<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1997
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. 14 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 15 [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)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
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 LLP
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 20, 1996.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
===============================================================================================================
PROPOSED
AMOUNT OF PROPOSED MAXIMUM MAXIMUM
TITLE OF SECURITIES SHARES BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Shares of Beneficial Interest
(par value $.10 per share)............... 6,004,513 $10.05 $329,992 $100
===============================================================================================================
</TABLE>
(1) The calculation of the maximum aggregate offering price is made pursuant to
Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during Registrant's
previous fiscal year was 5,971,678 shares.
(3) None of the shares described in (2) above have been used for reduction
pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act
of 1940 in previous filings during Registrant's current fiscal year.
(4) All of the shares redeemed during Registrant's previous fiscal year are
being used for the reduction of the registration fee in this amendment to
the Registration Statement.
================================================================================
<PAGE> 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
PricingSM System; Fee Table; Purchase
of Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase.............. Merrill Lynch Select PricingSM 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
PART C
</TABLE>
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 24, 1997
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 that seeks 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 PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes is
most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers that 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 made 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, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated February 24, 1997 (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)..................... 1.00%(d) None None 1.00%(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(f) 1.0% for one year(g) None(e)
Exchange Fee................. None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Investment Advisory
Fees(h).................... 0.55% 0.55% 0.55% 0.55%
12b-1 Fees(i):
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(j)................. 0.10% 0.12% 0.14% 0.10%
Other...................... 0.15% 0.15% 0.15% 0.15%
------ --- --- ----
Total Other Expenses..... 0.26% 0.28% 0.30% 0.26%
------ --- --- ----
Total Fund Operating
Expenses................... 0.81% 1.13% 1.15% 0.91%
====== === === ====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain fee-based programs. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares" -- page 24 and "Shareholder Services -- Fee Based Programs" -- page
35.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternative -- Class B and Class C 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 34.
(d) Reduced for purchases of $100,000 and over and waived for purchases of Class
A shares in connection with certain fee-based programs. 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 after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See "Purchase
of Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares" -- page 24 and "Shareholder Services -- Fee-Based Programs" -- page
35.
(f) The CDSC may be modified in connection with certain fee based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 35.
(g) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 35.
(h) See "Management of the Trust -- Management and Advisory
Arrangements" -- page 20.
(i) See "Purchase of Shares -- Distribution Plans" -- page 30.
(j) See "Management of the Trust -- Transfer Agency Services" -- page 22.
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 on page 2,
(2) a 5% annual return throughout the periods and (3)
redemption at the end of the period (including any applicable
CDSC for Class B and Class C shares):
Class A................................................... $ 18 $36 $55 $109
Class B................................................... $ 22 $36 $62 $137
Class C................................................... $ 22 $37 $63 $140
Class D................................................... $ 19 $39 $60 $121
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................................................... $ 12 $37 $63 $140
Class D................................................... $ 19 $39 $60 $121
</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 Conduct Rules 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 made directly through the Fund's transfer
agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares."
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. Class A, Class B and Class D shares may be purchased at a
price equal to the next determined net asset value per share subject to the
sales charges and ongoing fee arrangements described below. Shares of Class A
and Class D are sold to investors choosing the initial sales charge
alternatives, and shares of Class B are sold to investors choosing the deferred
sales charge alternative. Class C shares are not offered for sale by the Fund
but are available for exchange with Class C shares of other MLAM-advised mutual
funds. The Merrill Lynch Select PricingSM System is used by more than 50 mutual
funds advised by Merrill Lynch Asset Management, L.P. ("MLAM"
3
<PAGE> 6
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."
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, distribution 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 and distribution fees with respect to the
Class B and Class C shares in that the sales charges applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares."
4
<PAGE> 7
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 1.00% initial sales No No No
charge(2)(3)
- -------------------------------------------------------------------------------------------------
B 1.0% CDSC for one year(4) 0.20% 0.10% B shares convert to
D shares automatically
after approximately
ten years(5)
- -------------------------------------------------------------------------------------------------
C(6) 1.0% CDSC for one year(7) 0.20% 0.10% No
- -------------------------------------------------------------------------------------------------
D Maximum 1.00% initial sales 0.10% No No
charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. 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 and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A and Class D
share purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 0.20% CDSC if redeemed within one
year. Such CDSC may be waived in connection with certain fee-based programs.
See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
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.
(6) Class C shares will be issued only upon exchange for Class C shares of
another MLAM-advised mutual fund. See "Shareholder Services -- Exchange
Privilege."
(7) The CDSC may be waived in connection with certain fee-based programs.
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 who currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Other eligible investors include
participants in certain fee-based programs. In addition, Class A
shares will be offered at net asset value to Merrill Lynch & Co., Inc.
("ML&Co.") and its subsidiaries (the term "subsidiaries," when used
herein with respect to ML&Co., includes MLAM, 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 1.00%,
which is reduced for purchases of $100,000 and over and waived for
purchasers of Class A shares in connection with certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge but if the initial sales charge is waived such
purchases may be subject to a CDSC of 0.20% if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection
with certain fee-based programs. Sales charges also are reduced under
a right of accumulation that takes into account the investor's
holdings of all classes of all MLAM-advised mutual funds. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A
and Class D Shares."
5
<PAGE> 8
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. Such CDSC may be modified in
connection with certain fee-based programs. 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 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. Class C shares are
also subject to a 1.00% CDSC if they are redeemed within one year
after purchase. Such CDSC may be waived in connection with certain
fee-based programs. Although Class C shares are subject to a CDSC for
one year, Class C shares have no conversion feature and, accordingly,
an investor that acquires Class C shares will be subject to account
maintenance fees and higher distribution fees that will be imposed on
Class C shares for an indefinite period subject to annual approval by
the Trust's Board of Trustees and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. 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. Such CDSC may be waived in
connection with certain fee-based programs. The schedule of initial
sales charges and reductions for Class D shares is the same as the
schedule for Class A shares, except that there is no waiver for
purchases of Class D shares in connection with certain fee-based
programs. Class D shares also will be issued upon conversion of Class
B shares as described above under "Class B." See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial under his or her
particular circumstances.
6
<PAGE> 9
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
accumulated account maintenance fee. Although some investors who previously
purchased Class A shares may no longer be eligible to purchase Class A shares of
other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation which may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D account
maintenance fees will cause Class D shares to have a higher expense ratio, pay
lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternative. Because no initial sales charges are
deducted at the time of purchase, Class B shares provide the benefit of putting
all of the investor's dollars to work from the time the investment is made. The
deferred sales charge alternative may be particularly appealing to investors who
do not qualify for a reduction in initial sales charges. Both Class B and Class
C shares are subject to ongoing account maintenance fees and distribution fees;
however, the ongoing account maintenance fees 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. Financial statements for the fiscal
year ended October 31, 1996 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,
--------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989+
------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.............. $ 10.00 $ 9.62 $ 10.39 $ 9.70 $ 9.61 $ 9.24 $ 9.29 $ 9.45
------- ------- ------- ------- ------- ------- ------- ------
Investment
income -- net....... .48 .53 .52 .54 .59 .60 .59 .59
Realized and
unrealized gain
(loss) on
investments -- net... (.06) .38 (.77) .69 .09 .37 (.05) (.16)
------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations.......... .42 .91 (.25) 1.23 .68 .97 .54 .43
------- ------- ------- ------- ------- ------- ------- ------
Less dividends from
investment
income -- net..... (.48) (.53) (.52) (.54) (.59) (.60) (.59) (.59)
------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end
of period........... $ 9.94 $ 10.00 $ 9.62 $ 10.39 $ 9.70 $ 9.61 $ 9.24 $ 9.29
======= ======= ======= ======= ======= ======= ======= ======
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share..... 4.27% 9.69% (2.49)% 13.01% 7.16% 10.90% 5.99% 5.03%#
======= ======= ======= ======= ======= ======= ======= ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses.............. .81% .81% .76% .75% .86% .85% .92% .90%*
======= ======= ======= ======= ======= ======= ======= ======
Investment
income -- net....... 4.79% 5.36% 5.19% 5.35% 5.97% 6.34% 6.39% 6.50%*
======= ======= ======= ======= ======= ======= ======= ======
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands).......... $30,353 $34,970 $27,653 $24,173 $14,068 $ 6,546 $ 2,233 $1,384
======= ======= ======= ======= ======= ======= ======= ======
Portfolio turnover.... 146.82% 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,
-------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987+
-------- -------- -------- -------- -------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease)
in Net
Asset
Value
PER SHARE
OPERATING
PERFORMANCE:
Net asset
value,
beginning
of
period... $ 10.00 $ 9.62 $ 10.39 $ 9.69 $ 9.61 $ 9.24 $ 9.29 $ 9.45 $ 9.04 $ 10.00
-------- -------- -------- -------- -------- ------- -------- -------- -------- --------
Investment
income --
net... .44 .50 .49 .51 .56 .57 .57 .58 .56 .51
Realized
and
unrealized
gain
(loss) on
investments
-- net... (.07) . 38 (.77) .70 .08 .37 (.05) (.16) .41 (.96)
-------- -------- -------- -------- -------- ------- -------- -------- -------- --------
Total from
investment
operations... .37 .88 (.28) 1.21 .64 .94 .52 .42 .97 (.45)
-------- -------- -------- -------- -------- ------- -------- -------- -------- --------
Less
dividends
from
investment
income --
net... (.44) (.50) (.49) (.51) (.56) (.57) (.57) (.58) (.56) (.51)
-------- -------- -------- -------- -------- ------- -------- -------- -------- --------
Net asset
value,
end of
period... $ 9.93 $ 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.... 3.84% 9.34% (2.79)% 12.78% 6.72% 10.56% 5.68% 4.59% 10.95% (4.62)%#
======== ======== ======== ======== ======== ======= ======== ======== ======== ========
RATIOS TO
AVERAGE
NET
ASSETS:
Expenses... 1.13% 1.13% 1.07% 1.06% 1.16% 1.18% 1.22% 1.17% 1.08% .97%*
======== ======== ======== ======== ======== ======= ======== ======== ======== ========
Investment
income --
net... 4.47% 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). $169,441 $181,640 $142,152 $158,061 $124,802 $97,998 $109,388 $132,368 $158,872 $186,064
======== ======== ======== ======== ======== ======= ======== ======== ======== ========
Portfolio
turnover... 146.82% 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 PERIOD FOR THE PERIOD
FOR THE YEAR FOR THE YEAR OCTOBER 21, 1994+ FOR THE YEAR FOR THE YEAR OCTOBER 21, 1994+
ENDED OCTOBER 31, ENDED OCTOBER 31, TO OCTOBER 31, ENDED OCTOBER 31, ENDED OCTOBER 31, TO OCTOBER 31,
1996 1995 1994 1996 1995 1994
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Increase
(Decrease)
in Net
Asset
Value
PER SHARE
OPERATING
PERFORMANCE:
Net asset
value,
beginning
of
period... $ 10.00 $ 9.62 $ 9.70 $ 10.00 $ 9.62 $ 9.70
------- ------- ------- ------- ------- -------
Investment
income -- net... .44 .50 .01 .47 .52 .01
Realized
and
unrealized
gain
(loss)
on
investments -- net.. (.07) .38 (.08) (.06) .38 (.08)
------- ------- ------- ------- ------- -------
Total from
investment
operations... .37 .88 (.07) .41 .90 (.07)
------- ------- ------- ------- ------- -------
Less
dividends
from
investment
income -- net... (.44) (.50) (.01) (.47) (.52) (.01)
------- ------- ------- ------- ------- -------
Net asset
value,
end of
period.. $ 9.93 $ 10.00 $ 9.62 $ 9.94 $ 10.00 $ 9.62
======= ======= ======= ======= ======= =======
TOTAL
INVESTMENT
RETURN:**
Based on
net
asset
value
per
share... 3.82% 9.36% (.71)%# 4.17% 9.58% (.71)%#
======= ======= ======= ======= ======= =======
RATIOS TO
AVERAGE
NET
ASSETS:
Expenses... 1.15% 1.01% 1.18%* .91% .90% .97%*
======= ======= ======= ======= ======= =======
Investment
income -- net... 4.44% 4.76% 4.92%* 4.68% 5.12% 5.20%*
======= ======= ======= ======= ======= =======
SUPPLEMENTAL
DATA:
Net
assets,
end of
period
(in
thousands)... $ 8,313 $ 6,485 $ 1 $ 8,375 $ 7,000 $ 70
======= ======= ======= ======= ======= =======
Portfolio
turnover... 146.82% 115.78% 52.56% 146.82% 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. 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 Services
("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 local facilities for the water supply,
gas, electricity, sewage or solid waste disposal facilities and other
specialized facilities. For purposes of this Prospectus, such obligations are
referred to as Municipal Bonds if the interest paid thereon is excluded from
gross income for purposes of Federal income taxation 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 its state constitution 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 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. IDBs and private activity bonds generally are not secured by a pledge
of the taxing power of the issuer of such bonds. Therefore, an investor should
be aware that repayment of such bonds generally depends on the revenues of a
private entity and 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.
