furnish to each person to whom any such sale
or offer is made a copy of the Prospectus and, if requested, the
Statement of Additional Information (as then amended or supple-
mented) and will not furnish to any person any information
relating to the shares, which is inconsistent in any respect with
the information contained in the Prospectus and Statement of
Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in
any public place without our consent and the consent of the
Trust.
4. As a selected dealer, you are hereby authorized (i) to
place orders directly with the Trust for shares of the Fund to be
resold by us to you subject to the applicable terms and condi-
tions governing %-he placement of orders by us set -forth in Sec-
tion 3 of the Distribution Agreement and subject to the compen-
sation provisions of Section 3 hereof, and (ii) to tender shares
directly to the Trust or its agent for redemption subject to the
applicable terms and conditions set forth in Section 4 of the
Distribution Agreement.
S. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such
withholding: e.g., by a change in the "net asset value" from that
used in determining the offering price to your customers.
6. No person is authorized to make any representations
concerning shares of the Trust except those contained in the
current Prospectus and Statement of Additional Information of the
Fund and in such printed information subsequently issued by us or
the Trust as information supplemental to such Prospectus and
Statement of Additional Information. In purchasing shares
through us you shall rely solely on the representations obtained
in the Prospectus and Statement of Additional Information and
supplemental information above mentioned. Any printed informa-
tion which we furnish you other than the Fund's Prospectus,
Statement of Additional Information, periodic reports and proxy
solicitation material are our sole responsibility and not the
responsibility of the Trust, and you agree that the Trust shall
<PAGE> 7
have no liability or responsibility to you in these respects
unless expressly assumed-in connection therewith.
7. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to
the time of offering or sale and you agree thereafter to deliver
to such purchasers copies of the annual and interim reports and
proxy solicitation materials of the Trust. You further agree to
endeavor to obtain proxies from such purchasers. Additional
copies of the Prospectus and Statement of Additional Information,
annual or interim reports and proxy solicitation materials of the
Trust will be supplied to you in reasonable quantities upon
request.
8. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of shares entirely.
Each party hereto has the right to cancel this agreement upon
notice to the other party.
9. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering. We shall be under no liability to you
except for lack of good faith and for obligations expressly
assumed by us herein. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of
compliance with any provision of the Securities Act of 1933, as
amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
10. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association.
11. Upon application to us, we will inform you as to the
states in which we believe the shares have been qualified for
sale under, or are exempt from the requirements of, the
respective securities laws of such states, but we assume no
responsibility or obligation as to your right to sell shares in
any jurisdiction. We will file with the Department of State in
New York a Further State Notice with respect to the shares, if
necessary.
12. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or
telegraphed to you at the address specified by you below.
3.
<PAGE> 8
13. Your first order placed pursuant to this Agreement for
the purchase of shares of the Trust will represent your
acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
(Authorized Signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
P.O. Box 9011
Princeton, N.J. 08543-9011
Accepted:
Firm Name:-
( BY:
Address:
Date:
4.
<PAGE> 1
EX-99.9
TRANSFER AGENCY, DIVIDEND DISBURSING AGENCY
AND SHAREHOLDER SERVICING AGENCY AGREEMENT
THIS AGREEMENT made as of the 5th day of October, 1987
by and between Merrill Lynch Municipal Income Fund (the "Fund")
of Merrill Lynch Municipal Series Trust and Merrill Lynch
Financial Data Service, Inc. ("MLFDS") , a New Jersey corporation.
WITNESSETH:
WHEREAS, the Fund wishes to appoint MLFDS to be the
Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent, and subject to, the terms and provisions of this
Agreement, and MLFDS is desirous of accepting such appointment
upon, and subject to, such terms and provisions:
NOW THEREFORE, in consideration of mutual covenants
contained in this Agreement, the Fund and MLFDS agree as follows:
1. Appointment of MLFDS as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent.
(a) The Fund hereby appoints MLFDS to act as Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent
for the Fund upon, and subject to, the terms and provisions of
this Agreement.
(b) MLFDS hereby accepts the appointment as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent for the
Fund, and agrees to act as such upon, and subject to, the terms
and provisions of this Agreement.
