AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 1999
SECURITIES ACT FILE NO. 33-8058
INVESTMENT COMPANY ACT FILE NO. 811-4802
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 17 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 18 [X]
(CHECK APPROPRIATE BOX OR BOXES)
---------------
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
OF MERRILL LYNCH MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
---------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
ARTHUR ZEIKEL
MERRILL LYNCH MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS:
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
COUNSEL FOR THE TRUST: MICHAEL J. HENNEWINKEL, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
---------------
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on March 1, 1999 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.
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<PAGE>
[PROSPECTUS GRAPHIC]
[MERRILL LYNCH LOGO]
Merrill Lynch Municipal Intermediate Term Fund
of Merrill Lynch Municipal Series Trust
[PROSPECTUS GRAPHIC HERE]
March 1, 1999
This Prospectus contains information you should know before investing, including
information about risks. Please read it before you invest and keep it for future
reference.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
[KEY GRAPHIC]
KEY FACTS
--------------------------------------------------------------------
The Merrill Lynch Municipal Intermediate Term Fund at a Glance.....3
Risk/Return Bar Chart..............................................4
Fees and Expenses..................................................5
[DETAILS ABOUT THE FUNE GRAPHIC HERE]
DETAILS ABOUT THE FUND
--------------------------------------------------------------------
How the Fund Invests...............................................7
Investment Risks...................................................8
[YOUR ACCOUNT GRAPHIC HERE]
YOUR ACCOUNT
--------------------------------------------------------------------
Merrill Lynch Select PricingSM System.............................14
How to Buy, Sell, Transfer and Exchange Shares....................19
Participation in Merrill Lynch Fee-Based Programs.................23
[MANAGEMENT OF THE FUND GRAPHIC HERE]
MANAGEMENT OF THE FUND
--------------------------------------------------------------------
Merrill Lynch Asset Management....................................26
Financial Highlights..............................................27
[FOR MORE INFORMATION GRAPHIC HERE]
FOR MORE INFORMATION
--------------------------------------------------------------------
Shareholder Reports.......................................Back Cover
Statement of Additional Information.......................Back Cover
</TABLE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
<PAGE>
[KEY FACTS GRAPHIC HERE]
THE MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM
FUND AT A GLANCE
- --------------------------------------------------------------------------------
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined highlighted terms in this prospectus in
the sidebar.
MUNICIPAL BOND -- a debt obligation issued by or on behalf of a governmental
entity or other qualifying issuer that pays interest exempt from Federal income
tax.
INVESTMENT GRADE -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch IBCA, Inc.
JUNK BONDS -- fixed income securities rated below investment grade by the major
rating agencies, including Moody's Investors Service, Inc. and Standard &
Poor's, or unrated securities of comparable quality.
What is the Fund's investment objective?
The investment objective of the Fund is to provide shareholders with a high
level of income exempt from Federal income taxes. The Fund tries to accomplish
this goal by investing primarily in a diversified portfolio of MUNICIPAL BONDS.
The Fund cannot guarantee that it will achieve its goal.
What are the Fund's main investment strategies?
The Fund invests primarily in a portfolio of municipal bonds. These may be
obligations of a variety of issuers including states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities. Except during temporary
defensive periods, the Fund will invest at least 80% of its net assets in
municipal bonds. These bonds will generally be INVESTMENT GRADE obligations;
however, the Fund may invest up to 20% of its assets in high yield or "JUNK"
BONDS. Under normal market conditions, it is anticipated that the Fund will
maintain a dollar-weighted average maturity of five to twelve years. The Fund
also may invest in certain types of "derivative" securities. When choosing
investments, Fund management considers various factors, including the credit
quality of issuers, yield analysis, maturity analysis and call features of the
obligations.
What are the main risks of investing in the Fund?
As with any mutual fund, the value of the Fund's investments -- and therefore
the value of Fund shares -- may go up or down. These changes may occur in
response to interest rate changes or other factors that may affect a particular
issuer or obligation. Generally, when interest rates go up, the value of debt
instruments like municipal bonds goes down. If the value of the Fund's
investments goes down, you may lose money.
Derivatives and high yield or "junk" bonds may be volatile and subject to
liquidity, leverage, credit and other types of risks.
Who should invest?
The Fund may be an appropriate investment for you if you:
o Are looking for income that is exempt from Federal income tax;
o Want a professionally managed portfolio without the administrative
burdens of direct investments in municipal bonds;
o Are looking for liquidity;
o Can tolerate the risk of loss caused by changes in interest rates or
adverse changes in the price of bonds in general.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
3
<PAGE>
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
[KEY FACTS GRAPHIC HERE]
Key Facts
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance of
Class B shares for the past ten calendar years. Sales charges are not reflected
in the bar chart. If these amounts were reflected, returns would be less than
those shown. The table compares the average annual total returns for each class
of the Fund's shares for the periods shown with those of the Lehman Brothers
Municipal Bond Index. How the Fund performed in the past is not necessarily an
indication of how the Fund will perform in the future.
[RISK/RETURN BAR CHART GRAPHIC HERE]
7.74% 5.14% 10.94% 7.55% 10.71% -3.99% 11.79% 3.07% 8.31% 6.18%
- -------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
During the ten year period shown in the bar chart, the highest return for a
quarter was 4.46% (quarter ended June 30, 1989) and the lowest return for a
quarter was -4.29% (quarter ended March 31, 1994).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE CALENDAR YEAR ENDED) PAST PAST PAST TEN YEARS/
DECEMBER 31, 1998 ONE YEAR FIVE YEARS SINCE INCEPTION
- ------------------------------------------ ---------- ------------ ----------------
<S> <C> <C> <C>
Municipal Intermediate Term* -- Class A 5.45% 5.05% 6.87%
Lehman Brothers Municipal Bond
Index** 6.48% 6.22% 8.21%
Municipal Intermediate Term* -- Class B 5.18% 4.93% 6.65%
Lehman Brothers Municipal Bond
Index** 6.48% 6.22% 8.21%
Municipal Intermediate Term* -- Class C 5.17% N/A 6.71%+
Lehman Brothers Municipal Bond
Index** 6.48% N/A 8.98%
Municipal Intermediate Term* -- Class D 5.35% N/A 6.70%+
Lehman Brothers Municipal Bond
Index** 6.48% N/A 8.98%
</TABLE>
* Includes sales charge.
** This unmanaged Index consists of revenue bonds, prerefunded bonds, general
obligation bonds and insured bonds. Past performance is not predictive of
future performance.
+ Inception date is October 21, 1994.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
4
<PAGE>
FEES AND EXPENSES
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UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating
the Fund.
MANAGEMENT FEE -- a fee paid to the Manager for managing the Fund.
DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants, advertising and promotion.
SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate securities
dealers for account maintenance activities.
The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not
everyone is eligible to buy every class. After determining which classes you
are eligible to buy, decide which class best suits your needs. Your Merrill
Lynch Financial Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy
and hold the different classes of shares of the Fund. Future expenses may be
greater or less than those indicated below.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT): Class A Class B(a) Class C Class D
- ------------------------------------------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering
price) 1.00%(b) None None 1.00%(b)
Maximum Deferred Sales Charge (Load) (as
a percentage of original purchase price or
redemption proceeds, whichever is lower) None(c) 1.0%(b) 1.0%(b) None(c)
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
Redemption Fee None None None None
Exchange Fee None None None None
Maximum Account Fee None None None None
ANNUAL FUND OPERATING EXPENSES (EXPENSES
THAT ARE DEDUCTED FROM FUND ASSETS):
MANAGEMENT FEE 0.55% 0.55% 0.55% 0.55%
DISTRIBUTION AND/OR SERVICE (12B-1) FEES(d) None 0.30% 0.30% 0.10%
Other Expenses (including transfer agency
fees)(e) .19% .21% .22% .19%
Total Annual Fund Operating Expenses(f) .74% 1.06% 1.07% .84%
- ------------------------------------------------- -------- ------ ------ --------
</TABLE>
(a) Class B shares automatically convert to Class D shares about ten years
after you buy them. Then they will no longer be subject to distribution
fees and will pay lower account maintenance fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in other
materials. If you hold Class B or Class C shares for a long time, it may
cost you more in distribution (12b-1) fees than the maximum sales charge
that you would have paid if you had bought one of the other classes.
(e) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in the Merrill
Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly
closed account charge, which is assessed upon all accounts that close
during the year. This fee begins the month following the month the account
is closed and ends at the end of the calendar year. For the fiscal year
ended October 31, 1998, the Fund paid the Transfer Agent fees totaling
$150,719. The Manager provides accounting services to the Fund at its
cost. For the fiscal year ended October 31, 1998, the Fund reimbursed the
Manager $44,826 for these services.
(f) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
5
<PAGE>
[KEY FACTS GRAPHIC HERE]
Key Facts
EXAMPLES:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Class A $175 $334 $507 $1,009
Class B $208 $337 $585 $1,294
Class C $209 $340 $590 $1,306
Class D $185 $365 $561 $1,127
- ---------- ---- ---- ---- ------
</TABLE>
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Class A $175 $334 $507 $1,009
Class B $108 $337 $585 $1,294
Class C $109 $340 $590 $1,306
Class D $185 $365 $561 $1,127
- ---------- ---- ---- ---- ------
</TABLE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
6
<PAGE>
[DETAILS ABOUT THE FUND GRAPHIC HERE]
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
ABOUT THE
PORTFOLIO MANAGER
William R. Bock is the portfolio manager of the Fund. Mr. Bock has been a Vice
President of Merrill Lynch Asset Management since 1989.
ABOUT THE MANAGER
The Fund is managed by Merrill Lynch Asset Management.
The Fund's main goal is to seek as high a level of income exempt from Federal
income taxes as is consistent with its investment policies and prudent
investment management. The Fund invests primarily in investment grade municipal
bonds and it is anticipated, depending on market conditions, to maintain a
dollar-weighted average maturity of five to twelve years. There is no limit on
the remaining maturity of each municipal bond investment by the Fund. The
municipal bonds may be obligations of a variety of issuers including
governmental entities or other qualifying issuers. Issuers may be located in
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities.
The Fund may invest in either fixed rate or variable rate obligations. At least
80% of the Fund's total assets will be invested in investment grade securities.
The Fund will limit its investment in high yield or junk bonds to no more than
20% of its total assets. These bonds are generally more speculative and involve
greater price fluctuations than investment grade securities.
Except during temporary defensive periods, the Fund will invest at least 80% of
its net assets in municipal bonds. For temporary periods, or to provide
liquidity, the Fund may invest up to 20% of its total assets in short term
taxable money market obligations. Normally no more than 20% of the Fund's net
assets will be invested in taxable money market obligations. However, as a
temporary measure for defensive purposes, the Fund may invest without
limitation in short term obligations. Short term investments may limit the
potential for tax exempt income on your shares.
The Fund may use derivatives, including futures, options, indexed securities
and inverse securities. Derivatives are financial instruments whose value is
derived from another security, a commodity (such as oil or gold), or an index
such as the Lehman Brothers Municipal Bond Index.
The Fund's investments may include private activity bonds that may subject
certain shareholders to an alternative minimum tax.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
7
<PAGE>
[DETAILS ABOUT THE FUND GRAPHIC HERE]
Details About the Fund
Fund management considers a variety of factors when choosing investments, such
as:
o CREDIT QUALITY OF ISSUERS -- based on bond ratings and other factors
including economic and financial conditions.
o YIELD ANALYSIS -- takes into account factors such as the different
yields available on different types of obligations and the shape of
the yield curve (longer term obligations typically have higher
yields).
o MATURITY ANALYSIS -- the average maturity of the portfolio will be
maintained within a desirable range as determined from time to time.
Factors considered include portfolio activity, maturity of the
supply of available bonds and the shape of the yield curve.
In addition, Fund management considers the availability of features that
protect against an early call of a bond by the issuer.
INVESTMENT RISKS
- --------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period
of time.
BOND MARKET AND SELECTION RISK -- Bond market risk is the risk that the bond
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the investments
that Fund management selects will underperform the market or other funds with
similar investment objectives and investment strategies.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
8
<PAGE>
CREDIT RISK -- Credit risk is the risk that the issuer will be unable to pay
the interest or principal when due. The degree of credit risk depends on both
the financial condition of the issuer and the terms of the obligation.
INTEREST RATE RISK -- Interest rate risk is the risk that prices of municipal
bonds generally increase when interest rates decline and decrease when interest
rates increase. Prices of longer term securities generally change more in
response to interest rate changes than prices of shorter term securities.
CALL AND REDEMPTION RISK -- A bond's issuer may call a bond for redemption
before it matures. If this happens to a bond the Fund holds, the Fund may lose
income and may have to invest the proceeds in bonds with lower yields.
Risks associated with certain types of obligations in which the Fund may invest
include:
GENERAL OBLIGATION BONDS -- The faith, credit and taxing power of the
municipality that issues a general obligation bond secures payment of interest
and repayment of principal. Timely payments depend on the issuer's credit
quality, ability to raise tax revenues and ability to maintain an adequate tax
base.
REVENUE BONDS -- Payments of interest and principal on revenue bonds are made
only from the revenues generated by a particular facility, class of facilities
or the proceeds of a special excise tax or other revenue source. These payments
depend on the money earned by the particular facility or class of facilities.
Industrial development bonds are one type of revenue bond.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
9
<PAGE>
[DETAILS ABOUT THE FUND GRAPHIC HERE]
Details About the Fund
INDUSTRIAL DEVELOPMENT BONDS -- Municipalities and other public authorities
issue industrial development bonds to finance development of industrial
facilities for use by a private enterprise. The private enterprise pays the
principal and interest on the bond, and the issuer does not pledge its faith,
credit and taxing power for repayment. If the private enterprise defaults on
its payments, the Fund may not receive any income or get its money back from
the investment.
MORAL OBLIGATION BONDS -- Moral obligation bonds are generally issued by
special purpose public authorities of a state or municipality. If the issuer is
unable to meet its obligations, the repayment of these bonds becomes a moral
commitment, but not a legal obligation, of the state or municipality.
MUNICIPAL NOTES -- Municipal notes are shorter term municipal debt obligations.
They may provide interim financing in anticipation of tax collection, bond
sales or revenue receipts. If there is a shortfall in the anticipated proceeds,
the notes may not be fully repaid and the Fund may lose money.
MUNICIPAL LEASE OBLIGATIONS -- In a municipal lease obligation, the issuer
agrees to budget for and appropriate municipal funds to make payments due on
the lease obligation. However, this does not ensure that funds will actually be
appropriated in future years. The issuer does not pledge its unlimited taxing
power for payment of the lease obligation, but the leased property secures the
obligation. In addition, the proceeds of a sale may not cover the Fund's loss.
INSURED MUNICIPAL BONDS -- Bonds purchased by the Fund may be covered by
insurance that guarantees timely interest payments and repayment of principal
on maturity. If a bond's insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop.
JUNK BONDS -- Junk bonds are debt securities that are rated below investment
grade by the major rating agencies or are unrated securities that the Fund
management believes are of comparable quality. Although junk bonds generally
pay higher rates of interest than investment grade bonds, they are high risk
investments that may cause income and principal losses for the Fund. Junk bonds
generally are less liquid and experience more price volatility than
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
10
<PAGE>
higher rated debt securities. The issuers of junk bonds may have a larger
amount of outstanding debt relative to their assets than issuers of investment
grade bonds. In the event of an issuer's bankruptcy, claims of other creditors
may have priority over the claims of junk bond holders, leaving few or no
assets available to repay junk bond holders. Junk bonds may be subject to
greater call and redemption risk than higher rated debt securities.
WHEN ISSUED SECURITIES, DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS --
When issued and delayed delivery securities and forward commitments involve the
risk that the security the Fund buys will lose value prior to its delivery to
the Fund. There also is the risk that the security will not be issued or that
the other party will not meet its obligation, in which case the Fund loses the
investment opportunity of the assets it has set aside to pay for the security
and any gain in the security's price.
VARIABLE RATE DEMAND OBLIGATIONS -- Variable rate demand obligations (VRDOs)
are floating rate securities that combine an interest in a long term municipal
bond with a right to demand payment before maturity from a bank or other
financial institution. If the bank or financial institution is unable to pay,
the Fund may lose money.
ILLIQUID INVESTMENTS -- The Fund may invest up to 15% of its assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If the Fund
buys illiquid securities it may be unable to quickly resell them or may be able
to sell them only at a price below current value.
DERIVATIVES -- Derivatives allow the Fund to increase or decrease its risk
exposure more quickly and efficiently than other types of instruments.
Derivatives are volatile and involve significant risks, including:
o CREDIT RISK -- the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable
to honor its financial obligation to the Fund.
o LEVERAGE RISK -- the risk associated with certain types of investments
or trading strategies (such as borrowing money to increase the
amount of investments) that relatively small market movements may
result in large changes in the value
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
11
<PAGE>
[DETAILS ABOUT THE FUND GRAPHIC HERE]
Details About the Fund
of an investment. Certain investments or trading strategies that involve
leverage can result in losses that greatly exceed the
amount originally invested.
o LIQUIDITY RISK -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the
price that the seller believes the security is currently worth.
The Fund may use derivatives for hedging purposes, including anticipatory
hedges. Hedging is a strategy in which the Fund uses a derivative to offset the
risk that other Fund holdings may decrease in value. While hedging can reduce
losses, it can also reduce or eliminate gains if the market moves in a
different manner than anticipated by the Fund or if the cost of the derivative
outweighs the benefit of the hedge. Hedging also involves the risk that changes
in the value of the derivative will not match those of the holdings being
hedged as expected by the Fund, in which case any losses on the holdings being
hedged may not be reduced. There can be no assurance that the Fund's hedging
strategy will reduce risk or that hedging transactions will be either available
or cost effective. The Fund is not required to use hedging and may choose not
to do so.
INDEXED AND INVERSE FLOATING RATE SECURITIES -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of fixed rate, tax exempt
securities. Both indexed securities and inverse floaters are derivative
securities and can be considered speculative.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
12
<PAGE>
BORROWING AND LEVERAGE -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net
asset value of Fund shares and in the yield on the Fund's portfolio. Borrowing
will cost the Fund interest expense and other fees. The costs of borrowing may
reduce the Fund's return. Certain securities that the Fund buys may create
leverage including, for example, when issued securities, forward commitments
and options.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
13
<PAGE>
[YOUR ACCOUNT GRAPHIC HERE]
MERRILL LYNCH SELECT PRICINGSM SYSTEM
- --------------------------------------------------------------------------------
The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents an ownership interest in the same investment portfolio.
