<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1998
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. [_]
[X]
Post-Effective Amendment No. 15
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
Amendment No. 16
(Check appropriate box or boxes)
---------------
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
OF MERRILL LYNCH MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
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:
PHILIP L. KIRSTEIN, ESQ. COUNSEL FOR THE TRUST:
BROWN & WOOD LLP
MERRILL LYNCH ASSET MANAGEMENT, L.P. ONE WORLD TRADE CENTER
P.O. BOX 9011 NEW YORK, NEW YORK 10048-0557
PRINCETON, NEW JERSEY 08543-9011 ATTENTION: THOMAS R. SMITH, JR., ESQ.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX):
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED: Shares of Beneficial Interest, Par
value $.10 per share.
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH 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 Management of the Trust; Purchase of
Services............................ Shares; General Information
Item 17. Brokerage Allocation and Other
Practices........................... Portfolio Transactions
Item 18. Capital Stock and Other Securities... General Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered............ Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status........................... Distributions and Taxes
Item 21. Underwriters......................... Purchase of Shares
Item 22. Calculation of Performance Data...... Performance Data
Item 23. Financial Statements................. Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
FEBRUARY 5, 1998
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 the Fund's investment objective 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, except for participants in certain fee-
based programs the minimum initial purchase is $500 and the minimum subsequent
purchase is $50. Merrill Lynch may charge its customers a processing fee
(presently $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through Merrill Lynch Financial Data Services, Inc.
(the "Transfer Agent") are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated February 5, 1998 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and can be obtained, without charge, by calling or by writing
the Trust at the above telephone number or address. The Commission maintains a
web site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information about
the Fund. 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>
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 AV-
ERAGE 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:
Shareholder Servicing
Costs(j).............. 0.09% 0.11% 0.13% 0.09%
Other.................. 0.15% 0.15% 0.15% 0.15%
----- ----- ----- -----
Total Other Expenses.. 0.24% 0.26% 0.28% 0.24%
----- ----- ----- -----
Total Fund Operating 0.79% 1.11% 1.13% 0.89%
Expenses.............. ===== ===== ===== =====
</TABLE>
- - - - --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain participants in 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 27.
(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 by participants 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 that
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 21.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE
PERIOD OF:
---------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment
including the maximum $10.00 initial
sales charge (Class A and Class D
shares only) and assuming (1) the
Total Fund Operating Expenses for
each class set forth 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 $ 35 $ 53 $ 107
Class B............................ $ 21 $ 35 $ 61 $ 135
Class C............................ $ 22 $ 36 $ 62 $ 137
Class D............................ $ 19 $ 38 $ 59 $ 119
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 $ 35 $ 53 $ 107
Class B............................ $ 11 $ 35 $ 61 $ 135
Class C............................ $ 12 $ 36 $ 62 $ 137
Class D............................ $ 19 $ 38 $ 59 $ 119
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL 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
$5.35) for confirming purchases and repurchases. Purchases and redemptions
made directly through the Fund's transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."
MERRILL LYNCH SELECT 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 registered investment companies advised by Merrill Lynch Asset
Management, L.P. ("MLAM" or the "Manager") or an affiliate of MLAM, Fund Asset
Management, L.P. ("FAM"). Funds
3
<PAGE>
advised by MLAM or FAM that use the Merrill Lynch Select PricingSM System are
referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, 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 CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of
Shares."
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- - - - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 1.00% initial sales charge(/2/)(/3/) No No No
- - - - -----------------------------------------------------------------------------------------------------
1.0% CDSC for one year(/4/) 0.20% 0.10% B shares convert to
D shares automatically
after approximately
B ten years(/5/)
- - - - -----------------------------------------------------------------------------------------------------
C(/6/) 1.0% CDSC for one year(/7/) 0.20% 0.10% No
- - - - -----------------------------------------------------------------------------------------------------
Maximum 1.00% initial sales 0.10% No No
D 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."
4
<PAGE>
(3) Reduced for purchases of $100,000 or more and waived for purchases of
Class A shares by participants in connection with certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may
not be subject to an initial sales charge but, if the initial sales charge
is waived 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 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 of 1.00%, 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."
Class B:
Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.20% and an
ongoing distribution fee of 0.10% of the Fund's average net assets
attributable to Class B shares, and a CDSC if they are redeemed within
one year of purchase. 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 an account maintenance fee but
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
5
<PAGE>
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 1.0% CDSC if they are redeemed within one year of
purchase. Such CDSC may be waived in connection with certain fee-based
programs. Although Class C shares are subject to a CDSC for only one
year, 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. The maximum initial sales charge of 1.00% is reduced
for purchases of $100,000 and over. Purchases of $1,000,000 or more may
not be subject to an initial sales charge, but if the initial sales
charge is waived such purchases 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.
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.
6
<PAGE>
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>
FINANCIAL HIGHLIGHTS
The financial information in the table 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, 1997 and the independent auditors' report thereon are
included in the Statement of Additional Information. The following per share
data and ratios have been derived from information provided in the Fund's
audited financial statements. Further information about the performance of the
Fund is contained in the Fund's most recent annual report to shareholders
which may be obtained, without charge, by calling or by writing the Trust at
the telephone number or address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989+
------- ------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 9.94 $ 10.00 $ 9.62 $ 10.39 $ 9.70 $ 9.61 $ 9.24 $ 9.29 $ 9.45
------- ------- ------- ------- ------- ------- ------- ------- ------
Investment income--net.. .45 .48 .53 .52 .54 .59 .60 .59 .59
Realized and unrealized
gain (loss) on
investments--net........ .29 (.06) .38 (.77) .69 .09 .37 (.05) (.16)
------- ------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations.............. .74 .42 .91 (.25) 1.23 .68 .97 .54 .43
------- ------- ------- ------- ------- ------- ------- ------- ------
Less dividends from
investment income--net.. (.45) (.48) (.53) (.52) (.54) (.59) (.60) (.59) (.59)
------- ------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of
period.................. $ 10.23 $ 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............... 7.59% 4.27% 9.69% (2.49)% 13.01% 7.16% 10.90% 5.99% 5.03%
======= ======= ======= ======= ======= ======= ======= ======= ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .79% .81% .81% .76% .75% .86% .85% .92% .90%*
======= ======= ======= ======= ======= ======= ======= ======= ======
Investment income--net.. 4.40% 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)... $71,684 $30,353 $34,970 $27,653 $24,173 $14,068 $ 6,546 $ 2,233 $1,384
======= ======= ======= ======= ======= ======= ======= ======= ======
Portfolio turnover...... 167.41% 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.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- -------- -------- -------- -------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year....... $ 9.93 $ 10.00 $ 9.62 $ 10.39 $ 9.69 $ 9.61 $ 9.24 $ 9.29 $ 9.45 $ 9.04
------- -------- -------- -------- -------- -------- ------- -------- -------- --------
Investment income--net.. .41 .44 .50 .49 .51 .56 .57 .57 .58 .56
Realized and unrealized
gain (loss) on
investments--net........ .30 (.07) .38 (.77) .70 .08 .37 (.05) (.16) .41
------- -------- -------- -------- -------- -------- ------- -------- -------- --------
Total from investment
operations.............. .71 .37 .88 (.28) 1.21 .64 .94 .52 .42 .97
------- -------- -------- -------- -------- -------- ------- -------- -------- --------
Less dividends from
investment income--net.. (.41) (.44) (.50) (.49) (.51) (.56) (.57) (.57) (.58) (.56)
------- -------- -------- -------- -------- -------- ------- -------- -------- --------
Net asset value, end of
year.................... $ 10.23 $ 9.93 $ 10.00 $ 9.62 $ 10.39 $ 9.69 $ 9.61 $ 9.24 $ 9.29 $ 9.45
======= ======== ======== ======== ======== ======== ======= ======== ======== ========
TOTAL INVESTMENT
RETURN:*
Based on net asset value
per share............... 7.35% 3.84% 9.34% (2.79)% 12.78% 6.72% 10.56% 5.68% 4.59% 10.95%
======= ======== ======== ======== ======== ======== ======= ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.11% 1.13% 1.13% 1.07% 1.06% 1.16% 1.18% 1.22% 1.17% 1.08%
======= ======== ======== ======== ======== ======== ======= ======== ======== ========
Investment income--net.. 4.13% 4.47% 5.05% 4.87% 5.07% 5.68% 6.05% 6.09% 6.22% 6.03%
======= ======== ======== ======== ======== ======== ======= ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands).......... $94,552 $169,441 $181,640 $142,152 $158,061 $124,802 $97,998 $109,388 $132,368 $158,872
======= ======== ======== ======== ======== ======== ======= ======== ======== ========
Portfolio turnover...... 167.41% 146.82% 115.78% 52.56% 83.66% 74.20% 129.85% 236.07% 67.88% 119.78%
======= ======== ======== ======== ======== ======== ======= ======== ======== ========
</TABLE>
- - - - -----
* Total investment returns exclude the effects of sales loads.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C CLASS D
----------------------------------------- ------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD FOR THE YEAR ENDED FOR THE PERIOD
OCTOBER 31, OCTOBER 21, 1994+ OCTOBER 31, OCTOBER 21, 1994+
---------------------- TO OCTOBER 31, ----------------------- TO OCTOBER 31,
1997 1996 1995 1994 1997 1996 1995 1994
------ ------ ------ ----------------- ------- ------ ------ -----------------
<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..... $ 9.93 $10.00 $ 9.62 $9.70 $ 9.94 $10.00 $ 9.62 $9.70
------ ------ ------ ----- ------- ------ ------ -----
Investment income--net.. .41 .44 .50 .01 .44 .47 .52 .01
Realized and unrealized
gain (loss) on
investments--net........ .30 (.07) .38 (.08) .29 (.06) .38 (.08)
------ ------ ------ ----- ------- ------ ------ -----
Total from investment
operations.............. .71 .37 .88 (.07) .73 .41 .90 (.07)
------ ------ ------ ----- ------- ------ ------ -----
Less dividends from
investment income--net.. (.41) (.44) (.50) (.01) (.44) (.47) (.52) (.01)
------ ------ ------ ----- ------- ------ ------ -----
Net asset value, end of
period.................. $10.23 $ 9.93 $10.00 $9.62 $ 10.23 $ 9.94 $10.00 $9.62
====== ====== ====== ===== ======= ====== ====== =====
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 7.34% 3.82% 9.36% (.71)%# 7.48% 4.17% 9.58% (.71)%#
====== ====== ====== ===== ======= ====== ====== =====
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.13% 1.15% 1.01% 1.18%* .89% .91% .90% .97%*
====== ====== ====== ===== ======= ====== ====== =====
Investment income--net.. 4.10% 4.44% 4.76% 4.92%* 4.31% 4.68% 5.12% 5.20%*
====== ====== ====== ===== ======= ====== ====== =====
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $6,110 $8,313 $6,485 $ 1 $47,809 $8,375 $7,000 $ 70
====== ====== ====== ===== ======= ====== ====== =====
Portfolio turnover...... 167.41% 146.82% 115.78% 52.56% 167.41% 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>
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 certain 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>
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 IBCA, Inc. ("Fitch")
(currently AAA, AA, A, BBB for bonds, F-1, F-2 for notes and F-1, F-2 for
commercial paper) or, if unrated, such securities will possess
creditworthiness, in the opinion of the Manager of the Fund, comparable to
obligations in which the Fund may invest. Obligations ranked in the fourth
highest rating category, while considered "investment grade," may have certain
speculative characteristics and may be more likely to be downgraded than
securities rated in one of the three highest rating categories. See the
Appendix to the Statement of Additional
12
<PAGE>
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 property taxes and the
13
<PAGE>
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; accordingly, the timely payment of
interest and the repayment of principal in accordance with the terms of the
revenue or special obligation bond is a function of the economic viability of
such facility or such revenue source.
The Fund may purchase IDBs and private activity bonds. IDBs and private
activity bonds are 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 short-term market rates increase and increase as short-
term market rates decline. To the extent the Fund invests in these types of
Municipal Bonds, the Fund's return on such Municipal Bonds will be subject to
risk with respect to the value of the particular index, which may include
reduced or eliminated interest payments and losses of invested principal. Such
securities have the effect of providing a degree of investment leverage, since
they may increase or decrease in value in response to changes, as an
illustration, in market interest rates at a rate which is a multiple
(typically two) of the rate at which fixed-rate long-term tax exempt
securities increase or decrease in response to such changes. As a result, the
market values of such securities will generally be more volatile than the
market values of fixed-rate tax exempt securities. To seek to limit the
volatility of these securities, the Fund may purchase inverse floating
obligations with shorter term maturities or which contain limitations on the
extent to which the interest rate may vary. The Manager believes that indexed
and inverse floating obligations represent flexible portfolio management
instruments for the Fund which allows the Fund to seek potential investment
14
<PAGE>
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.
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 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
15
<PAGE>
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 securities having a
market value at all times at least equal to the amount of the forward
commitment.
CALL RIGHTS
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity
of the related Municipal Bond will expire without value.
The economic effect of holding both the Call Right and the related Municipal
Bond is identical to holding a Municipal Bond as a non-callable security.
Certain investments in such obligations may be illiquid. The Fund may not
invest in such illiquid obligations if such investments, together with other
illiquid investments, would exceed 15% of the Fund's net assets.