2. Definitions.
(a) In this Agreement:
(I) The term "Act" means the Investment Company Act
of 1940 as amended from time to time and any rule or regulation
thereunder;
(II) The term "Account" means any account of a
Shareholder, or, if the shares are held in an account in the name
of MLPF&S for benefit of an identified customer, such account,
including a Plan Account, any account under a plan (by whatever
name referred to in the Prospectus) pursuant to the Self-Enployed
Individuals Retirement Act of 1962 ("Keogh Act Plan") and any
<PAGE> 2
plan (by whatever name referred to in the Prospectus) in
conjunction with Section 401 of the Internal Revenue Code
("Corporation Master Plan");
(III) The term "application" means an application
made by a Shareholder or prospective Shareholder respecting the
opening of an Account:
(IV) The term "MLFD" means Merrill Lynch Funds
Distributor, Inc., a Delaware corporation;
(V) The term "MLPF&S" means Merrill Lynch, Pierce,
Fenner & Smith Incorporated, a Delaware corporation;
(VI) The term "Officer's Instruction" means an
instruction in writing given on behalf of the Fund to MLFDS, and
signed on behalf of the Fund by the President, any Vice
President, the Secretary or the Treasurer of the Fund;
(VII) The term "Prospectus" means the Prospectus and
the Statement of Additional Information of the Fund as from time
to time in effect;
(VIII) The term "Shares". means shares of stock or
beneficial interest, as the case may be, of the Fund,
irrespective of class or series;
(IX) The term "Shareholder" means the holder of
record of Shares;
(X) The term "Plan Account" means an account opened
by a Shareholder or prospective Shareholder with respect to an
open account, monthly payment or withdrawal plan (in each case by
whatever name referred to in the Prospectus), and may also
include an account relating to any other Plan if and when.
provision is made for such plan in the Prospectus.
3. Duties of MLFDS and Transfer Agent, Dividend Disbursing
Agent and Shareholder servicing Agent.
(a) Subject to the succeeding provisions of the
Agreement, MLFDS hereby agrees to perform the following functions
as Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent for the Fund:
(I) Issuing, transferring and redeeming Shares;
(II) opening, maintaining, servicing and closing
Accounts;
<PAGE> 3
(III) Acting as agent for the Fund Shareholders and/or customers of
MLPF&S in connection with Plan Accounts, upon the terms and subject to the
conditions contained in the Prospectus and application relating to the
specific Plan Account;
(IV) Acting as agent of the Fund and/or MLPF&S, maintaining such
records as may permit the imposition of such contingent deferred sales charges
as may be described in the Prospectus, including such reports as may be
reasonably requested by the Fund with respect to such Shares as may be subject
to a contingent deferred sales charge;
(V) Upon the redemption of Shares subject to such a contingent
deferred sales charge, calculating and deducting from the redemption proceeds
thereof the amount of such charge in the manner set forth in the Prospectus.
MLFDS shall pay, on behalf of MLFD, to MLPF&S such deducted contingent
deferred sales charges imposed upon all Shares maintained in the name of
MLPF&S, or maintained in the name of an account identified as a customer
account of MLPF&S. Sales charges imposed upon any other Shares shall be paid
by MLFDS to MLFD;
(VI) Exchanging the investment of an investor into, or from the
shares of other open-end investment companies or other series portfolios of
the Fund, if any, if and to the extent permitted by the Prospectus at the
direction of such investor;
(VII) Processing redemptions;
(VIII) Examining and approving legal transfers;
(IX) Replacing lost, stolen or destroyed certificates representing
Shares, in accordance with, and subject to, procedures and conditions adopted
by the Fund;
(X) Furnishing such confirmations of transactions relating to their
Shares as required by applicable law;
(XI) Acting as agent for the Fund and/or MLPF&S, furnishing such
appropriate periodic statements relating to Accounts, together with additional
enclosures, including appropriate income tax information and income tax forms
duly completed, as required by applicable law;
(XII) Acting as agent for the Fund and/or MLPF&S, mailing annual,
semi-annual and quarterly reports prepared by or on behalf of the Fund, and
mailing new Prospectuses upon their issue to Shareholders as required by
applicable law;
-3-
<PAGE> 4
(XIII) Furnishing such periodic statements of
transactions effected by MLFDS, reconciliations, balances and
summaries as the Fund may reasonably request;
(XIV) Maintaining such books and records relating to
transactions effected by MLFDS as are required by the Act, or by
any other applicable provision of law, rule or regulation, to be
maintained by the Fund or its transfer agent with respect to such
transactions, and preserving, or causing to be preserved any such
books and records for such periods as may be required by any such
law, rule or regulation and as may be required by any such law,
rule or regulation and as may be agreed upon from time to time
between MLFDS and the Fund. In addition, MLFDS agrees to
maintain and preserve master files and historical computer tapes
on a daily basis in multiple separate locations a sufficient
distance apart to insure preservation of at least one copy of
such information;
(XV) Withholding taxes on non-resident alien
Accounts, preparing and filing U.S. Treasury Department Form 1099
and other appropriate forms as required by applicable law with
respect to dividends and distributions; and
(XVI) Reinvesting dividends for full and fractional
shares and disbursing cash dividends, as applicable.