When you choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.
For example, if you select Class A or D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.10%. You may be eligible for a sales
charge waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.10% and an
account maintenance fee of 0.20%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B
or C shares.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, a
division of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
The Fund is a series of the Merrill Lynch Municipal Series Trust.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
14
<PAGE>
The table below summarizes key features of the Merrill Lynch Select PricingSM
System.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------------------ ---------------------- ------------------------- ----------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Not available for Generally available
investors including: through Merrill purchase. Available through Merrill
o Current Class A Lynch. Limited only in exchange for Lynch. Limited
shareholders availability through Class C shares of other availability through
o Participants in other securities Merrill Lynch mutual other securities
certain Merrill dealers. funds. dealers.
Lynch sponsored
programs
o Certain affiliates of
Merrill Lynch.
Initial Sales Yes. Payable at time No. Entire purchase No. Entire purchase Yes. Payable at time
Charge? of purchase. Lower price is invested in price is invested in of purchase. Lower
sales charges shares of the Fund. shares of the Fund. sales charges
available for larger available for larger
investments. investments.
Deferred Sales No. (May be charged Yes. Payable if you Yes. Payable if you No. (May be charged
Charge? for purchases over redeem within one redeem within one for purchases over
$1 million that are year of purchase. year of purchase. $1 million that are
redeemed within one redeemed within one
year.) year.)
Account No. 0.20% Account 0.20% Account 0.10% Account
Maintenance and Maintenance Fee. Maintenance Fee. Maintenance Fee.
Distribution Fees? 0.10% Distribution 0.10% Distribution No Distribution Fee.
Fee. Fee.
Conversion to No. Yes, automatically No. No.
======================== ========================= ======================
Class D shares? after approximately
=====================
ten years.
======================
</TABLE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
15
<PAGE>
[YOUR ACCOUNT GRAPHIC HERE]
Your Account
RIGHT OF ACCUMULATION --
permits you to pay the sales charge that would apply to the cost or value
(whichever is higher) of all shares you own in the Merrill Lynch mutual funds
that offer Select Pricing options.
LETTER OF INTENT -- permits you to pay the sales charge that would be
applicable if you add up all shares of Merrill Lynch Select Pricing System
funds that you agree to buy within a 13 month period. Certain restrictions
apply.
Class A and Class D Shares -- Initial Sales Charge Options
If you select Class A or Class D shares, you will pay a sales charge at the
time of purchase.
<TABLE>
<CAPTION>
DEALER
COMPENSATION
AS A % OF AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT* OFFERING PRICE
- -------------------------- ---------------- ------------------ ---------------
<S> <C> <C> <C>
Less than $100,000 1.00% 1.01% 0.95%
$100,000 but less than
$ 250,000 0.75% 0.76% 0.70%
$250,000 but less than
$ 500,000 0.50% 0.50% 0.45%
$500,000 but less than
$ 1,000,000 0.30% 0.30% 0.27%
$1,000,000 and
over** 0.00% 0.00% 0.00%
- ----------- ---- ---- ----
</TABLE>
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This
charge is 1% of the lesser of the original cost of the shares being
redeemed or your redemption proceeds.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for purchases under a RIGHT OF ACCUMULATION or LETTER OF INTENT.
Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to a 0.10% account maintenance fee, while
Class A shares are not.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
16
<PAGE>
If you redeem Class A or Class D shares and within 30 days buy new shares of
the same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.
Class B and Class C Shares -- Deferred Sales Charge Options
Class C shares are not available for purchase. You may obtain Class C shares of
the Fund only in exchange for Class C shares of another Merrill Lynch mutual
fund.
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B or Class C shares
within one year after purchase, you may be required to pay a deferred sales
charge. You will also pay distribution fees of 0.10% and account maintenance
fees of 0.20% each year under distribution plans that the Fund has adopted
under Rule 12b-1 under the Investment Company Act of 1940. Because these fees
are paid out of the Fund's assets on an ongoing basis, over time these fees
increase the cost of your investment and may cost you more than paying an
initial sales charge. The Distributor uses the money that it receives from the
deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the Merrill Lynch Financial Consultant
or other securities dealer who assists you in purchasing Fund shares.
CLASS B SHARES
If you redeem Class B shares within one year after purchase, you may be charged
a deferred sales charge. The charge will apply to the lesser of the original
cost of the shares being redeemed or the proceeds of your redemption. You will
not be charged a deferred sales charge when you redeem shares that you acquire
through reinvestment of Fund dividends or distributions.
The deferred sales charge relating to Class B shares will be reduced or waived
in certain circumstances, such as:
o Redemption in connection with participation in certain Merrill Lynch
fee-based programs.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
17
<PAGE>
[YOUR ACCOUNT GRAPHIC HERE]
Your Account
o Withdrawals resulting from shareholder death or disability as long as
the waiver request is made within one year of death or disability
or, if later, reasonably promptly following completion of probate,
or in connection with involuntary termination of an account in which
Fund shares are held.
o Withdrawal through the Merrill Lynch Systematic Withdrawal Plan of up
to 10% per year of your Class B account value at the time the plan
is established.
Your Class B shares convert automatically into Class D shares approximately ten
years after purchase. Any Class B shares received through reinvestment of
dividends or distributions paid on converting shares will also convert at that
time. Class D shares are subject to lower annual expenses than Class B shares.
The conversion of Class B to Class D shares is not a taxable event for Federal
income tax purposes.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund convert
approximately ten years after purchase compared to approximately eight years
for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's ten year conversion
schedule will apply. If you exchange your Class B shares in the Fund for Class
B shares of a fund with a shorter conversion schedule, the other fund's
conversion schedule will apply. The length of time that you hold both the
original and exchanged Class B shares in both funds will count toward the
conversion schedule. The conversion schedule may be modified in certain other
cases as well.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
18
<PAGE>
CLASS C SHARES
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends or distributions. The deferred
sales charge relating to Class C shares may be reduced or waived in connection
with participation in certain Merrill Lynch fee-based programs, involuntary
termination of an account in which Fund shares are held and withdrawals through
the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------
The chart below summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
19
<PAGE>
[YOUR ACCOUNT GRAPHIC HERE]
Your Account
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES
- -------------------- ----------------------------------
<S> <C><C>
Buy Shares First, select the share class
appropriate for you
----------------------------------
Next, determine the amount
of your investment
----------------------------------
Have your Merrill Lynch
Financial Consultant or
securities dealer submit your
purchase order
----------------------------------
Or contact the Transfer Agent
----------------------------------
Add to Your Purchase additional shares
Investment
----------------------------------
Acquire additional shares
through the automatic
dividend reinvestment plan
Participate in the automatic
investment plan
----------------------------------
Transfer Shares to Transfer to a participating
Another Securities securities dealer
----------------------------------
Dealer
Transfer to a non-participating
securities dealer
==================================
<CAPTION>
IF YOU WANT TO INFORMATION IMPORTANT FOR YOU TO KNOW
- -------------------- ------------------------------------------------------------------------
<S> <C>
Buy Shares Refer to the Merrill Lynch Select Pricing table on page 15. Be sure to
read this prospectus carefully.
------------------------------------------------------------------------
The minimum initial investment for the Fund is $1,000 for all
accounts, except that certain Merrill Lynch fee-based programs have
a $250 initial minimum investment.
(The minimums for initial investments may be waived under certain
circumstances.)
------------------------------------------------------------------------
The price of your shares is based on the next calculation of net asset
value after your order is placed. Any purchase orders placed within
fifteen minutes after the close of business on the New York Stock
Exchange will be priced at the net asset value determined that day.
Purchase orders placed after that time will be priced at the net asset
value determined on the next business day. The Fund may reject any
order to buy shares and may suspend the sale of shares at any time.
Merrill Lynch may charge a processing fee to confirm a purchase. This
fee is currently $5.35.
------------------------------------------------------------------------
To purchase shares directly, call the Transfer Agent at
1-800-MER-FUND and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the address
on the inside back cover of this Prospectus.
------------------------------------------------------------------------
Add to Your The minimum investment for additional purchases is $50.
Investment
(The minimum for additional purchases may be waived under certain
circumstances.)
------------------------------------------------------------------------
All dividends and capital gains distributions are automatically
reinvested without a sales charge.
You may invest a specific amount in Class A, B or D shares on a
periodic basis through certain Merrill Lynch investment or central
asset accounts.
------------------------------------------------------------------------
Transfer Shares to You may transfer your Fund shares only to another securities dealer
Another Securities that has entered into an agreement with Merrill Lynch. All
Dealer shareholder services will be available for the transferred shares. You
may only purchase additional shares of funds previously owned
before the transfer. All future trading of these assets must be
coordinated by the receiving firm.
------------------------------------------------------------------------
You must either:
o Transfer your shares to an account with the Transfer Agent; or
o Sell your shares.
========================================================================
</TABLE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
20
<PAGE>
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- ------------------ ------------------------------- ------------------------------------------------------------------------
<S> <C><C> <C>
Sell Your Shares Have your Merrill Lynch The price of your shares is based on the next calculation of net asset
Financial Consultant or value after your order is placed. For your redemption request to be
securities dealer submit your priced at the net asset value on the day of your request, you must
sales order submit your request to your dealer within fifteen minutes after that
day's close of business on the New York Stock Exchange (generally
4:00 p.m. Eastern time). Any redemption request placed after that
time will be priced at the net asset value at the close of business on
the next business day. Dealers must submit redemption requests to
the Fund not more than thirty minutes after the close of business on
the New York Stock Exchange on the day the request was received.
Securities dealers, including Merrill Lynch, may charge a fee to
process a redemption of shares. Merrill Lynch currently charges a fee
of $5.35. No processing fee is charged if you redeem shares directly
through the Transfer Agent.
The Fund may reject an order to sell shares under certain
circumstances.
------------------------------------------------------------------------
Sell through the Transfer You may sell shares held at the Transfer Agent by writing to the
Agent Transfer Agent at the address on the inside back cover of this
prospectus. All shareholders on the account must sign the letter and
signatures must be guaranteed. If you hold stock certificates, return
the certificates with the letter. The Transfer Agent will normally mail
redemption proceeds within seven days following receipt of a
properly completed request. If you make a redemption request
before the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your proceeds. This
delay will usually not exceed ten days.
If you hold share certificates, they must be delivered to the Transfer
Agent before they can be converted. Check with the Transfer Agent
or your Merrill Lynch Financial Consultant for details.
------------------------------------------------------------------------
Sell Shares Participate in the Fund's You can choose to receive systematic payments from your Fund
Systematically Systematic Withdrawal Plan account either by check or through direct deposit to your bank
account on a monthly or quarterly basis. If you have a Merrill Lynch
CMA(R), CBA(R) or Retirement Account you can arrange for systematic
redemptions of a fixed dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to certain conditions.
Under either method you must have dividends and other
distributions automatically reinvested. For Class B and C shares your
total annual withdrawals cannot be more than 10% per year of the
value of your shares at the time your plan is established. The deferred
sales charge is waived for systematic redemptions. Ask your Merrill
Lynch Financial Consultant for details.
========================================================================
</TABLE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
21
<PAGE>
[YOUR ACCOUNT GRAPHIC HERE]
Your Account
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- ---------------- --------------------------------- -----------------------------------------------------------------------
<S> <C><C> <C>
Exchange Your Select the fund into which you You can exchange your shares of the Fund for shares of many other
Shares want to exchange. Be sure to Merrill Lynch mutual funds. You must have held the shares used in
read that fund's prospectus the exchange for at least 15 calendar days before you can exchange
to another fund.
Each class of Fund shares is generally exchangeable for shares of the
same class of another fund. If you own Class A shares and wish to
exchange into a fund in which you have no Class A shares, you will
exchange into Class D shares.
Some of the Merrill Lynch mutual funds impose a different initial or
deferred sales charge schedule. If you exchange Class A or D shares
for shares of a fund with a higher initial sales charge than you
originally paid, you will be charged the difference at the time of
exchange. If you exchange Class B shares for shares of a fund with a
different deferred sales charge schedule, the higher schedule will
apply. The time you hold Class B or C shares in both funds will count
when determining your holding period for calculating a deferred
sales charge at redemption. If you exchange Class A or D shares for
money market fund shares, you will receive Class A shares of Summit
Cash Reserves Fund. Class B or C shares of the Fund will be exchanged
for Class B shares of Summit.
Although there is currently no limit on the number of exchanges that
you can make, the exchange privilege may be modified or terminated
at any time in the future.
=======================================================================
</TABLE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
22
<PAGE>
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
When you buy shares, you pay the NET ASSET VALUE, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, fifteen minutes after the close of business on the Exchange
(the Exchange generally closes at 4:00 p.m. Eastern time). The net asset value
used in determining your price is the next one calculated after your purchase
or redemption order is placed.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class A and Class
D shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or
automatically exchanged into another class of Fund shares or into a money
market fund. The class you receive may be the class you originally owned when
you entered the program, or in certain cases, a different class. If the
exchange is into Class B shares, the period before conversion to Class D shares
may be modified. Any redemption or exchange will be at net asset value.
However, if you participate in the program for less than a specified period,
you may be charged a fee in accordance with the terms of the program.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
23
<PAGE>
[YOUR ACCOUNT GRAPHIC HERE]
Your Account
Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your Merrill
Lynch Financial Consultant.
DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------
The Fund will distribute any net investment income monthly, and any net realized
capital gains at least annually. The Fund may also pay a special distribution at
the end of the calendar year to comply with Federal tax requirements. If your
account is with Merrill Lynch and you would like to receive exempt-interest
dividends, ordinary income (if any), dividends and capital gain dividends (if
any) in cash, contact your Merrill Lynch Financial Consultant. If your account
is with the Transfer Agent and you would like to receive dividends in cash,
contact the Transfer Agent.
TAXES -- To the extent that the dividends distributed by the Fund are from
municipal bond interest income, they are exempt from Federal income tax.
However, certain investors may be subject to alternative minimum tax on
dividends received from the Fund. Interest income from other investments may
produce taxable distributions.
Generally, within 60 days after the end of the Fund's taxable year, the Trust
will tell you the amount of exempt-interest dividends and capital gain
dividends you received that year. Capital gain dividends are taxable as long
term capital gains to you, regardless of how long you have held your shares. The
tax treatment of dividends from the Fund is the same whether you choose to
receive dividends in cash or to have them reinvested in shares of the Fund.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
24
<PAGE>
"BUYING A DIVIDEND"
You may want to avoid buying shares shortly before the Fund pays a dividend,
although the impact on you will be significantly less than if you were invested
in a fund paying fully taxable dividends. The reason? If you buy shares when the
Fund has realized but not yet distributed taxable income (if any) or capital
gains, you will pay the full price for the shares and then receive a portion of
the price back in the form of a dividend, all or, more likely, part of which
could be taxable. Before investing you may want to consult your tax adviser.
By law, the Fund must withhold 31% of your dividends and proceeds if you have
not provided a taxpayer identification number or social security number.
If you redeem Fund shares or exchange them for shares of another fund, any gain
on the transaction may be subject to Federal income tax.
This section summarizes some of the consequences of an investment in the Fund
under current Federal tax laws. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences to you
of an investment in the Fund under all applicable tax laws.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
25
<PAGE>
[MANAGEMENT OF THE FUND GRAPHIC HERE]
MERRILL LYNCH ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Merrill Lynch Asset Management, the Fund's Manager, manages the Fund's
investments and its business operations under the overall supervision of the
Trust's Board of Trustees. The Manager has the responsibility for making all
investment decisions for the Fund. The Fund has agreed to pay the Manager 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, 1998, the Manager received a fee equal to
0.55% of the Fund's average daily net assets.
Merrill Lynch Asset Management is part of the Merrill Lynch Asset Management
Group. The Asset Management Group had approximately $501 billion in investment
company and other portfolio assets under management as of December 1998. This
amount includes assets managed for Merrill Lynch affiliates.