REPURCHASE AGREEMENTS
As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer or an affiliate
thereof in U.S. Government securities. Under such agreements, the bank or
primary dealer
16
<PAGE>
or an affiliate thereof agrees, upon entering into the contract, to repurchase
the security at a mutually agreed upon time and price, thereby determining the
yield during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. In the case of
repurchase agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligations. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In the case of a repurchase
agreement, the Fund will require the seller to provide additional collateral
if the market value of the securities falls below the repurchase price at any
time during the term of the repurchase agreement. In the event of default by
the seller under the repurchase agreement construed to be a collateralized
loan, the underlying securities are not owned by the Fund but only constitute
collateral for the seller's obligation to pay the repurchase price. Therefore,
the Fund may suffer time delays and incur costs or possible losses in
connection with the disposition of the collateral. In the event of a default
under such a repurchase agreement, instead of the contractual fixed rate of
return, the rate of return to the Fund shall be dependent upon intervening
fluctuations of the market value of such security and the accrued interest on
the security. In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform. The Fund may not invest in
repurchase agreements maturing in more than seven days if such investments,
together with all other illiquid investments, would exceed 15% of the Fund's
total assets.
FINANCIAL FUTURES AND OPTIONS TRANSACTIONS
The Fund is authorized to purchase and sell certain exchange-traded
financial futures contracts ("financial futures contracts") and options
thereon solely for the purposes of hedging its investments in Municipal Bonds
against declines in value and hedging against increases in the cost of
securities it intends to purchase. However, any transactions involving
financial futures contracts or options thereon (including puts and calls
associated therewith) will be in accordance with the Fund's investment
policies and limitations. A financial futures contract obligates the seller of
a contract to deliver and the purchaser of a contract to take delivery of the
type of financial instrument covered by the contract, or in the case of index-
based financial futures contracts to make and accept a cash settlement at a
specific future time for a specified price. A sale of financial futures
contracts may provide a hedge against a decline in the value of portfolio
securities because such depreciation may be offset, in whole or in part, by an
increase in the value of the position in the financial futures contracts. A
purchase of financial futures contracts may provide a hedge against an
increase in the cost of securities intended to be purchased, because such
appreciation may be offset, in whole or in part, by an increase in the value
of the position in the financial futures contracts. Distributions, if any, of
net long-term capital gains from certain transactions in futures or options
are taxable at long-term capital gains rates for Federal income tax purposes,
regardless of the length of time the shareholder has owned Fund shares. See
"Distributions and Taxes -- Taxes."
The Fund deals in financial futures contracts traded on the Chicago Board of
Trade based on The Bond Buyer Municipal Bond Index, a price-weighted measure
of the market value of 40 large, recently issued tax-exempt bonds. There can
be no assurance, however, that a liquid secondary market will exist to
terminate any particular financial futures contract at any specific time. If
it is not possible to close a financial futures contract position entered into
by the Fund, the Fund would continue to be required to make daily cash
payments of variation margin in the event of adverse price movements. In such
a situation, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may
be
17
<PAGE>
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.
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
liquid securities in a segregated account with the Fund's custodian, so that
the amount so segregated plus the amount of initial and variation margin held
in the account of its broker equals the market value of the
18
<PAGE>
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 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 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.
19
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the Investment Company Act.
The Trustees are responsible for the overall supervision of the operations of
the Trust and the Fund and perform the various duties imposed on the directors
of investment companies by the Investment Company Act.
The Trustees are:
Arthur Zeikel* -- Chairman of the Manager and its affiliate FAM; Chairman
and Director of Princeton Services, Inc. ("Princeton Services"); and Executive
Vice President of ML & Co.
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 -- Self-employed financial consultant; former President
and Chief Investment Officer of Verus Capital, Inc.; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc.
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 140 registered investment companies. The
Manager also offers portfolio management services to individuals and
institutional accounts. As of December 31, 1997, the Manager and FAM had a
total of approximately $278.7 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.
20
<PAGE>
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, 1997, the fee paid
by the Fund to the Manager was $1,182,951 (based on average net assets of
approximately $213.9 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 fiscal year ended October
31, 1997, the Trust reimbursed the Manager $55,190 for accounting services to
the Fund.
For the fiscal year ended October 31, 1997, for Class A shares, the ratio of
total expenses to average net assets was 0.79%; for Class B shares, the ratio
of total expenses to average net assets was 1.11%; for Class C shares, the
ratio of total expenses to average net assets was 1.13%; for Class D shares,
the ratio of total expenses to average net assets was 0.89%.
William R. Bock is the Portfolio Manager for the Fund and has been
responsible for the day-to-day management of the Fund since 1995. 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, 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
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
21
<PAGE>
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 an annual fee of up to $11.00
per Class A or Class D account and up to $14.00 per Class B or Class C account
and is entitled to reimbursement for certain transaction charges and out-of-
pocket expenses incurred by the Transfer Agent under the Transfer Agency
Agreement. Additionally, a $.20 monthly closed account charge will be assessed
on all accounts which close during the calendar year. Application of this fee
will commence the month following the month the account is closed. At the end
of the calendar year, no further fees will be due. For purposes of the
Transfer Agency Agreement, the term "account" includes a shareholder account
maintained directly by the Transfer Agent and any other account representing
the beneficial interest of a person in the relevant share class on a
recordkeeping system, provided the recordkeeping system is maintained by a
subsidiary of ML & Co. For the fiscal year ended October 31, 1997, the total
fee paid by the Fund to the Transfer Agent was $220,213, pursuant to the
Transfer Agency Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of each of 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, except for participants in certain fee-based
programs, the minimum initial purchase is $500, 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 Pricing SM stem, 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 on that day, such orders shall
be deemed received on the next business day. The Fund or the Distributor may
suspend the offering of the Fund's shares of any class at any time in response
to conditions in the securities markets or otherwise and thereafter may resume
such offering from time to time. Any order may be rejected by the Distributor
or the Fund. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change. Merrill Lynch may
charge its customers a processing fee (presently $5.35) to confirm a sale of
shares to such customers. Purchases directly through the Fund's Transfer Agent
are not subject to the processing fee.
22
<PAGE>
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 CDSC and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available
for purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.
23
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- - - - ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 by participants in connection with certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may
not be subject to an initial sales charge but instead may be subject to a
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>
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.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases by certain retirement plan
investors and participants in certain fee-based programs. If the sales
charge is waived in connection with a purchase of $1,000,000 or more, such
purchases may be subject to a 0.20% CDSC if the shares are redeemed within
one year after purchase. Such CDSC may be waived in connection with certain
fee-based programs. The charge will be assessed on an amount equal to the
lesser of the proceeds of 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.
The proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.
For the fiscal year ended October 31, 1997, the Fund sold 6,709,488 Class A
shares for aggregate net proceeds of $67,140,511. The gross sales charges for
the sale of Class A shares of the Fund for that year were $1,531, of which
$104 and $1,427 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal year ended October 31, 1997, 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. For
the fiscal year ended October 31, 1997, the Fund sold 339,568 Class D shares
for aggregate net proceeds of $3,413,939. The gross sales charges for the sale
of Class D shares of the Fund for that year were $3,986, of which $308 and
$3,678 were received by the Distributor and Merrill Lynch, respectively. For
the fiscal year ended October 31, 1997, 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 and U.S. branches of
foreign banking institutions provided that the program or branch has $3
million or more initially invested in MLAM-advised mutual funds. Also eligible
to purchase Class A shares at net asset value are participants in certain
investment programs including TMASM Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services, collective investment
trusts for which Merrill Lynch Trust Company
25
<PAGE>
serves as trustee, certain Merrill Lynch investment programs that offer
pricing alternatives for securities transactions and purchases made in
connection with certain fee-based programs. In addition, Class A shares are
offered at net asset value to ML & Co. and its subsidiaries and their
directors and employees and to members of the boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired shares
of certain MLAM-advised closed-end funds in their initial offerings who wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund also may purchase Class A shares of the
Fund if certain conditions set forth in the Statement of Additional
Information are met (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."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee AccessSM Accounts
available through authorized employers. 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.
26
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives will receive Class
B shares.
The public offering price of Class B shares for investors choosing the
deferred sales charge alternative is the next determined net asset value per
share without the imposition of a sales charge at the time of purchase. Class
C shares of the Fund are not available for purchase but will be issued only
pursuant to the exchange privilege to holders of Class C shares of other MLAM-
advised mutual funds who elect to exchange Class C shares of such other MLAM-
advised mutual funds for Class C shares of the Fund. See "Shareholder
Services -- Exchange Privilege." As discussed below, Class B and Class C
shares are subject to a one year 1.0% CDSC. Approximately ten years after
Class B shares are issued, such Class B shares, together with shares issued
upon dividend reinvestment with respect to those shares, are automatically
converted into Class D shares of the Fund and thereafter will be subject to
lower continuing fees. See "Conversion of Class B Shares to Class D Shares"
below. Both Class B and Class C shares are subject to an account maintenance
fee 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 the Distributor and Merrill Lynch
(pursuant to a sub-agreement) 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 that 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
27
<PAGE>
purchase price. In addition, no CDSC will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
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, 1997, the Distributor received CDSCs
of $122,340 with respect to redemption of Class B shares, all of which was
paid to Merrill Lynch. Additional CDSCs payable to the Distributor may have
been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest applicable rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over 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 at 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).
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Internal Revenue Code of 1986, as amended) of a
shareholder. The Class B CDSC also is waived for any Class B Shares that are
purchased within qualifying Employees AccessSM Accounts. Additional
information concerning the waiver of the Class B CDSC is set forth in the
Statement of Additional Information. The terms of the CDSC may be modified in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs."
Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year 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
28
<PAGE>
purchase price. In addition, no CDSC will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. The Class C CDSC may
be waived in connection with certain fee-based programs. See "Shareholder
Services--Fee-Based Programs." For the fiscal year ended October 31, 1997, the
Distributor received CDSCs of $2,041 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 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."
29
<PAGE>
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 fees, distribution fees and CDSCs,
and the expenses consist of financial consultant compensation. As of October
31, 1997, direct cash revenues for the period since commencement of the
offering of Class B and Class C shares exceeded direct cash expenses by
$4,192,964 and $35,526, respectively (4.44% and 0.58% of Class B and Class C
net assets, respectively, at that date). As of December 31, 1996, the last
date for which fully allocated accrual data is available, the fully
30
<PAGE>
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 $186,000 (0.13% of
Class B net assets at that date). As of December 31, 1996, the last date for
which fully allocated accrual data is available, the fully allocated accrual
expenses incurred by the Distributor and Merrill Lynch with respect to Class C
shares for the period since commencement of operations exceeded fully
allocated accrual revenues by approximately $11,000 (0.14% of Class C net
assets at that date.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the 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."
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
31
<PAGE>
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. The redemption request in either event
requires the signature(s) of all persons in whose name(s) the shares are
registered, signed exactly as such name(s) appear(s) on the Transfer Agent's
register 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 ten 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 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 $5.35) to confirm a
repurchase of shares. Repurchases made
32
<PAGE>
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 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.
33
<PAGE>
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.
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.
34
<PAGE>
Automatic Reinvestment of Dividends and Capital Gain Distributions. All
dividends and capital gain distributions are reinvested automatically in full
and fractional shares of the Fund, without sales charge, at the net asset
value per share determined on the ex-dividend date of such dividend or
distribution. A shareholder may at any time, by written notification to
Merrill Lynch if the shareholder's account is maintained with Merrill Lynch or
by written notification or telephone call (1-800-MER-FUND), to the Transfer
Agent if the shareholder's account is maintained with the Transfer Agent,
elect to have subsequent dividends or both dividends and capital gain
distributions paid in cash, rather than reinvested, in which event payment
will be mailed on or about the payment date. The Fund is not responsible for
any failure of delivery to the shareholder's address of record and no interest
will accrue on amounts represented by uncashed distribution or redemption
checks. Cash payments can also be directly deposited to the shareholder's bank
account. No CDSC will be imposed upon redemption of shares issued as a result
of the automatic reinvestment of dividends or capital gain distributions.
Systematic Withdrawal Plans. A shareholder may elect to receive systematic
withdrawal payments from his or her Investment Account in the form of payments
by check or through automatic payment by direct deposit to his or her bank
account on either a monthly or quarterly basis. A shareholder whose shares are
held within a CMA(R) or CBA(R) account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(R)
or CBA(R) Systematic Redemption Program, subject to certain conditions. With
respect to redemptions of Class B and Class C shares pursuant to a systematic
withdrawal plan, the maximum number of Class B or Class C shares that can be
redeemed from an account annually shall not exceed 10% of the value of shares
of such class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Contingent
Deferred Sales Charges--Class B Shares" and "--Contingent Deferred Sales
Charges--Class C Shares." Where the systematic withdrawal plan is applied to
Class B shares, upon conversion of the last Class B shares in an account to
Class D shares, the systematic withdrawal plan will automatically be applied
thereafter to Class D shares. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to
Class D Shares."
Automatic Investment Plans. Regular additions of Class A, Class B, 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
35
<PAGE>
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 the Transfer Agent at (800) MER-FUND or
(800) 637-3863.
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
Fund may not purchase securities, including Municipal Bonds, during the
existence of any underwriting syndicate of which Merrill Lynch is a member or
in a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Trustees of the Trust which either
comply with rules adopted by the Commission or with interpretations of the
Commission staff. An affiliated person of the Trust may serve as its broker in
over-the-counter transactions conducted by the Fund on an agency basis only.
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. For the fiscal year ended October 31, 1997, the Fund
paid no brokerage commissions.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily prior
to the determination of the net asset value which is calculated 15 minutes
after the close of business on the NYSE (generally, 4:00 p.m., New
36
<PAGE>
York time) on that day. The net investment income of the Fund for dividend
purposes consists of interest earned on portfolio securities, less expenses,
in each case computed since the most recent determination of net asset value.