(b) MLFDS agrees to act as proxy agent in connection
with the holding of annual, if any, and special meetings of
Shareholders, mailing such notices, proxies and proxy statements
in connection with the holding of such meetings as may be
required by applicable law, receiving and tabulating votes cast
by proxy and communicating to the Fund the results of such
tabulation accompanies by appropriate certifications, and
preparing and furnishing to the Fund certified lists of
Shareholders as of such date, in such form and containing such
information as may be required by the Fund.
(c) MLFDS agrees to deal with, and answer in a timely
manner, all correspondence and inquiries relating to the
functions of MLFDS under this Agreement with respect to Accounts.
(d) MLFDS agrees to furnish to the Fund such
information and at such intervals as is necessary for the Fund to
comply with registration and/or the reporting requirements
(including applicable escheat laws) of the Securities and
Exchange Commission, Blue Sky authorities or other governmental
authorities.
<PAGE> 5
(e) MLFDS agrees to provide to the Fund such
information as may reasonably be required to enable the Fund to
reconcile the number of outstanding Shares between MLFD's records
and the account books of the Fund.
(f) Notwithstanding anything in the foregoing
provisions of this paragraph, MLFDS agrees to perform its
functions thereunder subject to such modification (whether in
respect of particular cases or in any particular class of cases)
as may from time to time be contained in an Officer's
Instruction.
4. compensation.
The charges for services described in this Agreement,
including "out-of-pocket" expenses, will be set forth in the
Schedule of Fees attached-hereto.
S. Right of Inspection.
MLFDS agrees that it will in a timely manner make
available to, and permit, any officer, accountant, attorney or
authorized agent of the Fund to examine and make transcripts and
copies (including photocopies and computer or other electronical
information storage media and print-outs) of any and all of its
books and records which relate to any transaction or function
performed by MLFDS under or pursuant to this Agreement.
6. Confidential Relationship.
MLFDS agrees that it will, on behalf of itself and its
officers and employees, treat all transactions contemplated by
this Agreement, and all information germane thereto, as
confidential and not to be disclosed to any person (other than
the Shareholder concerned, or the Fund, or as may be disclosed in
the examination of any books or records by any person lawfully
entitled to examine the same) except as may be authorized by the
Fund by way of an Officer's Instruction.
7. indemnification.
The Fund shall indemnify and hold MLFDS harmless from
any loss, cost, damage and reasonable expenses, including
reasonable attorney's fees (provided that such attorney is
appointed with the Fund's consent, which consent shall not be
unreasonably withheld), incurred by it resulting from any claim,
demand, action, or suit in connection with the performance of its
duties hereunder, provided that this indemnification shall not
apply to actions or commissions of MLFDS in cases of willful
misconduct, failure to act in good faith or negligence by MLFDS,
<PAGE> 6
it's officers, employees or agents, and further provided, that
prior to confession any claim against it which may be subject to
this indemnification, MLFDS shall give the Fund reasonable
opportunity to defend against said claim in its own name or in
the name of MLFDS. An action taken by MLFDS upon any officer's
Instruction reasonably believed by it to have been properly
executed shall not constitute willful misconduct, failure to act
in good faith or negligence under this Agreement.
8. Regarding MLFDS.
(a) MLFDS hereby agrees to hire, purchase, develope and
maintain such dedicated personnel, facilities, equipment,
software, resources and capabilities as may be reasonably
determined by the Fund to be necessary for the satisfactory
performance of the duties and responsibilities of MLFDS. MLFDS
warrants and represents that its officers and supervisory
personnel charged with carrying out its functions as Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent
for the Fund possess the special skill and technical knowledge
appropriate for that purpose. MLFDS shall at all times exercise
due care and diligence in the performance of its functions as
Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent for the Fund. MLFDS agrees that, in determining
whether it has exercised due care and diligence, its conduct
shall be measured by the standard applicable to persons,
possessing such special skill and technical knowledge.
(b) MLFDS warrants and represents that is duly authorized
and permitted to act as Transfer Agent, Dividend Disbursing
Agent, and Shareholder Servicing Agent under all applicable laws
and that it will immediately notify the Fund of any revocation of
such authority or permission or of the commencement of any
proceeding or other action which may lead to such revocation.
9. Termination.
(a) This Agreement shall become effective as of the date
first above written and shall thereafter continue from year to
year. This Agreement may be terminated by the Fund of MLFDS
(without penalty to the Fund or MLFDS) provided that the
terminating party gives the other party written notice of such
termination at least sixty (60) days in advance, except that the
Fund may terminate this Agreement immediately upon written notice
to MLFDS if the authority or permission of MLFDS to act as
Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent has been revoked or if any proceeding or other
action which the Fund reasonably believes will lead to such
revocation has been commenced.