A Note About Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the issuers of securities in
which the Fund invests, and this could hurt the Fund's investment returns.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
26
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by Deloitte & Touche LLP , whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
-----------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSET VALUE: 1998 1997 1996 1995 1994
- ----------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 10.23 $ 9.94 $ 10.00 $ 9.62 $ 10.39
Investment income -- net .43 .45 .48 .53 .52
Realized and unrealized gain (loss) on
investments -- net .37 .29 ( .06) .38 ( .77)
Total from investment operations .80 .74 .42 .91 ( .25)
Less dividends from investment income -- net ( .43) ( .45) ( .48) ( .53) ( .52)
Net asset value, end of year $ 10.60 $ 10.23 $ 9.94 $ 10.00 $ 9.62
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 8.00% 7.59% 4.27% 9.69% ( 2.49)%
RATIOS TO AVERAGE NET ASSETS:
Expenses .74% .79% .81% .81% .76%
Investment income -- net 4.17% 4.40% 4.79% 5.36% 5.19%
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $ 73,769 $ 71,684 $ 30,353 $ 34,970 $27,653
Portfolio turnover 174.64% 167.41% 146.82% 115.78% 52.56%
- ----------------------------------------------- -------- -------- -------- -------- -------
<CAPTION>
CLASS B
---------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSET VALUE: 1998 1997 1996 1995 1994
- ----------------------------------------------- ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 10.23 $ 9.93 $ 10.00 $ 9.62 $ 10.39
Investment income -- net .40 .41 .44 .50 .49
Realized and unrealized gain (loss) on
investments -- net .37 .30 ( .07) .38 ( .77)
Total from investment operations .77 .71 .37 .88 ( .28)
Less dividends from investment income -- net ( .40) ( .41) ( .44) ( .50) ( .49)
Net asset value, end of year $ 10.60 $ 10.23 $ 9.93 $ 10.00 $ 9.62
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 7.67% 7.35% 3.84% 9.34% ( 2.79)%
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.06% 1.11% 1.13% 1.13% 1.07%
Investment income -- net 3.86% 4.13% 4.47% 5.05% 4.87%
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $ 75,688 $ 94,552 $169,441 $181,640 $142,152
Portfolio turnover 174.64% 167.41% 146.82% 115.78% 52.56%
- ----------------------------------------------- -------- -------- -------- -------- --------
</TABLE>
* Total investment returns exclude the effects of sales loads.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
27
<PAGE>
[MANAGEMENT OF THE FUND GRAPHIC HERE]
Management of the Fund
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR OCTOBER 21,
ENDED OCTOBER 31, 1994+
INCREASE (DECREASE) IN ----------------------------------------------- TO OCTOBER 31,
NET ASSET VALUE: 1998 1997 1996 1995 1994
- ------------------------------------------- ----------- ----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 10.23 $ 9.93 $ 10.00 $ 9.62 $ 9.70
Investment income -- net .40 .41 .44 .50 .01
Realized and unrealized gain (loss) on
investments -- net .37 .30 ( .07) .38 ( .08)
Total from investment operations .77 .71 .37 .88 ( .07)
Less dividends from investment
income -- net ( .40) ( .41) ( .44) ( .50) ( .01)
Net asset value, end of period $ 10.60 $ 10.23 $ 9.93 $ 10.00 $ 9.62
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 7.65% 7.34% 3.82% 9.36% ( .71)%#
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.07% 1.13% 1.15% 1.01% 1.18%*
Investment income -- net 3.85% 4.10% 4.44% 4.76% 4.92%*
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 5,116 $ 6,110 $ 8,313 $ 6,485 $ 1
Portfolio turnover 174.64% 167.41% 146.82% 115.78% 52.56%
- ------------------------------------------- --------- --------- --------- --------- --------
<CAPTION>
CLASS D
---------------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR OCTOBER 21,
ENDED OCTOBER 31, 1994+
INCREASE (DECREASE) IN ----------------------------------------------- TO OCTOBER 31,
NET ASSET VALUE: 1998 1997 1996 1995 1994
- ------------------------------------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 10.23 $ 9.94 $ 10.00 $ 9.62 $ 9.70
Investment income -- net .42 .44 .47 .52 .01
Realized and unrealized gain (loss) on
investments -- net .37 .29 ( .06) .38 ( .08)
Total from investment operations .79 .73 .41 .90 ( .07)
Less dividends from investment
income -- net ( .42) ( .44) ( .47) ( .52) ( .01)
Net asset value, end of period $ 10.60 $ 10.23 $ 9.94 $ 10.00 $ 9.62
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 7.90% 7.48% 4.17% 9.58% ( .71)%#
RATIOS TO AVERAGE NET ASSETS:
Expenses .84% .89% .91% .90% .97%*
Investment income -- net 4.07% 4.31% 4.68% 5.12% 5.20%*
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 47,869 $ 47,809 $ 8,375 $ 7,000 $ 70
Portfolio turnover 174.64% 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.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
28
<PAGE>
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<PAGE>
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<PAGE>
POTENTIAL INVESTORS
Open an account (two options).
MERRILL LYNCH FINANCIAL CONSULTANT OR SECURITIES DEALER
Advises shareholders on their Fund investments.
DISTRIBUTOR
MERRILL LYNCH FUNDS DISTRIBUTOR,
A DIVISION OF PRINCETON FUNDS DISTRIBUTOR, INC.
P.O. Box 9081
Princeton, New Jersey 08543-9081
ARRANGES FOR THE SALE OF FUND SHARES
TRANSFER AGENT
FINANCIAL DATA SERVICES, INC.
P.O. Box 45289
Jacksonville, Florida 32232-5289
PERFORMS RECORDKEEPING AND REPORTING SERVICES
COUNSEL
BROWN & WOOD LLP
One World Trade Center
New York, New York 10048-0557
PROVIDES LEGAL ADVICE TO THE FUND.
THE FUND
THE BOARD OF TRUSTEES
OVERSEES THE FUND
CUSTODIAN
STATE STREET BANK AND TRUST COMPANY
P.O. Box 351
Boston, Massachusetts 02101
HOLDS THE FUND'S ASSETS FOR SAFEKEEPING
INDEPENDENT AUDITORS
DELOITTE & TOUCHE LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
AUDITS THE FINANCIAL STATEMENTS
OF THE FUND ON BEHALF OF
THE SHAREHOLDERS.
INVESTMENT ADVISER
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
TELEPHONE NUMBER
1-800-MER-FUND
MANAGES THE FUND'S DAY-TO-DAY ACTIVITIES.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
<PAGE>
[FOR MORE INFORMATION GRAPHIC HERE]
SHAREHOLDER REPORTS
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch
Financial Consultant or write to the Transfer Agent at its mailing address.
Include your name, address, tax identification number and Merrill Lynch
brokerage or mutual fund account number. If you have any questions, please call
your Merrill Lynch Financial Consultant or the Transfer Agent at
1-800-MER-FUND.
STATEMENT OF ADDITIONAL INFORMATION
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this Prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated above if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site
at http://www.sec.gov and copies may be obtained upon payment of a duplicating
fee by writing the Public Reference Section of the SEC, Washington, D.C.
20549-6009.
You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.
Investment Company Act file #811-4802
Code #10706-03-99
(c)Merrill Lynch Asset Management, L.P.
[PROSPECTUS GRAPHIC HERE]
[MERRILL LYNCH LOGO HERE]
Merrill Lynch Municipal
Intermediate Term Fund
of Merrill Lynch Municipal
Series Trust
[PROSPECTUS GRAPHIC HERE]
March 1, 1999
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
OF MERRILL LYNCH MUNICIPAL SERIES TRUST
P.O. Box 9011, Princeton, New Jersey 08543-9011 o 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. At times, the Fund may seek
to hedge its portfolio through the use of futures transactions and options.
There can be no assurance that the investment objective of the Fund will be
realized. For more information on the Fund's investment objective and policies,
see "Investment Objective and Policies."
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 "Purchase of Shares."
----------------
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 March
1, 1999 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) MER-FUND or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1998 annual report to shareholders. You may request a copy of the annual report
at no charge by calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m.
on any business day.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is March 1, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies ......................................... 3
General ................................................................. 3
Risk Factors and Special Considerations Relating to Municipal Bonds ..... 4
Description of Municipal Bonds .......................................... 5
Financial Futures Transactions and Options .............................. 8
Description of Temporary Investments .................................... 12
Investment Restrictions ................................................. 13
Portfolio Turnover ...................................................... 15
Management of the Trust ................................................... 15
Trustees and Officers ................................................... 15
Compensation of Trustees ................................................ 16
Management and Advisory Arrangements .................................... 17
Code of Ethics .......................................................... 18
Purchase of Shares ........................................................ 19
Initial Sales Charge Alternatives -- Class A and Class D Shares ......... 20
Deferred Sales Charge Alternatives -- Class B and Class C Shares ........ 24
Distribution Plans ...................................................... 26
Limitations on the Payment of Deferred Sales Charges .................... 27
Redemption of Shares ...................................................... 28
Redemption .............................................................. 28
Repurchase .............................................................. 29
Reinstatement Privilege -- Class A and Class D Shares ................... 29
Pricing of Shares ......................................................... 29
Determination of Net Asset Value ........................................ 29
Computation of Offering Price Per Share ................................. 30
Portfolio Transactions .................................................... 31
Transactions in Portfolio Securities .................................... 31
Shareholder Services ...................................................... 32
Investment Account ...................................................... 32
Exchange Privilege ...................................................... 33
Fee-Based Programs ...................................................... 35
Automatic Investment Plans .............................................. 35
Automatic Dividend Program .............................................. 35
Systematic Withdrawal Plan .............................................. 35
Distributions and Taxes ................................................... 36
Dividends and Distributions ............................................. 36
Taxes ................................................................... 37
Tax Treatment of Options and Futures Transactions ....................... 39
Performance Data .......................................................... 40
General Information ....................................................... 43
Description of Shares ................................................... 43
Independent Auditors .................................................... 44
Custodian ............................................................... 44
Transfer Agent .......................................................... 44
Legal Counsel ........................................................... 44
Reports to Shareholders ................................................. 44
Shareholder Inquiries ................................................... 44
Additional Information .................................................. 44
Financial Statements ...................................................... 45
Appendix I -- Ratings of Municipal Bonds .................................. I-1
</TABLE>
2
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with a
high level of income exempt from Federal income taxes. 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.
GENERAL
Under normal circumstances, except when acceptable securities are
unavailable as determined by Merrill Lynch Asset Management, L.P. (the
"Manager" or "MLAM"), the Fund's manager, the Fund will invest at least 80% of
its total assets in Municipal Bonds. The value of bonds and other fixed-income
obligations may fall when interest rates rise and rise when interest rates
fall. In general, bonds and other fixed-income obligations with longer
maturities will be subject to greater volatility resulting from interest rate
fluctuations than will similar obligations with shorter maturities. Under
normal conditions, it is generally anticipated that the Fund's average weighted
maturity will be five to twelve years. 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 a maturity of one year or less
(such short-term obligations being referred to herein as "Temporary
Investments"). In addition, the Fund reserves the right as a defensive measure
to invest temporarily a greater portion of its assets in Temporary Investments,
when, in the opinion of the Manager, prevailing market or financial conditions
warrant.
The Fund may also invest in 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. See
"Description of Temporary Investments." The Fund's hedging strategies, which
are described in more detail under "Financial Futures Transactions and
Options," are not fundamental policies and may be modified by the Trustees of
the Trust without the approval of the Fund's shareholders.
At least 80% of the Municipal Bonds purchased by the Fund will be what are
commonly referred to as "investment grade" securities, which are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Moody's Investors Service, Inc. ("Moody's") (currently
Aaa, Aa, A and Baa), Standard & Poor's ("S&P") (currently AAA, AA, A and BBB)
or Fitch IBCA, Inc. ("Fitch") (currently AAA,
3
<PAGE>
AA, A and BBB). If unrated, such securities will possess creditworthiness
comparable, in the opinion of the Manager, to other obligations in which the
Fund may invest.
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 S&P 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. See
"Description of Municipal Bonds -- \`High Yield' or \`Junk' Bonds." The Fund
does not intend to purchase debt securities that are in default or which the
Manager believes will be in default.
Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing the
quality of such bonds not only the creditworthiness of the issuer of such bonds
but also the creditworthiness of the financial institution that provides the
credit enhancement.
The Fund ordinarily does not intend to realize investment income not
exempt from Federal income tax. 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 believes such securities to be exempt from Federal income
taxation ("Non-Municipal Tax-Exempt Securities"). Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interest in one or more long-term municipal securities. Non-Municipal
Tax-Exempt Securities also may include securities issued by other investment
companies that invest in municipal bonds, to the extent such investments are
permitted by applicable law. Non-Municipal Tax-Exempt Securities will be
considered "Municipal Bonds" for purposes of the Fund's investment objective
and policies. The Fund at all times will have at least 80% of its net assets
invested in securities the interest on which is exempt from Federal taxation.
However, interest received on certain otherwise tax-exempt securities that are
classified as "private activity bonds" (in general, bonds that benefit
non-governmental entities) may be subject to Federal alternative minimum tax.
The percentage of the Fund's total assets invested in "private activity bonds"
will vary during the year. 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 that may be enacted in
the future may affect the availability of Municipal Bonds for investment by the
Fund. See "Distributions and Taxes -- Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS RELATING TO MUNICIPAL BONDS
The risks and special considerations involved in investment in Municipal
Bonds vary with the types of instruments being acquired. Investments in
Non-Municipal Tax-Exempt Securities may present similar risks, depending on the
particular product. Certain instruments in which the Fund may invest may be
characterized as derivative instruments. See "Investment Objective and Policies
- -- Description of Municipal Bonds" and " -- Financial Futures Transactions and
Options."
The value of Municipal Bonds generally may be affected by uncertainties in
the municipal markets as a result of legislation or litigation changing the
taxation of Municipal Bonds or the rights of Municipal Bond holders in the
event of a bankruptcy. Municipal bankruptcies are rare and certain provisions
of the U.S. Bankruptcy Code governing such bankruptcies are unclear. Further,
the application of state law to Municipal Bond issuers could produce varying
results among the states or among Municipal Bond issuers within a state. These
uncertainties could have a significant impact on the prices of the Municipal
Bonds in which the Fund invests.
The suitability for any particular investor of a purchase of shares of the
Fund will depend upon, among other things, such investor's investment
objectives and such investor's ability to accept the risks of investing in such
markets, including the loss of principal.
4
<PAGE>
DESCRIPTION OF MUNICIPAL BONDS
Set forth below is a detailed description of the Municipal Bonds and
Temporary Investments in which the Fund may invest. Information with respect to
ratings assigned to tax-exempt obligations that the Fund may purchase is set
forth in Appendix I to this Statement of Additional Information. See "How the
Fund Invests" in the Prospectus.
Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of bonds are issued by or on behalf of
public authorities to finance various privately owned or operated facilities,
including certain facilities for the local furnishing of electric energy or
gas, sewage facilities, solid waste disposal facilities and other specialized
facilities. Such obligations are included within the term Municipal Bonds if
the interest paid thereon is excluded from gross income for Federal income tax
purposes. Other types of industrial development bonds or private activity
bonds, the proceeds of which are used for the construction, equipment or
improvement of privately operated industrial or commercial facilities, may
constitute Municipal Bonds, although the current Federal tax laws place
substantial limitations on the size of such issues. The interest on Municipal
Bonds may bear a fixed rate or be payable at a variable or floating rate. The
two principal classifications of Municipal Bonds are "general obligation" and
"revenue" bonds, which latter category includes industrial development bonds
("IDBs") and, for bonds issued after August 15, 1986, private activity bonds.
GENERAL OBLIGATION BONDS. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. The taxing power of any governmental entity may be
limited, however, by provisions of its state constitution or laws, and an
entity's creditworthiness will depend on many factors, including potential
erosion of its tax base due to population declines, natural disasters, declines
in the state's industrial base or inability to attract new industries, economic
limits on the ability to tax without eroding the tax base, state legislative
proposals or voter initiatives to limit ad valorem real property taxes and the
extent to which the entity relies on Federal or state aid, access to capital
markets or other factors beyond the state's or entity's control. Accordingly,
the capacity of the issuer of a general obligation bond as to the timely
payment of interest and the repayment of principal when due is affected by the
issuer's maintenance of its tax base.
REVENUE BONDS. 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.
IDBS AND PRIVATE ACTIVITY BONDS. The Fund may purchase IDBs and private
activity bonds. IDBs and private activity bonds are, in most cases, tax-exempt
securities issued by states, municipalities or public authorities to provide
funds, usually through a loan or lease arrangement, to a private entity for the
purpose of financing construction or improvement of a facility to be used by
the entity. Such bonds are secured primarily by revenues derived from loan
repayments or lease payments due from the entity which may or may not be
guaranteed by a parent company or otherwise secured. IDBs and private activity
bonds generally are not secured by a pledge of the taxing power of the issuer
of such bonds. Therefore, an investor should be aware that repayment of such
bonds generally depends on the revenues of a private entity and be aware of the
risks that such an investment may entail. Continued ability of an entity to
generate sufficient revenues for the payment of principal and interest on such
bonds will be affected by many factors including the size of the entity,
capital structure, demand for its products or services, competition, general
economic conditions, government regulation and the entity's dependence on
revenues for the operation of the particular facility being financed. The Fund
may invest more than 25% of its total assets in IDBs or private activity bonds.
"MORAL OBLIGATION" BONDS. The Fund also may invest in "moral obligation"
bonds, which are normally issued by special purpose public authorities. If an
issuer of moral obligation bonds is unable to meet its obligations, the
repayment of such bonds becomes a moral commitment but not a legal obligation
of the state or municipality in question.
5
<PAGE>
LEASE OBLIGATIONS. Also included within the general category of Municipal
Bonds are participation certificates issued by government authorities or
entities to finance the acquisition or construction of equipment, land and/or
facilities. The certificates represent participations in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively called "lease obligations") relating to such equipment, land or
facilities. Although lease obligations do not constitute general obligations of
the issuer for which the issuer's unlimited taxing power is pledged, a lease
obligation is frequently backed by the issuer's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide
that the issuer has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. These securities represent a type of financing that has not
yet developed the depth of marketability associated with more conventional
securities. Certain investments in lease obligations may be illiquid. The Fund
may not invest in illiquid lease obligations if such investments, together with
all other illiquid investments, would exceed 15% of the Fund's total assets.
The Fund may, however, invest without regard to such limitation in lease
obligations which the Manager, pursuant to guidelines which have been adopted
by the Board of Trustees and subject to the supervision of the Board,
determines to be liquid. The Manager will deem lease obligations to be liquid
if they are publicly offered and have received an investment grade rating of
Baa or better by Moody's, or BBB or better by S&P or Fitch. Unrated lease
obligations, or those rated below investment grade, will be considered liquid
if the obligations come to the market through an underwritten public offering
and at least two dealers are willing to give competitive bids. In reference to
the latter, the Manager must, among other things, also review the
creditworthiness of the entity obligated to make payment under the lease
obligation and make certain specified determinations based on such factors as
the existence of a rating or credit enhancement such as insurance, the
frequency of trades or quotes for the obligation and the willingness of dealers
to make a market in the obligation.
INDEXED AND INVERSE FLOATING OBLIGATIONS. The Fund may invest in Municipal
Bonds (and Non-Municipal Tax-Exempt Securities) the return on which is based on
a particular index of value or interest rates. For example, the Fund may invest
in Municipal Bonds that pay interest based on an index of Municipal Bond
interest rates. The principal amount payable upon maturity of certain Municipal
Bonds also may be based on the value of the index. To the extent the Fund
invests in these types of Municipal Bonds, the Fund's return on such Municipal
Bonds will be subject to 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 variable long-term interest rates typically decline as short-term market
rates increase and increase as short-term market rates decline. The Fund's
return on such Municipal Bonds (and Non-Municipal Tax-Exempt Securities) will
be subject to risk with respect to the value of the particular index, which may
include reduced or limited interest payments and losses of invested principal.