Expenses of the Fund, including the management and any account maintenance
and/or distribution fees, are accrued daily. Dividends of net investment
income are declared daily and reinvested monthly in the form of additional
full and fractional shares of the Fund at net asset value unless the
shareholder elects to receive such dividends in cash. Shares will accrue
dividends as long as they are issued and outstanding. Shares are issued and
outstanding as of the settlement date of a purchase order to the day prior to
the settlement date of a redemption order.
All net realized 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. As
long as it so qualifies, the Fund (but not its shareholders) will not be
subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Trust intends to cause
the Fund to distribute substantially all of such income.
To the extent that the dividends distributed to the Fund's Class A, Class B,
Class C and Class D shareholders (together, the "shareholders") are derived
from interest income exempt from Federal income tax under Code Section 103(a)
and are properly designated as "exempt-interest dividends" by the Trust, they
will be excludable from a shareholder's gross income for Federal income tax
purposes. Exempt-interest dividends are included, however, in determining the
portion, if any, of a person's social security 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
37
<PAGE>
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. Recent
legislation creates additional categories of capital gains taxable at
different rates. Generally not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any exempt-interest dividends, ordinary income
dividends or capital gain dividends, as well as the amount of capital gain
dividends in the different categories of capital gain referred to above.
Distributions by the Fund, whether from exempt-interest income, ordinary
income or capital gains, 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 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
38
<PAGE>
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the
Trust's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
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
39
<PAGE>
extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance fees and distribution charges and any incremental transfer agency
costs relating to each class of shares will be borne exclusively by that
class. The Fund will include performance data for all classes of shares of the
Fund in any advertisement or information including performance data of the
Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data
calculations of including or excluding the maximum applicable sales charges,
actual annual or annualized total return data generally will be lower than
average annual total return data since the average annual rates of return
reflect compounding; aggregate total return data generally will be higher than
average annual total return data since the aggregate rates of return reflect
compounding over a longer period of time. In advertisements distributed to
investors whose purchases are subject to 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, 1997 was 4.08% for
Class A shares, 3.81% for Class B shares, 3.79% for Class C shares and 3.98%
for Class D shares and the tax-equivalent yield for the same period (based on
a Federal income tax rate of 28%) was 5.67% for Class A shares, 5.30% for
Class B shares, 5.26% for Class C shares and 5.53% 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.
40
<PAGE>
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York time), on each day during which the NYSE is
open for trading. The net asset value per share is computed by dividing the
sum of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of shares outstanding at such
time, rounded to the nearest cent. Expenses, including the management fees
payable to the Manager and any account maintenance and/or distribution fees
payable to the Distributor, are accrued daily.
The net asset value per share of Class A shares generally will be higher
than the net asset value per share of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the net asset value per share of Class D
shares generally will be higher than the net asset value per share of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
fees and higher account maintenance and transfer agency fees applicable with
respect to Class B and Class C shares. It is expected, however, that the per
share net asset value of the classes eventually will tend to converge
(although not necessarily meet) immediately after the payment of dividends,
which will differ by approximately the amount of the expense accrual
differentials between the classes.
ORGANIZATION OF THE TRUST
The Trust is an unincorporated business trust organized on August 14, 1986
under the laws of Massachusetts. It is a diversified, open-end management
investment company comprised of separate series ("Series"), each of which is a
separate portfolio offering shares to selected groups of purchasers. At the
date of this Prospectus, the Fund is the only existing Series of the Trust.
The Trustees are authorized to create an unlimited number of Series and, with
respect to each Series, to issue an unlimited number of full and fractional
shares of beneficial interest, $.10 par value per share of different classes.
Shareholder approval is not required for the authorization of additional
Series or classes of a Series of the Trust. 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 relating to the account maintenance associated with such
shares, and Class B and Class C shares bear certain expenses relating to the
distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to distribution and/or account maintenance
expenditures, as applicable. See "Purchase of Shares." The Trustees of the
Trust may classify and reclassify the shares of any Series into additional or
other classes at a future date.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to
the extent hereinafter provided) and on other matters submitted to the vote of
shareholders. 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 of 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
41
<PAGE>
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders may, in
accordance with the terms of the Declaration of Trust, cause a meeting of
shareholders to be held for the purpose of voting on the removal of Trustees.
Also, the Trust will be required to call a special meeting of shareholders of
a Series in accordance with the requirements of the Investment Company Act to
seek approval of new management and advisory arrangements, of a material
increase in account maintenance or distribution fees or of a change in the
fundamental policies, objectives or restrictions of a Series. Except as set
forth above, the Trustees shall continue to hold office and appoint successor
Trustees. Upon liquidation, or dissolution of a Series, each issued and
outstanding share of that Series is entitled to participate equally in
dividends and distributions declared by the respective Series and in net
assets of such Series 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.
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.
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.
42
<PAGE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND --
AUTHORIZATION FORM (PART 1)
- - - - -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class D shares
of Merrill Lynch Municipal Intermediate Term Fund and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $ . . . . . . . . payable to Merrill Lynch
Financial Data Services, Inc., as an initial investment (minimum $1,000). I
understand that this purchase will be executed at the applicable offering
price next to be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name ..........................................................................
First Name Initial Last Name
Name of Co-Owner (if any) .....................................................
First Name Initial Last Name
Address..........................................
.................................................
(Zip Code)
Occupation........................... Name and Address of Employer.........
......................................
......................................
..................................... ......................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- - - - -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital
Gains
Select One:
[_] Reinvest Select One:
[_] Reinvest
[_] Cash [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] CHECK
OR [_] DIRECT DEPOSIT TO BANK ACCOUNT
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch 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>
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.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- - - - -------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS
IN THE STATEMENT OF ADDITIONAL INFORMATION)
Dear Sir/Madam:
................ , 19 . . . .
Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Municipal Intermediate Term Fund or any other investment company with an
initial sales charge or deferred sales charge for which the Merrill Lynch
Funds Distributor, Inc. acts as distributor over the next 13-month period
which will equal or exceed:
[_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Municipal
Intermediate Term Fund Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Municipal Intermediate Term Fund held as security.
By: ................................. .....................................
Signature of Owner Signature of Co-Owner (If registered
in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(2) Name.............................
(1) Name.............................
Account Number....................... Account Number.......................
- - - - -------------------------------------------------------------------------------
5. FOR DEALER ONLY
We hereby authorize Merrill Lynch
Branch Office, Address, Stamp Funds Distributor, Inc. to act as
our agent in connection with
- - - - - - transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
Shareholder's signature.
- - - - - -
This form when completed should be ......................................
mailed to: Dealer Name and Address
Merrill Lynch Municipal By ..................................
Intermediate Term Fund Authorized Signature of Dealer
c/o Merrill Lynch Financial
Data Services, Inc. [ ][ ][ ] [ ][ ][ ][ ]
P.O. Box 45289 Branch-Code F/C No. ...............
Jacksonville, Florida 32232-5289 F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer Account No.
44
<PAGE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND -- AUTHORIZATION FORM (PART 2)
- - - - -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- - - - -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
(Please Print)
Name of Owner........................ [ ]
First Name Initial Last Name Social Security No. or
Taxpayer Identification
Address.............................. No.
.....................................
(Zip Code) Account Number.....................
(if existing account)
Name of Co-Owner (if any)............
First Name
Initial Last Name
Address..............................
.....................................
(Zip Code)
- - - - -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in
Merrill Lynch 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
(month)
soon as possible thereafter.
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU (check one):
[_] $ of [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in
the account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of .........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (please print)......................................................
Address........................................................................
...........................................................................
Signature of Owner...................................... Date..................
Signature of Co-Owner (if any).................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
........................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
* ANNUAL WITHDRAWAL CANNOT EXCEED 10% OF THE VALUE OF SHARES OF SUCH CLASS
HELD IN THE ACCOUNT AT THE TIME THE ELECTION TO JOIN THE SYSTEMATIC WITHDRAWAL
PLAN IS MADE.
45
<PAGE>
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 AUTHORIZATION TO
SERVICES, INC. HONOR ACH DEBITS DRAWN BY
MERRILL LYNCH FINANCIAL DATA
You are hereby authorized to draw an SERVICES, INC.
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 $........ To................................Bank
(Investor's Bank)
Account No. ......................
Please date and invest ACH debits on Bank Address..........................
the 20th of each month beginning
....................... or as soon City........State.......Zip Code......
as thereafter as possible
(month) As a convenience to me, I hereby
request and authorize you to pay and
I agree that you are drawing these charge to my account ACH debits drawn
ACH debits voluntarily at my request on my account by and payable to
and that you shall not be liable for Merrill Lynch Financial Data
any loss arising from any delay in Services, Inc. I agree that your
preparing or failure to prepare any rights in respect to each such debit
such debit. If I change banks or shall be the same as if it were a
desire to terminate or suspend this check drawn on you and signed
program, I agree to notify you personally by me. This authority is
promptly in writing. I hereby to remain in effect until revoked by
authorize you to take any action to me in writing. Until you receive such
correct erroneous ACH debits of my notice, you shall be fully protected
bank account or purchases of Fund in honoring any such debit. I further
shares including liquidating shares agree that if any such debit be
of the Fund and crediting my bank dishonored, whether with or without
account. I further agree that if a cause and whether intentionally or
check or debit is not honored upon inadvertently, you shall be under no
presentation, Merrill Lynch liability.
Financial Data Services, Inc. is
authorized to discontinue .......... .........................
immediately the Automatic Investment Date Signature of Depositor
Plan and to liquidate sufficient
shares held in my account to offset .......... .........................
the purchase made with the Bank Signature of Depositor
dishonored debit. Account (If joint account, both
Number must sign)
.......... .....................
Date Signature of Depositor
.....................
Signature of
Depositor
(If joint
account, both
must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
46
<PAGE>
MANAGER
Merrill Lynch Asset Management, L.P.
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>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTI-
TUTE 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..................................................... 16
Financial Futures and Options Transactions................................ 17
Investment Restrictions................................................... 19
Management of the Trust.................................................... 20
Trustees.................................................................. 20
Management and Advisory Arrangements...................................... 20
Code of Ethics............................................................ 21
Transfer Agency Services.................................................. 21
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............. 27
Distribution Plans........................................................ 30
Limitations on the Payment of Deferred Sales Charges...................... 31
Redemption of Shares....................................................... 31
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..................................................... 41
Determination of Net Asset Value.......................................... 41
Organization of the Trust................................................. 41
Shareholder Reports....................................................... 42
Shareholder Inquiries..................................................... 42
Authorization Form......................................................... 43
</TABLE>
Code # 10435-0298
[LOGO] MERRILL LYNCH
Merrill Lynch
Municipal Intermediate
Term Fund
Merrill Lynch Municipal
Series Trust
[ART]
PROSPECTUS
February 5, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
MERRILL LYNCH MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Municipal Intermediate Term Fund (the "Fund"), formerly
Merrill Lynch Municipal Income Fund, is presently the only series of Merrill
Lynch Municipal Series Trust (the "Trust"), a diversified, open-end management
investment company organized as a Massachusetts business trust. The investment
objective of the Fund is to provide shareholders with as high a level of
income exempt from Federal income taxes as is consistent with its investment
policies and prudent investment management. There can be no assurance that the
investment objective of the Fund will be realized.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated February
5, 1998 (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 5, 1998.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as high
a level of income exempt from Federal income taxes as is consistent with its
investment policies and prudent investment management. The Fund seeks to
achieve its objective by investing primarily in a diversified portfolio of
obligations issued by or on behalf of states, territories and possessions of
the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, the payments from which, in the
opinion of bond counsel to the issuer, are exempt in their entirety from
Federal income taxes ("Municipal Bonds"). The Fund at all times, except during
temporary defensive periods, will maintain at least 80% of its net assets
invested in Municipal Bonds. At times, the Fund may seek to hedge its
portfolio through the use of futures and options transactions to reduce
volatility in the net asset value of Fund shares. Reference is made to
"Investment Objective and Policies" in the Prospectus for a discussion of the
investment objective and policies of the Fund.
While there is no limit on the remaining maturity of individual Municipal
Bonds in the Fund's portfolio, depending on market conditions, an
intermediate-term dollar weighted average maturity of five to twelve years is
anticipated. Generally, as is the case with any investment grade fixed-income
obligations, Municipal Bonds with longer maturities tend to produce higher
yields. Under normal conditions, however, such yield-to-maturity increases
tend to decline in the longer maturities (i.e., the slope of the yield curve
flattens). At the same time, due to their longer exposure to interest rate
risk, prices of longer-term obligations are subject to greater market
fluctuations as a result of changes in interest rates. Based on the foregoing
premises, the Fund's manager, Merrill Lynch Asset Management, L.P. (the
"Manager"), believes that the yield and price volatility characteristics of an
intermediate-term portfolio generally offer an attractive trade-off between
return and risk. There may be market conditions, however, where an
intermediate-term portfolio may be less attractive due to the fact that the
Municipal Bond yield curve changes from time to time depending on supply and
demand forces, monetary and tax policies and investor expectations. As a
result, there may be situations where investments in individual Municipal
Bonds with longer remaining maturities may be more attractive than individual
intermediate-term Municipal Bonds. Nevertheless, the Fund anticipates
maintaining a dollar weighted average portfolio maturity of five to twelve
years. In the event of any sustained market conditions that make it less
desirable to maintain such an intermediate-term average portfolio maturity,
the Trustees of the Trust may consider changing the investment policies of the
Fund with respect to average portfolio maturity.