The value of bonds and other fixed-income obligations may decrease when
interest rates rise and increase when interest rates fall. In general, bonds and
other fixed-income obligations with longer maturities will be subject to greater
volatility changes resulting from interest rate fluctuations than will similar
obligations with shorter maturities. Under normal market conditions, it is
generally anticipated that the Fund's average maturity will be from five to
twelve years.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
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.
16
<PAGE> 19
REPURCHASE AGREEMENTS
As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer or an affiliate
thereof in U.S. Government securities. Under such agreements, the bank or
primary dealer or an affiliate thereof agrees, upon entering into the contract,
to repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. In the
case of repurchase agreements, the prices at which the trades are conducted do
not reflect accrued interest on the underlying obligations. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In the case of a repurchase
agreement, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of default by the
seller under the repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a repurchase
agreement, instead of the contractual fixed rate of return, the rate of return
to the Fund shall be dependent upon intervening fluctuations of the market value
of such security and the accrued 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-
17
<PAGE> 20
exempt bonds. There can be no assurance, however, that a liquid secondary market
will exist to terminate any particular financial futures contract at any
specific time. If it is not possible to close a financial futures contract
position entered into by the Fund, the Fund would continue to be required to
make daily cash payments of variation margin in the event of adverse price
movements. In such a situation, if the Fund has insufficient cash, it may have
to sell portfolio securities to meet daily variation margin requirements at a
time when it may be disadvantageous to do so. The inability to close financial
futures contract positions also could have an adverse impact on the Fund's
ability to hedge effectively. There is also the risk of loss by the Fund of
margin deposits in the event of bankruptcy of a broker with whom the Fund has an
open position in a financial futures contract. The Fund also may purchase and
sell financial futures contracts on U.S. Government securities and write and
purchase put and call options on such financial futures contracts as a hedge
against adverse changes in interest rates as described more fully in the
Statement of Additional Information. With respect to U.S. Government securities,
currently there are financial futures contracts based on long-term U.S. Treasury
bonds, U.S. Treasury notes, Government National Mortgage Association
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 that may become
available if the Manager and the Trustees of the Trust should determine that
there is normally a sufficient correlation between the prices of such futures
contracts and the Municipal Bonds in which the Fund invests to make such hedging
appropriate.
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 that 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 that 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, that
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.
18
<PAGE> 21
When the Fund purchases a financial futures contract, or writes a put
option or purchases a call option thereon, it will maintain an amount of cash,
cash equivalents (e.g., commercial paper and daily tender adjustable notes) or
short-term high-grade fixed-income securities in a segregated account with the
Fund's custodian, so that the amount so segregated plus the amount of initial
and variation margin held in the account of its broker equals the market value
of the financial futures contract, thereby ensuring that the use of such
financial futures contract or option thereon is unleveraged. It is not
anticipated that transactions in financial futures contracts or options thereon
will have the effect of increasing portfolio turnover.
Although certain risks are involved in futures and options transactions,
the Manager believes that, because the Fund will engage in futures and options
transactions only for hedging purposes, the futures 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, 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 that 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
19
<PAGE> 22
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 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. ("Princeton Services"); Executive Vice President of
ML&Co.; Director of the Distributor.
RONALD W. FORBES -- Professor of Competition and Strategy, School of
Business, State University of New York at Albany.
CYNTHIA A. MONTGOMERY -- Professor of Competition and Strategy, Harvard
Business School.
CHARLES C. REILLY -- Former 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 -- Dean Emeritus, 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 investment
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, 1997, the Manager and FAM had a total
20
<PAGE> 23
of approximately $239.8 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Trustees of the Trust, the
Manager is responsible for the actual management of the Fund's portfolio and
constantly reviews the Fund's holdings in light of its own research analysis and
that from other relevant sources. The responsibility for making decisions to
buy, sell or hold a particular security rests with the Manager, subject to
review by the Trustees. The 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 fiscal year ended October 31, 1996, the fee paid by
the Fund to the Manager was $1,240,092 (based on average net assets of
approximately $225.5 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, 1996, the Trust reimbursed
the Manager $51,101 for accounting services to the Fund.
For the fiscal year ended October 31, 1996, for Class A shares, the ratio
of total expenses to average net assets was 0.81%; for Class B shares, the ratio
of total expenses to average net assets was 1.13%; for Class C shares, the ratio
of total expenses to average net assets was 1.15%; for Class D shares, the ratio
of total expenses to average net assets was 0.91%.
William R. Bock is the Portfolio Manager for the Fund and is responsible
for the day-to-day management of 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 a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition,
21
<PAGE> 24
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 subsidiary of ML&Co., acts as the Trust's Transfer Agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of
up to $11.00 per Class A or Class D account and up to $14.00 per Class B or
Class C account and is entitled to reimbursement for certain transaction charges
and out-of-pocket expenses incurred by it under the Transfer Agency Agreement.
The term "account" includes a shareholder account maintained directly by the
Transfer Agent and any other account representing the beneficial interest of a
person in the relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML&Co. For the fiscal year
ended October 31, 1996, the total fee paid by the Fund to the Transfer Agent was
$262,508.
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 that are 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 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
22
<PAGE> 25
markets or otherwise and thereafter may resume such offering from time to time.
Any order may be rejected by the Distributor or the Fund. Neither the
Distributor nor the dealers are permitted to withhold placing orders to benefit
themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a sale of shares to such customers.
Purchases directly through the Fund's Transfer Agent are not subject to the
processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of purchasing
shares that the Investor believes is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. Shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives, and shares of Class B are sold
to investors choosing the deferred sales charge alternative. Investors should
determine whether under their particular circumstances it is more advantageous
to incur an initial sales charge or to have the entire initial purchase price
invested in the Fund with the investment thereafter being subject to a 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 PricingSM System is set forth
under "Merrill Lynch Select PricingSM System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents 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
CDSC, distribution fees and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid (except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). See "Distribution Plans"
below. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges and distribution fees 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 PricingSM System.
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 1.00% initial sales No No No
charge(2)(3)
- -------------------------------------------------------------------------------------------------
B 1.0% CDSC for one year(4) 0.20% 0.10% B shares convert to
D shares automatically
after approximately
ten years(5)
- -------------------------------------------------------------------------------------------------
C(6) 1.0% CDSC for one year(7) 0.20% 0.10% No
- -------------------------------------------------------------------------------------------------
D Maximum 1.00% initial sales 0.10% No No
charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. 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 and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A and Class D
share purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 0.20% CDSC if redeemed within one
year. Such CDSC may be waived in connection with certain fee-based programs.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee based
programs may be modified. Also, Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made have an eight year conversion
period. If Class B shares of the Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the
shares acquired.
(6) Class C shares will be issued only upon exchange for Class C shares of
another MLAM-advised mutual fund. See "Shareholder Services -- Exchange
Privilege."
(7) The CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
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 $1,000,000 or more will be subject to a CDSC
of 0.20% if the shares are redeemed within one year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. The charge will
be assessed on an amount equal to the lesser of the proceeds of 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. For the fiscal year ended October 31, 1996, the Fund sold 716,582
Class A shares for aggregate net proceeds of $7,149,811. The gross sales charges
for the sale of Class A shares of the Fund for that year were $3,886, of which
$285 and $3,601 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal year ended October 31, 1996, the Distributor
received no CDSC's with respect to redemptions within one year after purchase of
Class A shares purchased subject to a front-end sales charge waiver. For the
fiscal year ended October 31, 1996, the Fund sold 390,259 Class D shares for
aggregate net proceeds of $3,907,908. The gross sales charges for the sale of
Class D shares of the Fund for that year were $5,128, of which $263 and $4,865
were received by the Distributor and Merrill Lynch, respectively. For the fiscal
year ended October 31, 1996, the Distributor received no CDSCs with respect to
redemptions within one year after purchase of Class D shares purchased subject
to a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares 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, collective investment trusts
for which Merrill Lynch Trust Company serves as trustee, certain Merrill Lynch
investment programs that offer pricing alternatives for securities transactions
and certain purchases made in connection with certain fee-based programs. In
addition, Class A shares are offered at net asset value to ML&Co. and its
subsidiaries and their directors and employees and to members of the boards of
MLAM-advised investment companies, including the Fund. Certain persons who
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
25
<PAGE> 28
of common stock in shares of the Fund also may purchase Class A shares of the
Fund if certain conditions set forth in the Statement of Additional Information
are met (for closed-end funds that commenced operations prior to October 21,
1994). In addition, Class A shares of the Fund and certain other MLAM-advised
mutual funds are offered at net asset value to shareholders of Merrill Lynch
Senior Floating Rate Fund, Inc. and, if certain conditions set forth in the
Statement of Additional Information are met, to shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. who wish to reinvest the net proceeds from a sale of certain of their
shares of common stock pursuant to a tender offer conducted by such funds in
shares of the Fund and certain other MLAM-advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gain distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors." See "Shareholder
Services -- Fee-Based Programs."
Class A and Class D shares are offered at net asset value to Employee
Access Accounts(SM) available through qualified employers which provide
employer-sponsored retirement and savings plans that are eligible to purchase
such shares at net asset value. Subject to certain conditions, Class A and Class
D shares are offered at net asset value to shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc., and Class A shares are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc., who wish to reinvest in shares of
the Fund the net proceeds from a sale of certain of their shares of common
stock, pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value 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
BlueprintSM Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE -- CLASS B 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
26
<PAGE> 29
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 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 and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares 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 Shares. Class B 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>
CLASS B 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, 1996, the Distributor received CDSCs
of $163,849 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
applicable rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over 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.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If as such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 1.00% (the
applicable rate in the third year after purchase for shares purchased on or
after October 21, 1994).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The
Class B CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans and in connection with certain group plans placing
orders through the Merrill Lynch Blueprint(SM) Program. The CDSC also is waived
for any Class B shares which are purchased by eligible 401(k) or eligible 401(a)
plans which are rolled over into a Merrill Lynch or Merrill Lynch Trust Company
custodied IRA and held in such account at the time of redemption. The Class B
CDSC also is waived for any Class B shares which are purchased by a Merrill
Lynch rollover IRA that was funded by a rollover from a terminated 401(k) plan
managed by the MLAM Private Portfolio Group and held in such account at the time
of redemption. Additional information concerning the waiver of the Class B CDSC
is set forth in the Statement of Additional Information. The terms of the CDSC
may be modified in connection with certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
28
<PAGE> 31
Contingent Deferred Sales Charges -- Class C Shares. 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 as 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. No Class C CDSC will be assessed in connection with
certain fee-based programs. See "Shareholder Services -- Fee-Based Programs."
For the fiscal year ended October 31, 1996, the Distributor received CDSCs of
$2,718 with respect to the redemption of Class C shares, all of which were paid
to Merrill Lynch.
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 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.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of
29
<PAGE> 32
the appropriate funds. Subsequent to such conversion, that Class B Retirement
Plan will be sold Class D shares of the appropriate funds at net asset value per
share.
The conversion period may also be modified for certain fee-based programs.
See "Shareholder Services -- Fee-Based Programs."
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
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.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Trustees for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, CDSCs and certain other related
revenues, and expenses consist of financial consultant compensation, branch
office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance
30
<PAGE> 33
fees, distribution fees and CDSCs, and the expenses consist of financial
consultant compensation. As of October 31, 1996, direct cash revenues for the
period since commencement of the offering of Class B and Class C shares exceeded
direct cash expenses by $3,538,429 and $17,904, respectively (2.09% and 0.22% of
Class B and Class C net assets, respectively, at that date). As of December 31,
1995, 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 $538,000 (0.29% of
Class B net assets at that date). Similar fully allocated accrual data for Class
C shares is not presented because such revenues and expenses for the period from
October 21, 1994 (commencement of operations) to December 31, 1995 are de
minimis.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the 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 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."