Such securities have the effect of providing a degree of investment leverage,
since they may increase or decrease in value in response to changes, as an
illustration, in market interest rates at a rate which is a multiple (typically
two) of the rate at which fixed-rate long-term tax-exempt securities increase
or decrease in response to such changes. As a result, the market values of such
securities will generally be more volatile than the market values of fixed-rate
tax-exempt securities. To seek to limit the volatility of these securities, the
Fund may purchase inverse floating obligations with shorter-term maturities or
which contain limitations on the extent to which the interest rate may vary.
Certain investments in such obligations may be illiquid. The Fund may not
invest in such illiquid obligations if such investments, together with other
illiquid investments, would exceed 15% of the Fund's total assets. The Manager,
however, believes that indexed and inverse floating obligations represent
flexible portfolio management instruments for the Fund which allow the Fund to
seek potential investment rewards, hedge other portfolio positions or vary the
degree of investment leverage relatively efficiently under different market
conditions.
WHEN ISSUED SECURITIES, DELAYED DELIVERY SECURITIES AND FORWARD
COMMITMENTS. The Fund may purchase or sell securities that it is entitled to
receive on a when issued basis. The Fund may also purchase or sell securities
on a delayed delivery basis. The Fund may also purchase or sell securities
through a forward commitment. These transactions involve the purchase or sale
of securities by the Fund at an established price with payment and delivery
taking place in the future. The Fund enters into these transactions to obtain
what is considered an
6
<PAGE>
advantageous price to the Fund at the time of entering into the transaction.
The Fund has not established any limit on the percentage of its assets that may
be committed in connection with these transactions. When the Fund purchases
securities in these transactions, the Fund segregates liquid securities in an
amount equal to the amount of its purchase commitments.
There can be no assurance that a security purchased on a when issued basis
will be issued or that a security purchased or sold through a forward
commitment will be delivered. The value of securities in these transactions on
the delivery date may be more or less than the Fund's purchase price. The Fund
may bear the risk of a decline in the value of the security in these
transactions and may not benefit from an appreciation in the value of the
security during the commitment period.
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 maturity of the
related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's total assets.
"JUNK" BONDS. Junk bonds are debt securities that are rated below
investment grade by the major rating agencies or are unrated securities that
Fund management believes are of comparable quality. Although junk bonds
generally pay higher rates of interest than investment grade bonds, they are
high-risk investments that may cause income and principal losses for the Fund.
The major risks in junk bond investments include the following:
Junk bonds may be issued by less creditworthy companies. These securities
are vulnerable to adverse changes in the issuer's industry and to general
economic conditions. Issuers of junk bonds may be unable to meet their interest
or principal payment obligations because of an economic downturn, specific
issuer developments or the unavailability of additional financing.
The issuers of junk bonds may have a larger amount of outstanding debt
relative to their assets than issuers of investment grade bonds. If the issuer
experiences financial stress, it may be unable to meet its interest or
principal payment obligations. The issuer's ability to pay its debt obligations
also may be lessened by specific issuer developments, or the unavailability of
additional financing.
Junk bonds are frequently ranked junior to claims by other creditors. If
the issuer cannot meet its obligations, the senior obligations are generally
paid off before the junior obligations.
Junk bonds frequently have redemption features that permit an issuer to
repurchase the security from the Fund before it matures. If an issuer redeems
the junk bonds, the Fund may have to invest the proceeds in bonds with lower
yields and may lose income.
Prices of junk bonds are subject to extreme price fluctuations. Negative
economic developments may have a greater impact on the prices of junk bonds
than on other higher rated fixed income securities.
Junk bonds may be less liquid than higher rated fixed income securities
even under normal economic conditions. There are fewer dealers in the junk bond
market, and there may be significant differences in the prices quoted for junk
bonds by the dealers. Because they are less liquid, judgment may play a greater
role in valuing certain of the Fund's portfolio securities than in the case of
securities trading in a more liquid market.
The Fund may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms with a defaulting issuer.
YIELDS. Yields on Municipal Bonds are dependent on a variety of factors,
including the general condition of the money market and of the municipal bond
market, the size of a particular offering, the financial condition of the
issuer, the maturity of the obligation and the rating of the issue. The ability
of the Fund to achieve its investment objective is also dependent on the
continuing ability of the issuers of the securities in which the Fund invests
to meet their obligations for the payment of interest and principal when due.
There are variations in the
7
<PAGE>
risks involved in holding Municipal Bonds, both within a particular
classification and between classifications, depending on numerous factors.
Furthermore, the rights of owners of Municipal Bonds and the obligations of the
issuer of such Municipal Bonds may be subject to applicable bankruptcy,
insolvency and similar laws and court decisions affecting the rights of
creditors generally and to general equitable principles, which may limit the
enforcement of certain remedies.
DERIVATIVES
The Fund may use instruments referred to as "Derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil) or an index (a measure of value or rates, such
as the S&P 500 or the prime lending rate). Derivatives allow the Fund to
increase or decrease the level of risk to which the Fund is exposed more
quickly and efficiently than transactions in other types of instruments.
The Fund may use Derivatives for hedging purposes. Hedging is a strategy
in which a Derivative is used to offset the risk that other Fund holdings may
decrease in value. Losses on the other investment may be substantially reduced
by gains on a Derivative that reacts in an opposite manner to market movements.
While hedging can reduce losses, it can also reduce or eliminate gains if the
market moves in a different manner than anticipated by the Fund or if the cost
of the Derivative outweighs the benefit of the hedge. Hedging also involves the
risk that changes in the value of the Derivative will not match those of the
holdings being hedged as expected by the Fund, in which case any losses on the
holdings being hedged may not be reduced.
Use of Derivatives for hedging purposes involves correlation risk. If the
value of the Derivative moves more or less than the value of the hedged
instruments the Fund will experience a gain or loss which will not be
completely offset by movements in the value of the hedged instruments.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
Reference is made to "How the Fund Invests" in the Prospectus. Set forth
below is additional information concerning these transactions.
The Fund is authorized to purchase and sell certain exchange traded
financial futures contracts ("financial futures contracts") solely for the
purpose of hedging its investments in Municipal Bonds against declines in value
and to hedge against increases in the cost of securities it intends to
purchase. However, any transactions involving financial futures or options
(including puts and calls associated therewith) will be in accordance with the
Fund's investment policies and limitations. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract
to take delivery of the type of financial instrument covered by the contract,
or in the case of index-based futures contracts to make and accept a cash
settlement, at a specific future time for a specified price. To hedge its
portfolio, the Fund may take an investment position in a futures contract which
will move in the opposite direction from the portfolio position being hedged. A
sale of financial futures contracts may provide a hedge against a decline in
the value of portfolio securities because such depreciation may be offset, in
whole or in part, by an increase in the value of the position in the financial
futures contracts. A purchase of financial futures contracts may provide a
hedge against an increase in the cost of securities intended to be purchased
because such appreciation may be offset, in whole or in part, by an increase in
the value of the position in the futures contracts. While the Fund's use of
hedging strategies is intended to moderate capital changes in portfolio
holdings and thereby reduce the volatility of the net asset value of Fund
shares, the Fund anticipates that its net asset value will fluctuate.
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."
DESCRIPTION OF FUTURES CONTRACTS. A futures contract is an agreement
between two parties to buy and sell a security or, in the case of an
index-based futures contract, to make and accept a cash settlement for a set
price on a future date. A majority of transactions in futures contracts,
however, do not result in the actual delivery of
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the underlying instrument or cash settlement, but are settled through
liquidation, I.E., by entering into an offsetting transaction. Futures
contracts have been designed by boards of trade which have been designated
"contracts markets" by the Commodity Futures Trading Commission ("CFTC").
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the
purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin," are required to be made on a daily
basis as the price of the futures contract fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"marking to the market." At any time prior to the settlement date of the
futures contract, the position may be closed out by taking an opposite position
that will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
The Fund deals in financial futures contracts based on a long-term
municipal bond index developed by the Chicago Board of Trade ("CBT") and The
Bond Buyer (the "Municipal Bond Index"). The Municipal Bond Index is comprised
of 40 tax-exempt municipal revenue and general obligation bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
S&P 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 futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the
exchange membership which is also responsible for handling daily accounting of
deposits or withdrawals of margin.
The Fund may purchase and sell financial futures contracts on U.S.
Government securities as a hedge against adverse changes in interest rates as
described below. With respect to U.S. Government securities, currently there
are financial futures contracts based on long-term U.S. Treasury bonds,
Treasury notes, Government National Mortgage Association ("GNMA") Certificates
and three-month U.S. Treasury bills. The Fund may purchase and write call and
put options on futures contracts on U.S. Government securities and purchase and
sell Municipal Bond index futures contracts in connection with its hedging
strategies.
Subject to policies adopted by the Trustees, the Fund also may engage in
other futures contracts transactions such as futures contracts on other
municipal bond indices that may become available if the Manager and the
Trustees of the Trust should determine that there is normally a sufficient
correlation between the prices of such futures contracts and the Municipal
Bonds in which the Fund invests to make such hedging appropriate.
FUTURES STRATEGIES. The Fund may sell a financial futures contract (I.E.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This strategy,
however, entails increased transaction costs in the form of dealer spreads and
typically would reduce the average yield of the Fund's portfolio securities as
a result of the shortening of maturities. The sale of futures contracts
provides an alternative means of hedging against declines in the value of its
investments in Municipal Bonds. As such values decline, the value of the Fund's
positions in the futures contracts will tend to increase, thus offsetting all
or a portion of the depreciation in the market value of the Fund's Municipal
Bond investments that 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
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debt instruments available to the Fund. Employing futures as a hedge also may
permit the Fund to assume a defensive posture without reducing the yield on its
investments beyond any amounts required to engage in futures trading.
When the Fund intends to purchase Municipal Bonds, the Fund may purchase
futures contracts as a hedge against any increase in the cost of such Municipal
Bonds resulting from a decrease in interest rates or otherwise, that may occur
before such purchases can be effected. Subject to the degree of correlation
between the Municipal Bonds and the futures contracts, subsequent increases in
the cost of Municipal Bonds should be reflected in the value of the futures
held by the Fund. As such purchases are made, an equivalent amount of futures
contracts will be closed out. Due to changing market conditions and interest
rate forecasts, however, a futures position may be terminated without a
corresponding purchase of portfolio securities.
CALL OPTIONS ON FUTURES CONTRACTS. The Fund may also purchase and sell
exchange traded call and put options on financial futures contracts on U.S.
Government securities. The purchase of a call option on a futures contract is
analogous to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the futures contract upon which
it is based or the price of the underlying debt securities, it may or may not
be less risky than ownership of the futures contract or underlying debt
securities. Like the purchase of a futures contract, the Fund will purchase a
call option on a futures contract to hedge against a market advance when the
Fund is not fully invested.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is below
the exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any decline that may have occurred in
the Fund's portfolio holdings.
PUT OPTIONS ON FUTURES CONTRACTS. The purchase of a put option on a
futures contract is analogous to the purchase of a protective put option on
portfolio securities. The Fund will purchase a put option on a futures contract
to hedge the Fund's portfolio against the risk of rising interest rates.
The writing of a put option on a futures contract constitutes a partial
hedge against increasing prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is higher
than the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
Municipal Bonds which the Fund intends to purchase.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option will be included in initial margin. The writing of an option on a
futures contract involves risks similar to those relating to futures contracts.
The Trust has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "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 futures contract may
be a "senior security" under the Investment Company Act.
RESTRICTIONS ON USE OF FUTURES TRANSACTIONS. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio assets after taking into
account unrealized profits and unrealized losses on any such contracts and
options. (However, the Fund intends to engage in options and futures
transactions only for hedging purposes.) Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
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When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (E.G., high grade commercial paper and daily tender adjustable
notes) or liquid securities in a segregated account with the Fund's custodian,
so that the amount so segregated plus the amount of initial and variation
margin held in the account of its broker equals the market value of the futures
contracts, thereby ensuring that the use of such futures contract is
unleveraged. It is not anticipated that transactions in futures contracts will
have the effect of increasing portfolio turnover.
RISK FACTORS IN FUTURES TRANSACTIONS AND OPTIONS. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged security,
the Fund will experience either a loss or gain on the futures contract which is
not completely offset by movements in the price of the hedged securities. To
compensate for imperfect correlations, the Fund may purchase or sell futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
futures contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts.
The particular municipal bonds comprising the index underlying the
Municipal Bond Index financial futures contract may vary from the bonds held by
the Fund. As a result, the Fund's ability to hedge effectively all or a portion
of the value of its Municipal Bonds through the use of such financial futures
contracts will depend in part on the degree to which price movements in the
index underlying the financial futures contract correlate with the price
movements of the Municipal Bonds held by the Fund. The correlation may be
affected by disparities in the average maturity, ratings, geographical mix or
structure of the Fund's investments as compared to those comprising the
Municipal Bond Index and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may
be subject to change over time as additions to and deletions from the Municipal
Bond Index alter its structure. The correlation between futures contracts on
U.S. Government securities and the Municipal Bonds held by the Fund may be
adversely affected by similar factors and the risk of imperfect correlation
between movements in the prices of such futures contracts and the prices of
Municipal Bonds held by the Fund may be greater. Municipal Bond Index futures
contracts were approved for trading in 1986. Trading in such futures contracts
may tend to be less liquid than trading in other futures contracts. The trading
of futures contracts also is subject to certain market risks, such as
inadequate trading activity, which could at times make it difficult or
impossible to liquidate existing positions.
The Fund expects to liquidate a majority of the futures contracts it
enters into through offsetting transactions on the applicable contract market.
There can be no assurance, however, that a liquid secondary market will exist
for any particular futures contract at any specific time. Thus, it may not be
possible to close out a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments
of variation margin. In such situations, if the Fund has insufficient cash, it
may be required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability
to close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments in Municipal Bonds. The liquidity
of a secondary market in a futures contract may be adversely affected by "daily
price fluctuation limits" established by commodity exchanges which limit the
amount of fluctuation in a futures contract price during a single trading day.
Once the daily limit has been reached in the contract, no trades may be entered
into at a price beyond the limit, thus preventing the liquidation of open
futures positions. Prices have in the past moved beyond the daily limit on a
number of consecutive trading days. The Fund will enter into a futures position
only if, in the judgment of the Manager, there appears to be an actively traded
secondary market for such futures contracts.
The successful use of transactions in futures and related options also
depends on the ability of the Manager to forecast correctly the direction and
extent of interest rate movements within a given time frame. To the extent
interest rates remain stable during the period in which a futures contract or
option is held by the Fund or such rates move in a direction opposite to that
anticipated, the Fund may realize a loss on the hedging transaction which is
not fully or partially offset by an increase in the value of portfolio
securities. As a result, the Fund's total return for such period may be less
than if it had not engaged in the hedging transaction.
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Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contracts can result in
substantial unrealized gains or losses. 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. Because the Fund
will engage in the purchase and sale of futures contracts solely for hedging
purposes, however, any losses incurred in connection therewith should, if the
hedging strategy is successful, be offset in whole or in part by increases in
the value of securities held by the Fund or decreases in the price of
securities the Fund intends to acquire.
The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option on a futures contract also entails the risk that changes in the value of
the underlying futures contract will not be fully reflected in the value of the
option purchased.
DESCRIPTION OF TEMPORARY INVESTMENTS
The Fund may invest in short-term tax-free and taxable securities subject
to the limitations set forth above and in the Prospectus under "How the Fund
Invests." The tax-exempt money market securities may include municipal notes,
municipal commercial paper, municipal bonds with a remaining maturity of less
than one year, variable rate demand notes and participations therein. Municipal
notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes and grant anticipation notes. Anticipation notes are sold as
interim financing in anticipation of tax collection, bond sales, government
grants or revenue receipts. Municipal commercial paper refers to short-term
unsecured promissory notes generally issued to finance short-term credit needs.
The taxable money market securities in which the Fund may invest as Temporary
Investments consist of U.S. Government securities, U.S. Government agency
securities, domestic bank or savings institution certificates of deposit and
bankers' acceptances, short-term corporate debt securities such as commercial
paper and repurchase agreements. These Temporary Investments must have a stated
maturity not in excess of one year from the date of purchase. The Fund may not
invest in any security issued by a commercial bank or a savings institution
unless the bank or institution is organized and operating in the United States,
has total assets of at least one billion dollars and is a member of the Federal
Deposit Insurance Corporation ("FDIC"), except that up to 10% of total assets
may be invested in certificates of deposit of smaller institutions if such
certificates are fully insured by the FDIC.
VRDOS AND PARTICIPATING VRDOS. VRDOs are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility that
because of default or insolvency the demand feature of VRDOs and Participating
VRDOs may not be honored. The interest rates are adjustable at intervals
(ranging from daily to up to one year) to some prevailing market rate for
similar investments, such adjustment formula being calculated to maintain the
market value of the VRDOs, at approximately the par value of the VRDOs on the
adjustment date. The adjustments typically are based upon the Public Securities
Association Index or some other appropriate interest rate adjustment index. The
Fund may invest in all types of tax-exempt instruments currently outstanding or
to be issued in the future which satisfy the short-term maturity and quality
standards of the Fund.
Participating VRDOs provide the Fund with a specified undivided interest
(up to 100%) of the underlying obligation and the right to demand payment of
the unpaid principal balance plus accrued interest on the Participating VRDOs
from the financial institution upon a specified number of days' notice, not to
exceed seven days. In addition, the Participating VRDO is backed by an
irrevocable letter of credit or guaranty of the financial institution. The Fund
would have an undivided interest in the underlying obligation and thus
participate on the same basis as the financial institution in such obligation
except that the financial institution typically retains fees out of the
interest paid on the obligation for servicing the obligation, providing the
letter of credit and issuing the repurchase commitment. The Fund has been
advised by its counsel that the Fund should be entitled to treat the income
received on Participating VRDOs as interest from tax-exempt obligations.
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VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed to be illiquid securities. A VRDO with a demand notice
period exceeding seven days will therefore be subject to the Fund's restriction
on illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and will be ultimately responsible
for such determinations.
The Temporary Investments, VRDOs and Participating VRDOs in which the Fund
may invest will be in the following rating categories at the time of purchase:
MIG-1/VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and Prime-1 through
Prime-3 for commercial paper (as determined by Moody's), SP-1 through SP-2 for
notes and A-1 through A-3 for VRDOs and commercial paper (as determined by
S&P), or F-1 through F-3 for notes, VRDOs and commercial paper (as determined
by Fitch). Temporary Investments, if not rated, must be of comparable quality
in the opinion of the Manager. In addition, the Fund reserves the right to
invest temporarily a greater portion of its assets in Temporary Investments for
defensive purposes, when, in the judgment of the Manager, market conditions
warrant.