For the fiscal years ended October 31, 1996 and 1997 the portfolio turnover
rates were 146.82% and 167.41%, respectively. High portfolio turnover involves
correspondingly greater transaction costs in the form of commissions and
dealer spreads, which are borne directly by the Fund.
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 issued
2
<PAGE>
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, the possibility
3
<PAGE>
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 IBCA,
Inc. ("Fitch") or which, in the Manager's judgment, possess similar credit
characteristics ("high-yield securities"). See Appendix--"Ratings of Municipal
Bonds"--for additional information regarding ratings of debt securities. The
Manager considers the ratings assigned by Standard & Poor's, Moody's or Fitch
as one of several factors in its independent credit analysis of issuers.
High-yield securities are considered by Standard & Poor's, Moody's and Fitch
to have varying degrees of speculative characteristics. Consequently, although
high-yield securities can be expected to provide higher yields, such
securities may be subject to greater market price fluctuations and risk of
loss of principal than lower-yielding, higher-rated debt securities.
Investments in high-yield securities will be made only when, in the judgment
of the Manager, such securities provide attractive total return potential
relative to the risk of such securities, as compared to higher quality debt
securities. The Fund generally will not invest in debt securities in the
lowest rating categories (those rated CC or lower by Standard & Poor's or
Fitch or Ca or lower by Moody's) unless the Manager believes that the
financial condition of the issuer or the protection afforded the particular
securities is stronger than would otherwise be indicated by such low ratings.
The Fund does not intend to purchase debt securities that are in default or
which the Manager believes will be in default.
4
<PAGE>
Issuers of high-yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher-rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high-yield
securities may be more likely to experience financial stress, especially if
such issuers are highly leveraged. During periods of economic recession, such
issuers may not have sufficient revenues to meet their interest payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific issuer developments, or the issuer's inability
to meet specific projected business forecasts, or the unavailability of
additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high-yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High-yield securities frequently have call or redemption features that would
permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high-yield securities
because there may be a thin trading market for such securities. Because not
all dealers maintain markets in all high-yield securities, there is no
established secondary market for many of these securities, and the Fund
anticipates that such securities could be sold only to a limited number of
dealers or institutional investors. To the extent that a secondary trading
market for high-yield securities does exist, it generally is not as liquid as
the secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the Fund's portfolio. Market
quotations generally are available on many high-yield securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
It is expected that a significant portion of the high-yield securities
acquired by the Fund will be purchased upon issuance, which may involve
special risks because the securities so acquired are new issues. In such
instances the Fund may be a substantial purchaser of the issue and therefore
have the opportunity to participate in structuring the terms of the offering.
Although this may enable the Fund to seek to protect itself against certain of
such risks, the considerations discussed herein would nevertheless remain
applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high-yield
securities, particularly in a thinly traded market. Factors adversely
affecting the market value of high-yield securities are likely to affect
adversely the Fund's net asset value. In addition, the Fund may incur
additional expenses to the extent that it is required to seek recovery upon a
default on a portfolio holding or participate in the restructuring of the
obligation.
Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the issuer, the general conditions of the money
market and of the municipal bond market, the size of a particular offering,
the maturity of the obligation, and the rating of the issue. The ability of
the Fund to achieve its investment objective also is dependent on the
continuing ability of the issuers of the bonds in which the Fund
5
<PAGE>
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.
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
6
<PAGE>
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. The
following is additional information concerning these transactions.
As described in the Prospectus, the Fund may purchase and sell financial
futures contracts ("financial futures contracts") or options thereon to hedge
its portfolio of Municipal Bonds against declines in the value of such
securities and to hedge against increases in the cost of securities the Fund
intends to purchase. However, any transactions involving financial futures
contracts or options (or puts and calls associated therewith) will be in
accordance with the Fund's investment policies and limitations. See
"Investment Objective and Policies--Investment Restrictions" in the
Prospectus. To hedge its portfolio, the Fund may take an investment position
in a financial futures contract or the related option which will move in the
opposite direction from the portfolio position being hedged. While the Fund's
use of hedging strategies is intended to moderate capital changes in portfolio
holdings and thereby reduce volatility of the net asset value of Fund shares,
the Fund anticipates that its net asset value will fluctuate. Set forth below
is information concerning futures and options transactions.
Description of Financial Futures Contracts. A financial futures contract is
an agreement between two parties to buy and sell a security or, in the case of
an index-based financial futures contract, to make and 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
7
<PAGE>
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
"marking 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 indices which may become available if the
Manager and the Trustees of the Trust should determine that there is normally
a sufficient correlation between the prices of such financial futures
contracts and the Municipal Bonds in which the Fund invests to make such
hedging appropriate.
8
<PAGE>
Futures Strategies. The Fund may sell a financial futures contract (i.e.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This
strategy, however, entails increased transaction costs in the form of dealer
spreads and typically would reduce the average yield of the Fund's portfolio
securities as a result of the shortening of maturities. The sale of financial
futures contracts provides an alternative means of hedging against declines in
the value of its investments in Municipal Bonds. As such values decline, the
value of the Fund's positions in the financial futures contracts will tend to
increase, thus offsetting all or a portion of the depreciation in the market
value of the Fund's Municipal Bond investments which are being hedged. While
the Fund will incur commission expenses in selling and closing out futures
positions, commissions on futures transactions are lower than transaction
costs incurred in the purchase and sale of Municipal Bonds. In addition, the
ability of the Fund to trade in the standardized contracts available in the
futures markets may offer a more effective defensive position than a program
to reduce the average maturity of the portfolio securities due to the unique
and varied credit and technical characteristics of the municipal debt
instruments available to the Fund. Employing futures as a hedge also may
permit the Fund to assume a defensive posture without reducing the yield on
its investments beyond any amounts required to engage in futures trading.
When the Fund intends to purchase Municipal Bonds, the Fund may purchase
financial futures contracts as a hedge against any increase in the cost of
Municipal Bonds resulting from a decrease in interest rates or otherwise, that
may occur before such purchases can be effected. Subject to the degree of
correlation between Municipal Bonds and the financial futures contracts,
subsequent increases in the cost of Municipal Bonds should be reflected in the
value of the futures held by the Fund. As such purchases are made, an
equivalent amount of financial futures contracts will be closed out. Due to
changing market conditions and interest rate forecasts, however, a futures
position may be terminated without a corresponding purchase of portfolio
securities.
Call Options on Financial Futures Contracts. The Fund also may purchase and
sell exchange-traded call and put options on financial futures contracts on
U.S. Government securities. The purchase of a call option on a financial
futures contract is analogous to the purchase of a call option on an
individual security. Depending on the pricing of the option compared to either
the financial futures contract upon which it is based, or upon the price of
the underlying debt securities, it may or may not be less risky than ownership
of the financial futures contract or underlying debt securities. Like the
purchase of a financial futures contract, the Fund will purchase a call option
on a financial futures contract to hedge against a market advance when the
Fund is not fully invested.
The writing of a call option on a financial futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the financial futures contract. If the futures price at
expiration is below the exercise price, the Fund will retain the full amount
of the option premium which provides a partial hedge against any decline that
may have occurred in the Fund's portfolio holdings.
Put Options on Financial Futures Contracts. The purchase of a put option on
a financial futures contract is analogous to the purchase of a protective put
option on a portfolio security. The Fund will purchase a put option on a
financial futures contract to hedge the Fund's portfolio against the risk of
rising interest rates.
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
9
<PAGE>
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 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
10
<PAGE>
contracts if the volatility to the price of the hedged securities is
historically less than that of the financial futures contracts.
The particular municipal bonds comprising the index underlying the Municipal
Bond Index financial futures contract may vary from the bonds held by the
Fund. As a result, the Fund's ability to hedge effectively all or a portion of
the value of its Municipal Bonds through the use of such financial futures
contracts will depend in part on the degree to which price movements in the
index underlying the financial futures contract correlate with price movements
of the Municipal Bonds held by the Fund. The correlation may be affected by
disparities in the average maturity, ratings, geographic mix or structure of
the Fund's investments as compared to those comprising the Municipal Bond
Index, and general economic or political factors. In addition, the correlation
between movements in the value of the Municipal Bond Index may be subject to
change over time, as additions to and deletions from the Municipal Bond Index
alter its structure. The correlation between financial futures contracts on
U.S. Government securities and the Municipal Bonds held by the Fund may be
adversely affected by similar factors and the risk of imperfect correlation
between movements in the prices of such financial futures contracts and the
prices of Municipal Bonds held by the Fund may be greater.
The Fund expects to liquidate a majority of the financial futures contracts
it enters into through offsetting transactions on the applicable contract
market. There can be no assurance, however, that a liquid secondary market
will exist for any particular financial futures contract at any specific time.
Thus, it may not be possible to close out a financial futures contract
position. In the event of adverse price movements, the Fund would continue to
be required to make daily cash payments of variation margin. In such
situations, if the Fund has insufficient cash, it may be required to sell
portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. The inability to close out financial
futures contract positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments in Municipal Bonds. The Fund will
enter into a financial futures contract position only if, in the judgment of
the Manager, there appears to be an actively traded secondary market for such
financial futures contracts.
The successful use of transactions in futures and related options also
depends on the ability of the Manager to forecast correctly the direction and
extent of interest rate movements within a given time frame. To the extent
interest rates remain stable during the period in which a financial futures
contract or option is held by the Fund or such rates move in a direction
opposite to that anticipated, the Fund may realize a loss on the hedging
transaction which is not fully or partially offset by an increase in the value
of portfolio securities. As a result, the Fund's total return for such period
may be less than if it had not engaged in the hedging transaction.
Because of low initial margin deposits made upon the opening of a financial
futures contract position, futures transactions involve substantial leverage.
As a result, relatively small movements in the price of the financial futures
contract can result in substantial unrealized gains or losses. Because the
Fund will engage in the purchase and sale of financial futures contracts
solely for hedging purposes, however, any losses incurred in connection
therewith should, if the hedging strategy is successful, be offset in whole or
in part by increases in the value of securities held by the Fund or decreases
in the price of securities the Fund intends to acquire.
The amount of risk the Fund assumes when it purchases an option on a
financial futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, 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.
11
<PAGE>
Municipal Bond Index financial futures contracts were approved for trading
in 1986. Trading in such financial futures contracts may tend to be less
liquid than that in other financial futures contracts. The trading of
financial futures contracts also is subject to certain market risks, such as
inadequate trading activity, which could at times make it difficult or
impossible to liquidate existing positions.
INVESTMENT RESTRICTIONS
The Trust has adopted a number of restrictions and policies relating to the
investment of its assets and its activities which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the Fund's shares
present at a meeting at which more than 50% of the outstanding shares of the
Fund are represented or (ii) more than 50% of the Fund's outstanding shares).
The Fund may not:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
12
<PAGE>
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, a Fund will not purchase shares of any registered open-end
investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the
Investment Company Act at any time the Fund's shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Trustees of the 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. The
Fund is "diversified" under the Investment Company Act and must satisfy the
foregoing 5% requirements with respect to 75% of its total assets.
13
<PAGE>
----------------
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 officer is P.O. Box 9011, Princeton, New
Jersey 08543-9011.
Arthur Zeikel (65)--President and Trustee(1)(2)--Chairman of the Manager and
Fund Asset Management, L.P. ("FAM") (which terms, as used herein, include
their corporate predecessors) since 1997; President of the Manager and FAM
from 1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton Services")
since 1997, Director since 1993 and President from 1993 to 1997; Executive
Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990.
Ronald W. Forbes (57)--Trustee(2)--1400 Washington Avenue, Albany, New York
12222. Professor of Finance, School of Business, State University of New York
at Albany since 1989.
Cynthia A. Montgomery (45)--Trustee(2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. 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 (66)--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 (65)--Trustee(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director of The Boston University
Center for the Advancement of Ethics and Character; Professor of Education at
Boston University since 1982; formerly taught on the faculties of The
University of Chicago, Stanford University and Ohio State University.
Richard R. West (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
14
<PAGE>
Business Administration; Director of Bowne & Co., Inc. (financial printers),
Vornado, Inc. (real estate holding company), and Alexander's Inc. (real estate
company).
Terry K. Glenn (57)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Merrill Lynch Funds
Distributor, Inc. (the "Distributor") since 1986 and Director thereof since
1991; President of Princeton Administrators, L.P. since 1988.
Vincent R. Giordano (53)--Senior Vice President(1)(2)--Senior Vice President
of the Manager and FAM since 1984; Senior Vice President of Princeton Services
since 1993.
Donald C. Burke (37)--Vice President(1)(2)--First Vice President of the
Manager since 1997; Vice President of the Manager from 1990 to 1997 and
Director of Taxation of the Manager since 1990.
Kenneth A. Jacob (46)--Vice President(1)(2)--First Vice President of the
Manager since 1997; Vice President of the Manager from 1984 to 1997.
William R. Bock (62)--Vice President(1)(2)--Vice President of the Manager
since 1989 and Portfolio Manager of the Fund since 1995.
Gerald M. Richard (48)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Manager and FAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Vice President of the Distributor since 1981
and Treasurer since 1984.
Susan B. Baker (40)--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 January 1, 1998, 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 $100 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-affiliated Trustees, a fee of
$300 per year. The Chairman of the Committee receives an additional fee of
$1,000 per year. For the fiscal year ended October 31, 1997 fees and expenses
paid to the non-affiliated Trustees of the Fund aggregated $14,861.