31
<PAGE> 34
REDEMPTION OF SHARES
The Trust is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper notice
of redemption. Except for any CDSC that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends 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 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
32
<PAGE> 35
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
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. Alternatively, the reinstatement privilege may be exercised through
the investor's Merrill Lynch Financial Consultant within 30 days after the date
the request for redemption was accepted by the Transfer Agent or Distributor.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to each
of such services, copies of the various plans described below and instructions
as to how to participate in the various plans and services, or information on
changing options with respect thereto, can be obtained from the Trust by calling
the telephone number on the cover page hereof or from the Distributor or Merrill
Lynch. Included in such services are the following:
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an investment account ("Investment Account") and will
receive, at least quarterly, statements from the Transfer Agent showing any
automatic investment purchases and reinvestments of dividends and capital gain
distributions, and any other activity in the account since the preceding
statement. Shareholders also will receive separate confirmations for each
purchase or sale transaction other than automatic investment purchase and the
reinvestment of dividends and capital gain distributions. A shareholder may make
additions to his Investment Account at any time by mailing a check directly to
the Transfer Agent. Shareholders also may maintain their accounts through
Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage
account, an Investment Account in the transferring shareholder's name will be
opened automatically, without charge, at the Transfer Agent. Shareholders
considering transferring their Class A or Class D shares from Merrill Lynch to
another brokerage firm or financial institution should be aware that, if the
firm to which the Class A or Class D shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A or
Class D shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment
33
<PAGE> 36
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. U.S. shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Securities and Exchange Commission.
Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds. Class C shares are available only
through the Exchange Privilege.
Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of the Fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is "tacked" to the holding period of the newly acquired shares of the other
fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
34
<PAGE> 37
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services -- Exchange Privilege" in the
Statement of Additional Information.
Automatic Reinvestment of Dividends and Capital Gain Distributions. Unless
specific instructions are given as to the method of payment of dividends and
capital gain 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.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares that will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, that may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (that
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (that may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND (637-3863).
35
<PAGE> 38
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 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 year ended October 31, 1994, the Fund paid no
brokerage commissions. For the fiscal years ended October 31, 1995 and 1996, the
Fund paid total brokerage commissions of $10,635 and $3,300, respectively, 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
36
<PAGE> 39
and outstanding. Shares are issued and outstanding as of the settlement date of
a purchase order to the day prior to the settlement date of a redemption order.
All net realized long-or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders annually after the close of the Fund's
fiscal year. Capital gains distributions will be reinvested automatically in
shares of the Fund unless the shareholder elects to receive such distributions
in cash.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable to that class. See "Additional Information -- Determination of
Net Asset Value."
See "Shareholder Services -- Automatic Reinvestment of Dividends and
Capital Gain Distributions" for information as to how to elect either dividend
reinvestment or cash payments. Portions of dividends and distributions that 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
37
<PAGE> 40
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 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 that
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference," which could subject certain investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund will purchase
such "private activity bonds", and the Trust will report to shareholders within
60 days after the Fund's taxable year-end the portion of 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
38
<PAGE> 41
number. When establishing an account, an investor must certify under penalty of
perjury that such number is correct and that such investor is not otherwise
subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
The 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
39
<PAGE> 42
than average annual total return data since the average annual rates of return
reflect compounding; aggregate total return data generally will be higher than
average annual total return data since the aggregate rates of return reflect
compounding over a longer period of time. In advertisements distributed to
investors whose purchases are subject to 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, 1996 was 4.40% for Class A shares,
4.13% for Class B shares, 4.11% for Class C shares and 4.30% for Class D shares
and the tax-equivalent yield for the same period (based on a Federal income tax
rate of 28%) was 6.11% for Class A shares, 5.74% for Class B shares, 5.71% for
Class C shares and 5.97% for Class D shares.
Total return, yield and tax-equivalent yield figures are based on the
Fund's historical performance and are not intended to indicate future
performance. The Fund's total return, yield and tax-equivalent yield will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to performance data
published by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar") and CDA Investment Technology, Inc. or to data contained in
publications such as Money Magazine, U.S. News & World Report, Business Week,
Forbes Magazine and Fortune Magazine. From time to time, the Fund may include
the Fund's Morningstar risk-adjusted performance ratings in advertisements or
supplemental sales literature. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York time), on each day during which the NYSE is open
for trading. The net asset value per share is computed by dividing the sum of
the value of the securities held by the Fund plus any cash or other assets minus
all liabilities by the total number
40
<PAGE> 43
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 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 arrange-
41
<PAGE> 44
ments, 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.
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<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.)
<TABLE>
<S> <C>
1. .............................................................. 4...........................................................
2. .............................................................. 5...........................................................
3. .............................................................. 6...........................................................
</TABLE>
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.............................................
................................................................................
(Zip Code)
Occupation .........................................
...................................................
Signature of Owner
<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> <C> <C> <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)
<TABLE>
<S> <C>
......................,
19 . . . .
Dear Sir/Madam: Date of initial purchase
</TABLE>
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 or sales made under a Letter of
Intention, Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee
the Shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
</TABLE>
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> <C> <C> <C> <C> <C> <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)
<CAPTION>
(PLEASE PRINT)
<S> <C> <C> <C>
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)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A or [ ] Class D shares in Merrill Lynch Municipal
Intermediate Term Fund at cost or current offering price. Withdrawals to be made
either (check one) [ ] Monthly on the 24th day of each month, or [ ] Quarterly
on the 24th day of March, June, September and December. If the 24th falls on a
weekend or holiday, the next succeeding business day will be utilized. Begin
systematic withdrawal on ________________ 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 08536
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 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08536-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE> 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 PricingSM 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...................... 17
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......................... 30
Limitations on the Payment of
Deferred Sales Charges................... 31
Redemption of Shares......................... 32
Redemption................................. 32
Repurchase................................. 32
Reinstatement Privilege --
Class A and Class D Shares............... 33
Shareholder Services......................... 33
Fee-Based Programs......................... 35
Portfolio Transactions....................... 36
Distributions and Taxes...................... 36
Distributions.............................. 36
Taxes...................................... 37
Performance Data............................. 39
Additional Information....................... 40
Determination of Net Asset Value........... 40
Organization of the Trust.................. 41
Shareholder Reports........................ 42
Shareholder Inquiries...................... 42
Authorization Form........................... 43
Code # 10435-0297
</TABLE>
YZa
MERRILL LYNCH
MUNICIPAL INTERMEDIATE
TERM FUND
MERRILL LYNCH MUNICIPAL
SERIES TRUST
mlynch compass
PROSPECTUS
February 24, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<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 PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes is
most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated
February 24, 1997 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission and can be obtained, without charge, by calling or by
writing the 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 24, 1997.
<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 fiscal years ended October 31, 1995 and 1996 the portfolio turnover
rates were 115.78% and 146.82%, 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, 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 Services ("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
4
<PAGE> 55
afforded the particular securities is stronger than would otherwise be indicated
by such low ratings. The Fund does not intend to purchase debt securities that
are in default or which the Manager believes will be in default.
Issuers of high-yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher-rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high-yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. During periods of economic recession, such issuers
may not have sufficient revenues to meet their interest payment obligations. The
issuer's ability to service its debt obligations also may be adversely affected
by specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of high-yield securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
High-yield securities frequently have call or redemption features that
would permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
The Fund may have difficulty disposing of certain high-yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high-yield securities, there is no established
secondary market for many of these securities, and the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for
high-yield securities does exist, it generally is not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the Fund's portfolio. Market
quotations generally are available on many high-yield securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
It is expected that a significant portion of the high-yield securities
acquired by the Fund will be purchased upon issuance, which may involve special
risks because the securities so acquired are new issues. In such instances the
Fund may be a substantial purchaser of the issue and therefore have the
opportunity to participate in structuring the terms of the offering. Although
this may enable the Fund to seek to protect itself against certain of such
risks, the considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high-yield
securities, particularly in a thinly traded market. 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
5
<PAGE> 56
investment objective also is dependent on the continuing ability of the issuers
of the bonds in which the Fund invests to meet their obligations for the payment
of interest and principal when due. There are variations in the risks involved
in holding Municipal Bonds, both within a particular classification and between
classifications, depending on numerous factors. Furthermore, the rights of
owners of Municipal Bonds and the obligations of the issuer of such Municipal
Bonds may be subject to applicable bankruptcy, insolvency and similar laws and
court decisions affecting the rights of creditors generally.
Municipal Bonds at times may be purchased or sold on a delayed delivery
basis or a when-issued basis. These transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligations and
the interest rate are each fixed at the time the buyer enters into the
commitment. The Fund only will make commitments to purchase such securities with
the intention of actually acquiring the securities, but the Fund may sell these
securities prior to the settlement date if it is deemed advisable. Purchasing
Municipal Bonds on a when-issued basis involves the risk that the yields
available in the market when the delivery takes place actually may be higher
than those obtained in the transaction itself; if yields so increase, the value
of the when-issued obligation generally will decrease. The Fund will maintain a
separate account at its custodian bank consisting of cash or liquid Municipal
Bonds (valued on a daily basis) equal at all times to the amount of the when-
issued commitment.
DESCRIPTION OF TEMPORARY INVESTMENTS
As Temporary Investments, the Fund may invest in short-term taxable
securities subject to the limitations set forth under "Investment Objective and
Policies" in the Prospectus. The taxable money market securities in which the
Fund may invest as Temporary Investments consist of U.S. Government securities,
U.S. Government agency securities, domestic bank or savings institution
certificates of deposit and bankers' acceptances, short-term corporate debt
securities such as commercial paper, and repurchase agreements. These Temporary
Investments must have a remaining maturity not in excess of one year from the
date of purchase.
The Trust has established the following standards with respect to money
market securities and VRDOs in which the Fund invests. Commercial paper
investments at the time of purchase must be rated A-1 through A-3 by Standard &
Poor's, F-1 through F-3 by Fitch, or Prime-1 through Prime-3 by Moody's or, if
not rated, issued by companies having an outstanding debt issue rated at least A
by Standard & Poor's, Moody's or Fitch. Investments in corporate bonds and
debentures (which must have maturities at the date of purchase of one year or
less) must be rated at the time of purchase at least A by Standard & Poor's,
Moody's or Fitch. Notes and VRDOs at the time of purchase must be rated SP-1/A-1
through SP-2/A-3 by Standard & Poor's, MIG-1/VMIG-1 through MIG-4/VMIG-4 by
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.
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REPURCHASE AGREEMENTS
As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer or an affiliate
thereof in U.S. Government securities. Under such agreements, the bank or
primary dealer or an affiliate thereof agrees, on entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. In the
case of repurchase agreements, the prices at which the trades are conducted do
not reflect accrued interest on the underlying obligation. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In the case of a repurchase
agreement, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a repurchase
agreement, instead of the contractual fixed rate of return, the rate of return
to the Fund shall be dependent on intervening fluctuations of the market value
of such security and the accrued interest on the security. In such event, the
Fund would have rights against the seller for breach of contract with respect to
any losses arising from market fluctuations following the failure of the seller
to perform. The Fund may not invest in repurchase agreements maturing in more
than seven days if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's total assets.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt interest.
The treatment of purchase and sales contracts is less certain.
FINANCIAL FUTURES 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.
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Description of Financial Futures Contracts. A financial futures contract
is an agreement between two parties to buy and sell a security or, in the case
of an index-based financial futures contract, to make and accept a cash
settlement for a set price on a future date. A majority of transactions in
financial futures contracts, however, do not result in the actual delivery of
the underlying instrument or cash settlement, but are settled through
liquidation, i.e., by entering into an offsetting transaction. Financial futures
contracts have been designed by boards of trade which have been designated
"contract markets" by the Commodity Futures Trading Commission (the "CFTC").
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker and the
relevant contract market, which varies, but is generally about 5% of the
contract amount, must be deposited with the broker. This amount is known as
"initial margin" and represents a "good faith" deposit assuring the performance
of both the purchaser and seller under the financial futures contract.
