As filed with the Securities and Exchange Commission on November 29, 1999
Securities Act File No. 33-55576
Investment Company Act File No. 811-4375
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 9 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 203 [X]
(Check appropriate box or boxes)
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Merrill Lynch Michigan Municipal Bond Fund
of Merrill Lynch Multi-State 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)
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Terry K. Glenn
Merrill Lynch Multi-State Municipal Series Trust
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
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Copies to:
Counsel for the Trust Michael J. Hennewinkel, Esq.
BROWN & WOOD LLP MERRILL LYNCH
One World Trade Center ASSET MANAGEMENT
New York, New York 10048-0557 P.O. Box 9011
Attention: Thomas R. Smith, Jr., Esq. Princeton, New Jersey 08543-9011
Brian M. Kaplowitz, Esq.
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It is proposed that this filing will become effective (check appropriate
box):
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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Title of Securities Being Registered:
Shares of Beneficial Interest, par value $.10 per share.
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<PAGE>
Prospectus
[LOGO] Merrill Lynch
Merrill Lynch Michigan Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust
November 29, 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
Page
[Clip Art] KEY FACTS
- --------------------------------------------------------------------------------
Merrill Lynch Michigan Municipal Bond Fund at a Glance ....................... 3
Risk/Return Bar Chart ........................................................ 5
Fees and Expenses ............................................................ 6
[Clip Art] DETAILS ABOUT THE FUND
- --------------------------------------------------------------------------------
How the Fund Invests ......................................................... 8
Investment Risks ............................................................. 9
[Clip Art] YOUR ACCOUNT
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Merrill Lynch Select Pricing(SM) System ......................................14
How to Buy, Sell, Transfer and Exchange Shares ...............................19
Participation in Merrill Lynch Fee-Based Programs ............................23
[Clip Art] MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
Fund Asset Management ........................................................26
Financial Highlights .........................................................27
[Clip Art] FOR MORE INFORMATION
- --------------------------------------------------------------------------------
Shareholder Reports ..................................................Back Cover
Statement of Additional Information ..................................Back Cover
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<PAGE>
Key Facts [Clip Art]
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.
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.
Michigan Municipal Bond -- a debt
obligation issued by or on behalf
of a governmental entity in
Michigan or other qualifying issuer
that pays interest exempt from
Michigan income taxes as well as
from Federal income tax.
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND AT A GLANCE
- --------------------------------------------------------------------------------
What is the Fund's investment objective?
The investment objective of the Fund is to provide shareholders with income
exempt from Federal and Michigan income taxes.
What are the Fund's main investment strategies?
The Fund invests primarily in a portfolio of long term investment grade Michigan
municipal bonds. These may be obligations of a variety of issuers including
governmental entities in Michigan and issuers located in Puerto Rico, the U.S.
Virgin Islands and Guam. The Fund will invest at least 65% of its assets in
Michigan municipal bonds and at least 80% of its total assets in Michigan
municipal bonds and other bonds that pay interest exempt from Federal income tax
but not Michigan income tax. The Fund may invest up to 20% of its assets in high
yield bonds (also known as "junk" bonds), however, the Fund will not invest in
bonds that are in default or that Fund management believes will be in default.
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 the call
features of the obligations. Under normal conditions, the Fund's weighted
average maturity will be more than ten years. The Fund cannot guarantee that it
will achieve its objective.
What are the main risks of investing in the Fund?
As with any 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. Prices of longer term securities generally change more
in response to interest rate changes than prices of shorter term securities.
The Fund is a non-diversified fund, which means that it may invest more of its
assets in obligations of a single issuer than if it were a diversified fund. By
concentrating in a smaller number of issuers, the Fund's risk is increased
because developments affecting an individual issuer may have a greater impact on
the Fund's performance. In addition, since the Fund invests at least 65% of its
assets in Michigan municipal bonds, it is more exposed to negative political or
economic factors in Michigan than a fund that invests more widely. Derivatives
and high yield bonds may be volatile and subject to liquidity, leverage and
credit risks.
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND 3
<PAGE>
[Clip Art] Key Facts
Who should invest?
The Fund may be an appropriate investment for you if you:
o Are looking for income that is exempt from Federal and Michigan
income taxes
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 negative political or
economic developments in Michigan, changes in interest rates or
adverse changes in the price of bonds in general
4 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<PAGE>
RISK/RETURN BAR CHART
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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 for
Class B shares for each complete calendar year since the Fund's inception. 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.