The following table sets forth for the fiscal year ended October 31, 1997
compensation paid by the Fund to the non-affiliated Trustees and for the
calendar year ended December 31, 1997 the aggregate compensation paid
15
<PAGE>
by all investment companies advised by MLAM and its affiliate, FAM ("MLAM/FAM
Advised Funds") to the non-affiliated 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/)... $2,400 None $153,500
Cynthia A.
Montgomery(/1/)........ $2,400 None $153,500
Charles C. Reilly(/1/).. $3,400 None $313,000
Kevin A. Ryan(/1/)...... $2,400 None $153,500
Richard R. West(/1/).... $2,400 None $290,000
</TABLE>
- - - - --------
(1) The Trustees serve on the boards of other MLAM/FAM Advised Funds as
follows: Mr. Forbes (29 registered investment companies consisting of 42
portfolios); Ms. Montgomery (29 registered investment companies consisting
of 42 portfolios); Mr. Reilly (47 registered investment companies
consisting of 60 portfolios); Mr. Ryan (29 registered investment companies
consisting of 42 portfolios); and Mr. West (48 registered investment
companies consisting of 70 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, 1995, 1996 and 1997, the fees paid by the Fund
to the Manager aggregated $955,580, $1,240,092 and $1,182,951, 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 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
16
<PAGE>
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, 1997, the Fund reimbursed the Manager
$55,190 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.
ALTERNATIVE SALES ARRANGEMENTS
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/FAM-Advised
Funds who elect to exchange Class C shares of such other MLAM/FAM-Advised
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
17
<PAGE>
in the investment portfolio of the Fund and has the same rights, except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-
1 distribution plan adopted with respect to such class pursuant to which
account maintenance and/or distribution fees are paid (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege."
The Merrill Lynch Select 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 that use 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, 1995 were $3,255, of which the Distributor received $216 and
Merrill Lynch received $3,039 as a selected dealer. 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 as a selected dealer. The gross sales charges for the sale of Class A
shares for the fiscal year ended October 31, 1997 were $1,531 of which the
Distributor received $104 and Merrill Lynch received $1,427 as a selected
dealer.
For the fiscal years ended October 31, 1995, 1996 and 1997, the Distributor
received Contingent Deferred Sales Charges ("CDSCs") of $1,752, $0 and $0 with
respect to redemptions within one year after purchase of Class A shares
purchased subject to a front-end sales charge waiver.
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 as a selected dealer. 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 as a selected dealer. The gross sales charges for the sale of Class D
shares for the fiscal year ended October 31, 1997 were $3,986 of which the
Distributor received $308 and Merrill Lynch received $3,678 as a selected
dealer.
For the fiscal years ended October 31, 1995, 1996 and 1997, 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>
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>
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 of 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 SM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee Access SM Accounts available through authorized employers. 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>
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; and second, such purchase of Class D shares
must be made within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
other mutual funds and that such shares have been outstanding for a period of
no less than six months; and second, such purchase of Class D shares must be
made within 60 days after the redemption and the proceeds from the redemption
must be maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse consequences to the
Fund that might result from an acquisition of assets having net unrealized
appreciation that is disproportionately higher at the time of acquisition than
the realized or unrealized appreciation of the Fund. The issuance of Class D
shares for consideration other than cash is limited to bona fide
reorganizations, statutory mergers or other acquisitions of portfolio
securities that (i) meet the investment objectives and policies of the Fund;
(ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control);
21
<PAGE>
and (iii) are liquid securities, the value of which is readily ascertainable,
that are not restricted as to transfer either by law or liquidity of market
(except that the Fund may acquire through such transactions restricted or
illiquid securities to the extent the Fund does not exceed the applicable
limits on acquisition of such securities set forth under "Investment Objective
and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
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 shareholders, 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.
22
<PAGE>
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 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,
1997 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, 1997.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF OCTOBER 31, 1997
CLASS B SHARES
(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, 1997):
Under NASD Rule as
Adopted................ $369,674 $23,105 $27,099 $50,204 $4,880 $45,324 $95
Under Distributor's
Voluntary Waiver....... $369,674 $23,105 $ 1,848 $24,953 $4,880 $20,073 $95
<CAPTION>
CLASS C SHARES
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Class C Shares, for the
period
October 21, 1994
(commencement of
operations) to October
31, 1996:
Under NASD Rule as
Adopted................ $ 3,972 $ 248 $ 37 $ 285 $ 22 $ 263 $ 6
</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
23
<PAGE>
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. This figure may include CDSCs that
were deferred when a shareholder redeemed shares prior to the expiration of
the applicable CDSC period and invested the proceeds, without the imposition
of a sales charge, in Class A shares in conjunction with the shareholder's
participation in the Merrill Lynch Mutual Funds Advisor ("MFA") program. The
CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA program.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days 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. The value of shares
at the time of the redemption may be more or less than the shareholder's cost
depending in part on the market value of the securities held by the Fund at
such time.
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge 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 in certain instances including
following the death or disability of a Class B shareholder. Redemptions for
which the waiver applies in the case of such withdrawals is 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, 1995, 1996 and 1997, the Distributor received CDSCs with respect
to Class B shares of the Fund of $219,856, $163,849, and $122,340,
respectively, all of which were paid to Merrill Lynch. Additional CDSCs
payable to the Distributor may have been waived or converted to a contingent
obligation in connection with a shareholder's participation in certain fee-
based programs. Similarly, for the fiscal years ended October 31, 1995, 1996
and 1997, the Distributor received CDSCs with respect to Class C shares of the
Fund of $1,574, $2,718 and $2,041, 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.
24
<PAGE>
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 ("OTC") 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. For the fiscal year
ended October 31, 1995, the Fund engaged in two transactions with Merrill
Lynch aggregating approximately $7,263,000. For the fiscal years ended October
31, 1996 and 1997, 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 an 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.
The Fund may not purchase securities, including Municipal Bonds, during the
existence of any underwriting syndicate of which Merrill Lynch is a member or
in a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Trustees of the Trust which either
comply with rules adopted by the Commission or with interpretations of the
Commission Staff. Rule 10f-3 under the 1940 Act sets forth conditions under
which the Fund may purchase municipal bonds from an underwriting syndicate of
which Merrill Lynch is a member. The rule sets forth requirements relating to,
among other things, the terms of an issue of municipal bonds purchased by the
Fund, the amount of municipal bonds which may be purchased in any one issue
and the assets of the Fund which may be invested in a particular issue.
The 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.
25
<PAGE>
For the fiscal years ended October 31, 1995 and 1996, the Fund paid total
brokerage commissions of $10,635 and $3,300, respectively. For the fiscal year
ended October 31, 1997, the Fund paid no brokerage commissions.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the national securities exchanges from executing exchange
transactions for their affiliates and institutional accounts which they manage
unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Fund in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided
to the Fund.
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 New York Stock Exchange ("NYSE") (generally, 4:00 p.m., New
York time), on each day during which the NYSE is open for trading. The NYSE is
not open on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Net asset value per share is computed by dividing the sum of
the value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
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
26
<PAGE>
equivalent return to the bondholder. Financial futures contracts, which are
traded on exchanges, are valued at their last sale price as of the close of
such exchanges. Options on financial futures contracts on U.S. Government
securities, which are traded on exchanges, are valued at their last bid price
in the case of options purchased by the Fund and their last asked price in the
case of options written by the Fund. Short-term investments with a remaining
maturity of 60 days or less are valued on an amortized cost basis which
approximates market value. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Trustees of the Trust, including valuations
furnished by a pricing service retained by the Trust, which may utilize a
matrix system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Trust under the general
supervision of the Trustees.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
described below that 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
27
<PAGE>
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. 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 may, at any time, notify Merrill Lynch in writing if their
account is maintained with Merrill Lynch or notify the Transfer Agent in
writing or by telephone (1-800-MER-FUND) 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. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed distribution or
redemption checks.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares in the form of payments
by checks or through automatic payment by direct deposit to such shareholder's
bank accounts on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired shares
of the Fund having a value, based on cost or the current offering price, of
$5,000 or more, and monthly withdrawals are available for shareholders with
shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and class of shares to be redeemed. Redemptions will be made at net
asset value as determined 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York City time) on the 24th day of each month or
the 24th day of the last month of each quarter, whichever is applicable. If
the NYSE is not open for business on such date, the shares will be redeemed at
the close of business on the following business day. The check for the
withdrawal payment will be mailed or the direct deposit 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 shares in the Investment Account are reinvested automatically in shares of
the Fund. 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.
28
<PAGE>
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
correspondingly reduced. Purchases of additional 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 shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R) or CBA(R)
Account may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the CMA(R)/CBA(R) Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $50. The proceeds of
systematic redemptions will be posted to the shareholder's account five
business days after the date the shares are redeemed. All redemptions are made
at net asset value. A shareholder may elect to have his or her shares redeemed
on the first, second, third or fourth Monday of each month, in the case of
monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R)/CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R)/CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Contingent Deferred Sales Charges--Class B Shares" and "--Contingent Deferred
Sales Charges--Class C Shares" in the Prospectus. Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last
Class B shares in an account to Class D shares, the systematic withdrawal plan
will automatically be applied thereafter to Class D shares. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares" in the Prospectus; if an
investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Financial Consultant.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill
Lynch Select 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
29
<PAGE>
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 at
least 15 days. It is contemplated that the exchange privilege may be
applicable to other new mutual funds whose shares may be distributed by the
Distributor.
Exchange of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
funds ("new Class A or Class D shares") are transacted on the basis of
relative net asset value per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the outstanding Class A or Class D shares and the sales charge payable
at the time of the exchange on the new Class A or Class D shares. With respect
to outstanding Class A or Class D shares as to which previous exchanges have
taken place, the "sales charge previously paid" shall include the aggregate of
the sales charges paid with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
funds offering Class A or Class D shares. For purposes of the exchange
privilege, dividend reinvestment Class A and Class D shares shall be deemed to
have been sold with a sales charge equal to the sales charge previously paid
on the Class A or Class D shares on which the dividend was 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 sales charge 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
30
<PAGE>
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 MLAM-advised funds
described above with shares for which certificates have not been issued, may
exercise the exchange privilege by wire through their securities dealers. The
Trust reserves the right to require a properly completed Exchange Application.
This exchange privilege may be modified or terminated in accordance with the
rules of the Commission. The Trust reserves the right to limit the number of
times an investor may exercise the exchange privilege. Certain funds may
suspend the continuous offering of their shares at any time and may thereafter
resume such offering from time to time. The exchange privilege is available
only to U.S. shareholders in states where the exchange legally may be made.
DISTRIBUTIONS AND TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Code. As
long as it so qualifies, the Fund (but not its shareholders) will not be
subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Trust intends to cause
the Fund to distribute substantially all of such income.
31
<PAGE>
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, including new categories of capital
gains, and tax preference items, discussed below) among the Class A, Class B,
Class C and Class D shareholders according to a method (which it believes is
consistent with the Commission rule permitting the issuance and sale of
multiple classes of shares) that is based on the gross income allocable to
Class A, Class B, Class C and Class D shareholders during the taxable year, or
such other method as the Internal Revenue Service may prescribe. To the extent
that the dividends distributed to the Fund's shareholders are derived from
interest income exempt from Federal income tax under Code Section 103(a) and
are properly designated as exempt-interest dividends, they will be excludable
from a shareholders's gross income for Federal income tax purposes. Exempt-
interest dividends are included, however, in determining the portion, if any,
of a person's social security benefits and railroad retirement benefits
subject to Federal income tax. Interest on indebtedness incurred or continued
to purchase or carry shares of a RIC paying exempt-interest dividends, such as
the Fund, will not be deductible by the investor for Federal income tax
purposes to the extent attributable to exempt-interest dividends. Shareholders
are advised to consult their tax advisers with respect to whether exempt-
interest dividends retain the exclusion under Code Section 103(a) if a
shareholder would be treated as a "substantial user" or "related person" under
Code 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. Recent
32
<PAGE>
legislation creates additional categories of capital gains taxable at
different rates. Generally not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any exempt-interest dividends, ordinary income
dividends or capital gain dividends, as well as the amount of capital gain
dividends in the different categories of capital gain referred to above.
Distributions by the Fund, whether from exempt-interest income, ordinary
income or capital gains, 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 paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay alternative minimum tax on
exempt-interest dividends paid by the Fund.
The Fund may invest in high yield securities, as previously described. Some
of these high yield securities may be subject to special tax rules under which
the Fund may be required to accrue and distribute income before amounts due
under the obligations are paid. In addition, it is possible that a portion of
the interest payments on such high yield securities could be recharacterized
as taxable ordinary income.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the
Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will
be reduced (or the gain increased) to the extent any sales charge
33
<PAGE>
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.
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.
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.