REPURCHASE AGREEMENTS. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer or an affiliate
thereof, in U.S. Government securities. Under such agreements, the bank or
primary dealer or an affiliate thereof agrees, upon entering into the contract,
to repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. In
repurchase agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligations. Such agreements usually
cover short periods, such as under one week. Repurchase agreements may be
construed to be collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. In a repurchase agreement, the
Fund will require the seller to provide additional collateral if the market
value of the securities falls below the repurchase price at any time during the
term of the repurchase agreement. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a
repurchase agreement, instead of the contractual fixed rate of return, the rate
of return to the Fund shall be dependent upon intervening fluctuations of the
market value of such security and the accrued interest on the security. In such
event, the Fund would have rights against the seller for breach of contract
with respect to any losses arising from market fluctuations following the
failure of the seller to perform. The Fund may not invest 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.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
investment restrictions and policies relating to the investment of its assets
and its activities. The fundamental policies set forth below may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the 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 at the
time of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities).
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(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 that
invest in real estate or interests therein.
(5) Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
(6) Issue senior securities to the extent such issuance would violate
applicable law.
(7) Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
(8) Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933
(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.
In addition, the Fund has adopted non-fundamental investment restrictions
that may be changed by the Board of Trustees without a vote of the Fund's
shareholders. Under the non-fundamental investment restrictions, the Fund may
not:
(a) Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of
the 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 that cannot be readily resold because of legal
or contractual restrictions or that 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 that mature within seven days or
securities that the Board of Trustees of the Trust has otherwise determined
to be liquid pursuant to applicable law.
(d) Notwithstanding fundamental investment restriction (7) above, borrow
amounts in excess of 20% of its total assets taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes.
In addition, to comply with tax requirements for qualification as a
"regulated investment company," the Fund's investments will be limited in a
manner such that, at the close of each quarter of each fiscal year, (a) no
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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 Board of 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.
Because of the affiliation of Merrill Lynch with the Manager, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch or its
affiliates except pursuant to an exemptive order under the Investment Company
Act. See "Portfolio Transactions." Without such an exemptive order the Fund
would be prohibited from engaging in portfolio transactions with Merrill Lynch
or any of its affiliates acting as principal.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to the Manager. As a result of the investment policies described
herein, the Fund's portfolio turnover rate may be higher than that of other
investment companies; however, it is extremely difficult to predict portfolio
turnover rates with any degree of accuracy. Higher portfolio turnover may
contribute to higher transaction costs in the form of dealer spreads and
brokerage commissions which are borne directly by the Fund. High portfolio
turnover may also result in negative tax consequences, such as an increase in
capital gains dividends or in ordinary income dividends of accrued market
discount. See "Distributions and Taxes -- Taxes." The portfolio turnover rate
is calculated by dividing the lesser of purchases or sales of portfolio
securities for the particular fiscal year by the monthly average of the value
of the portfolio securities owned by the Fund during the particular fiscal
year. For purposes of determining this rate, all securities whose maturities at
the time of acquisition are one year or less are excluded.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
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
"non-interested Trustees"). The Trustees are responsible for the overall
supervision of the operations of the Trust and perform the various duties
imposed on the directors or trustees of investment companies by the Investment
Company Act.
Information about the Trustees, the executive officers of the Trust and
the portfolio manager of the Fund, including their ages and their principal
occupations for at least the last five years, is set forth below. Unless
otherwise noted, the address of each Trustee, executive officer and the
portfolio manager is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66) -- PRESIDENT AND TRUSTEE(1)(2) -- Chairman of the
Manager and of 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") from 1997 to 1999 and Director thereof since 1993; President of
Princeton Services from 1993 to 1997; Executive Vice President of Merrill Lynch
& Co., Inc. ("ML & Co.") from 1990 to 1999.
RONALD W. FORBES (58) -- TRUSTEE(2) -- 1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany since 1989; Consultant, Urban Institute, Washington, D.C. since
1995.
CYNTHIA A. MONTGOMERY (46) -- TRUSTEE(2) -- Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02163. Professor, Harvard Business
School since 1989; Associate Professor, J.L. Kellogg Graduate
15
<PAGE>
School of Management, Northwestern University from 1985 fo 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 (67) -- TRUSTEE(2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Versus 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 from 1986 to 1997.
KEVIN A. RYAN (66) -- 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 (60) -- TRUSTEE(2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, and Dean from 1984 to 1993, and currently Dean
Emeritus of New York University, Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc., Vornado Realty Trust, Inc., and
Alexander's Inc.
TERRY K. GLENN (58) -- EXECUTIVE VICE PRESIDENT(1)(2) -- Executive Vice
President of the Manager and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Princeton Funds
Distributor, Inc. ("PFD") since 1986 and Director thereof since 1991; President
of Princeton Administrators, L.P. since 1988.
DONALD C. BURKE (38) -- VICE PRESIDENT AND TREASURER(1)(2) -- Senior Vice
President and Treasurer of MLAM since 1999; First Vice President of MLAM from
1997 to 1999; Vice President of MLAM from 1990 to 1997.
VINCENT R. GIORDANO (54) -- SENIOR VICE PRESIDENT(1)(2) -- Senior Vice
President of the Manager and MLAM since 1984; Senior Vice President of
Princeton Services since 1993.
KENNETH A. JACOB (47) -- VICE PRESIDENT(1)(2) -- First Vice President of
MLAM since 1997; Vice President of MLAM from 1984 to 1997; Vice President of
the Manager since 1984.
WILLIAM R. BOCK (63) -- VICE PRESIDENT(1)(2) -- Vice President and
Portfolio Manager of MLAM since 1989.
SUSAN B. BAKER (41) -- SECRETARY(1)(2) -- Vice President of the Manager
since 1993; attorney associated with MLAM 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 FAM or MLAM acts as the investment adviser
or manager.
(3) Member of the Trust's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Trustees.
As of the date of this Statement of Additional Information, the Trustees,
officers of the Trust and officers of the Fund as a group (12 persons) owned an
aggregate of less than 1% of the outstanding shares of the Fund. At such date,
Mr. Zeikel, a Trustee and officer of the Trust, the other officers of the Trust
and the officers of the Fund owned an aggregate of less than 1% of the
outstanding shares of common stock of ML & Co.
COMPENSATION OF TRUSTEES
The Trust pays each non-interested Trustee a fee of $800 per year plus
$100 per meeting attended. The Trust also compensates members of its Audit and
Nominating Committee (the "Committee"), which consists of all the
non-interested Trustees, a fee of $300 per year. The Chairman of the Committee
receives an additional fee of $1000 per year. The Trust reimburses each
non-interested Trustee for his out-of-pocket expenses relating to attendance at
Board and Committee meetings. The fees and expenses of the Trustees are
allocated to the respective series of the Trust on the basis of asset size.
16
<PAGE>
The following table shows the compensation earned by the non-interested
Trustees for the fiscal year ended October 31, 1998 and the aggregate
compensation paid to them from all registered investment companies advised by
the Manager and its affiliate, FAM ("MLAM/FAM-advised funds"), for the calendar
year ended December 31, 1997.
<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) .............. $1,500 None $153,500
Cynthia A. Montgomery(1) ......... $1,500 None $153,500
Charles C. Reilly(1) ............. $2,500 None $313,000
Kevin A. Ryan(1) ................. $1,500 None $153,500
Richard R. West(1) ............... $1,500 None $299,000
</TABLE>
- ----------
(1) The Trustees serve on the boards of other MLAM/FAM-advised funds as
follows: Mr. Forbes (37 registered investment companies consisting of 50
portfolios); Ms. Montgomery (37 registered investment companies consisting
of 50 portfolios); Mr. Reilly (56 registered investment companies
consisting of 69 portfolios); Mr. Ryan (37 registered investment companies
consisting of 50 portfolios); and Mr. West (58 registered investment
companies consisting of 83 portfolios).
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, the Manager 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.
MANAGEMENT AND ADVISORY ARRANGEMENTS
MANAGEMENT SERVICES. The Manager provides the Fund with investment
advisory and management services. Subject to the supervision of the Trustees,
the Manager is responsible for the actual management of the Fund's portfolio
and constantly reviews the Fund's holdings in light of its own research
analysis and that from other relevant sources. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Manager.
The Manager performs certain of the other administrative services and provides
all the office space, facilities, equipment and necessary personnel for
management of the Trust and the Fund.
MANAGEMENT FEE. Pursuant to a Management Agreement between the Trust on
behalf of the Fund and the Manager (the "Management Agreement"), the Manager
receives for its services to the Fund monthly compensation at the annual rate
of 0.55% of the average daily net assets of the Fund. The table below sets
forth information about the total management fees paid by the Fund to the
Manager for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, MANAGEMENT FEE
- ------------------------------- ---------------
<S> <C>
1998 ........................ $1,174,988
1997 ........................ $1,182,951
1996 ........................ $1,240,092
</TABLE>
PAYMENT OF FUND EXPENSES. The Management Agreement obligates the Manager
to provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Trust connected with
investment and economic research, trading and investment management of the
Trust, as well as the fees of all Trustees of the Trust who are affiliated
persons of ML & Co. or any of its affiliates. The Fund pays all other expenses
incurred in its operation and a portion of the Trust's general administrative
expenses allocated on the basis of the asset size of the respective series of
the Trust ("Series"). Expenses that will be borne directly by the Series
include redemption expenses, expenses of portfolio transactions, expenses of
registering the shares under federal and state securities laws, pricing costs
(including the daily calculation of net asset value), expenses of printing
shareholder reports, prospectuses and statements of additional information,
except to the extent paid by Merrill Lynch Funds Distributor, a division of PFD
(the "Distributor") as described below, fees for legal and auditing services,
Commission fees, interest, certain taxes and other expenses attributable to a
particular Series. Expenses that will be allocated on the basis of asset size
of the respective Series include fees and
17
<PAGE>
expenses of non-interested Trustees, state franchise taxes, costs of printing
proxies and other expenses relating to shareholder meetings and other expenses
properly payable by the Trust. The organizational expenses of the Trust were
paid by the Trust, and if additional Series are added to the Trust, the
organizational expenses will be allocated among the Series in a manner deemed
equitable by the Trustees. Depending upon the nature of a lawsuit, litigation
costs may be assessed to the specific Series to which the lawsuit relates or
allocated on the basis of the asset size of the respective Series. The Trustees
have determined that this is an appropriate method of allocation of expenses.
Accounting services are provided to the Trust by the Manager and the Trust
reimburses the Manager for its costs in connection with such services. As
required by the Fund's distribution agreements, the Distributor will pay the
promotional expenses of the Fund incurred in connection with the offering of
shares of the Fund. Certain expenses in connection with the account maintenance
and distribution of Class B and Class C shares will be financed by the Trust
pursuant to the Distribution Plans in compliance with Rule 12b-1 under the
Investment Company Act. See "Purchase of Shares -- Distribution Plans."
Reference is made to "Management of the Fund" in the Prospectus for certain
information concerning the management and advisory arrangements of the Trust.
ORGANIZATION OF THE MANAGER. The Manager is a limited partnership, the
partners of which are ML & Co., a financial services holding company and the
parent of Merrill Lynch, 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 its voting securities or
their power to exercise a controlling influence over its management or
policies.
DURATION AND TERMINATION. Unless earlier terminated as described herein,
the Management Agreement will remain in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Trustees who are not parties to
such contract or interested persons (as defined in the 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 or by
vote of the shareholders of the Fund.
TRANSFER AGENCY SERVICES. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Trust's Transfer Agent pursuant
to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer
Agency Agreement, the Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent
receives a fee of $11.00 per Class A or Class D account and $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.
DISTRIBUTION EXPENSES. The Fund has entered into four separate
distribution agreements with the Distributor in connection with the continuous
offering of each class of shares of the Fund (the "Distribution Agreements").
The Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays for
the printing and distribution of copies thereof used in connection with the
offering to dealers and investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Management Agreement described above.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of
the Manager (together, the "Codes"). The Codes significantly
18
<PAGE>
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 pre-clear any personal
securities investment (with limited exceptions, such as government securities).
The pre-clearance 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 that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternative and shares of Class B are sold to
investors choosing the deferred sales charge alternatives. Shares of Class C
are not available for purchase but will be issued only in exchange for Class C
shares of other mutual funds advised by MLAM or FAM. 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 (also known as service 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 contingent deferred sales charges ("CDSCs"), distribution fees and account
maintenance fees that are imposed on Class B and Class C shares, as well as the
account maintenance fees that are imposed on Class D shares, are imposed
directly against those classes and not against all assets of the Fund and,
accordingly, such charges do 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 are calculated in the same manner at
the same time and 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 Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLAM or FAM. Funds advised by MLAM
or FAM that utilize the Merrill Lynch Select Pricing(SM) System are referred to
herein as "Select Pricing Funds."
The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change. Merrill Lynch may
charge its customers a processing fee (presently $5.35) to confirm a sale of
shares to such customers. Purchases made directly through the Transfer Agent
are not subject to the processing fee.
19
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
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 or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charges and, in the case of Class D shares, the
account maintenance fee. Although some investors who previously purchased Class
A shares may no longer be eligible to purchase Class A shares of other Select
Pricing 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 a reduced initial sales charge
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.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account
and to single purchases by a trustee or other fiduciary purchasing shares for a
single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company," as that term is defined in the Investment Company Act, but does not
include purchases by any such company that has not been in existence for at
least six months or which has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount;
provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein
are credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment
adviser.
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 who currently own Class A shares are entitled to purchase additional
Class A shares of the Fund in that account. Class A shares are available at net
asset value to corporate warranty insurance reserve fund programs provided that
the program has $3 million or more initially invested in Select Pricing Funds.
Also eligible to purchase Class A shares at net asset value are participants in
certain investment programs including TMA(SM) Managed Trusts to which Merrill
Lynch Trust Company provides discretionary trustee services, collective
investment trusts for which Merrill Lynch Trust Company serves as trustee and
certain purchases made in connection with certain fee-based programs. In
addition, Class A shares are offered at net asset value to ML & Co. and its
subsidiaries and their directors and employees and to members of the Boards of
MLAM/FAM-advised investment companies. Certain persons who acquired shares of
certain MLAM/FAM-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 are met. In addition, Class A shares of the Fund and
certain other Select Pricing Funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions 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 Select Pricing Funds.
20
<PAGE>
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.
CLASS A AND CLASS D SALES CHARGE INFORMATION
<TABLE>
<CAPTION>
CLASS A SHARES
- -----------------------------------------------------------------------------------------------
FOR THE FISCAL YEAR GROSS SALES SALES CHARGES SALES CHARGES CDSCS RECEIVED ON
ENDED CHARGES RETAINED BY PAID TO REDEMPTION OF
OCTOBER 31, COLLECTED DISTRIBUTOR MERRILL LYNCH LOAD-WAIVED SHARES
- --------------------- ------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C>
1998 $ 771 $ 48 $ 723 $0
1997 $1,531 $104 $1,427 $0
1996 $3,886 $285 $3,601 $0
</TABLE>
<TABLE>
<CAPTION>
CLASS D SHARES
- -----------------------------------------------------------------------------------------------
FOR THE FISCAL YEAR GROSS SALES SALES CHARGES SALES CHARGES CDSCS RECEIVED ON
ENDED CHARGES RETAINED BY PAID TO REDEMPTION OF
OCTOBER 31, COLLECTED DISTRIBUTOR MERRILL LYNCH LOAD-WAIVED SHARES
- --------------------- ------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C>
1998 $2,860 $147 $2,713 $0
1997 $3,986 $308 $3,678 $0
1996 $5,128 $263 $4,865 $0
</TABLE>
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.
REDUCED INITIAL SALES CHARGES
REINVESTED DIVIDENDS AND CAPITAL GAINS. No initial sales charges are
imposed upon Class A and Class D shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
RIGHT OF ACCUMULATION. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of any other Select Pricing 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 INTENT. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available only
to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit plans
for which Merrill Lynch provides plan participant recordkeeping services. The
Letter of Intent 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 Intent may be included under a
subsequent Letter of Intent 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 Select Pricing
Funds presently held, at cost or maximum offering price (whichever is higher),
on the date of the first purchase under the Letter of Intent, 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 Intent (minimum of $25,000), the investor will be notified and
must pay, within 20 days
21
<PAGE>
of the expiration of such Letter, the difference between the sales charge on
the Class A or Class D shares purchased at the reduced rate and the sales
charge applicable to the shares actually purchased through the Letter. Class A
or Class D shares equal to at least 5.0% 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 Intent
must be at least 5.0% of the dollar amount of such Letter. If a purchase during
the term of such Letter would otherwise be subject to a further reduced sales
charge based on the right of accumulation, the purchaser will be entitled on
that purchase and subsequent purchases to the further reduced percentage sales
charge that would be applicable to a single purchase equal to the total dollar
value of the Class A or Class D shares then being purchased under such Letter,
but there will be no retroactive reduction of the sales charge on any previous
purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intent will be deducted
from the total purchases made under such Letter. An exchange from the Summit
Cash Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.
TMA(SM) MANAGED TRUSTS. Class A shares are offered at net asset value to
TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services at net asset value.
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 investment for such accounts is $500, except that the initial minimum
investment for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
PURCHASE PRIVILEGE OF CERTAIN PERSONS. Trustees of the Trust, members of
the Boards of other MLAM-advised funds, 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. Under such program, the Fund realizes
economies of scale and reduction of sales-related expenses by virtue of
familiarity with the Fund. Employees and directors or trustees wishing to
purchase shares of the Fund must satisfy the Fund's suitability standards.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of
shares of a mutual fund that was sponsored by the Financial Consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis; and, second, the investor must establish that such
redemption had been made within 60 days prior to the investment in the Fund and
the proceeds from the redemption had been maintained in the interim in cash or
a money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor that has a business relationship with a Merrill
Lynch Financial Consultant and that 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 that has a business relationship with a Merrill Lynch
Financial Consultant and that has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of shares of such
other mutual fund and that such shares have been outstanding for a period of no
less than six
22
<PAGE>
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.