<PAGE> 7
(b) Upon termination of this Agreement, MLFDS shall deliver
all unissued and canceled stock certificates representing Shares
remaining in its possession, and all Shareholder records, books,
stock ledgers, instruments and other documents (including
computerized or other electronically stored information ) made or
accumulated in the performance of its duties as Transfer Agent,
Disbursing Agent and Shareholder Servicing Agent for the Fund
along with a certified locator document clearly indicating the
complete contents therein, to such successor as may be specified
in a notice of termination or Officer's Instruction; and the Fund
assumes all responsibility for failure thereafter to produce any
paper, record or documents so delivered and identified in the
locator document, if and when required to be produced.
10. Amendment.
Except to the extent that the performance by MLFDS of
its functions under this Agreement may from time to time be
modified by an Officer's Instruction, this Agreement may be
amended or modified only by further written agreement between the
parties.
11. Governing Law.
This Agreement shall be governed by the laws of the
State of New Jersey.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective duly authorized
Officers and their respective corporation seals hereunto duly
affixed and attested, as of the day and year above written.
MERRILL LYNCH MUNICIPAL SERIES TRUST
By:
Title:
MERRILL LYNCH FINANCIAL DATA SERVICE, INC.
By:
Title:
<PAGE> 1
EX-99.13
CERTIFICATE OF SOLE SHAREHOLDER
Merrill Lynch Asset Management, Inc., the holder of l0,OOO
shares of beneficial interest, par value $0.10 per share# of
Merrill Lynch Municipal Income Fund of Merrill Lynch Municipal
Series Trust, a Massachusetts business trust (the 'Trust'), does
hereby confirm to the Trust its representation that it purchased
such shares for investment purposes, with no present intention of
redeeming or reselling any portion thereof, and does further agree
that if it redeems any portion of such shares prior to the
amortization of the Trust's organizational expenses, the proceeds
thereof will be reduced by the proportionate amount of the
unamortized organizational expenses which the number of shares
being redeemed bears to the number of shares initially purchased.
MERRILL LYNCH ASSET MANAGEMENT, INC.
By: /s/ Terry K. Glenn
Dated: October 2, 1986
<PAGE> 1
Merrill Lynch Municipal Income
of Merrill Lynch Municipal Series Trust
Class A
Total Return
EX-99.16(a)
Period from
10/31/88 Annual
(inception) Total
to 10/31/89 Return*
------------ ----------
Initial Investment $1,000.00 $1,000.00
Divided by
Maximum Offering Price 9. 65
- - - - - -
Divided by Net Asset Value 9.46
- - - - -
Equals Shares Purchased 103.63 105.71
Plus Shares Acquired through
Dividend Reinvestment 6. 93 7. 11
- - - - - - - - - - -
Equals Shares Held
at 10/31/89 110.56 112.82
Multiplied by Net Asset
Value at 10/31/89 9. 30 9. 30
- - - - - - - - - - -
Equals Ending Redeemable
Value at $1,000
Investment (ERV) at 10/31/89 $1,028.20 $1,049.20
Divided by $1,000 (P) 1.0282 1.0492
Subtract 1 0.0282 0.0492
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) 2. 82%
Expressed as a percentage
equals the Aggregate Total
Return for the Period 4. 92%
ERV divided by P 1.0282
Raise to the power of 1
Equals 1.0282
Subtract 1 0.0282
Expressed as a percentage
equals the Average
Annualized Total Return 2. 82%
* Does not include sales charge for the period.
<PAGE> 1
EX-99.16(b)
Municipal Income
Standardized Yield Computation
August 31, 1998
Longtern Income generallay based on
yield to maturity times market
value of each security. $895,892
Plus short term income accrued for
the past thirty days 32,191
Equals Total Income (a) 928,083
Less Expenses for the past thirty
days (b) 147,914
Equals net monthly income for yield
Calculation
Average shares outstanding for the
month (c ) 17,591,246
Times maximum offering price (d)
Equals total dollars $162,719,026
Not monthly income divided by total
dollars equals .004794578
Add 1
Raise to the power of 6 1.004794578
Subtract 1 .029114500
Times 2 .059229
Expressed as a percentage of
the standardized yield for
the month
Divided by the reciprcal of the
effective tax rate of
28% (1 - .28 - .72)
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Municipal Intermediate Term Fund
of Merrill Lynch Municipal Series Trust
We consent to the use in Post-Effective Amendment No. 13 to Registration
Statement No. 33-8058 of our report dated December 11, 1995 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
February 26, 1996
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