----------------
34
<PAGE>
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 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>
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
------ ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One Year Ended
October 31,
1997........... 6.51% $1,065.10 6.35% $1,063.50 6.34% $1,063.40 6.41% $1,064.10
Five Years Ended
October 31,
1997........... 6.07% $1,342.40 5.97% $1,336.30
Inception
(November 26,
1986) to
October 31,
1997........... 6.82% $1,933.50
Inception
(October 31,
1988) to
October 31,
1997........... 6.59% $1,775.80
Inception
(October 21,
1994) to
October 31,
1997........... 6.50% $1,210.00 6.38% $1,206.00
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
October 31,
1997............ 7.59% $1,075.90 7.35% $1,073.50 7.34% $1,073.40 7.48% $1,074.80
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
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(November 26,
1986) to
October 31,
1997........... 84.42% $1,844.20
Inception
(October 31,
1988) to
October 31,
1997........... 77.58% $1,775.80
Inception
(October 21,
1994) to
October 31,
1997........... 21.00% $1,210.00 20.60% $1,206.00
<CAPTION>
YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30 days ended
October 31,
1997........... 4.08% 3.81% 3.79% 3.98%
<CAPTION>
TAX-EQUIVALENT YIELD*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30 days ended
October 31,
1997........... 5.67% 5.30% 5.26% 5.53%
</TABLE>
- - - - -------
* Based upon a Federal income tax rate of 28%.
36
<PAGE>
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of
Shares" and "Redemption of Shares," respectively, the total return data quoted
by the Fund in advertisements directed to such investors may take into account
the reduced, and not the maximum, sales charge or may take into account the
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or the waiver of sales charges, a lower amount of expenses is
deducted.
GENERAL INFORMATION
DESCRIPTION OF SERIES AND SHARES
The Declaration of Trust provides that the Trust shall comprise separate
Series, each of which will consist of a separate portfolio which will issue
separate shares. The Trustees are authorized to create an unlimited number of
Series and, with respect to each Series, to issue an unlimited number of full
and fractional shares of beneficial interest, par value $.10 per share, of
different classes and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial
interests in the Series. Shareholder approval is not necessary for the
authorization of additional Series or classes of a Series of the Trust. At the
date of this Statement of Additional Information, the Fund is the only Series
of the Trust. Also at the date of this Statement of Additional Information,
the shares of the Fund are divided into Class A, Class B, Class C and Class D
shares. All class shares represent interests in the same assets of the Fund
and have identical voting, dividend, liquidation and other rights and the same
terms and conditions except that the Class B, Class C and Class D shares bear
certain expenses related to the account maintenance and/or distribution of
such shares and have exclusive voting rights with respect to matters relating
to such account maintenance and/or distribution expenditures. See "Purchase of
Shares."
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, as appropriate, 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 herein
37
<PAGE>
and in the Prospectus. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Trust voting for the election of
Trustees can elect all of the Trustees if they choose to do so and in such
event the holders of the remaining shares would not be able to elect any
Trustees. No amendments may be made to the Declaration of Trust other than
amendments necessary to conform the Declaration to certain laws or
regulations, to change the name of the Trust, or to make certain non-material
changes, without the affirmative vote of a majority of the outstanding shares
of the Trust. Under Massachusetts law, shareholders of a business trust may,
under certain circumstances, be held personally liable as partners for the
trust's obligations. However, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
both inadequate insurance existed and the trust itself was unable to meet its
obligations.
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, 1997 is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net Assets................... $71,683,923 $94,551,670 $6,110,349 $47,809,026
=========== =========== ========== ===========
Number of Shares Outstanding. 7,004,483 9,239,983 597,406 4,673,117
=========== =========== ========== ===========
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)................ $ 10.23 $ 10.23 $ 10.23 $ 10.23
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............... $ 10.33 $ 10.23 $ 10.23 $ 10.33
=========== =========== ========== ===========
</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 selection of
the independent auditors is subject to approval by the independent Trustees of
the Trust. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101, acts as the Custodian of the 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.
38
<PAGE>
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.
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 January 1, 1998.
39
<PAGE>
APPENDIX
RATINGS OF MUNICIPAL BONDS
DESCRIPTIONS OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and generally are referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
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 construction,
40
<PAGE>
(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>
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.
42
<PAGE>
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.
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.
43
<PAGE>
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
A Commercial Paper Rating is not a recommendation to purchase, 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.
44
<PAGE>
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date information to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
DESCRIPTION OF FITCH IBCA, 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
45
<PAGE>
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore, impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
Improving UP ARROW
Stable LEFT ARROW/RIGHT ARROW
Declining DOWN ARROW
Uncertain UP ARROW/DOWN ARROW
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.
46
<PAGE>
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.
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.
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>
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:
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.
48
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders, Merrill Lynch Municipal Intermediate
Term Fund of Merrill Lynch Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch Municipal Intermediate
Term Fund of Merrill Lynch Municipal Series Trust as of October 31, 1997, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at October 31, 1997 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, 1997, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 5, 1997
49
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Intermediate Term Fund, October 31, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alaska -- 3.6% AAA Aaa $4,000 Alaska, Industrial Development and Export Authority, Refunding
(Revolving Fund), AMT, Series A, 5.60% due 4/01/2009 (d) $4,147
Alaska, Student Loan Revenue Bonds (Student Loan Corp.), AMT,
Series A (c):
AAA Aaa 1,500 5.45% due 7/01/2009 1,540
AAA Aaa 2,250 5.65% due 7/01/2012 2,304
Arizona -- 1.0% NR* NR* 2,000 Mohave County, Arizona, IDA, IDR (North Star Steel Co. Project),
AMT, 6.70% due 3/01/2020 2,175
</TABLE>
50
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
California -- 21.2% California State, GO:
A+ A1 7,855 6% due 10/01/2008 8,726
A+ A1 7,305 6% due 10/01/2009 8,114
A- Baa3 10,000 Northern California Power Agency, Public Power Revenue
Refunding Bonds (Geothermal Project No. 3), Series A,
5.65% due 7/01/2007 10,415
AAA Aaa 4,000 Oxnard, California, Financing Authority, Solid Waste Revenue
Bonds, AMT, 5.75% due 5/01/2010 (c) 4,243
BBB- Baa2 1,305 Riverside County, California, Public Financing Authority,
Tax Allocation Revenue Bonds (Redevelopment Project),
Series A, 5.20% due 10/01/2011 1,309
SP1+ VMIG1+ 7,500 Santa Clara County, California, TRAN, 4.75% due 10/01/1998 7,562
AAA Aaa 6,000 University of California, Hospital Revenue Bonds (Davis Medical
Center), 5.60% due 7/01/2009 (c) 6,389
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 1,348
District of A1+ VMIG1+ 5,200 District of Columbia, General Fund Recovery Bonds, VRDN, UT,
Columbia -- 4.6% Series B-3, 3.80% due 6/01/2003 (a) 5,200
AAA Aaa 4,700 District of Columbia, Refunding, UT, Series A, 5.375% due
6/01/2010 (c) 4,803
Florida -- 1.8% AAA Aaa 3,500 Dade County, Florida, Educational Facilities Authority,
Exchangeable Revenue Bonds (University of Miami), 7.65% due
4/01/2010 (d) 3,823
A1+ VMIG1+ 200 Martin County, Florida, PCR, Refunding (Florida Power &
Light Company Project), VRDN, 3.65% due 9/01/2024 (a) 200
Georgia -- 0.6% A1 NR* 1,400 Burke County, Georgia, Development Authority, PCR, Refunding
(Georgia Power Company -- Plant Vogtle Project), VRDN, 3.65%
due 9/01/2026 (a) 1,400
Hawaii -- 3.5% AAA Aaa 5,000 Hawaii State Refunding, GO, 6% due 3/01/2009 (e) 5,547
AAA Aaa 2,000 Honolulu, Hawaii, City and County Revenue Refunding Bonds, Series C,
5.50% due 11/01/2010 (e) 2,101
Illinois -- 3.8% Illinois Health Facilities Authority Revenue Bonds:
AAA Aaa 2,500 Refunding (Lutheran General Health), Series C, 7% due 4/01/2008 (f) 2,942
NR* VMIG1+ 3,900 (Resurrection Health Care System), VRDN, 3.75% due 5/01/2011 (a) 3,900
AAA Aaa 1,425 University of Illinois, COP, Series A, 7.25% due 8/15/2000 (f) 1,541
Indiana -- 3.8% AAA Aaa 4,175 Central High School Building Corp., Indiana, Refunding (First
Mortgage), 5.50% due 8/01/2010 (c) 4,340
AAA NR* 3,420 Indianapolis, Indiana, Gas Utility Revenue Bonds, Junior Lien,
7% due 6/01/2008 (h) 3,913
</TABLE>
Portfolio
Abbreviations
To simplify the listings of Merrill Lynch Municipal Intermediate Term
Fund's portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list below and at right.
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
COP Certificates of Participation
GO General Obligation Bonds
HDA Housing Development Authority
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
PCR Pollution Control Revenue Bonds
RITES Residual Interest Tax-Exempt Securities
TRAN Tax Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
51
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Maine -- 2.4% NR* A 2,670 Maine Educational Loan Marketing Corporation, Student Loan Revenue
Refunding Bonds, AMT, Series 1991, 6.90% due 11/01/2003 2,798
Maine State Turnpike Authority, Turnpike Revenue Bonds (d):
AAA Aaa 1,000 7.125% due 7/01/2008 1,200
AAA Aaa 1,000 7.50% due 7/01/2009 1,242
Massachusetts -- AAA Aaa 2,000 Massachusetts State Port Authority Revenue Bonds, AMT, Series A,
2.1% 7.375% due 7/01/2010 (e) 2,169
NR* Aaa 2,500 Massachusetts State Turnpike Authority, Western Turnpike Revenue
Bonds, Series A, 5.55% due 1/01/2017 (d) 2,549
Michigan -- 1.0% NR* A 1,000 Michigan Higher Education, Student Loan Authority Revenue Bonds,
AMT, Series XIV-A, 6.75% due 10/01/2006 1,075
A A2 1,000 Michigan State Hospital Finance Authority, Revenue Refunding
Bonds (Detroit Medical Center Obligation Group), Series A, 6.375%
due 8/15/2009 1,073
New York -- 18.4% NR* Aaa 2,995 Nassau County, New York, General Improvement, UT, Series X, 5.10%
due 11/01/2009 (c) 3,046
BBB+ Baa1 10,000 New York City, New York, GO, Series D, 5.40% due 8/01/2011 10,003
BBB+ Baa1 5,000 New York City, New York, Refunding, UT, Series D, 6.50% due
11/01/2009 5,599
New York State Dormority Authority, Revenue Refunding Bonds
(State University Educational Facilities):
A- A3 3,000 5.50% due 5/15/2009 3,125
A- A3 3,000 5% due 5/15/2012 2,924
AA- Aa3 8,000 New York State Thruway Authority, General Revenue Bonds, Series D,
5.40% due 1/01/2010 8,296
United Nations Development Corporation, New York, Revenue Refunding
Bonds, Series B:
NR* A2 1,000 5.30% due 7/01/2011 1,001
NR* A2 1,000 5.40% due 7/01/2014 1,000
AAA Aaa 5,000 Westchester County, New York, IDA, Resource Recovery Revenue Bonds
(Westchester Recovery Company Project), AMT, 6% due 7/01/2008 (c) 5,500
Ohio -- 3.1% AAA Aaa 2,000 Cleveland, Ohio, COP (Cleveland Stadium Project), 6% due
11/15/2008 (c) 2,213
AAA Aaa 4,435 Ohio State Turnpike Commission, Turnpike Revenue Bonds, Series A,
5.50% due 2/15/2010 (d) 4,640
Oregon -- 2.9% AAA Aaa 2,225 Multnomah County, Oregon, Educational Facilities Revenue
Refunding Bonds (University of Portland Project), 5.75% due
4/01/2010 (c) 2,388
AAA Aaa 3,790 Port of Portland, Oregon, International Airport Revenue Bonds
(Portland International Airport), AMT, Series 11, 5.40% due
7/01/2008 (e) 3,946
Pennsylvania -- 1.2% AAA Aaa 2,500 Allegheny County, Pennsylvania, Airport Revenue Refunding Bonds
(Pittsburgh International Airport), AMT, Series A, 5.75% due
1/01/2011 (d) 2,662
Tennessee -- 0.6% A+ A1 1,360 Tennessee HDA, Mortgage Finance, Refunding, Series A, 5.65% due
1/01/2007 1,406
Texas -- 1.0% NR* VMIG1+ 600 Gulf Coast, Texas, IDA, Solid Waste Disposal Revenue Bonds
(CITGO Petroleum Corp. Project), VRDN, AMT, 3.85% due 5/01/2025 (a) 600
A1+ NR* 500 Harris County, Texas, Health Facilities Development Corporation,
Hospital Revenue Bonds (Methodist Hospital), VRDN, 3.70% due
12/01/2025 (a) 500
</TABLE>
52
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
NR* VMIG1+ 1,000 Port of Arthur, Texas, Navigational District, PCR, Refunding
(Texaco Incorporated Project), VRDN, 3.75% due 10/01/2024 (a) 1,000
Virginia -- 1.3% Virginia State, HDA, Commonwealth Mortgage, Series J, Sub-Series J-2:
AA+ Aa1 1,365 6.45% due 1/01/2010 1,459
AA+ Aa1 1,300 6.50% due 1/01/2011 1,390
Washington -- 16.3% King and Snohomish Counties, Washington, School District No.