CLOSED-END FUND INVESTMENT OPTION. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by FAM or MLAM who
purchased such closed-end fund shares prior to October 21, 1994 (the date the
Merrill Lynch Select Pricing(SM) System commenced operations) and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to buy Class A shares) or Class D shares of the Fund and other Select Pricing
Funds ("Eligible Class D Shares"), if the following conditions are met. First,
the sale of closed-end fund shares must be made through Merrill Lynch, and the
net proceeds therefrom must be immediately reinvested in Eligible Class A or
Eligible 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 eligible fund in connection with a tender offer conducted
by the eligible fund and reinvest the proceeds immediately in the designated
class of shares of the Fund. This investment option is available only with
respect to eligible shares as to which no Early Withdrawal Charge or CDSC (each
as defined in the eligible fund's prospectus) is applicable. Purchase orders
from eligible fund shareholders wishing to exercise this investment option will
be accepted only on the day that the related tender offer terminates and will
be effected at the net asset value of the designated class of the Fund on such
day.
ACQUISITION OF CERTAIN INVESTMENT COMPANIES. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund that might result from an acquisition of assets having net unrealized
appreciation that is disproportionately higher at the time of acquisition than
the realized or unrealized appreciation of the Fund. The issuance of Class D
shares for consideration other than cash is limited to bona fide
reorganizations, statutory mergers or other acquisitions of portfolio
securities that (i) meet the investment objectives and policies of the Fund;
(ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, which are not restricted as to
transfer either by law or liquidity of market (except that the Fund may acquire
through such transactions restricted or illiquid securities to the extent the
Fund does not exceed the applicable limits on acquisition of such securities
set forth under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
23
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time. Class C shares are available only in exchange for Class C shares of other
Select Pricing Funds. Class C shares may be suitable for shareholders who are
uncertain as to the length of time they intend to hold their assets in Select
Pricing Funds.
Because no initial sales charges are deducted at the time of the purchase,
Class B and Class C shares provide the benefit of putting all of the investor's
dollars to work from the time the investment is made. The deferred sales charge
alternatives may be particularly appealing to investors that do not qualify for
the reduction in initial sales charges. Both Class B and Class C shares are
subject to ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be offset to
the extent any return is realized on the additional funds initially invested in
Class B or Class C shares. In addition, Class B shares will be converted into
Class D shares of the Fund after a conversion period of approximately ten
years, and thereafter investors will be subject to lower ongoing fees.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. See "Pricing of Shares -- Determination of Net Asset Value" below.
CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES
Class B shares that are redeemed within one year of purchase may be
subject to a 1.0% CDSC charged as a percentage of the dollar amount subject
thereto. 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. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed. Accordingly, no CDSC will be imposed on increases in net asset value
above the initial purchase price. In addition, no CDSC will be assessed on
shares derived from reinvestment of dividends or capital gains distributions.
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. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
The Class B CDSC is waived on redemptions of shares in certain
circumstances, including 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. The Class B
CDSC also is waived for any Class B shares that are purchased within qualifying
Employee Access(SM) Accounts. The terms of the CDSC may be modified in
connection with certain fee-based programs. See "Shareholder Services --
Fee-Based Programs."
CONVERSION OF CLASS B SHARES TO CLASS D SHARES. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.10% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset value 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 the 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.
24
<PAGE>
In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing Funds will convert approximately ten
years after initial purchase. If, during the Conversion Period, a shareholder
exchanges Class B shares with an eight-year Conversion Period for Class B
shares with a ten-year Conversion Period, or vice versa, the Conversion Period
applicable to the Class B shares acquired in the exchange will apply and the
holding period for the shares exchanged will be tacked on to the holding period
for the shares acquired. The conversion period also may be modified for
investors that participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
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.
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.
CONTINGENT DEFERRED SALES CHARGES -- CLASS C SHARES
Class C shares that are redeemed within one year of purchase may be
subject to a 1.0% CDSC charged as a percentage of the dollar amount subject
thereto. In determining whether a Class C CDSC is applicable to a redemption,
the calculation will be determined in the manner that results in the lowest
possible rate being charged. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed. Accordingly, no Class C CDSC will be imposed on increases in net
asset value above the initial purchase price. In addition, no Class C CDSC will
be assessed on shares derived from reinvestment of dividends or capital gains
distributions. 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. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption. The Class C CDSC may be
waived in connection with certain fee-based programs, involuntary termination
of an account in which Fund shares are held and withdrawals through the Merrill
Lynch Systematic Withdrawal Plan. See "Shareholder Services -- Fee-Based
Programs."
CLASS B AND CLASS C SALES CHARGE INFORMATION
<TABLE>
<CAPTION>
CLASS B SHARES*
- ---------------------------------------------------------
FOR THE FISCAL YEAR CDSCS RECEIVED CDSCS PAID TO
ENDED OCTOBER 31, BY DISTRIBUTOR MERRILL LYNCH
- --------------------- ---------------- --------------
<S> <C> <C>
1998 $ 52,971 $ 52,971
1997 $122,340 $122,340
1996 $163,849 $163,849
</TABLE>
- ----------
* Additional Class B CDSCs payable to the Distributor with respect to the
fiscal years ended October 31, 1997 and 1998 may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs.
<TABLE>
<CAPTION>
CLASS C SHARES
- ---------------------------------------------------------
FOR THE FISCAL YEAR CDSCS RECEIVED CDSCS PAID TO
ENDED OCTOBER 31, BY DISTRIBUTOR MERRILL LYNCH
- --------------------- ---------------- --------------
<S> <C> <C>
1998 $ 252 $ 252
1997 $2,041 $2,041
1996 $2,718 $2,718
</TABLE>
Merrill Lynch compensates its Financial Consultants for selling Class B
and Class C shares at the time of purchase from its own funds. 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
25
<PAGE>
the dealer's own funds. The combination of the CDSC and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B and
Class C shares without a sales charge being deducted at the time of purchase.
See "Distribution Plans" below. 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.
DISTRIBUTION PLANS
Reference is made to "Fees and Expenses" 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.
The Distribution Plans for Class B, Class C and Class D shares each
provides that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid monthly, at the
annual rates of 0.20%, 0.20% and 0.10%, respectively, of the average daily net
assets of the Fund attributable to shares of the relevant class in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) in
connection with account maintenance activities with respect to Class B, Class C
and Class D shares. Each of those classes has exclusive voting rights with
respect to the 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).
The Distribution Plans for Class B and Class C shares each provides that
the Fund also pays the Distributor a distribution fee relating to the shares of
the relevant class, accrued daily and paid monthly, at the annual rates 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.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. 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 each
related class of shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection and nomination
of non-interested Trustees shall be committed to the discretion of the
non-interested Trustees then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the non-interested Trustees concluded that there is
reasonable likelihood that each Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the non-interested Trustees
or by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the approval of
the related class of shareholders and all material amendments are required to
be approved by the vote of Trustees, including a majority of the non-interested
Trustees who have no direct or indirect financial interest in the Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of the Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the
date of the Distribution Plan or such report, the first two years in an easily
accessible place.
Among other things, each Distribution Plan provides that the Distributor
shall provide and the Trustees shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees paid to the
Distributor. 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
26
<PAGE>
their deliberations as to the continuance of the Class B and Class C
Distribution Plans annually, as of December 31 of each year, on a "fully
allocated accrual" basis and quarterly on a "direct expense and revenue/cash"
basis. On the fully allocated accrual basis, revenues consist of the account
maintenance fees, distribution fees, the CDSCs and certain other related
revenues, and expenses consist of financial consultant compensation, branch
office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs
and the expenses consist of financial consultant compensation.
As of December 31, 1997, the last date for which fully allocated accrual
data is available, the fully allocated accrual revenues of the Distributor and
Merrill Lynch for the period since the commencement of operations of Class B
shares exceeded the fully allocated accrual expenses by approximately $255,000
(0.28% of Class B net assets at that date). As of October 31, 1998, direct cash
revenues for the period since the commencement of operations of Class B shares
exceeded direct cash expenses by $4,451,663 (5.88% of Class B net assets at
that date). As of December 31, 1997, the fully allocated accrual expenses
incurred by the Distributor and Merrill Lynch for the period since the
commencement of operations of Class C shares exceeded the fully allocated
accrual revenues by approximately $4,000 (0.06% of Class C net assets at that
date). As of October 31, 1998, direct cash revenues for the period since the
commencement of operations of Class C shares exceeded direct cash expenses by
$49,087 (0.96% of Class C net assets at that date).
For the fiscal year ended October 31, 1998, the Fund paid the Distributor
$253,305 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $84.7
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended October 31, 1998, the Fund paid the
Distributor $17,596 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately
$5.9 million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended October 31, 1998, the Fund paid the
Distributor $47,291 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan of approximately
$47.4 million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
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 following table sets forth comparative information as of October 31,
1998 with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to the Class B shares, the Distributor's voluntary
maximum.
27
<PAGE>
<TABLE>
<CAPTION>
DATA CALCULATED AS OF OCTOBER 31, 1998
---------------------------------------
(IN THOUSANDS)
ALLOWABLE
ELIGIBLE ALLOWABLE INTEREST ON
GROSS AGGREGATE UNPAID
SALES(1) SALES CHARGE BALANCE(2)
---------- -------------- -------------
<S> <C> <C> <C>
CLASS B SHARES FOR THE PERIOD NOVEMBER
26, 1986 (COMMENCEMENT OF
OPERATIONS) TO OCTOBER 31, 1998
Under NASD Rule as Adopted ................ $373,939 $23,371 $31,574
Under Distributor's Voluntary Waiver ...... $373,939 $23,371 $ 1,870
CLASS C SHARES, FOR THE PERIOD OCTOBER
21, 1994 (COMMENCEMENT OF
OPERATIONS) TO OCTOBER 31, 1998
Under NASD Rule as Adopted ................ $ 4,117 $ 257 $ 63
<CAPTION>
DATA CALCULATED AS OF OCTOBER 31, 1998
----------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
AMOUNTS FEE AT
MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
AMOUNT PAID TO UNPAID ASSET
PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
--------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
CLASS B SHARES FOR THE PERIOD NOVEMBER
26, 1986 (COMMENCEMENT OF
OPERATIONS) TO OCTOBER 31, 1998
Under NASD Rule as Adopted ................ $54,945 $5,045 $49,900 $76
Under Distributor's Voluntary Waiver ...... $25,241 $5,045 $20,196 $76
CLASS C SHARES, FOR THE PERIOD OCTOBER
21, 1994 (COMMENCEMENT OF
OPERATIONS) TO OCTOBER 31, 1998
Under NASD Rule as Adopted ................ $ 320 $ 28 $ 292 $ 5
</TABLE>
- ----------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in THE WALL STREET JOURNAL, plus 1.0%, as permitted under the
NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"What are the Fund's fees and expenses?" in the Prospectus. This figure
may include CDSCs that were deferred when a shareholder redeemed shares
prior to the expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFA(SM)) Program (the "MFA Program"). The
CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum (with respect to
Class B shares) or the NASD maximum (with respect to Class B and Class C
shares).
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper
notice of redemption. Except for any CDSC that may be applicable, there will be
no charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the NYSE is restricted as determined by the Commission or the
NYSE is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists as defined by the Commission as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the market value of the securities
held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida
32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of
shares deposited with the Transfer Agent may be accomplished by a written
letter requesting redemption. Proper notice of redemption in the case of shares
for which certificates have been issued may be accomplished by a written letter
as noted above accompanied by certificates for the shares to be redeemed.
Redemption requests should not be sent to the Fund. The redemption request in
either event requires the signature(s) of all persons in whose name(s) the
shares are registered, signed exactly as such name(s) appear(s) on the Transfer
Agent's
28
<PAGE>
register. The signature(s) on the redemption requests 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 "Exchange Act"), 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 Fund may be requested to redeem 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 Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment (E.G., cash, Federal funds or certified check drawn on a United
States bank) has been collected for the purchase of such Fund shares, which
will not exceed 10 days.
REPURCHASE
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund 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 the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer prior to fifteen minutes
after the regular close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern time) and such request is received by the Fund from such
dealer not later than 30 minutes after the close of business on the NYSE on the
same day. Dealers have the responsibility of submitting such repurchase
requests to the Fund not later than 30 minutes after the close of business on
the NYSE, in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a repurchase of shares
to such customers. Repurchases made directly through the Transfer Agent on
accounts held at the Transfer Agent are not subject to the processing fee. The
Fund reserves the right to reject any order for repurchase, which right of
rejection might adversely affect shareholders seeking redemption through the
repurchase procedure. However, a shareholder whose order for repurchase is
rejected by the Fund 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 of the Fund
have a privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or the Distributor.
The reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily Monday through Friday as of 15 minutes after the
close of business on the NYSE on each day the NYSE is open for
29
<PAGE>
trading. The NYSE generally closes at 4:00 p.m., Eastern time. The NYSE is not
open for trading 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 is computed by dividing the value of the securities held
by the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares outstanding at such time, rounded to
the nearest cent. Expenses, including the fees payable to the Manager and
Distributor, are accrued daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance, distribution
and 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 the Class D shares; moreover, the per share net
asset value of the Class B and Class C shares generally will be lower than the
per share net asset value of Class D shares reflecting the daily expense
accruals of the distribution fees and higher transfer agency fees applicable
with respect to Class B and Class C shares of the Fund. It is expected,
however, that the per share net asset value of the four classes will tend to
converge (although not necessarily meet) immediately after the payment of
dividends or distributions, which will differ by approximately the amount of
the expense accrual differentials between the classes.
The Municipal Bonds and other portfolio securities in which the Fund
invests are traded primarily in over-the-counter ("OTC") municipal bond and
money markets and are valued at the last available bid price for long positions
and at the last available ask price for short positions in the OTC market or on
the basis of yield equivalents as obtained from one or more dealers that make
markets in the securities. One bond is the "yield equivalent" of another bond
when, taking into account market price, maturity, coupon rate, credit rating
and ultimate return of principal, both bonds will theoretically produce an
equivalent return to the bondholder. Financial futures contracts and options
thereon, which are traded on exchanges, are valued at their settlement prices
as of the close of such exchanges. Short-term investments with a remaining
maturity 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.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A,
Class B, Class C and Class D shares of the Fund based on the value of the
Fund's net assets and number of shares outstanding on October 31, 1998 is set
forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net Assets ..................................... $ 73,768,818 $ 75,687,648 $ 5,116,397 $ 47,869,193
============ ============ =========== ============
Number of Shares Outstanding ................... 6,956,915 7,138,813 482,812 4,516,048
============ ============ =========== ============
Net Asset Value Per Share (net assets divided by
number of shares outstanding) ................ $ 10.60 $ 10.60 $ 10.60 $ 10.60
Sales Charge (for Class A and Class D shares:
4.00% of offering price; 4.17% of net asset
value per share)* ............................ .11 ** ** .11
------------ ------------- ------------ ------------
Offering Price ................................. $ 10.71 $ 10.60 $ 10.60 $ 10.71
============ ============ =========== ============
</TABLE>
- ----------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares
-- Deferred Sales Charge Alternatives -- Class B and Class C Shares --
Contingent Deferred Sales Charges -- Class B Shares" and " -- Contingent
Deferred Sales Charges -- Class C Shares" herein.
30
<PAGE>
PORTFOLIO TRANSACTIONS
TRANSACTIONS IN PORTFOLIO SECURITIES
Subject to policies established by the Trustees, 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. Where possible, the Trust
deals directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. It is the policy of the Trust to obtain the best results in
conducting portfolio transactions for the Fund, taking into account such
factors as price (including the applicable dealer spread or commission), the
size, type and difficulty of the transaction involved, the firm's general
execution and operations facilities and the firm's risk in positioning the
securities involved. The portfolio securities of the Fund generally are traded
on a principal basis and normally do not involve either brokerage commissions
or transfer taxes. The cost of portfolio securities transactions of the Fund
primarily consists of dealer or underwriter spreads. While reasonable
competitive spreads or commissions are sought, the Fund will not necessarily be
paying the lowest spread or commission available. Transactions with respect to
the securities of small and emerging growth companies in which the Fund may
invest may involve specialized services on the part of the broker or dealer and
thereby entail higher commissions or spreads than would be the case with
transactions involving more widely traded securities.
Subject to obtaining the best net results, dealers who provide
supplemental investment research (such as information concerning tax-exempt
securities, economic data and market forecasts) to the Manager may receive
orders for transactions by the Fund. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Manager under its Management Agreement and the expense of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information. Supplemental investment research obtained from such dealers might
be used by the Manager in servicing all of its accounts and all such research
might not be used by the Manager in connection with the Fund. Consistent with
the Conduct Rules of the NASD and policies established by the Trustees of the
Trust, the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
Because of the affiliation of Merrill Lynch with the Manager, the Fund is
prohibited from engaging in certain transactions involving such firm or its
affiliates except pursuant to an exemptive order under the Investment Company
Act. Included among such restricted transactions are purchases from or sales to
Merrill Lynch of securities in transactions in which it acts as principal.
Under an exemptive order, the Trust may effect principal transactions with
Merrill Lynch in high quality, short-term, tax-exempt securities subject to
conditions set forth in such order. Information regarding transactions executed
pursuant to the exemptive order is set forth in the following table:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR NUMBER OF APPROXIMATE AGGREGATE
ENDED OCTOBER 31, TRANSACTIONS MARKET VALUE OF TRANSACTIONS
- --------------------- -------------- -----------------------------
<S> <C> <C>
1998 .............. 0 $0
1997 .............. 0 $0
1996 .............. 0 $0
</TABLE>
An affiliated person of the Trust may serve as broker for the Fund in OTC
transactions conducted on an agency basis. Certain court decisions have raised
questions as to the extent to which investment companies should seek exemptions
under the Investment Company Act in order to seek to recapture underwriting and
dealer spreads from affiliated entities. The Trustees have considered all
factors deemed relevant and have made a determination not to seek such
recapture at this time. The Trustees will reconsider this matter from time to
time.