Subsequent payments to and from the broker, called "variation margin," are
required to be made on a daily basis as the price of the financial futures
contract fluctuates making the long and short positions in the financial futures
contract more or less valuable, a process known as "mark to the market." At any
time prior to the settlement date of the financial futures contract, the
position may be closed out by taking an opposite position which will operate to
terminate the position in the financial futures contract. A final determination
of variation margin is then made, additional cash is required to be paid to or
released by the broker and the purchaser realizes a loss or gain. In addition, a
nominal commission is paid on each completed sale transaction.
The Fund deals in financial futures contracts based on a long-term
municipal bond index developed by the Chicago Board of Trade (the "CBT") and The
Bond Buyer (the "Municipal Bond Index"). Financial futures contracts based on
the Municipal Bond Index began trading on June 11, 1985. The Municipal Bond
Index is comprised of 40 tax-exempt municipal revenue bonds and general
obligation bonds. Each bond included in the Municipal Bond Index must be rated A
or higher by Moody's, Standard & Poor's or Fitch and must have a remaining
maturity of 19 years or more. Twice a month new issues satisfying the
eligibility requirements are added to, and an equal number of old issues are
deleted from, the Municipal Bond Index. The value of the Municipal Bond Index is
computed daily according to a formula based on the price of each bond in the
Municipal Bond Index, as evaluated by six dealer-to-dealer brokers.
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
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<PAGE> 59
between the prices of such financial futures contracts and the Municipal Bonds
in which the Fund invests to make such hedging appropriate.
Futures Strategies. The Fund may sell a financial futures contract (i.e.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This strategy,
however, entails increased transaction costs in the form of dealer spreads and
typically would reduce the average yield of the Fund's portfolio securities as a
result of the shortening of maturities. The sale of financial futures contracts
provides an alternative means of hedging against declines in the value of its
investments in Municipal Bonds. As such values decline, the value of the Fund's
positions in the financial futures contracts will tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Fund's Municipal Bond investments which are being hedged. While the Fund will
incur commission expenses in selling and closing out futures positions,
commissions on futures transactions are lower than transaction costs incurred in
the purchase and sale of Municipal Bonds. In addition, the ability of the Fund
to trade in the standardized contracts available in the futures markets may
offer a more effective defensive position than a program to reduce the average
maturity of the portfolio securities due to the unique and varied credit and
technical characteristics of the municipal debt instruments available to the
Fund. Employing futures as a hedge also may permit the Fund to assume a
defensive posture without reducing the yield on its investments beyond any
amounts required to engage in futures trading.
When the Fund intends to purchase Municipal Bonds, the Fund may purchase
financial futures contracts as a hedge against any increase in the cost of
Municipal Bonds resulting from 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.
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Put Options on Financial Futures Contracts. The purchase of a put option
on a financial futures contract is analogous to the purchase of a protective put
option on a portfolio security. The Fund will purchase a put option on a
financial futures contract to hedge the Fund's portfolio against the risk of
rising interest rates.
The writing of a put option on a financial futures contract constitutes a
partial hedge against increasing prices of the securities which are deliverable
upon exercise of the financial futures contract. If the futures price at
expiration is higher than the exercise price, the Fund will retain the full
amount of the option premium which provides a partial hedge against any increase
in the price of Municipal Bonds which the Fund intends to purchase.
The writer of an option on a financial futures contract is required to
deposit initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an option
will be included in initial margin. The writing of an option on a financial
futures contract involves risks similar to those relating to financial futures
contracts.
------------------------
The Trust has received an order from the Securities and Exchange Commission
(the "Commission") exempting it from the provisions of Section 17(f) and Section
18(f) of the Investment Company Act of 1940, as amended (the "Investment Company
Act"), in connection with its strategy of investing in futures contracts.
Section 17(f) relates to the custody of securities and other assets of an
investment company and may be deemed to prohibit certain arrangements between
the Fund and commodities brokers with respect to initial and variation margin.
Section 18(f) of the Investment Company Act prohibits an open-end investment
company such as the Trust from issuing a "senior security" other than a
borrowing from a bank. The staff of the Commission has in the past indicated
that a financial futures contract may be a "senior security" under the
Investment Company Act.
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 liquid 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
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<PAGE> 61
the financial futures contract which is not completely offset by movements in
the price of the hedged securities. To compensate for imperfect correlations,
the Fund may purchase or sell financial futures contracts in a greater dollar
amount than the hedged securities if the volatility of the hedged securities is
historically greater than the volatility of the financial futures contracts.
Conversely, the Fund may purchase or sell fewer financial futures contracts if
the volatility to the price of the hedged securities is historically less than
that of the financial futures contracts.
The particular municipal bonds comprising the index underlying the
Municipal Bond Index financial futures contract may vary from the bonds held by
the Fund. As a result, the Fund's ability to hedge effectively all or a portion
of the value of its Municipal Bonds through the use of such financial futures
contracts will depend in part on the degree to which price movements in the
index underlying the financial futures contract correlate with price movements
of the Municipal Bonds held by the Fund. The correlation may be affected by
disparities in the average maturity, ratings, geographic mix or structure of the
Fund's investments as compared to those comprising the Municipal Bond Index, and
general economic or political factors. In addition, the correlation between
movements in the value of the Municipal Bond Index may be subject to change over
time, as additions to and deletions from the Municipal Bond Index alter its
structure. The correlation between financial futures contracts on U.S.
Government securities and the Municipal Bonds held by the Fund may be adversely
affected by similar factors and the risk of imperfect correlation between
movements in the prices of such financial futures contracts and the prices of
Municipal Bonds held by the Fund may be greater.
The Fund expects to liquidate a majority of the financial futures contracts
it enters into through offsetting transactions on the applicable contract
market. There can be no assurance, however, that a 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.
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<PAGE> 62
The amount of risk the Fund assumes when it purchases an option on a
financial futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the
purchase of an option also entails the risk that changes in the value of the
underlying financial futures contract will not be fully reflected in the value
of the option purchased.
Municipal Bond Index financial futures contracts were approved for trading
in 1986. Trading in such financial futures contracts may tend to be less liquid
than that in other financial futures contracts. The trading of financial futures
contracts also is subject to certain market risks, such as inadequate trading
activity, which could at times make it difficult or impossible to liquidate
existing positions.
INVESTMENT RESTRICTIONS
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
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<PAGE> 63
may be amended from time to time, in connection with hedging transactions,
short sales, when-issued and forward commitment transactions and similar
investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Trustees of the Fund has
otherwise determined to be liquid pursuant to applicable law. Securities
purchased in accordance with Rule 144A under the Securities Act (each a
"Rule 144A Security") and determined to be liquid by the Fund's Board of
Trustees are not subject to the limitations set forth in this investment
restriction.
d. Notwithstanding fundamental investment restriction (7) above,
borrow amounts in excess of 20% of its total assets taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes.
In addition, to comply with tax requirements for qualification as a
"regulated investment company," the Fund's investments will be limited in a
manner such that, at the close of each quarter of each fiscal year, (a) no more
than 25% of the Fund's total assets are invested in the securities of a single
issuer, and (b) with regard to at least 50% of the Fund's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
[For purposes of this restriction, the Fund will regard each state and each
political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a 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.
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<PAGE> 64
------------------------
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 as amended, 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 (64) -- President and Trustee(1)(2) -- President of the
Manager (which term, as used herein, includes its corporate predecessors) since
1977; President of Fund Asset Management, L.P. ("FAM") (which term, as used
herein, includes its 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") since 1977.
RONALD W. FORBES (56) -- Trustee(2) -- 1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany since 1989; Member, Task Force on Municipal Securities Markets,
Twentieth Century Fund.
CYNTHIA A. MONTGOMERY (44) -- 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 since 1990 and Director of Newell Co. since
1995.
CHARLES C. REILLY (65) -- Trustee(2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 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 from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
KEVIN A. RYAN (64) -- 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.
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<PAGE> 65
RICHARD R. WEST (59) -- Trustee(2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, and Dean from 1984 to 1993, and currently Dean
Emeritus of New York University Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado,
Inc. (real estate holding company), Smith-Corona Corporation (manufacturer of
typewriters and word processors) and Alexander's Inc. (real estate company).
TERRY K. GLENN (56) -- 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; President of Princeton Administrators,
L.P. since 1988.
VINCENT R. GIORDANO (52) -- Senior Vice President(1)(2) -- 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 (36) -- 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 (45) -- Vice President(1)(2) -- Vice President of the
Manager and FAM since 1984.
WILLIAM R. BOCK (61) -- Vice President(1)(2) -- Vice President of the
Manager since 1989 and Portfolio Manager of the Fund since 1995.
GERALD M. RICHARD (47) -- 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;
Treasurer since 1984 and employee of the Distributor since 1978.
SUSAN B. BAKER (39) -- Secretary(1)(2) -- Vice President of the Manager
since 1993; attorney associated with the Manager since 1987.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Trust.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which the Manager or its affiliate, FAM, acts as
investment adviser or manager.
At February 1, 1997, the Trustees and officers of the Trust as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of 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 an annual
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 compensates members of its Audit and Nominating Committee (the
"Committee"), which consists of all of the non-interested Trustees, a fee of
$500 per year. The Chairman of the Committee receives an additional fee of
$1,000 per year. For the fiscal year ended October 31, 1996 fees and expenses
paid to the non-interested Trustees of the Fund aggregated $16,194.
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<PAGE> 66
The following table sets forth for the fiscal year ended October 31, 1996
compensation paid by the Fund to the non-interested Trustees and for the
calendar year ended December 31, 1996 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 $142,500
Cynthia A. Montgomery(1)...................... $ 2,900 None $142,500
Charles C. Reilly(1).......................... $ 2,900 None $293,833
Kevin A. Ryan(1).............................. $ 2,900 None $142,500
Richard R. West(1)............................ $ 3,900 None $269,833
</TABLE>
- ---------------
(1) In addition to the Trust, the Trustees serve on the boards of other MLAM/FAM
Advised Funds as follows: Mr. Forbes (23 registered investment companies
consisting of 36 portfolios); Ms. Montgomery (23 registered investment
companies consisting of 36 portfolios); Mr. Reilly (41 registered investment
companies consisting of 54 portfolios); Mr. Ryan (23 registered investment
companies consisting of 36 portfolios); and Mr. West (41 registered
investment companies consisting of 54 portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Trust.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Manager or FAM.
Because of different objectives or other factors, a particular security may be
bought for one or more clients when one or more clients are selling the same
security. If purchases or sales of securities for the Fund or other funds for
which the Manager or FAM acts as manager or for their advisory clients arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Manager or FAM during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there may
be an adverse effect on price.
The Trust has entered into a management agreement on behalf of the Fund
(the "Management Agreement") with the Manager. As discussed in the Prospectus,
the Manager receives for its services to the Fund monthly compensation at an
annual rate of 0.55% of the average daily net assets of the Fund. For the fiscal
years ended October 31, 1994, 1995 and 1996, the fees paid by the Fund to the
Manager aggregated $999,575, $955,580 and $1,240,092, respectively.
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
16
<PAGE> 67
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, 1996, the Fund reimbursed the Manager $51,101 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 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
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B are sold to
investors choosing the deferred sales charge alternative. Class C shares of the
Fund are not available for purchase but will be issued only pursuant to the
exchange privilege to holders of Class C shares of other MLAM-advised mutual
funds who elect to exchange Class C shares of such other MLAM-advised mutual
funds for Class C shares of the Fund. Each Class A, Class B, Class C and Class D
share of the Fund represents an identical interest in the investment portfolio
of the Fund and has the same rights, except that Class B, Class C and Class D
shares bear the expenses of the ongoing account maintenance fees, and Class B
and Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer
17
<PAGE> 68
agency costs resulting from the deferred sales charge arrangements. Class B,
Class C and Class D shares each have exclusive voting rights with respect to the
Rule 12b-1 distribution plan adopted with respect to such class pursuant to
which account maintenance and/or distribution fees are paid (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege."
The Merrill Lynch Select PricingSM System is used by more than 50
registered investment companies advised by the Manager or its affiliate, FAM.
Funds advised by the Manager or FAM which utilize the Merrill Lynch Select
PricingSM System, 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 fiscal 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 fiscal year ended October 31, 1995 were $3,255, of which
the Distributor received $216 and Merrill Lynch received $3,039. The gross sales
charges for the sale of Class A shares for the fiscal year ended October 31,
1996 were $3,886, of which the Distributor received $285 and Merrill Lynch
received $3,601.