417 (Northshore), Refunding, UT (e):
AAA Aaa 2,720 5.25% due 12/01/2008 2,823
AAA Aaa 2,765 5.25% due 12/01/2009 2,848
AA+ Aa1 5,000 King County, Washington, GO, Series D, 5.70% due 12/01/2010 5,373
King County, Washington, School District No. 216 (Enumclaw) (e):
AAA Aaa 1,000 6.25% due 12/01/2008 1,133
AAA Aaa 1,550 6.25% due 12/01/2009 1,747
AA+ Aa1 4,000 Port of Seattle, Washington, GO, AMT, 5.80% due 5/01/2009 4,244
AA Aa 5,395 Seattle, Washington, Municipal Light and Power Revenue Bonds,
Series A, 5.75% due 8/01/2008 5,700
AAA Aaa 1,025 Washington State Health Care Facilities Authority, Revenue
Refunding Bonds (Kadlec Medical Center -- Richland), 5.75% due
12/01/2005 (c) 1,100
Washington State Public Power Supply System, Revenue Refunding Bonds:
AA- Aa1 2,200 (Nuclear Project No. 2), Series B, 5.20% due 7/01/2011 2,197
AAA Aaa 5,250 (Nuclear Project No. 3), Series A, 5.50% due 7/01/2007 (c) 5,539
AAA Aaa 3,015 (Nuclear Project No. 3), Series A, 5.60% due 7/01/2008 (c) 3,194
West Virginia -- 2.5% AAA Aaa 5,000 West Virginia, School Building Authority, Revenue Refunding
Bonds (Capital Improvement), 6% due 7/01/2008 (c) 5,544
Wisconsin -- 4.4% A+ A1 7,500 Kenosha, Wisconsin, Waterworks Revenue Bonds, BAN, 4.70% due
12/01/2001 7,528
AA Aa2 2,000 Wisconsin State Housing and Economic Development Authority,
Home Ownership Revenue Bonds, AMT, Series F, 7.40% due 7/01/2013 (b) 2,163
Puerto Rico -- 1.9% A1+ Baa1 3,950 Puerto Rico Commonwealth, Highway and Transportation Authority,
Highway Revenue Bonds, RITES, Series X, 6.135% due 7/01/2005 (g) 4,231
--------
Total Investments (Cost -- $221,142) -- 103.6% 228,150
Liabilities in Excess of Other Assets -- (3.6%) (7,995)
--------
Net Assets -- 100.0% $220,155
========
(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, 1997.
(b) FHA Insured.
(c) AMBAC Insured.
(d) MBIA Insured.
(e) FGIC Insured.
(f) FSA Insured.
(g) 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, 1997.
(h) Escrowed to maturity.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
53
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<S> <C> <C> <C>
As of October 31, 1997
Assets: Investments, at value (identified cost -- $221,141,878) (Note 1a) $228,150,169
Cash 59,751
Receivables:
Securities sold $10,645,688
Interest 3,241,146
Beneficial interest sold 312,184 14,199,018
-----------
Prepaid registration fees and other assets (Note 1e) 69,539
------------
Total assets 242,478,477
------------
Liabilities: Payables:
Securities purchased 21,637,680
Beneficial interest redeemed 241,502
Dividends to shareholders (Note 1f) 148,899
Investment adviser (Note 2) 109,255
Distributor (Note 2) 31,828 22,169,164
-----------
Accrued expenses and other liabilities 154,345
------------
Total liabilities 22,323,509
------------
Net Assets: Net assets $220,154,968
============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of shares authorized $700,448
Consist of: Class B Shares of beneficial interest, $.10 par value, unlimited number of shares authorized 923,998
Class C Shares of beneficial interest, $.10 par value, unlimited number of shares authorized 59,741
Class D Shares of beneficial interest, $.10 par value, unlimited number of shares authorized 467,312
Paid-in capital in excess of par 213,466,723
Accumulated realized capital losses on investments -- net (Note 5) (2,471,545)
Unrealized appreciation on investments -- net 7,008,291
------------
Net assets $220,154,968
============
Net Asset Class A -- Based on net assets of $71,683,923 and 7,004,483 shares of beneficial
Value: interest outstanding $10.23
============
Class B -- Based on net assets of $94,551,670 and 9,239,983 shares of beneficial
interest outstanding $10.23
============
Class C -- Based on net assets of $6,110,349 and 597,406 shares of beneficial
interest outstanding $10.23
============
Class D -- Based on net assets of $47,809,026 and 4,673,117 shares of beneficial
interest outstanding $10.23
============
See Notes to Financial Statements.
</TABLE>
54
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<S> <C> <C> <C>
For the Year Ended October 31, 1997
Investment Interest and amortization of premium and discount earned $11,223,721
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $1,182,951
Account maintenance and distribution fees -- Class B (Note 2) 353,316
Transfer agent fees -- Class B (Note 2) 129,568
Registration fees (Note 1e) 104,098
Printing and shareholder reports 74,178
Accounting services (Note 2) 55,190
Professional fees 48,913
Transfer agent fees -- Class A (Note 2) 46,471
Account maintenance fees -- Class D (Note 2) 39,032
Transfer agent fee -- Class D (Note 2) 35,575
Account maintenance and distribution fees -- Class C (Note 2) 20,384
Trustees' fees and expenses 14,861
Custodian fees 12,852
Pricing fees 9,597
Transfer agent fees -- Class C (Note 2) 8,599
Other 7,407
----------
Total expenses 2,142,992
-----------
Investment income -- net 9,080,729
-----------
Realized & Realized gain on investments -- net 4,147,015
Unrealized Gain on Change in unrealized appreciation on investments -- net 2,357,789
Investments -- Net -----------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $15,585,533
===========
See Notes to Financial Statements.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $9,080,729 $10,224,192
Realized gain on investments -- net 4,147,015 154,528
Change in unrealized appreciation/depreciation on investments -- net 2,357,789 (1,703,506)
------------ ------------
Net increase in net assets resulting from operations 15,585,533 8,675,214
------------ ------------
Dividends to Investment income -- net:
Shareholders Class A (2,263,578) (1,611,220)
(Note 1f): Class B (4,858,261) (7,875,619)
Class C (278,427) (341,198)
Class D (1,680,463) (396,155)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (9,080,729) (10,224,192)
------------ ------------
Beneficial Interest Net decrease in net assets derived from beneficial interest transactions (2,831,837) (12,064,882)
Transactions (Note 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets 3,672,967 (13,613,860)
Beginning of year 216,482,001 230,095,861
------------ ------------
End of year $220,154,968 $216,482,001
============ ============
See Notes to Financial Statements.
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived Class A
from information provided in the financial statements. For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $9.94 $10.00 $9.62 $10.39 $9.70
Operating ------- ------- ------- ------- -------
Performance: Investment income -- net .45 .48 .53 .52 .54
Realized and unrealized gain (loss) on investments -- net .29 (.06) .38 (.77) .69
------- ------- ------- ------- -------
Total from investment operations .74 .42 .91 (.25) 1.23
------- ------- ------- ------- -------
Less dividends from investment income -- net (.45) (.48) (.53) (.52) (.54)
------- ------- ------- ------- -------
Net asset value, end of year $10.23 $9.94 $10.00 $9.62 $10.39
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 7.59% 4.27% 9.69% (2.49%) 13.01%
Return:* ======= ======= ======= ======= =======
Ratios to Average Expenses .79% .81% .81% .76% .75%
Net Assets: ======= ======= ======= ======= =======
Investment income -- net 4.40% 4.79% 5.36% 5.19% 5.35%
======= ======= ======= ======= =======
Supplemental Net assets, end of year (in thousands) $71,684 $30,353 $34,970 $27,653 $24,173
Data: ======= ======= ======= ======= =======
Portfolio turnover 167.41% 146.82% 115.78% 52.56% 83.66%
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements. For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $9.93 $10.00 $9.62 $10.39 $9.69
Operating ------- ------- ------- ------- -------
Performance: Investment income -- net .41 .44 .50 .49 .51
Realized and unrealized gain (loss) on investments -- net .30 (.07) .38 (.77) .70
------- ------- ------- ------- -------
Total from investment operations .71 .37 .88 (.28) 1.21
------- ------- ------- ------- -------
Less dividends from investment income -- net (.41) (.44) (.50) (.49) (.51)
------- ------- ------- ------- -------
Net asset value, end of year $10.23 $9.93 $10.00 $9.62 $10.39
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 7.35% 3.84% 9.34% (2.79%) 12.78%
Return:* ======= ======= ======= ======= =======
Ratios to Average Expenses 1.11% 1.13% 1.13% 1.07% 1.06%
Net Assets: ======= ======= ======= ======= =======
Investment income -- net 4.13% 4.47% 5.05% 4.87% 5.07%
======= ======= ======= ======= =======
Supplemental Net assets, end of year (in thousands) $94,552 $169,441 $181,640 $142,152 $158,061
Data: ======= ======= ======= ======= =======
Portfolio turnover 167.41% 146.82% 115.78% 52.56% 83.66%
======= ======= ======= ======= =======
* Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Class C
For the
The following per share data and ratios have been derived Period
from information provided in the financial statements. For the Year Oct. 21, 1994+
Ended October 31, to Oct. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.93 $10.00 $9.62 $9.70
Operating ------- ------- ------- -------
Performance: Investment income -- net .41 .44 .50 .01
Realized and unrealized gain (loss) on investments -- net .30 (.07) .38 (.08)
------- ------- ------- -------
Total from investment operations .71 .37 .88 (.07)
------- ------- ------- -------
Less dividends from investment income -- net (.41) (.44) (.50) (.01)
------- ------- ------- -------
Net asset value, end of period $10.23 $9.93 $10.00 $9.62
======= ======= ======= =======
Total Investment Based on net asset value per share 7.34% 3.82% 9.36% (.71%)++++
Return:** ======= ======= ======= =======
Ratios to Average Expenses 1.13% 1.15% 1.01% 1.18%*
Net Assets: ======= ======= ======= =======
Investment income -- net 4.10% 4.44% 4.76% 4.92%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $6,110 $8,313 $6,485 $1
Data: ======= ======= ======= =======
Portfolio turnover 167.41% 146.82% 115.78% 52.56%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Class D
For the
The following per share data and ratios have been derived Period
from information provided in the financial statements. For the Year Oct. 21, 1994+
Ended October 31, to Oct. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.94 $10.00 $9.62 $9.70
Operating ------- ------- ------- -------
Performance: Investment income -- net .44 .47 .52 .01
Realized and unrealized gain (loss) on
investments -- net .29 (.06) .38 (.08)
------- ------- ------- -------
Total from investment operations .73 .41 .90 (.07)
------- ------- ------- -------
Less dividends from investment income -- net (.44) (.47) (.52) (.01)
------- ------- ------- -------
Net asset value, end of period $10.23 $9.94 $10.00 $9.62
======= ======= ======= =======
Total Investment Based on net asset value per share 7.48% 4.17% 9.58% (.71%)++++
Return:** ======= ======= ======= =======
Ratios to Average Expenses .89% .91% .90% .97%*
Net Assets: ======= ======= ======= =======
Investment income -- net 4.31% 4.68% 5.12% 5.20%*
======= ======= ======= =======
</TABLE>
58
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Supplemental Net assets, end of period (in thousands) $47,809 $8,375 $7,000 $70
Data: ======= ======= ======= =======
Portfolio turnover 167.41% 146.82% 115.78% 52.56%
======= ======= ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Municipal Intermediate Term Fund, October 31, 1997
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 PricingSM 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.
[bullet] Financial futures contracts -- The Fund may purchase or sell
interest rate futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by
the Fund as unrealized gains or losses. When the contract is closed, the
Fund records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
59
<PAGE>
(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.
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 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, 1997, 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 $104 $1,427
Class D $308 $3,677
For the year ended October 31, 1997, MLPF&S received contingent deferred
sales charges of $397,577 and $2,041 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, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
year ended October 31, 1997 were $333,231,913 and $336,225,039,
respectively.
60
<PAGE>
Net realized and unrealized gains as of October 31, 1997, were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $4,147,015 $6,999,164
Short-term investments -- 9,127
----------- ----------
Total $4,147,015 $7,008,291
=========== ==========
As of October 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $7,008,291, of which $7,045,622 related to
appreciated securities and $37,331 related to depreciated securities.
The aggregate cost of investments at October 31, 1997 for Federal income
tax purposes was $221,141,878.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions
was $2,831,837 and $12,064,882 for the years ended October 31, 1997 and
October 31, 1996, respectively.
Transactions in shares of beneficial interest for each class were
as follows:
Class A Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 6,709,488 $67,140,511
Shares issued to shareholders
in reinvestment of dividends 131,599 1,326,752
---------- -----------
Total issued 6,841,087 68,467,263
Shares redeemed (2,891,728) (28,944,364)
---------- -----------
Net increase 3,949,359 $39,522,899
========== ===========
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 B Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 2,459,944 $24,587,970
Shares issued to shareholders
in reinvestment of dividends 298,447 2,996,372
---------- -----------
Total issued 2,758,391 27,584,342
Automatic conversion of shares. (4,335,272) (43,314,661)
Shares redeemed (6,240,186) (62,481,421)
---------- -----------
Net decrease (7,817,067) $(78,211,740)
========== ===========
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
Automatic conversion of shares. (68,180) (673,631)
Shares redeemed (4,149,275) (41,273,703)
---------- -----------
Net decrease (1,106,912) $(11,019,863)
========== ===========
Class C Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 263,377 $2,624,458
Shares issued to shareholders
in reinvestment of dividends 22,330 224,277
---------- -----------
Total issued 285,707 2,848,735
Shares redeemed (525,342) (5,253,237)
---------- -----------
Net decrease (239,635) $(2,404,502)
========== ===========
61
<PAGE>
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 D Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 339,568 $3,413,939
Shares issued to shareholders
in reinvestment of dividends 76,475 769,028
Automatic conversion of shares 4,335,272 43,314,661
---------- -----------
Total issued 4,751,315 47,497,628
Shares redeemed. (921,079) (9,236,122)
---------- -----------
Net increase 3,830,236 $38,261,506
========== ===========
Class D Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 390,259 $3,907,908
Shares issued to shareholders
in reinvestment of dividends 21,768 216,202
Automatic conversion of shares 68,171 673,631
---------- -----------
Total issued 480,198 4,797,741
Shares redeemed (337,194) (3,358,288)
---------- -----------
Net increase 143,004 $1,439,453
========== ===========
5. Capital Loss Carryforward:
At October 31, 1997, the Fund had a net capital loss carryforward of
approximately $1,703,000, of which $1,434,000 expires in 2003 and
$269,000 expires in 2004. This amount will be available to offset like
amounts of any future taxable gains.