The Fund may not purchase securities, including Municipal Bonds, during
the existence of any underwriting syndicate of which Merrill Lynch is a member
or in a private placement in which Merrill Lynch serves as placement agent
except pursuant to procedures approved by the Trustees of the Trust which
either comply with rules adopted by the Commission or with interpretations of
the Commission staff. Rule 10f-3 under the Investment Company 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
31
<PAGE>
things, the terms of an issue of Municipal Bonds purchased by the Fund, the
amount of Municipal Bonds that may be purchased in any one issue and the assets
of the Fund that may be invested in a particular issue.
Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless the member (i)
has obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Fund in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided to
the Fund. 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 of the Manager or an affiliate when one
or more clients of the Manager or an affiliate are selling the same security.
If purchases or sales of securities arise for consideration at or about the
same time that would involve the Fund or other clients or funds for which the
Manager or an affiliate acts as manager, 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 an affiliate 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.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans and
instructions as to how to participate in the various services or plans, or how
to change options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
also receive separate confirmations for each purchase or sale transaction other
than automatic investment purchases and the reinvestment of ordinary income
dividends and capital gains distributions. A shareholder with an account held
at the Transfer Agent may make additions to his or her Investment Account at
any time by mailing a check directly to the Transfer Agent. A shareholder may
also maintain an account through Merrill Lynch. Upon the transfer of shares out
of a Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name may be opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or continue
to maintain an Investment Account at the Transfer Agent for those Class A or
Class D shares. Shareholders interested in transferring their Class B or Class
C shares from Merrill Lynch who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new
32
<PAGE>
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent. If
the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he or she be issued certificates for
his or her shares and then must turn the certificates over to the new firm for
re-registration in the new brokerage firm's name.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market mutual fund specifically designated for exchange
by holders of Class A, Class B, Class C and Class D shares of Select Pricing
Funds. 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. Before effecting an
exchange, shareholders should obtain a currently effective prospectus of the
fund into which the exchange is to be 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.
EXCHANGES OF CLASS A AND CLASS D SHARES. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund
if the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second Select
Pricing Fund, but does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second Select Pricing 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 D shares are
exchangeable with shares of the same class of other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A
or Class D shares") for Class A or Class D shares of other Select Pricing Funds
or Class A shares of Summit ("new Class A or Class D shares") are transacted on
the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class D shares and the
sales charge payable at the time of the exchange on the new Class A or Class D
shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares generally
may be exchanged into the Class A or Class D shares, respectively, of the other
funds with a reduced sales charge or without a sales charge.
EXCHANGES OF CLASS B AND CLASS C SHARES. Each Select Pricing Fund with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offers to exchange its Class B or Class C shares for Class B or Class C shares,
respectively, of another Select Pricing Fund or for Class B shares of Summit
("new Class B or Class C shares") on the basis of relative net asset value per
Class B or Class C share, without the payment of any CDSC that might otherwise
be due on redemption of the outstanding shares. Class B shareholders of the
Fund exercising the exchange privilege will continue to be subject to the
Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating
to the new Class B shares acquired through use of the exchange privilege. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the CDSC that may
be payable on a disposition of the new Class B or Class C shares, the holding
period for the outstanding Class B
33
<PAGE>
or Class C shares is "tacked" to the holding period of the new Class B or Class
C shares. For example, an investor may exchange Class B or Class C shares of
the Fund for those of Merrill Lynch Special Value Fund, Inc. ("Special Value
Fund") after having held the Fund's Class B shares for two and a half years.
The 2% CDSC that generally would apply to a redemption would not apply to the
exchange. Three years later the investor may decide to 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 two and a half year holding period of
Fund Class B shares to the three-year holding period for the Special Value Fund
Class B shares, the investor will be deemed to have held the Special Value Fund
Class B shares for more than five years.
EXCHANGES FOR SHARES OF A MONEY MARKET FUND. Class A and Class D shares
are exchangeable for Class A shares of Summit and Class B and Class C shares
are exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class
C shares of Select Pricing Funds and, in the event of such an exchange, the
period of time that Class B shares of Summit are held will count toward
satisfaction of the holding period requirement for purposes of reducing any
CDSC and toward satisfaction of any Conversion Period with respect to Class B
shares. Class B shares of Summit will be subject to a distribution fee at an
annual rate of 0.75% of average daily net assets of such Class B shares. This
exchange privilege does not apply with respect to certain Merrill Lynch
fee-based programs for which alternative exchange arrangements may exist.
Please see your Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select
Pricing Funds into a money market Fund were directed to certain Merrill
Lynch-sponsored money market funds other than Summit. Shareholders who have
exchanged Select Pricing Fund shares for shares of such other money market
funds and subsequently wish to exchange those money market fund shares for
shares of the Fund will be subject to the CDSC schedule applicable to such Fund
shares, if any. The holding period for those money market fund shares will not
count toward satisfaction of the holding period requirement for reduction of
the CDSC imposed on such shares, if any, and, with respect to Class B shares,
toward satisfaction of the Conversion Period. However, the holding period for
Class B or Class C shares received in exchange for such money market fund
shares will be aggregated with the holding period for the original Select
Pricing Fund shares for purposes of reducing the CDSC or satisfying the
Conversion Period.
EXCHANGES BY PARTICIPANTS IN THE MFA PROGRAM. The Fund's exchange
privilege is modified with respect to purchases of Class A and Class D shares
by non-retirement plan investors under the MFA Program. First, the initial
allocation of assets is made under the MFA Program. Then, any subsequent
exchange under the MFA Program of Class A or Class D shares of a Select Pricing
Fund for Class A or Class D shares of the Fund will be made solely on the basis
of the relative net asset values of the shares being exchanged. Therefore,
there will not be a charge for any difference between the sales charge
previously paid on the shares of the other Select Pricing Fund and the sales
charge payable on the shares of the Fund being acquired in the exchange under
the MFA Program.
EXERCISE OF THE EXCHANGE PRIVILEGE. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and
shareholders of the other Select Pricing Funds with shares for which
certificates have not been issued, may exercise the exchange privilege by wire
through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be
modified or terminated in accordance with the rules of the Commission. The Fund
reserves the right to limit the number of times an investor may exercise the
exchange privilege. Certain funds may suspend the continuous offering of their
shares to the general public at any time and may thereafter resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor.
34
<PAGE>
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a
"Program"), may permit the purchase of Class A shares at net asset value. Under
specified circumstances, participants in certain Programs may deposit other
classes of shares which will be exchanged for Class A shares. Initial or
deferred sales charges otherwise due in connection with such exchanges may be
waived or modified, as may the Conversion Period applicable to the deposited
shares. Termination of participation in a Program may result in the redemption
of shares held therein or the automatic exchange thereof to another class at
net asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
1-800-MER-FUND or 1-800-637-3863.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor) or
Class B, Class C or Class D shares at the applicable public offering price.
These purchases may be made either through the shareholder's securities dealer,
or by mail directly to the Transfer Agent, acting as agent for such securities
dealer. Voluntary accumulation also can be made through a service known as the
Fund's Automatic Investment Plan. The Fund would be authorized, on a regular
basis, to provide systematic additions to the Investment Account of such
shareholder through charges of $50 or more to the regular bank account of the
shareholder by either pre-authorized checks or automated clearing house debits.
Alternatively, an investor that maintains a CMA(R) or CBA(R) account may
arrange to have periodic investments made in the Fund in amounts of $100 or
more through the CMA(R) or CBA(R) Automated Investment Program.
AUTOMATIC DIVIDEND PROGRAM
Unless specific instructions are given as to the method of payment,
dividends and capital gains distributions will be automatically reinvested,
without sales charge, in additional full and fractional 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 NYSE on the monthly payment date for such
dividends and distributions. No CDSC will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
Shareholders may, at any time, by written notification to Merrill Lynch if
their account is maintained with Merrill Lynch, or by written notification or
by telephone (1-800-MER-FUND) to the Transfer Agent, if their account is
maintained with the Transfer Agent, elect to have subsequent dividends or both
dividends and capital gains distributions, paid in cash, rather than reinvested
in shares of the Fund or vice versa (provided that, in the event that a payment
on an account maintained at the Transfer Agent would amount to $10.00 or less,
a shareholder will not receive such payment in cash and such payment will
automatically be reinvested in additional shares). 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 checks. Cash payments can also be directly
deposited to the shareholder's bank account.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
shares of the Fund
35
<PAGE>
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 the class of shares to be redeemed. Redemptions will be made at net
asset value as determined as of 15 minutes after the close of business on the
NYSE (generally, the NYSE closes at 4:00 p.m., Eastern 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 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 automatically
reinvested 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 Transfer Agent or the Distributor.
With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the value
of shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the 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." 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 be applied thereafter to Class D shares if the shareholder so elects.
If an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Merrill Lynch Financial
Consultant.
Withdrawal payments should not be considered as dividends. Each withdrawal
is a taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. The Fund will not knowingly accept purchase orders for shares of
the Fund from investors that maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Automatic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R) or
CBA(R) Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
three business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the
case of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automated Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND 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, the NYSE closes at 4:00
p.m., Eastern time) on that day. The net investment income of the Fund for
dividend purposes consists
36
<PAGE>
of interest earned on portfolio securities, less expenses, in each case
computed since the most recent determination of net asset value. Expenses of
the Fund, including the management fees and the account maintenance and
distribution fees, are accrued daily. Dividends of net investment income are
declared daily and reinvested monthly in the form of additional full and
fractional shares of the Fund at net asset value as of the close of business on
the "payment date" unless the shareholder elects to receive such dividends in
cash. Shares will accrue dividends as long as they are issued and outstanding.
Shares are issued and outstanding from the settlement date of a purchase order
to the day prior to the settlement date of a redemption order.
All net realized capital gains, if any, are declared and distributed to
the Fund's shareholders at least annually. Capital gains distributions will be
reinvested automatically in shares of the Fund unless the shareholder elects to
receive such distributions in cash.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer
agency fees applicable to that class. See "Pricing of Shares -- Determination
of Net Asset Value."
See "Shareholder Services" for information as to how to elect either
dividend reinvestment or cash payments. Portions of dividends and distributions
which are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of the Fund or received in cash.
TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the 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.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Trust intends to qualify the Fund to pay "exempt-interest dividends"
as defined in Section 852(b)(5) of the Code. Under such section if, at the
close of each quarter of the Fund's taxable year, at least 50% of the value of
the Fund's total assets consists of obligations exempt from Federal income tax
("tax-exempt obligations") under Section 103(a) of the Code (relating generally
to obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its Class A, Class B, Class C and
Class D shareholders (together the "shareholders"). Exempt-interest dividends
are dividends or any part thereof paid by the Fund that are attributable to
interest on tax-exempt obligations and designated by the Trust as
exempt-interest dividends in a written notice mailed to the Fund's shareholders
within 60 days after the close of the Fund's taxable year. The Fund will
allocate interest from tax-exempt obligations (as well as ordinary income,
capital gains and tax preference items discussed below) among the Class A,
Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission rule permitting the issuance and
sale of multiple classes of shares) that is based upon the gross income that is
allocable to the Class A, Class B, Class C and Class D shareholders during the
taxable year, or such other method as the Internal Revenue Service may
prescribe.
Exempt-interest dividends will be excludable from a shareholder's gross
income for Federal income tax purposes. Exempt-interest dividends are included,
however, in determining the portion, if any, of a person's social security and
railroad retirement benefits subject to Federal income taxes. Interest on
indebtedness incurred or continued to purchase or carry shares of a RIC paying
exempt-interest dividends, such as the Fund, will not be deductible by the
investor for Federal income tax purposes to the extent attributable to
exempt-interest dividends. Shareholders are advised to consult their tax
advisors with respect to whether exempt-interest dividends retain the exclusion
under Code Section 103(a) if a shareholder would be treated as a "substantial
user" or
37
<PAGE>
"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 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. Certain categories of capital gains are
taxable at different rates. Generally not later than 60 days after the close of
the Fund's taxable year, the Trust will provide shareholders with a written
notice designating the amounts of any exempt-interest dividends and capital gain
dividends, as well as any amount of capital gain dividends in the different
categories of capital gain referred to above. Distributions by the Fund, whether
from exempt-interest income, ordinary income or capital gains, will not be
eligible for the dividends received deduction allowed to corporations under the
Code.
All or a portion of the Fund's gains from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
If the Fund pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on certain "private activity bonds" issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (E.G., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference," which could subject certain investors in such bonds,
including shareholders of the Fund, to an alternative minimum tax. The Fund
will purchase such "private activity bonds," and the Trust will report to
shareholders within 60 days after calendar year-end the portion of the Fund's
dividends declared during the year which constitute an item of tax preference
for alternative minimum tax purposes. The Code further provides that
corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay alternative minimum tax on
exempt-interest dividends paid by the Fund.
The Fund may invest in high yield securities, as described in "Investment
Objective and Policies -- Description of Municipal Bonds." Furthermore, the
Fund may also invest in instruments the return on which includes
non-traditional features such as indexed principal or interest payments
("non-traditional instruments"). These instruments may be subject to special
tax rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such high yield securities
and/or non-traditional instruments could be recharacterized as taxable ordinary
income.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis
in the Class D shares acquired will be the same as such shareholder's basis
38
<PAGE>
in the Class B shares converted and the holding period of the acquired Class D
shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new shares in the absence of the exchange privilege. Instead,
such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Ordinary income dividends paid to shareholders that are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax
under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisors concerning the applicability of the United
States withholding tax.
Under certain provisions of the Code, some shareholders may be subject to
a 31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such shareholder is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase and sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). The Fund may also purchase and write call and put options
on such financial futures contracts. In general, unless an election is
available to the Fund or an exception applies, such options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, I.E., each such
option or financial futures contract will be treated as sold for its fair
market value on the last day of the taxable year, and any gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. Application of these rules to Section 1256 contracts held
by the Fund may alter the timing and character of distributions to
shareholders. The mark-to-market rules outlined above, however, will not apply
to certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in financial futures
contracts or the related options.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code 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 the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.
39
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective shareholders.
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.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period. Tax equivalent yield quotations will be
computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b)
one minus a stated tax rate and (c) adding the result to that part, if any, of
the Fund's yield that is not tax-exempt.
The 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.
40
<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 SHARES CLASS B SHARES
----------------------------------------- ----------------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ----------------------------------------- ------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended October 31, 1998 ......... 6.92% $ 1,069.20 6.67% $ 1,066.70
Five Years Ended
October 31, 1998 ...................... 5.11% $ 1,283.00 4.99% $ 1,275.70
Ten Years Ended
October 31, 1998 ...................... 6.73% $ 1,918.00 6.50% $ 1,876.30
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended October 31,
1998 .................................... 8.00% $ 1,080.00 7.67% $ 1,076.70
1997 .................................... 7.59% $ 1,075.90 7.35% $ 1,073.50
1996 .................................... 4.27% $ 1,042.70 3.84% $ 1,038.40
1995 .................................... 9.69% $ 1,096.90 9.34% $ 1,093.40
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
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1986) to
October 31, 1998 ...................... -- -- 98.55% $ 1,985.50
Inception (October 31, 1988) to
October 31, 1998 ...................... 91.80% $ 1,918.00 -- --
YIELD
30 days ended October 31, 1998 .......... 3.67% -- 3.39% --
TAX EQUIVALENT YIELD*
30 days ended October 31, 1998 .......... 5.10% -- 4.71% --
</TABLE>
- ----------
* Based on a Federal income tax rate of 28%.
41
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
----------------------------------------- ----------------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ----------------------------------------- ------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended October 31, 1998 ......... 6.65% $ 1,066.50 6.82% $ 1,068.20
Inception (October 21, 1994) to
October 31, 1998 ...................... 6.78% $ 1,302.60 6.76% $ 1,301.20
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year Ended October 31,
1998 .................................... 7.65% $ 1,076.50 7.90% $ 1,079.00
1997 .................................... 7.34% $ 1,073.40 7.48% $ 1,074.80
1996 .................................... 3.82% $ 1,038.20 4.17% $ 1,041.70
1995 .................................... 9.36% $ 1,093.60 9.58% $ 1,095.80
Inception (October 21, 1994)
to October 31, 1994 ................... ( 0.71)% $ 992.90 (0.71)% $ 992.90
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (October 21, 1994) to
October 31, 1998 ...................... 30.26% $ 1,302.60 30.12% $ 1,301.20
YIELD
30 days ended October 31, 1998 .......... 3.38% -- 3.57% --
TAX EQUIVALENT YIELD*
30 days ended October 31, 1998 .......... 4.69% -- 4.96% --
</TABLE>
- ----------
* Based on a Federal income tax rate of 28%.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
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 not take into account the CDSC, and, therefore, may reflect greater
total return since, due to the reduced sales charges or the waiver of CDSCs, a
lower amount of expenses may be deducted.
On occasion, the Fund may compare its performance to the Lehman Brothers
Municipal Bond Index or other market indices or to performance data published
by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar"), CDA Investment Technology, Inc., MONEY MAGAZINE, U.S. NEWS &
WORLD REPORT, BUSINESS WEEK, FORBES MAGAZINE and FORTUNE MAGAZINE or other
industry publications. When comparing its performance to a market index, the
Fund may refer to various statistical measures derived from the historic
performance of the Fund and the index, such as standard deviation and beta. In
addition, from time to time, the Fund may include the Fund's risk-adjusted
performance ratings assigned by Morningstar 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.
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.
42
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Trust is a business trust organized on August 14, 1986 under the laws
of Massachusetts. The Trust is an open-end management investment company
comprised of separate Series, each of which is a separate portfolio offering
shares to selected groups of purchasers. Each of the Series is managed
independently in order to provide to shareholders who are residents of the
state to which such Series relates as high a level of income exempt from
Federal, and in certain cases state and local, income taxes as is consistent
with prudent investment management. The Trustees are authorized to create an
unlimited number of Series and, with respect to each Series, to issue an
unlimited number of full and fractional shares of beneficial interest, $.10 par
value per share, of different classes 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. The Trust is presently comprised only of
the Fund. Shareholder approval is not required for the authorization of
additional Series or classes of a Series of the Trust.