During the fiscal year ended October 31, 1994, the Distributor received no
Contingent Deferred Sales Charges ("CDSCs") with respect to redemptions within
one year after purchase of Class A shares purchased subject to a front-end sales
charge waiver. During the fiscal year ended October 31, 1995, the Distributor
received CDSCs of $1,752 with respect to redemptions within one year after
purchase of Class A shares purchased subject to a front-end sales charge waiver.
During the fiscal year ended October 31, 1996, the Distributor received no CDSCs
with respect to redemptions within one year after purchase of Class A shares
purchased subject to a front-end sales charge waiver.
The Distributor and Merrill Lynch did not receive any gross sales charges
for the sale of Class D shares for the period October 21, 1994 (commencement of
operations) to October 31, 1994. The gross sales charges for the sale of Class D
shares for the fiscal year ended October 31, 1995 were $9,724, of which the
Distributor received $655 and Merrill Lynch received $9,069. The gross sales
charges for the sale of Class D shares for the fiscal year ended October 31,
1996 were $5,128 of which the Distributor received $263 and Merrill Lynch
received $4,865.
For the period October 21, 1994 (commencement of operations) to October 31,
1994, the Distributor received no CDSCs with respect to redemptions within one
year after purchase of Class D shares purchased subject to a front-end sales
charge waiver. During the fiscal year ended October 31, 1995, the Distributor
received no CDSCs with respect to redemptions within one year after purchase of
Class D shares purchased subject to a front-end sales charge waiver. During the
fiscal year ended October 31, 1996, the Distributor received no CDSCs with
respect to redemptions within one year after purchase of Class D shares
purchased subject to a front end sales charge waiver.
18
<PAGE> 69
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, that in the aggregate are at least equal to the prescribed
amounts, by an individual, his spouse and their children under the age of 21
years purchasing shares for his or their own account and to single purchases by
a trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account although more than one beneficiary is involved. The
term "purchase" also includes purchases by a "company," as that term is defined
in the Investment Company Act, but does not include purchases by any such
company which has not been in existence for at least six months or which has no
purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or FAM
who purchased such closed-end fund shares prior to October 21, 1994, the date
the Merrill Lynch Select PricingSM System commenced operations, and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible 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, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, 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
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.
19
<PAGE> 70
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 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 AccountsSM. Class A or Class D shares are offered at net
asset value to Employee Access AccountsSM 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.
20
<PAGE> 71
TMASM Managed Trusts. Class A shares are offered at net asset value to
TMASM Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services at net asset value.
Purchase Privilege of Certain Persons. Trustees of the Trust, members of
the Boards of other MLAM-advised investment companies, ML&Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML&Co.,
includes MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML&Co.) and their directors and employees, and
any trust, pension, profit-sharing or other benefit plan for such persons may
purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied; first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; 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 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
21
<PAGE> 72
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.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or
the services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any
MLAM-advised mutual fund. Minimum purchase requirements may be waived or varied
for such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
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.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the
22
<PAGE> 73
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,
1996 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, 1996.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF OCTOBER 31, 1996
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
<CAPTION>
(IN THOUSANDS)
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>
Class B Shares (for the period
November 26, 1986 (commencement of
operations) to October 31, 1996):
Under NASD Rule as Adopted............. $365,617 $22,851 $23,018 $45,869 $4,364 $41,505 $169
Under Distributor's Voluntary Waiver... $365,617 $22,851 $ 1,828 $24,679 $4,364 $20,315 $169
CLASS C SHARES
(IN THOUSANDS)
Class C Shares, for the period October
21, 1994 (commencement of operations)
to October 31, 1996:
Under NASD Rule as Adopted............. $3,532 $220 $13 $233 $12 $221 $8
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. 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.
23
<PAGE> 74
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 fiscal years ended October
31, 1994, 1995 and 1996, the Distributor received CDSCs with respect to Class B
shares of the Fund of $162,923, $219,856, and $163,849, respectively, all of
which were paid to Merrill Lynch. For the fiscal years ended October 31, 1995
and 1996, the Distributor received CDSCs, with respect to Class C shares of the
Fund of $1,574 and $2,718, respectively, all of which were paid to Merrill
Lynch.
The CDSC is also waived for any Class B shares that were acquired and held
at the time of redemption by Employee Access 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.
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 fiscal year ended
October 31, 1994, the Fund engaged in three principal transactions with Merrill
Lynch aggregating approximately $2,300,000. During the fiscal year ended October
31, 1995, the Fund engaged in two transactions with Merrill Lynch aggregating
approximately $7,263,000.
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During the fiscal year ended October 31, 1996, the Fund engaged in no
transactions with Merrill Lynch. 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 5% of the
securities of that issuer. In addition, under the Investment Company Act, the
Trust may not purchase municipal bonds for the Fund from any underwriting
syndicate of which Merrill Lynch is a member except pursuant to an exemptive
order or rules adopted by the Commission. Rule 10f-3 under the Investment
Company Act sets forth conditions under which the Trust may purchase municipal
bonds in such transactions. The rule sets forth requirements relating to, among
other things, the terms of an issue of municipal bonds purchased by the Trust,
the amount of municipal bonds which may be purchased in any one issue and the
assets of the Fund which may be invested in a particular issue.
The Trust does not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who provide
supplemental investment research (such as information concerning tax-exempt
securities, economic data and market forecasts) to the Manager may receive
orders for transactions for the Fund. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Manager under its Management Agreement and the expense of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information. The Trust has no obligation to deal with any broker in the
execution of transactions for the Fund's portfolio securities. In addition,
consistent with the Conduct Rules 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 year ended October 31, 1994, the Fund paid no brokerage
commissions. For the fiscal years ended October 31, 1995 and 1996, the Fund paid
total brokerage commissions of $10,635 and $3,300, respectively.
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
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<PAGE> 76
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
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.
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SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Full details as to each of such services and copies of the various plans
described below can be obtained from the Trust, the Distributor or Merrill
Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive, at least quarterly, statements from the
Transfer Agent showing any automatic investment purchases and reinvestments of
dividends and capital gain distributions activity in the account since the
previous statement. Shareholders also will receive separate confirmations for
each purchase or sale transaction other than automatic investment purchases and
the reinvestment of dividends and capital gain distributions. Shareholders
considering transferring their Class A or Class D shares from Merrill Lynch to
another brokerage firm or financial institution should be aware that, if the
firm to which the Class A or Class D shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A or
Class D shares so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain an Investment Account
at the Transfer Agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder at the Transfer Agent. A shareholder may make additions to his
or her Investment Account at any time by mailing a check directly to the
Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if an eligible Class A investor as described in the
Prospectus) or Class B or Class D shares at the applicable public offering price
either through the shareholder's securities dealer, or by mail directly to the
Transfer Agent, acting as agent for such securities dealer. Voluntary
accumulation also can be made through a service known as the Fund's Automatic
Investment Plan whereby the Trust is authorized through pre-authorized checks or
automated clearing house debits of $50 or more to charge the regular bank
account of the shareholder on a regular basis to provide systematic additions to
the Investment Account of such shareholder. 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) or 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.
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<PAGE> 78
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.
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 three 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
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Monday of months selected at the shareholder's option. If the first Monday of
the month is a holiday, the redemption will be processed at net asset value on
the next business day. The Systematic Redemption Program is not available if
Fund shares are being purchased within the account pursuant to the Automatic
Investment Program. For more information on the CMA(R) or 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. Under the Merrill Lynch Select
PricingSM System, Class A shareholders may exchange Class A shares of the Fund
for Class A shares of a second MLAM-advised mutual fund if the shareholder holds
any Class A shares of the second fund in the account in which the exchange is
made at the time of the exchange or is otherwise eligible to purchase Class A
shares of the second fund. If the Class A shareholder wants to exchange Class A
shares for shares of a second MLAM-advised mutual fund, 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 for the newly acquired shares of the other fund
as more fully described below. Class A, Class B, Class C and Class D shares are
also exchangeable for shares of certain MLAM-advised money market funds as
follows: Class A shares may be exchanged for shares of Merrill Lynch Ready
Assets Trust, Merrill Lynch Retirement Reserves Money Fund (available only for
exchanges within certain retirement plans), Merrill Lynch U.S.A. Government
Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B, Class C and Class
D shares may be exchanged for shares of Merrill Lynch Government Fund, Merrill
Lynch Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund and
Merrill Lynch Treasury Fund. Shares with a net asset value of at least $100 are
required to qualify for the exchange privilege, and any shares utilized in an
exchange must have been held by the shareholder for 15 days. It is contemplated
that the exchange privilege may be applicable to other new mutual funds whose
shares may be distributed by the Distributor.
Exchange of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
funds ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
dividend reinvestment Class A and Class D shares shall be deemed to have been
sold with a sales charge equal to the sales charge previously paid on the Class
A or Class D shares
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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, ("new Class B or
Class C shares") of another MLAM-advised mutual fund 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 Special Value
Fund 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 that Fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange Class
B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Fund Class B shares for six months
and three years later decide to redeem the shares of Institutional Fund for
cash. At the time of this redemption, the 1% CDSC that would have been due had
the Class B shares of the Fund been redeemed for cash rather than exchanged for
shares of Institutional Fund will be payable. If, instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund with a four-year
CDSC period which the shareholder continued to hold for an additional three and
a half years, any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, 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
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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.
DISTRIBUTIONS AND TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Code. 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 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
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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 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 certain investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund will purchase
such "private activity bonds," and the Trust will report to shareholders within
60 days after the Fund's taxable year-end the portion of 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
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paid by the Fund will be included in adjusted current earnings, a corporate
shareholder may be required to pay alternative minimum tax on exempt-interest
dividends paid by the Fund.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund 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 previously imposed 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 has
expired, but may be reinstated in the future. The Environmental Tax was imposed
even if the corporation was not required to pay an alternative minimum tax
because the corporation's regular income tax liability exceeded its minimum tax
liability. The Code provides, however, that a RIC, such as the Fund, would not
be 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) could subject corporate shareholders of the
Fund to the Environmental Tax.
33
<PAGE> 84
TAX TREATMENT OF FUTURES AND OPTIONS TRANSACTIONS
The Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). The Fund also may purchase and write call and put options
on such financial futures contracts. In general, unless an election is available
to the Fund or an exception applies, such options and financial futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, i.e., each such
option or financial futures contract will be treated as 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.
34
<PAGE> 85
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.
35
<PAGE> 86
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,
1996........ 3.23% $1,032.30 1.85% $1,018.50 2.83% $1,028.30 3.13% $1,031.30
Five Years
Ended
October 31,
1996........ 5.98% $1,337.10 5.84% $1,328.50
Inception (November 26, 1986)
to
October 31,
1996........ 5.60% $1,717.80
Inception
(October 31,
1988) to
October 31,
1996........ 6.46% $1,650.60
Inception
(October 21,
1994) to
October 31,
1996........ 6.09% $1,127.30 5.85% $1,122.10
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year Ended
October 31,
1996........ 4.27% $1,042.70 3.84% $1,038.40 3.82% $1,038.20 4.17% $1,041.70
1995........ 9.69% $1,096.90 9.34% $1,093.40 9.36% $1,093.60 9.58% $1,095.80
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,
1996........ 71.78% $1,717.80
Inception
(October 31,
1988) to
October 31,
1996........ 65.06% $1,650.60
Inception
(October 21,
1994) to
October 31,
1996........ 12.73% $1,127.30 12.21% $1,122.10
YIELD
30 days ended
October 31,
1996........ 4.40% 4.13% 4.11% 4.30%
TAX-EQUIVALENT YIELD*
30 days ended
October 31,
1996........ 6.11% 5.74% 5.71% 5.97%
</TABLE>
- ---------------
* Based upon a Federal income tax rate of 28%.
36
<PAGE> 87
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
37
<PAGE> 88
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, 1996 is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net Assets........................... $30,353,584 $169,440,708 $8,312,980 $8,374,729
=========== ============ ====== =======
Number of Shares Outstanding......... 3,055,124 17,057,050 837,041 842,881
=========== ============ ====== =======
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)....................... $ 9.94 $ 9.93 $ 9.93 $ 9.94
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....................... $ 10.04 $ 9.93 $ 9.93 $ 10.04
=========== ============ ====== =======
</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 and "Redemption of
Shares -- Deferred Sales Charges -- Class B and Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6619,
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 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.