62
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Description of Municipal Bonds........................................... 2
Description of Temporary Investments..................................... 6
Repurchase Agreements.................................................... 6
Financial Futures and Options Transactions............................... 7
Investment Restrictions................................................... 12
Management of the Trust................................................... 14
Trustees and Officers.................................................... 14
Compensation of Trustees................................................. 15
Management and Advisory Arrangements..................................... 16
Purchase of Shares........................................................ 17
Alternative Sales Arrangements........................................... 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..................... 23
Redemption of Shares...................................................... 24
Deferred Sales Charges--Class B and Class C Shares....................... 24
Portfolio Transactions.................................................... 25
Determination of Net Asset Value.......................................... 26
Shareholder Services...................................................... 27
Investment Account....................................................... 27
Automatic Investment Plans............................................... 27
Automatic Reinvestment of Dividends and Capital Gain Distributions....... 28
Systematic Withdrawal Plans.............................................. 28
Exchange Privilege....................................................... 29
Distributions and Taxes................................................... 31
Tax Treatment of Futures and Options Transactions......................... 34
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........................................................... 39
Legal Counsel............................................................ 39
Reports to Shareholders.................................................. 39
Additional Information................................................... 39
Appendix--Ratings of Municipal Bonds...................................... 40
Independent Auditors' Report.............................................. 49
Financial Statements...................................................... 50
</TABLE>
Code # 10706-0298
[LOGO] MERRILL LYNCH
Merrill Lynch
Municipal Intermediate
Term Fund
Merrill Lynch Municipal
Series Trust
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
February 5, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the years in the ten-year period ended
October 31, 1997.
Contained in Part B:
Financial Statements:
Schedule of Investments as of October 31, 1997.
Statement of Assets and Liabilities as of October 31, 1997.
Statement of Operations for the year ended October 31, 1997.
Statements of Changes in Net Assets for each of the years in the two-
year period ended October 31, 1997.
Financial Highlights for each of the years in the five-year period
ended October 31, 1997.
(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)
--Amendment of Declaration of Trust of the Registrant, dated October
(c) 3, 1988.(a)
--Instrument establishing Class A shares and Class B shares of the
(d) 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)
--Class B Distribution Agreement between the Registrant and Merrill
6(a) 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.
--Form of Custody Agreement between the Registrant and State Street
8 Bank and Trust Company.(e)
9 --Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Merrill Lynch
Financial Data Services.(c)
10 --None.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
OCTOBER 31,
TITLE OF CLASS 1997*
-------------- -----------
<S> <C>
Class A shares of beneficial interest, par value $0.10 per share................ 3,478
Class B shares of beneficial interest, par value $0.10 per share................ 4,856
Class C shares of beneficial interest, par value $0.10 per share................ 538
Class D shares of beneficial interest, par value $0.10 per share................ 1,541
</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").
C-2
<PAGE>
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees and
agents (including persons who serve at its request as directors, officers
or trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened, while in office or thereafter, by reason of his
being or having been such a trustee, officer, employee or agent, except
with respect to any matter as to which he shall have been adjudicated to
have acted in bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties; provided, however, that as to any matter disposed
of by a compromise payment by such person, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence
or reckless disregard of duty, or the matter of good faith and reasonable
belief as to the best interests of the Trust, had been adjudicated, it
would have been adjudicated in favor of such person. The rights accruing to
any Person under these provisions shall not exclude any other right to
which he may be lawfully entitled; provided that no Person may satisfy any
right 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 the
Securities Act of 1933, as amended (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,
C-3
<PAGE>
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 the manager for
the following open-end registered investment companies: Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund for
Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill Lynch
Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value, 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 Real Estate Fund, Inc., Merrill Lynch
Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-
Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch U.S.A. Government Reserves, Merrill
Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc.,
Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds
(advised by Hotchkis and Wiley, a division of MLAM); and the following closed-
end registered investment companies: Merrill Lynch High Income Municipal Bond
Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as
sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisory Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as
the investment adviser for the following open-end registered investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., Financial Institutions Series
Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, Merrill Lynch 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 registered investment companies: Apex Municipal Fund,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Debt Strategies Fund, Inc. Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniHoldings Fund, Inc.
MuniHoldings California Insured Fund, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings New York Insured Fund, 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 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
C-4
<PAGE>
Government Bond Fund is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2646. The address of the Manager, FAM, Princeton Services,
Inc. ("Princeton Services"), and Princeton Administrators, L.P. is also P.O.
Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch 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, 1995 for his, her or its own account or in the capacity of
director, officer, employee, 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 first two paragraphs of this Item 28. Messrs. Zeikel, Glenn
and Richard 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>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<C> <C> <S>
ML & Co................ Limited Partner Financial Services Holding
Company; Limited Partner of FAM
Princeton Services..... General Partner General Partner of FAM
Arthur Zeikel.......... Chairman (since 1997); Chairman (since 1997) and
President (1977 to President (1977 to 1997) of
1997) FAM; Chairman and Director of
Princeton Services; President
of Princeton Services from
(1993 to 1997); Executive Vice
President of ML & Co.
Jeffrey M. Peek........ President (since 1997) President (since 1997) of FAM;
President and Director of
Princeton Services (since
1997); 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
Linda L. Federici...... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Vincent R. Giordano.... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Elizabeth A. 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
Philip L. Kirstein..... Senior Vice President, Senior Vice President, General
Counsel and Secretary Counsel and Secretary of FAM;
Senior Vice President, General
Counsel, Director and Secretary
of Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<C> <C> <S>
Ronald M. Kloss........ Senior Vice President and Senior Vice President and
Controller Controller of FAM; Senior Vice
President and Controller of
Princeton Services
Debra Landsman-Yaros... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services; Vice
President of MLFD
Stephen M.M. Miller.... Senior Vice President Executive Vice President of
Princeton Administrators, L.P.;
Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr.. Senior Vice President Senior Vice President of 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
Richard L. Reller...... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services; Director of
MLFD
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
Gregory D. Upah........ Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Ronald L. Welburn...... 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, 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.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2646.
<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
Richard L. Reller........... Director None
Thomas J. Verage............ Director None
William E. Aldrich.......... Senior Vice President None
Robert W. Crook............. Senior Vice President None
Michael J. Brady............ Vice President None
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
- - - - ---- ---------------------------- -------------------------
<S> <C> <C>
William M. Breen........ Vice President None
Michael G. Clark........ 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 are 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 the caption "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>
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
4th day of February, 1998.
Merrill Lynch Municipal Series Trust
(Registrant)
/s/ Terry K. Glenn
By: _________________________________
(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.
SIGNATURE TITLE DATE(S)
Arthur Zeikel* President and
- - - - ------------------------------------- Trustee (Principal
(ARTHUR ZEIKEL) Executive Officer)
Gerald M. Richard* Treasurer (Principal
- - - - ------------------------------------- Financial and
(GERALD M. RICHARD) Accounting Officer)
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)
/s/ Terry K. Glenn
*By: ________________________________ February 4,
(TERRY K. GLENN, ATTORNEY-IN-FACT) 1998
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
--Consent of Deloitte & Touche LLP, independent auditors for the
11 Registrant
17(a) --Financial Data Schedule for Class A shares
(b) --Financial Data Schedule for Class B shares
(c) --Financial Data Schedule for Class C shares
(d) --Financial Data Schedule for Class D shares
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- - - - ---------------------- -------------------
Compass Place, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 221141878
<INVESTMENTS-AT-VALUE> 228150169
<RECEIVABLES> 14199018
<ASSETS-OTHER> 129290
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 242478477
<PAYABLE-FOR-SECURITIES> 21637680
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 685829
<TOTAL-LIABILITIES> 22323509
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 215618222
<SHARES-COMMON-STOCK> 7004483
<SHARES-COMMON-PRIOR> 3055124
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2471545)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7008291
<NET-ASSETS> 71683923
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11223721
<OTHER-INCOME> 0
<EXPENSES-NET> (2142992)
<NET-INVESTMENT-INCOME> 9080729
<REALIZED-GAINS-CURRENT> 4147015
<APPREC-INCREASE-CURRENT> 2357789
<NET-CHANGE-FROM-OPS> 15585533
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2263578)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6709488
<NUMBER-OF-SHARES-REDEEMED> (2891728)
<SHARES-REINVESTED> 131599
<NET-CHANGE-IN-ASSETS> 3672967
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (6618560)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1182951
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2142992
<AVERAGE-NET-ASSETS> 51202733
<PER-SHARE-NAV-BEGIN> 9.94
<PER-SHARE-NII> .45
<PER-SHARE-GAIN-APPREC> .29
<PER-SHARE-DIVIDEND> (.45)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.23
<EXPENSE-RATIO> .79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 221141878
<INVESTMENTS-AT-VALUE> 228150169
<RECEIVABLES> 14199018
<ASSETS-OTHER> 129290
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 242478477
<PAYABLE-FOR-SECURITIES> 21637680
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 685829
<TOTAL-LIABILITIES> 22323509
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 215618222
<SHARES-COMMON-STOCK> 9239983
<SHARES-COMMON-PRIOR> 17057050
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2471545)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7008291
<NET-ASSETS> 94551670
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11223721
<OTHER-INCOME> 0
<EXPENSES-NET> (2142992)
<NET-INVESTMENT-INCOME> 9080729
<REALIZED-GAINS-CURRENT> 4147015
<APPREC-INCREASE-CURRENT> 2357789
<NET-CHANGE-FROM-OPS> 15585533
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4858261)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2459944
<NUMBER-OF-SHARES-REDEEMED> (10575458)
<SHARES-REINVESTED> 298447
<NET-CHANGE-IN-ASSETS> 3672967
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (6618560)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1182951
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2142992
<AVERAGE-NET-ASSETS> 117130195
<PER-SHARE-NAV-BEGIN> 9.93
<PER-SHARE-NII> .41
<PER-SHARE-GAIN-APPREC> .30
<PER-SHARE-DIVIDEND> (.41)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.23
<EXPENSE-RATIO> 1.11
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND - CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 221141878
<INVESTMENTS-AT-VALUE> 228150169
<RECEIVABLES> 14199018
<ASSETS-OTHER> 129290
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 242478477
<PAYABLE-FOR-SECURITIES> 21637680
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 685829
<TOTAL-LIABILITIES> 22323509
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 215618222
<SHARES-COMMON-STOCK> 597406
<SHARES-COMMON-PRIOR> 837041
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2471545)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7008291
<NET-ASSETS> 6110349
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11223721
<OTHER-INCOME> 0
<EXPENSES-NET> (2142992)
<NET-INVESTMENT-INCOME> 9080729
<REALIZED-GAINS-CURRENT> 4147015
<APPREC-INCREASE-CURRENT> 2357789
<NET-CHANGE-FROM-OPS> 15585533
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (278427)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 263377
<NUMBER-OF-SHARES-REDEEMED> (525342)
<SHARES-REINVESTED> 22330
<NET-CHANGE-IN-ASSETS> 3672967
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (6618560)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1182951
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2142992
<AVERAGE-NET-ASSETS> 6757556
<PER-SHARE-NAV-BEGIN> 9.93
<PER-SHARE-NII> .41
<PER-SHARE-GAIN-APPREC> .30
<PER-SHARE-DIVIDEND> (.41)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.23
<EXPENSE-RATIO> 1.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND - CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 221141878
<INVESTMENTS-AT-VALUE> 228150169
<RECEIVABLES> 14199018
<ASSETS-OTHER> 129290
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 242478477
<PAYABLE-FOR-SECURITIES> 21637680
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 685829
<TOTAL-LIABILITIES> 22323509
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 215618222
<SHARES-COMMON-STOCK> 4673117
<SHARES-COMMON-PRIOR> 842881
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2471545)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7008291
<NET-ASSETS> 47809026
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11223721
<OTHER-INCOME> 0
<EXPENSES-NET> (2142992)
<NET-INVESTMENT-INCOME> 9080729
<REALIZED-GAINS-CURRENT> 4147015
<APPREC-INCREASE-CURRENT> 2357789
<NET-CHANGE-FROM-OPS> 15585533
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1680463)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4674840
<NUMBER-OF-SHARES-REDEEMED> (921079)
<SHARES-REINVESTED> 76475
<NET-CHANGE-IN-ASSETS> 3672967
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (6618560)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1182951
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2142992
<AVERAGE-NET-ASSETS> 38819381
<PER-SHARE-NAV-BEGIN> 9.94
<PER-SHARE-NII> .44
<PER-SHARE-GAIN-APPREC> .29
<PER-SHARE-DIVIDEND> (.44)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.23
<EXPENSE-RATIO> .89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Municipal Intermediate Term Fund of
Merrill Lynch Municipal Series Trust;
We consent to the use in Post-Effective Amendment No. 15 to Registration
Statement No. 33-8058 of our report dated December 5, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ Deloitte & Touche
Deloitte & Touche LLP
Princeton, New Jersey
February 2, 1998