At the date of this Statement of Additional Information, the shares of the
Fund are divided into Class A, Class B, Class C and Class D shares. Class A,
Class B, Class C and Class D shares represent interests in the same assets of
the Fund and are identical in all respects except that Class B, Class C and
Class D shares bear certain expenses relating to the account maintenance
associated with such shares and Class B and Class C shares bear certain
expenses relating to the distribution of such shares. All shares of the Trust
have equal voting rights. Each class has exclusive voting rights with respect
to matters relating to distribution and/or account maintenance expenditures, as
applicable (except that Class B shareholders may vote upon any material changes
to expenses charged under the Class D Distribution Plan). 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.
Each issued and outstanding share of a Series is entitled to one vote and
to participate equally in dividends and distributions with respect to that
Series and, upon liquidation or dissolution of the Series, in the net assets of
such Series remaining after satisfaction of outstanding liabilities except
that, as noted above, expenses relating to distribution and/or account
maintenance of the Class B, Class C and Class D shares are borne solely by the
respective class. There normally will be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. Shareholders may, in accordance with the terms of the Declaration
of Trust, cause a meeting of shareholders to be held for the purpose of voting
on the removal of Trustees. Also, the Trust will be required to call a special
meeting of shareholders in accordance with the requirements of the Investment
Company Act to seek approval of new management and advisory arrangements, of a
material increase in distribution fees or a change in the fundamental policies,
objectives or restrictions of a Series.
The obligations and liabilities of a particular Series are restricted to
the assets of that Series and do not extend to the assets of the Trust
generally. The shares of each Series, when issued, will be fully paid and
nonassessable, have no preference, preemptive, conversion, exchange or similar
rights and will be freely transferable. Holders of shares of any Series are
entitled to redeem their shares as set forth elsewhere herein and in the
Prospectus. Shares do not have cumulative voting rights and the holders of more
than 50% of the shares of the Trust voting for the election of Trustees can
elect all of the Trustees if they choose to do so and in such event the holders
of the remaining shares would not be able to elect any Trustees. No amendments
may be made to the Declaration of Trust, other than amendments necessary to
conform the Declaration to certain laws or regulations, to change the name of
the Trust, or to make certain non-material changes, without the affirmative
vote of a majority of the outstanding shares of the Trust, or of the affected
Series or class, as applicable.
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" only shall be liable. Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable as
43
<PAGE>
partners for the trust's obligations. However, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which both inadequate insurance existed and the trust itself
was unable to meet its obligations.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of the Fund for $100,000. Such shares were acquired for investment and
can only be disposed of by redemption. If additional Series are added to the
Trust, the organizational expenses will be allocated among the Series in a
manner deemed equitable by the Trustees.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Trust. The selection of
independent auditors is subject to approval by the non-interested Trustees of
the Trust. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, P. O. Box 351, Boston, Massachusetts
02101, acts as the Custodian of the Fund's assets. The Custodian is responsible
for safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest on the Fund's
investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Trust'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 "How to Buy,
Sell, Transfer and Exchange Shares -- Through the Transfer Agent" 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 the Fund's shareholders, at least semi-annually, reports showing the
Fund's portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
To the knowledge of the Trust, the following entity owned beneficially 5%
or more of the Fund's shares as of February 1, 1999.
44
<PAGE>
<TABLE>
<CAPTION>
FUND NAME/ACCOUNT NUMBER ADDRESS
- --------------------------------- ------------------------------------- ----------------------
<S> <C> <C>
Merrill Lynch Muni Intermediate The Cornelsen Family Partnership LP 506 Fox Ridge Rd.
Class D Acct #68507H07 Saint Louis, MO 63131
5.3% of Class
</TABLE>
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
45
<PAGE>
(This page intentionally left blank)
SAI Code to come
46
<PAGE>
APPENDIX I
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") LONG-TERM DEBT
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." 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 risk appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
SHORT-TERM NOTES: The three ratings of Moody's for short-term notes are
MIG1/VMIG1, MIG2/VMIG2 and MIG3/VMIG3; MIG1/VMIG1 denotes "best quality . . .
strong protection by established cash flows"; MIG2/ VMIG2 denotes "high
quality" with ample margins of protection; MIG3/VMIG3 notes are of "favorable
quality . . . but . . . lacking the undeniable strength of the preceding
grades."
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Issuers rated PRIME-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
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leading market positions in well established industries; high rates of return
on funds employed; conservative capitalization structure with moderate reliance
on debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated PRIME-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S ("STANDARD & POOR'S") ISSUE CREDIT RATING
DEFINITIONS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated.
The issue credit rating is not a recommendation to purchase, sell, or hold
a financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of payment capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms of
obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
LONG-TERM ISSUE CREDIT RATINGS
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
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BB An obligation rated "BB," "B," "CCC," "CC" and "C" is regarded as having
significant speculative
B characteristics. "BB" indicates the least degree of speculation and "C"
the highest degree of speculation. CCC While such bonds will likely
have some quality and protective characteristics, these may be
outweighed CC by large uncertainties or major exposures to adverse
conditions.
C D An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
SHORT-TERM ISSUE CREDIT RATINGS
A-1 A short-term obligation rated "A-1" is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that the
obligor's capacity to meet its financial commitment on these obligations
is extremely strong.
A-2 A short-term obligation rated "A-2" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity
to meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C A short-term obligation rated "C" is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period. The "D" rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation
are jeopardized.
DESCRIPTION OF FITCH IBCA, INC. ("FITCH") RATINGS
Fitch credit ratings are an opinion on the ability of an entity or of a
securities issue to meet financial commitments, such as interest, preferred
dividends, or repayment of principal, on a timely basis.
Credit ratings are used by investors as indications of the likelihood of
getting their money back in accordance with the terms on which they invested.
Thus, the use of credit ratings defines their function: "investment-grade"
ratings (international long-term "AAA" -- "BBB" categories; short-term "F1" --
"F3") indicate a relatively low probability of default, while those in the
"speculative" or "non-investment grade" categories (international long-term
"BB" -- "D") either signal a higher probability of default or that a default
has already occurred. Ratings imply no specific prediction of default
probability.
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Entities or issues carrying the same rating are of similar but not
necessarily identical credit quality since the rating categories do not fully
reflect small differences in the degrees of credit risk.
Fitch credit and other ratings are not recommendations to buy, sell, or
hold any security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of any payments of any security. The ratings are based on
information obtained from issuers, other obligors, underwriters, their experts,
and other sources Fitch believes to be reliable. Fitch does not audit or verify
the truth or accuracy of such information. Ratings may be changed or withdrawn
as a result of changes in, or the unavailability of, information or for other
reasons.
INTERNATIONAL CREDIT RATINGS
Fitch's international credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other corporate
entities and the securities they issue, as well as municipal and other public
finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these long- and
short-term ratings assess its general creditworthiness on a senior basis. When
applied to specific issues and programs, these ratings take into account the
relative preferential position of the holder of the security and reflect the
terms, conditions, and covenants attaching to that security.
ANALYTICAL CONSIDERATIONS
When assigning ratings, Fitch considers the historical and prospective
financial condition, quality of management, and operating performance of the
issuer and of any guarantor, any special features of a specific issue or
guarantee, the issue's relationship to other obligations of the issuer, as well
as developments in the economic and political environment that might affect the
issuer's financial strength and credit quality.
Investment-grade ratings reflect expectations of timeliness of payment.
However, ratings of different classes of obligations of the same issuer may
vary based on expectations of recoveries in the event of a default or
liquidation. Recovery expectations, which are the amounts expected to be
received by investors after a security defaults, are a relatively minor
consideration in investment-grade ratings, but Fitch does use "notching" of
particular issues to reflect their degree of preference in a winding up,
liquidation, or reorganization as well as other factors. Recoveries do,
however, gain in importance at lower rating levels, because of the greater
likelihood of default, and become the major consideration at the "DDD"
category. Factors that affect recovery expectations include collateral and
seniority relative to other obligations in the capital structure.
Variable rate demand obligations and other securities which contain a
demand feature will have a dual rating, such as "AAA/F1+." The first rating
denotes long-term ability to make principal and interest payments. The second
rating denotes ability to meet a demand feature in full and on time.
INTERNATIONAL LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
AAA HIGHEST CREDIT QUALITY. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA VERY HIGH CREDIT QUALITY. "AA" ratings denote a very low expectation of
credit risk. They indicate strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A HIGH CREDIT QUALITY. "A" ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB GOOD CREDIT QUALITY. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes
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in circumstances and in economic conditions are more likely to impair
this capacity. This is the lowest investment-grade category.
SPECULATIVE GRADE
BB SPECULATIVE. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available
to allow financial commitments to be met. Securities rated in this
category are not investment grade.
B HIGHLY SPECULATIVE. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is
contingent upon a sustained, favorable business and economic
environment.
CCC HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is solely CC reliant upon sustained, favorable business
or economic developments. A "CC" rating indicates that C default of some kind
appears probable. "C" ratings signal imminent default.
DDD DEFAULT. Securities are not meeting current obligations and are
extremely speculative. "DDD" designates DD the highest potential for recovery
of amounts outstanding on any securities involved. For U.S. corporates, D for
example, "DD" indicates expected recovery of 50%-90% of such outstandings, and
"D," the lowest recovery potential, I.E., below 50%.
INTERNATIONAL SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 HIGHEST CREDIT QUALITY. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 GOOD CREDIT QUALITY. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3 FAIR CREDIT QUALITY. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result
in a reduction to non-investment grade.
B SPECULATIVE. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D DEFAULT. Denotes actual or imminent payment default.
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Notes:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, to categories below "CCC," or to short-term ratings other than
"F1."
"NR" indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction
of such change. These are designated as "Positive," indicating a potential
upgrade, "Negative," for a potential downgrade, or "Evolving," if ratings may
be raised, lowered or maintained. RatingAlert is typically resolved over a
relatively short period.
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PART C. OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
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<S> <C>
1(a) -- Declaration of Trust of the Registrant, dated August 14, 1986.(a)
(b) -- Instrument establishing Merrill Lynch Municipal Intermediate Term Fund (the "Fund") as a series of
the Registrant.(a)
(c) -- Amendment to Declaration of Trust, dated October 3, 1988.(f)
(d) -- Instrument establishing Class A and Class B shares of beneficial interest of the Fund.(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 -- By-Laws of the Registrant.(c)
3 -- 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)
4 -- Form of Management Agreement between the Registrant and Merrill Lynch Asset Management,
L.P.(c)
(b) -- Supplement to Management Agreement between the Registrant and Merrill Lynch Asset
Management, L.P.(e)
5(a) -- Class B Distribution Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc.(c)
(b) -- Form of Class A Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc (including Form of Selected Dealers Agreement).(e)
(c) -- Letter Agreement between the Fund and Merrill Lynch Funds Distributor, Inc., dated September 15,
1993, in connection with the Merrill Lynch 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)
6 -- None.
7 -- Form of Custody Agreement between the Registrant and State Street Bank and Trust Company.(e)
8 -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between the Registrant and Merrill Lynch Financial Data Services, Inc. (now known as
Financial Data Services, Inc.)(c)
9 -- Opinion of Brown & Wood LLP, counsel to the Registrant.(f)
10 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
11 -- None.
12 -- Certificate of Merrill Lynch Asset Management, L.P.(a)
13(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)
14(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.
15 -- Merrill Lynch Select PricingSM System Plan pursuant to Rule 18f-3.(g)
</TABLE>
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(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.
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(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) Previously filed as an exhibit to the Registration Statement.
(g) 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 Bond Fund of Merrill
Lynch Multi-State Municipal Series Trust filed on January 25, 1996.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
ITEM 25. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a shareholder,
creditor or otherwise) against all liabilities and expenses (including amounts
paid in satisfaction of judgments, in compromise, as fines and penalties and as
counsel fees) reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he may be involved or with which he may be threatened, while in office
or thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as to
any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of good faith and reasonable belief
as to the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no person may satisfy any right in indemnity or
reimbursement granted herein or in Section 5.1 or to which he may be otherwise
entitled except out of the property of the Trust, and no Shareholder shall be
personally liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in
connection with indemnification under this Section 5.3, provided that the
indemnified person shall have given a written undertaking to reimburse the
Trust in the event it is subsequently determined that he is not entitled to
such indemnification."
Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended, may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount which it is ultimately determined he is
entitled to receive from the Registrant by reason of indemnification; and
(iii)(a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested,
non-party Trustees, or an independent legal
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<PAGE>
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 ("1933 Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or Prospectus
and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Trustees, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Trustee, officer,
or controlling person of the Registrant and the principal underwriter in
connection with the successful defense of any action, suit or proceeding) is
asserted by such Trustee, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of
such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. ("FAM") acts as the investment adviser for the
following open-end registered investment companies: CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc., Financial Institutions Series Trust, Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc.,
Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc., and The Municipal Fund Accumulation Program, Inc.; and for the
following closed-end registered investment companies: Apex Municipal Fund,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt
Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income Opportunities
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal
Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc.,
MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc., MuniHoldings
California Insured Fund III, Inc., MuniHoldings California Insured Fund IV,
Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund II,
MuniHoldings Florida Insured Fund III, MuniHoldings Florida Insured Fund IV,
MuniHoldings Insured Fund, Inc., MuniHoldings Michigan Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured
Fund II, Inc., MuniHoldings New Jersey Insured Fund III, Inc., MuniHoldings New
York Fund, Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New
York Insured Fund II, Inc., MuniHoldings New York Insured Fund III, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield
New Jersey 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. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager"), an
affiliate of FAM, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities Fund,
Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder
Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset
Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch Fund For Tommorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch
C-3
<PAGE>
Global Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc. Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc. and Hotchkis and Wiley and funds (advised by Hotchkis and
Wiley, a division of MLAM); and for 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 Advisors Trust.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts
02111-2665. The address of FAM, MLAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators, L.P. ("Princeton Administrators") is
also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Princeton
Funds Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributor ("MLFD")
is P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch
& Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey
Street, New York, New York 10281-1201. The address of the Fund's transfer
agent, Financial Data Services, Inc. ("FDS"), 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, 1996 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Burke is Vice President and Treasurer and Mr. Glenn is Executive Vice
President of substantially all of the investment companies described in the
first two paragraphs of this Item 26, and Messrs. Giordano, Harvey, Kirstein
and Monagle are directors, trustees or officers of one or more of such
companies.
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ---------------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
ML & Co .................... Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services ......... General Partner General Partner of FAM
Jeffrey M. Peek ............ President President of FAM; President and Director of
Princeton Services; Executive Vice
President of ML & Co.; Managing Director
and Co-Head of the Investment Banking
Division of Merrill Lynch (in 1997); Senior
Vice President and Director of the Global
Securities and Economics Division of
Merrill Lynch (from 1995 to 1997.)
Terry K. Glenn ............. Executive Vice President Executive Vice President of FAM; Executive
Vice President and Director of Princeton
Services; President and Director of PFD;
Director of FDS; President of Princeton
Administrators
Donald C. Burke ............ Senior Vice President Senior Vice President and Treasurer of FAM;
and Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President of
PFD; First Vice President of MLAM from
1997 to 1999; Vice President of MLAM
from 1990 to 1997
Michael G. Clark ........... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Director of
PFD; First Vice President of MLAM from
1997 to 1999; Vice President of MLAM
from 1996 to 1997
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------------- ------------------------ ---------------------------------------------
<S> <C> <C>
Mark A. DeSario ............. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
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
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, Secretary and General
Secretary and General Counsel of FAM; Senior Vice President of
Counsel Princeton Services
Philip L. Kirstein .......... Senior Vice President Senior Vice President of FAM; Senior Vice
President, Secretary and Director of
Princeton Services
Ronald M. Kloss ............. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Debra W. Landsman-Yaros ..... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Vice
President of PFD
Stephen M. M. Miller ........ Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr. ...... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Brian A. Murdock ............ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Director of
PFD
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 27. PRINCIPAL UNDERWRITERS.
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies
referred to in the first two paragraphs of Item 26 except CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc. and The Municipal Fund Accumulation Program, Inc. MLFD also acts
as the principal underwriter for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
A separate division of PFD acts as the principal underwriter of a number of
other investment companies.
(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH PFD WITH REGISTRANT
- -------------------------- --------------------------- --------------------------
<S> <C> <C>
Terry K. Glenn ........... President and Director Executive Vice President
Michael G. Clark ......... Director None
Thomas J. Verage ......... Director None
Robert W. Crook .......... Senior Vice President None
Michael J. Brady ......... Vice President None
William M. Breen ......... Vice President None
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH PFD WITH REGISTRANT
- --------------------------------- ------------------------------ ---------------------------
<S> <C> <C>
James T. Fatseas ................ Vice President None
Debra W. Landsman-Yaros ......... Vice President None
Michelle T. Lau ................. Vice President None
Donald C. Burke ................. Vice President Vice President and Treasurer
Salvatore Venezia ............... Vice President None
William Wasel ................... Vice President None
Robert Harris ................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules thereunder are maintained at the
offices of the Registrant (800 Scudders Mill Road, Plainsboro, New Jersey
08536), and its transfer agent, Financial Data Services, Inc. (4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484).
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund --
Merrill Lynch Asset Management" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Trust -- Management
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 30. UNDERTAKINGS.
Not applicable.
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<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 17th day of
February 1999.
MERRILL LYNCH MUNICIPAL SERIES TRUST
(Registrant)
By: /s/ Arthur Zeikel
-------------------------------------
(ARTHUR ZEIKEL, 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(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------- ---------------------------------------- ------------------
<S> <C> <C>
ARTHUR ZEIKEL* President (Principal Executive Officer)
---------------------------------- and Trustee
(ARTHUR ZEIKEL)
/s/ DONALD C. BURKE
---------------------------------- Vice President and Treasurer February 17, 1999
(DONALD C. BURKE) (Principal Financial and
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)
*By: /s/ ARTHUR ZEIKEL February 17, 1999
------------------------------
(ARTHUR ZEIKEL, ATTORNEY-IN-FACT)
</TABLE>
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------
<S> <C> <C>
10 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant
</TABLE>
EXHIBIT 10
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Municipal Intermediate Term Fund of
Merrill Lynch Municipal Series Trust:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 17 to Registration Statement No. 33-8058 of our report dated December 9,
1998 appearing in the annual report to shareholders of Merrill Lynch Municipal
Intermediate Term Fund for the year ended October 31, 1998, and to the
reference to us under the caption "Financial Highlights" in the Prospectus,
which is a part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
February 17, 1999