38
<PAGE> 89
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on 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, 1997.
39
<PAGE> 90
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.
Con. (...) -- Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under
40
<PAGE> 91
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.
Short-term Notes: The four ratings of Moody's for short-term notes and
VRDDs 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, enjoying strong protection" "from
established cash flows;" MIG-2/VMIG-2 denotes "high quality" "with ample margins
of protection;" MIG-3/VMIG-3 instruments are of "favorable quality . . . but
lacking the undeniable strength of the preceding grades;" MIG-4/VMIG-4
instruments are of "adequate quality, carrying specific risk but having
protection . . . and not distinctly or predominently speculative."
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:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term promissory obligations. Prime-1
repayment ability will often be evidenced by the following characteristics:
leading market positions in well established industries; high rates of return on
funds employed; conservative capitalization 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 with well-established
access to a range of financial markets and assured sources of alternate
liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3 Issuers rated Prime-3 (or 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 may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME Issuers rated Not Prime do not fall within any of the Prime
rating categories.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("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.
41
<PAGE> 92
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other 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 to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher-rated categories.
BB, 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 "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
42
<PAGE> 93
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 considered short-term in the relevant
market. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a "+" designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, 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.
43
<PAGE> 94
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, sell or hold
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 to
Standard & Poor's by the issuer or obtained by Standard & Poor's from other
sources it considers reliable. Standard & Poor's does not conduct 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.
A Standard & Poor's municipal note rating reflects the liquidity concerns
and market access risks unique to such notes. Notes due in three years or less
likely will receive a note rating. Notes maturing beyond three years most likely
will most likely receive a long-term debt rating. The following criteria will be
used in making that assessment:
- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
- Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given a "+"
designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
Standard & Poor's may continue to rate note issues with a maturity greater
than three years in accordance with the same rating scale currently employed for
municipal bond ratings.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date information to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
44
<PAGE> 95
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.
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.
45
<PAGE> 96
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
<TABLE>
<S> <C>
Improving X
Stable UW
Declining Z
Uncertain X
Z
</TABLE>
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.
Ratings Outlook: An outlook is used to describe the most likely direction
of any rating change over the intermediate term. It is described as "Positive"
or "Negative." The absence of a designation indicates a stable outlook.
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.
It should be noted that issues 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.
46
<PAGE> 97
<TABLE>
<C> <S>
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.
47
<PAGE> 98
DESCRIPTION OF FITCH SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
<TABLE>
<C> <S>
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>
48
<PAGE> 99
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, 1996, 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, 1996 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, 1996, 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 10, 1996
49
<PAGE> 100
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alaska--1.2% AAA Aaa $ 2,575 Alaska State Housing Financial Corporation, Refunding,
Series A, 5.30% due 6/01/2007 (d)(f)(i) $ 2,612
Arizona--1.0% NR* NR* 2,000 Mohave County, Arizona, IDA, IDR (North Star Steel Co.
Project), AMT, 6.70% due 3/01/2020 2,135
California--13.8% A+ A1 5,620 California State, GO, 5.20% due 6/01/2008 5,625
A A 2,000 California State Public Works Board, Lease Revenue Refunding
Bonds (Various Community College Project), Series C, 5.50%
due 9/01/2009 2,000
AAA Aaa 5,000 Modesto, California, Irrigation District Financing Authority,
Revenue Refunding Bonds, Series 96A, 5.55% due 10/01/2008 (d) 5,142
A- A 5,000 Northern California Power Agency, Public Power Revenue
Refunding Bonds (Geothermal Project No.3), Series A, 5.65%
due 7/01/2007 5,137
AAA Aaa 4,000 Oxnard, California, Finance Authority, Solid Waste Revenue Bonds,
AMT, 5.75% due 5/01/2010 (c) 4,047
AAA Aaa 6,000 University of California, Hospital Revenue Bonds (Davis
Medical Center), 5.60% due 7/01/2009 (c) 6,127
A NR* 1,610 University of California, Research Facilities Revenue Bonds,
Series B, 6.50% due 9/01/2003 1,750
Colorado--0.6% A NR* 1,225 Denver, Colorado, Urban Renewal Authority, Tax Increment
Revenue Bonds (Downtown Denver), AMT, Series A, 7.25% due
9/01/2017 1,331
Connecticut--0.9% Connecticut State, HFA, Housing Mortgage, AMT, Series B,
Subseries B-2:
AA Aa 915 5.75% due 5/15/2008 926
AA Aa 1,075 5.75% due 11/15/2008 1,088
Florida--5.5% AAA Aaa 3,500 Dade County, Florida, Educational Facilities Authority,
Exchangeable Revenue Bonds (University of Miami), 7.65% due
4/01/2010 (d) 3,894
AAA Aaa 2,500 Florida HFA (Antigua Club Apartments), AMT, Series A-1, 6.875%
due 8/01/2026 (c) 2,652
A1+ VMIG1++ 100 Jacksonville, Florida, PCR, Refunding (Florida Power and Light
Co. Project), VRDN, 3.50% due 5/01/2029 (a) 100
AAA Aaa 3,160 Orange County, Florida, Health Facilities Authority, Hospital
Revenue Bonds (Orlando Regional Heathcare), Series A, 6.25%
due 10/01/2007 (d) 3,439
AAA Aaa 1,940 Venice, Florida, Health Care Revenue Bonds (Secours Health
System Projects), 5.40% due 8/15/2008 (d) 1,953
Georgia--0.1% A-1 VMIG1++ 300 Burke County, Georgia, Development Authority, PCR (Georgia
Power Company--Plant Vogtle Project), VRDN, Second Series,
3.60% due 4/01/2025 (a) 300
Hawaii--1.5% AAA Aaa 3,000 Honolulu, Hawaii, City and County, UT, Series A, 6% due
9/01/2007 (e) 3,225
Illinois--10.5% Cook County, Illinois, COP (Community College District No.
508--Chicago), UT (e):
AAA Aaa 2,000 8.10% due 1/01/1999 2,155
AAA Aaa 1,000 8.50% due 1/01/2002 1,168
Illinois Health Facilities Authority Revenue Bonds:
A1+ VMIG1++ 1,700 (Northwest Community Hospital), VRDN, 3.50% due
7/01/2025 (a) 1,700
A1+ VMIG1++ 1,100 (Northwestern Memorial Hospital), VRDN, 3.55% due
8/15/2025 (a) 1,100
AAA Aaa 2,500 Refunding (Lutheran General Health), Series C, 7% due
4/01/2008 (h) 2,860
NR* VMIG1++ 1,200 (Resurrection Health Care System), VRDN, 3.60% due
5/01/2011 (a) 1,200
</TABLE>
50
<PAGE> 101
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA Aaa 10,000 Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue Refunding Bonds (McCormick Plant
Expansion Project), Series A, 6% due 6/15/2007 (c) 10,629
AAA Aaa 1,745 University of Illinois, COP, Series A, 7.25% due 8/15/2000 (h) 1,909
Indiana--2.7% NR* Baa 1,000 Indiana State, Educational Facility Authority Revenue Bonds
(University Evansville Project), 5.65% due 2/15/2011 963
AAA NR* 3,420 Indianapolis, Indiana, Gas Utility Revenue Bonds, 7% due
6/01/2008 (g) 3,800
A+ NR* 1,000 Indianapolis, Indiana, Local Public Improvement Bond Bank,
Refunding, Series D, 6.50% due 2/01/2006 1,089
Kentucky--0.1% A1+ VMIG1++ 200 Carroll County, Kentucky, Solid Waste Disposal Facilities
Revenue Bonds (Kentucky Utilities Co. Project), VRDN, AMT,
Series A, 3.65% due 11/01/2024 (a) 200
Louisiana--0.5% A1+ P1 1,000 Louisiana State Offshore Terminal Authority, Deepwater Port
Revenue Refunding Bonds (Loop Inc.-First Stage), ACES, 3.60%
due 9/01/2006 (a) 1,000
Maine--2.5% NR* A 2,815 Maine Educational Loan Marketing Corporation, Student Loan
Revenue Refunding Bonds, AMT, 6.90% due 11/01/2003 3,064
Maine State Turnpike Authority, Turnpike Revenue Bonds (d):
AAA Aaa 1,000 7.125% due 7/01/2008 1,171
AAA Aaa 1,000 7.50% due 7/01/2009 1,205
Massachusetts-- A+ A1 1,500 Massachusetts State Consolidated Loan, UT, Series B, 9.25%
1.8% due 7/01/2000 1,738
AAA Aaa 2,000 Massachusetts State Port Authority Revenue Bonds, AMT,
Series A, 7.375% due 7/01/2010 (e) 2,212
Michigan--5.1% NR* A 1,000 Michigan Higher Education, Student Loan Authority Revenue
Bonds, AMT, Series XIV-A, 6.75% due 10/01/2006 1,055
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 1,040
NR* A1 3,280 (McLaren Obligation Group), 5.75% due 10/15/2003 3,384
NR* P1 300 Michigan State Strategic Fund, PCR, Refunding (Consumers
Power Project), VRDN, Series A, 3.55% due 4/15/2018 (a) 300
AAA Aaa 5,000 Michigan State Underground Storage Tank, Financial Assurance
Authority, Revenue Refunding Bonds, Series I, 6% due
5/01/2007 (c) 5,350
Minnesota--1.1% AA+ Aaa 2,230 Minnesota State, GO, 6% due 11/01/2006 2,422
Mississippi-- NR* P1 2,700 Jackson County, Mississippi, PCR, Refunding (Chevron USA, Inc.
3.1% Project), VRDN, 3.55% due 6/01/2023 (a) 2,700
Mississippi Higher Education Assistance Corporation, Student
Loan Revenue Refunding Bonds, AMT, Series C:
A NR* 2,370 6.40% due 1/01/2003 2,503
A NR* 1,440 6.50% due 7/01/2004 1,532
</TABLE>
Portfolio
Abbreviations
To simplify the listings of Merrill Lynch Municipal Intermediate
Term Fund's portfolio holdings in the Schedule of Investments, we
have abbreviated the names of many of the securities according to
the list below and at right.
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
RITES Residual Interest Tax-Exempt Securities
UT Unlimited Tax
VRDN Variable Rate Demand Notes
51
<PAGE> 102
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Nevada--2.5% AAA Aaa $ 5,000 Clark County, Nevada, School District, 6% due 6/15/2007 (e) $ 5,331
New Jersey--0.3% AAA Aaa 555 New Jersey State Housing and Mortgage Finance Agency Revenue
Bonds (Home Buyer), AMT, Series F, 7.80% due 10/01/2010 (d) 575
New Mexico--0.6% A1+ P1 400 Farmington, New Mexico, PCR, Refunding (Arizona Public
Service Co.), VRDN, Series B, 3.60% due 9/01/2024 (a) 400
A1+ P1 900 Hurley, New Mexico, PCR (Kennecott Santa Fe), VRDN, 3.60% due
12/01/2015 (a) 900
New York--11.0% Battery Park City Authority, New York, Junior Revenue Bonds,
Series A (c):
AAA Aaa 1,190 5.20% due 11/01/2007 1,194
AAA Aaa 1,445 5.30% due 11/01/2008 1,451
AA Aa 5,000 New York City, New York, Housing Development Corporation, M/F
Housing Revenue Refunding Bonds, Series A, 5.50% due 11/01/2009 4,995
A1+ NR* 100 New York City, New York, IDA, IDR (Japan Airlines Company Ltd.
Project), VRDN, AMT, 3.75% due 11/01/2015 (a)(h) 100
A1+ VMIG1++ 1,200 New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, VRDN, Series G, 3.60%
due 6/15/2024 (a)(e) 1,200
New York City, New York, Refunding, UT:
BBB+ Baa1 2,500 Series A, 7% due 8/01/2006 2,742
BBB+ Baa1 2,000 Series E, 6.50% due 2/15/2005 2,115
BBB+ Baa1 2,000 Series I, 6.50% due 3/15/2006 2,116
BBB- Baa1 3,000 New York State Dormitory Authority Revenue Bonds (Upstate
Community Colleges), Series A, 5.375% due 7/01/2007 2,983
AAA Aaa 4,840 New York State Urban Development Corporation Revenue Bonds
(Sports Facility Assistance Programs), Series A, 5.50% due
4/01/2010 (d) 4,840
North Carolina-- AAA Aaa 4,000 North Carolina, Municipal Power Agency, Revenue Refunding
2.2% Bonds (No. 1 Catawba Electric), 8% due 1/01/2006 (c) 4,834
North Dakota-- NR* Aa 1,000 North Dakota State Student Loan Revenue Refunding Bonds, Series
0.5% A, 5.90% due 7/01/1998 1,025
Ohio--1.2% AAA Aaa 2,490 Cleveland, Ohio, Parking Facilities Revenue Refunding Bonds,
6% due 9/15/2007 (d) 2,677
Oregon--1.8% AAA Aaa 3,790 Port of Portland, Oregon, International Airport Revenue Bonds
(Portland International Airport), AMT, Series II, 5.40% due
7/01/2008 (e) 3,805
South Carolina-- NR* P1 700 Charleston County, South Carolina, Industrial Revenue Refunding
2.4% Bonds (Massey Coal 2.4% Terminal Corp.), VRDN, 3.60% due
1/01/2007 (a) 700
Piedmont Municipal Power Agency, South Carolina, Electric
Revenue Refunding Bonds, Series B:
AAA Aaa 1,000 6% due 1/01/2007 (d) 1,061
AAA Aaa 3,400 5.25% due 1/01/2008 (e) 3,377
South Dakota-- AAA Aaa 5,000 South Dakota, State Building Authority, Lease Revenue
2.4% Refunding Bonds, Series A, 5.75% 2.4% due 12/01/2006 (c) 5,233
Tennessee--1.4% A+ A1 2,960 Tennessee HDA, Mortgage Finance, Refunding, Series A, 5.65%
due 1/01/2007 3,014
</TABLE>
52
<PAGE> 103
<TABLE>
<S> <C> <C> <C> <C> <C>
Texas--3.9% NR* A 660 Brazos, Texas, Higher Education Authority Inc., Student Loan
Revenue Refunding Bonds, AMT, Series A, 6.70% due 9/01/2001 704
NR* VMIG1++ 1,000 Gulf Coast, Texas, IDA, Solid Waste Disposal Revenue Bonds
(CITGO Petroleum Corp. Project), VRDN, AMT, 3.70% due
5/01/2025 (a) 1,000
A1+ NR* 2,500 Harris County, Texas, Health Facilities Development Corporation,
Hospital Revenue Bonds (Methodist Hospital), VRDN, 3.60% due
12/01/2025 (a) 2,500
AAA Aaa 3,545 University of Texas, Refunding (Permanent University Fund),
9.50% due 7/01/2000 4,138
Vermont--1.8% AAA Aaa 3,700 Vermont Municipal Bond Bank, Series I, 5.60% due 12/01/2008 (c) 3,827
Virginia--2.5% Virginia State, HDA, Commonwealth Mortgage:
AA+ Aa1 2,585 Series H, 6.50% due 7/01/2007 2,714
AA+ Aa1 1,365 Series J, Sub-Series J-2, 6.45% due 1/01/2010 1,420
AA+ Aa1 1,300 Series J, Sub-Series J-2, 6.50% due 1/01/2011 1,362
Washington--12.3% AA+ Aa1 4,000 Port of Seattle, Washington, GO, AMT, 5.80% due 5/01/2009 4,087
AAA Aaa 1,280 Sammammish Plateau, Washington, Water and Sewer District
Revenue Refunding Bonds, 6% due 12/01/2007 (d) 1,373
AA+ Aa1 2,000 Seattle, Washington, GO, Series A, 5.40% due 1/15/2007 2,031
AA Aa 5,395 Seattle, Washington, Municipal Light and Power Revenue Bonds,
Series A, 5.75% due 8/01/2008 5,540
AAA Aaa 2,370 Snohomish County, Washington, School District No. 103, UT,
6.25% due 12/01/2007 (e) 2,582
AAA Aaa 1,025 Washington State Health Care Facilities Authority, Revenue
Refunding Bonds (Kadlec Medical Center--Richland), 5.75% due
12/01/2005 (c) 1,065
Washington State Public Power Supply System, Revenue Refunding
Bonds (Nuclear Project No. 3):
AAA Aaa 5,250 Series A, 5.50% due 7/01/2007 (c) 5,300
AAA Aaa 3,015 Series A, 5.60% due 7/01/2008 (c) 3,043
AA- Aa1 1,500 Series B, 7.375% due 7/01/2004 1,647
Wisconsin--1.0% AA Aa 2,000 Wisconsin State Housing and Economic Development Authority,
Home Ownership Revenue Bonds, AMT, Series F, 7.40% due
7/01/2013 (b) 2,164
Puerto Rico--1.8% A1+ Baa1 3,950 Puerto Rico Commonwealth, Highway and Transportation Authority,
Highway Revenue Bonds, RITES, Series X, 5.982% due 7/01/2005 (j) 3,925
Total Investments (Cost--$215,371)--101.6% 220,022
Liabilities in Excess of Other Assets--(1.6%) (3,540)
--------
Net Assets--100.0% $216,482
========
<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, 1996.
(b)FHA Insured.
(c)AMBAC Insured.
(d)MBIA Insured.
(e)FGIC Insured.
(f)GNMA Collateralized.
(g)Escrowed to maturity.
(h)FSA Insured.
(i)FNMA Collateralized.
(j)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at October 31, 1996.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
See Notes to Financial Statements.
</TABLE>
53
<PAGE> 104
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of October 31, 1996
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$215,371,494) (Note 1a) $220,021,996
Cash 53,968
Receivables:
Securities sold $ 10,296,445
Interest 3,117,151
Beneficial interest sold 132,257 13,545,853
------------
Prepaid registration fees and other assets (Note 1e) 121,428
------------
Total assets 233,743,245
------------
Liabilities: Payables:
Securities purchased 16,446,930
Beneficial interest redeemed 267,076
Dividends to shareholders (Note 1f) 261,784
Investment adviser (Note 2) 101,162
Distributor (Note 2) 45,823 17,122,775
------------
Accrued expenses and other liabilities 138,469
------------
Total liabilities 17,261,244
------------
Net Assets: Net assets $216,482,001
============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $ 305,513
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 1,705,705
Class C Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 83,704
Class D Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 84,288
Paid-in capital in excess of par 216,270,849
Accumulated realized capital losses on investments--net (Note 5) (6,618,560)
Unrealized appreciation on investments--net 4,650,502
------------
Net assets $216,482,001
============
Net Asset Class A--Based on net assets of $30,353,584 and 3,055,124 shares
Value: of beneficial interest outstanding $ 9.94
============
Class B--Based on net assets of $169,440,708 and 17,057,050 shares
of beneficial interest outstanding $ 9.93
============
Class C--Based on net assets of $8,312,980 and 837,041 shares
of beneficial interest outstanding $ 9.93
============
Class D--Based on net assets of $8,374,729 and 842,881 shares
of beneficial interest outstanding $ 9.94
============
See Notes to Financial Statements.
</TABLE>
54
<PAGE> 105
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended October 31, 1996
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned $ 12,653,366
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 1,240,092
Account maintenance and distribution fees--Class B (Note 2) 527,411
Transfer agent fees--Class B (Note 2) 209,227
Printing and shareholder reports 99,175
Registration fees (Note 1e) 86,200
Professional fees 79,179
Accounting services (Note 2) 51,101
Transfer agent fees--Class A (Note 2) 33,977
Account maintenance and distribution fees--Class C (Note 2) 22,681
Trustees' fees and expenses 16,194
Custodian fees 14,661
Pricing fees 13,687
Transfer agent fees--Class C (Note 2) 10,735
Transfer agent fees--Class D (Note 2) 8,569
Account maintenance fees--Class D (Note 2) 8,434
Other 7,851
------------
Total expenses 2,429,174
------------
Investment income--net 10,224,192
------------
Realized & Realized gain on investments--net 154,528
Unrealized Gain Change in unrealized appreciation on investments--net (1,703,506)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 8,675,214
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
55
<PAGE> 106
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C> <C>
Operations: Investment income--net $ 10,224,192 $ 8,852,570
Realized gain (loss) on investments--net 154,528 (5,179,687)
Change in unrealized appreciation/depreciation on investments--net (1,703,506) 11,774,800
------------ ------------
Net increase in net assets resulting from operations 8,675,214 15,447,683
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (1,611,220) (1,507,705)
(Note 1f): Class B (7,875,619) (7,096,365)
Class C (341,198) (70,020)
Class D (396,155) (178,480)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (10,224,192) (8,852,570)
------------ ------------
Beneficial Interest Net increase (decrease) in net assets derived from beneficial
Transactions interest transactions (12,064,882) 53,625,113
(Note 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets (13,613,860) 60,220,226
Beginning of year 230,095,861 169,875,635
------------ ------------
End of year $216,482,001 $230,095,861
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived Class A
from information provided in the financial statements.
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.00 $ 9.62 $ 10.39 $ 9.70 $ 9.61
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .48 .53 .52 .54 .59
Realized and unrealized gain (loss) on
investments--net (.06) .38 (.77) .69 .09
-------- -------- -------- -------- --------
Total from investment operations .42 .91 (.25) 1.23 .68
-------- -------- -------- -------- --------
Less dividends from investment income--net (.48) (.53) (.52) (.54) (.59)
-------- -------- -------- -------- --------
Net asset value, end of year $ 9.94 $ 10.00 $ 9.62 $ 10.39 $ 9.70
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 4.27% 9.69% (2.49%) 13.01% 7.16%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses .81% .81% .76% .75% .86%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 4.79% 5.36% 5.19% 5.35% 5.97%
======== ======== ======== ======== ========
</TABLE>
56
<PAGE> 107
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Supplemental Net assets, end of year (in thousands) $ 30,353 $ 34,970 $ 27,653 $ 24,173 $ 14,068
Data: ======== ======== ======== ======== ========
Portfolio turnover 146.82% 115.78% 52.56% 83.66% 74.20%
======== ======== ======== ======== ========
<CAPTION>
The following per share data and ratios have
been derived from information provided in Class B
the financial statements.
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.00 $ 9.62 $ 10.39 $ 9.69 $ 9.61
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .44 .50 .49 .51 .56
Realized and unrealized gain (loss) on
investments--net (.07) .38 (.77) .70 .08
-------- -------- -------- -------- --------
Total from investment operations .37 .88 (.28) 1.21 .64
-------- -------- -------- -------- --------
Less dividends from investment income--net (.44) (.50) (.49) (.51) (.56)
-------- -------- -------- -------- --------
Net asset value, end of year $ 9.93 $ 10.00 $ 9.62 $ 10.39 $ 9.69
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 3.84% 9.34% (2.79%) 12.78% 6.72%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.13% 1.13% 1.07% 1.06% 1.16%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 4.47% 5.05% 4.87% 5.07% 5.68%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $169,441 $181,640 $142,152 $158,061 $124,802
Data: ======== ======== ======== ======== ========
Portfolio turnover 146.82% 115.78% 52.56% 83.66% 74.20%
======== ======== ======== ======== ========
<CAPTION>
Class C Class D
The following per share data and ratios For the For the
have been derived from information Period Period
provided in the financial statements. For the Year Oct. 21, 1994++ For the Year Oct. 21, 1994++
Ended Oct. 31, to Oct. 31, Ended Oct. 31, to Oct. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 9.62 $ 9.70 $ 10.00 $ 9.62 $ 9.70
Operating -------- -------- -------- -------- -------- --------
Performance: Investment income--net .44 .50 .01 .47 .52 .01
Realized and unrealized gain (loss)
on investments--net (.07) .38 (.08) (.06) .38 (.08)
-------- -------- -------- -------- -------- --------
Total from investment operations .37 .88 (.07) .41 .90 (.07)
-------- -------- -------- -------- -------- --------
Less dividends from investment
income--net (.44) (.50) (.01) (.47) (.52) (.01)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 9.93 $ 10.00 $ 9.62 $ 9.94 $ 10.00 $ 9.62
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value per share 3.82% 9.36% (.71%)+++ 4.17% 9.57% (.71%)+++
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses 1.15% 1.01% 1.18%* .91% .90% .97%*
======== ======== ======== ======== ======== ========
Net Assets: Investment income--net 4.44% 4.76% 4.92%* 4.68% 5.12% 5.20%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 8,313 $ 6,485 $ 1 $ 8,375 $ 7,000 $ 70
======== ======== ======== ======== ======== ========
Portfolio turnover 146.82% 115.78% 52.56% 146.82% 115.78% 52.56%
======== ======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
See Notes to Financial Statements.
</TABLE>
57
<PAGE> 108
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.
(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.
58
<PAGE> 109
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.
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 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, 1996, 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 $285 $3,601
Class D $263 $4,865
For the year ended October 31, 1996, MLPF&S received contingent
deferred sales charges of $163,849 and $2,718 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.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1996 were $306,030,864 and
$330,828,102, respectively.
Net realized and unrealized gains (losses) as of October 31, 1996,
were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $ 282,515 $ 4,650,502
Financial futures contracts (127,987) --
----------- -----------
Total $ 154,528 $ 4,650,502
=========== ===========
As of October 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $4,650,502, of which $5,118,085
related to appreciated securities and $467,583 related to
depreciated securities. The aggregate cost of investments at October
31, 1996 for Federal income tax purposes was $215,371,494.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial
interest transactions was $(12,064,882) and $53,625,113 for the
years ended October 31, 1996 and October 31, 1995, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 716,582 $ 7,149,811
Shares issued to shareholders
in reinvestment of dividends 83,630 831,199
----------- -----------
Total issued 800,212 7,981,010
Shares redeemed (1,241,561) (12,339,524)
----------- -----------
Net decrease (441,349) $(4,358,514)
=========== ===========
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
=========== ===========
59
<PAGE> 110
NOTES TO FINANCIAL STATEMENTS (concluded)
Class B Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 2,647,311 $ 26,325,018
Shares issued to shareholders
in reinvestment of dividends 463,232 4,602,453
----------- ------------
Total issued 3,110,543 30,927,471
Shares redeemed (4,149,275) (41,273,703)
Automatic conversion of shares (68,180) (673,631)
----------- ------------
Net decrease (1,106,912) $(11,019,863)
============= ============
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 C Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 404,511 $ 4,024,375
Shares issued to shareholders
in reinvestment of dividends 27,533 273,233
----------- -----------
Total issued 432,044 4,297,608
Shares redeemed (243,648) (2,423,566)
----------- -----------
Net increase 188,396 $ 1,874,042
=========== ===========
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
=========== ===========
Class D Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 390,259 $ 3,907,908
Automatic conversion of shares 68,171 673,631
Shares issued to shareholders
in reinvestment of dividends 21,768 216,202
----------- -----------
Total issued 480,198 4,797,741
Shares redeemed (337,194) (3,358,288)
----------- -----------
Net increase 143,004 $ 1,439,453
=========== ===========
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
=========== ===========
5. Capital Loss Carryforward:
At October 31, 1996, the Fund had a net capital loss carryforward of
approximately $5,174,000, of which $456,000 expires in 1997,
$795,000 expires in 1998, $3,654,000 expires in 2003, and $269,000
expires in 2004. This amount will be available to offset like
amounts of any future taxable gains. Expired capital loss
carryforward in the amount of $6,981,719 has been reclassified to
paid-in capital in excess of par.
60
<PAGE> 111
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<PAGE> 112
[This page intentionally left blank]
<PAGE> 113
- ------
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................. 7
Financial Futures and
Options Transactions................ 7
Investment Restrictions................. 12
Management of the Trust................. 14
Trustees and Officers................. 14
Compensation of Trustees.............. 15
Management and Advisory
Arrangements........................ 16
Purchase of Shares...................... 17
Initial Sales Charge
Alternatives -- Class A and Class D
Shares.............................. 18
Reduced Initial Sales Charges -- Class
A and Class D Shares................ 20
Employer-Sponsored Retirement or
Savings Plans and Certain Other
Arrangements........................ 22
Distribution Plans.................... 22
Limitations on the Payment of Deferred
Sales Charges....................... 22
Redemption of Shares.................... 24
Deferred Sales Charges -- Class B and
Class C Shares...................... 24
Portfolio Transactions.................. 24
Determination of Net Asset Value........ 26
Shareholder Services.................... 27
Investment Account.................... 27
Automatic Investment Plans............ 27
Automatic Reinvestment of Dividends
and Capital Gain Distributions...... 27
Systematic Withdrawal Plans -- Class A
and Class D Shares.................. 28
Exchange Privilege.................... 29
Distributions and Taxes................. 31
Performance Data........................ 35
General Information..................... 37
Description of Series and Shares...... 37
Computation of Offering Price Per
Share............................... 38
Independent Auditors.................. 38
Custodian............................. 38
Transfer Agent........................ 38
Legal Counsel......................... 39
Reports to Shareholders............... 39
Additional Information................ 39
Appendix -- Ratings of Municipal
Bonds................................. 40
Independent Auditors' Report............ 49
Financial Statements.................... 50
Code # 10706-0297
</TABLE>
YZa
MERRILL LYNCH
MUNICIPAL INTERMEDIATE
TERM FUND
MERRILL LYNCH MUNICIPAL
SERIES TRUST
mlynch compass
STATEMENT OF
ADDITIONAL
INFORMATION
February 24, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 114
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> 115
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the years in the nine-year period ended
October 31, 1996 and for the period November 26, 1986 (commencement of
operations) to October 31, 1987.
Contained in Part B:
Financial Statements:
Schedule of Investments as of October 31, 1996.
Statement of Assets and Liabilities as of October 31, 1996.
Statement of Operations for the year ended October 31, 1996.
Statements of Changes in Net Assets for each of the years in the two
year period ended October 31, 1996.
Financial Highlights for each of the years in the five-year period
ended October 31, 1996.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------------------------
<C> <S>
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)
7 -- None.
8 -- Form of Custody Agreement between the Registrant and State Street Bank and Trust
Company.(e)
</TABLE>
C-1
<PAGE> 116
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------------------------
<C> <S>
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 PricingSM 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 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) Filed on February 26, 1996 as an exhibit to Post-Effective Amendment No.
13 to the Registrant's Registration Statement on Form N-1A.
(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 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 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.
C-2
<PAGE> 117
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
DECEMBER 31,
TITLE OF CLASS 1996*
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Class A shares of beneficial interest, par value $0.10 per share............. 2,052
Class B shares of beneficial interest, par value $0.10 per share............. 8,781
Class C shares of beneficial interest, par value $0.10 per share............. 1,017
Class D shares of beneficial interest, par value $0.10 per share............. 1,184
</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; (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
C-3
<PAGE> 118
the Securities Act of 1933 (the "1933 Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or Prospectus
and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and, 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 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 Global Value Fund, Inc., Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond
Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund,
Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific 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 Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, Merrill Lynch Limited Maturity Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., and The
Municipal Fund Accumulation Program, Inc.; and the following closed-end
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest
Michigan Insured Fund, Inc., MuniVest New Jersey 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 Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey
C-4
<PAGE> 119
Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured
Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield Pennsylvania
Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and WorldWide DollarVest Fund, Inc.
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, 1994 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, 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
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;
Senior Vice President of
Princeton Services
Norman R. Harvey................. Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Michael J. Hennewinkel........... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
</TABLE>
C-5
<PAGE> 120
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH PROFESSION, VOCATION OR
NAME THE MANAGER EMPLOYMENT
- --------------------------------- ------------------------------- ------------------------------
<S> <C> <C>
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. Senior Vice President
of Princeton Services
Joseph T. Monagle, Jr. .......... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Michael L. Quinn................. Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services; Managing
Director and First Vice
President of Merrill Lynch
from 1989 to 1995
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 companies: Merrill Lynch High Income Municipal Bond Fund,
Inc., Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior
Floating Rate Fund, Inc.
C-6
<PAGE> 121
(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
Michael G. Clark............... Vice President 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> 122
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 21st day of February,
1997.
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)
- ----------------------------------- ----------------------------------- ------------------
<C> <S> <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 21, 1997
- -----------------------------------
(TERRY K. GLENN, ATTORNEY-IN-FACT)
</TABLE>
C-8
<PAGE> 123
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<C> <S> <C>
10 -- Opinion of Brown & Wood LLP, counsel for the Registrant
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant
17(a)-- Financial Data Schedule for Class A shares
(b)-- Financial Data Schedule for Class B shares
(c)-- Financial Data Schedule for Class C shares
(d)-- Financial Data Schedule for Class D shares
</TABLE>
<PAGE> 1
EXHIBIT 10
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, N.Y. 10048-0557
TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599
February 24, 1997
Merrill Lynch Municipal Intermediate Term Fund
of Merrill Lynch Municipal Series Trust
P.O. Box 901l
Princeton, New Jersey 08543-9011
Dear Ladies and Gentlemen:
This opinion is furnished in connection with the registration by Merrill
Lynch Municipal Series Trust, a Massachusetts business trust (the "Trust"), of
shares of beneficial interest, par value $0.10 per share (the "Shares"), of the
Merrill Lynch Municipal Intermediate Term Fund, a series of the Trust, under
the Securities Act of 1933 pursuant to a Registration statement on Form N-lA
(File No. 33-8058), as amended (the "Registration Statement"), in the amount
set forth under "Amount Being Registered" on the facing page of the
Registration Statement.
As counsel for the Trust, we are familiar with the proceedings taken by it
in connection with the authorization, 'issuance and sale of the Shares. In
addition, we have examined and are familiar with the Declaration of Trust of
the Trust, as amended, the By-Laws of the Trust and such other documents as we
have deemed relevant to the matters referred to in this opinion.
LOS ANGELES - SAN FRANCISCO - WASHINGTON - BEIJING - SAO PAULO - TOKYO
REPRESENTATIVE OFFICE
AFFILIATED WITH BROWN WOOD, A MULTINATIONAL PARTNERSHIP
WITH OFFICES IN LONDON AND HONG KONG
<PAGE> 2
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued,
fully paid and nonassessable shares of beneficial interest, except that
shareholders of the Trust may under certain circumstances be held personally
liable for the Trust's obligations.
In rendering this opinion, we have relied as to matters of Massachusetts
law upon an opinion of Bingham, Dana & Gould rendered to the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
2
<PAGE> 1
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. 14 to Registration
Statement No. 33-8058 of our report dated December 10, 1996 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 21, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000799113
<NAME> MERRILL LYNCH MUNICIPAL SERIES TRUST
<SERIES>
<NUMBER> 011
<NAME> ML MUNICIPAL INTERMEDIATE TERM FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 215,371,494
<INVESTMENTS-AT-VALUE> 220,021,996
<RECEIVABLES> 13,545,853
<ASSETS-OTHER> 175,396
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 233,743,245
<PAYABLE-FOR-SECURITIES> 16,446,930
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 814,314
<TOTAL-LIABILITIES> 17,261,244
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 218,450,059
<SHARES-COMMON-STOCK> 3,055,124
<SHARES-COMMON-PRIOR> 3,496,473
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,618,560)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,650,502
<NET-ASSETS> 30,353,584
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,653,366
<OTHER-INCOME> 0
<EXPENSES-NET> (2,429,174)
<NET-INVESTMENT-INCOME> 10,224,192
<REALIZED-GAINS-CURRENT> 154,528
<APPREC-INCREASE-CURRENT> (1,703,506)
<NET-CHANGE-FROM-OPS> 8,675,214
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,611,220)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 716,582
<NUMBER-OF-SHARES-REDEEMED> (1,241,561)
<SHARES-REINVESTED> 83,630
<NET-CHANGE-IN-ASSETS> (13,613,860)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (13,754,807)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,240,092
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,429,174
<AVERAGE-NET-ASSETS> 33,577,248
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> (.06)
<PER-SHARE-DIVIDEND> (.48)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.94
<EXPENSE-RATIO> .81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000799113
<NAME> MERRILL LYNCH MUNICIPAL SERIES TRUST
<SERIES>
<NUMBER> 012
<NAME> ML MUNICIPAL INTERMEDIATE TERM FUND.
<S> <C>
<PERIOD-TYPE> 12-MOS
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<TABLE> <S> <C>
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<CIK> 0000799113
<NAME> MERRILL LYNCH MUNICIPAL SERIES TRUST
<SERIES>
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<NAME> ML MUNICIPAL INTERMEDIATE TERM FUND
<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000799113
<NAME> MERRILL LYNCH MUNICIPAL SERIES TRUST
<SERIES>
<NUMBER> 014
<NAME> ML MUNICIPAL INTERMEDIATE TERM FUND
<S> <C>
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</TABLE>