(Graph Depicted as a Bar Chart)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(7.85)% 16.99% 2.94% 7.47% 4.17%
During the period shown in the bar chart, the highest return for a quarter was
7.63% (quarter ended March 31, 1995) and the lowest return for a quarter was
- -7.07% (quarter ended March 31, 1994). The Fund's year-to-date return as of
September 30, 1999 was -4.91%.
<TABLE>
<CAPTION>
Average Annual Total Returns (as of the Past Past Since
calendar year ended December 31, 1998) One Year Five Years Inception
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Merrill Lynch Michigan Municipal Bond Fund* A 0.52% 4.14% 5.30%+
Lehman Brothers Municipal Bond Index** 6.48% 6.22% 7.10%++
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Merrill Lynch Michigan Municipal Bond Fund* B 0.17% 4.44% 5.49%+
Lehman Brothers Municipal Bond Index** 6.48% 6.22% 7.10%++
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Merrill Lynch Michigan Municipal Bond Fund* C 3.16% N/A 6.98%#
Lehman Brothers Municipal Bond Index** 6.48% N/A 8.98%##
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Merrill Lynch Michigan Municipal Bond Fund* D 0.41% N/A 6.47%#
Lehman Brothers Municipal Bond Index** 6.48% N/A 8.98%##
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</TABLE>
* Includes sales charge.
** This unmanaged Index consists of long term revenue bonds, prerefunded bonds,
general obligation bonds and insured bonds. Past performance is not
predictive of future performance.
+ Inception date is January 29, 1993.
++ Since January 31, 1993.
# Inception date is October 21, 1994.
## Since October 31, 1994.
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND 5
<PAGE>
[Clip Art] Key Facts
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.
FEES AND EXPENSES
- --------------------------------------------------------------------------------
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)(a): Class A Class B(b) Class C Class D
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) 4.00%(c) None None 4.00%(c)
- --------------------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as
a percentage of original purchase price or
redemption proceeds, whichever is lower) None(d) 4.0%(c) 1.0%(c) None(d)
- --------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
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Redemption Fee None None None None
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Exchange Fee None None None None
- --------------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are
deducted from Fund assets):
- --------------------------------------------------------------------------------------------------------------
Management Fee(e) 0.55% 0.55% 0.55% 0.55%
- --------------------------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(f) None 0.50% 0.60% 0.10%
- --------------------------------------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees) (g) 0.38% 0.39% 0.40% 0.39%
- --------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.93% 1.44% 1.55% 1.04%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a)In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
(b)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.
(c)Some investors may qualify for reductions in the sales charge (load).
(d)You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(e)The Fund pays the Manager a fee at the annual rate of 0.55% of the average
daily net assets of the Fund for the first $500 million; 0.525% of the
average daily net assets from $500 million to $1 billion; and 0.50% of the
average daily net assets above $1 billion. For the fiscal year ended July 31,
1999, the Manager received a fee equal to 0.55% of the Fund's average daily
net assets.
(f)The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other Fund 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 charges.
6 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<PAGE>
(footnotes continued from previous page)
(g)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 July 31,
1999, the Fund paid the Transfer Agent fees totaling $38,662. The Manager
provides accounting services to the Fund at its cost. For the fiscal year
ended July 31, 1999, the Fund reimbursed the Manager $84,307 for these
services.
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:
---
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A $491 $685 $894 $1,497
- --------------------------------------------------------------------------------
Class B $547 $656 $787 $1,724
- --------------------------------------------------------------------------------
Class C $258 $490 $845 $1,845
- --------------------------------------------------------------------------------
Class D $502 $718 $951 $1,620
- --------------------------------------------------------------------------------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
-------
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------------------------------
Class A $491 $685 $894 $1,497
- -------------------------------------------------------------------------------
Class B $147 $456 $787 $1,724
- -------------------------------------------------------------------------------
Class C $158 $490 $845 $1,845
- -------------------------------------------------------------------------------
Class D $502 $718 $951 $1,620
- -------------------------------------------------------------------------------
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND 7
<PAGE>
Details About the Fund [Clip Art]
ABOUT THE
PORTFOLIO MANAGER
Fred K. Stuebe is the portfolio
manager and Vice President of
the Fund and has been a
Portfolio Manager of Merrill
Lynch Asset Management since
1995 and a Vice President
thereof since 1989.
About The Manager
The Fund is managed by Fund
Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund's main objective is to seek income that is exempt from Federal and
Michigan income taxes. The Fund invests primarily in long term, investment grade
Michigan municipal bonds. These may be obligations of a variety of issuers
including governmental entities or other qualifying issuers. Issuers may be
located in Michigan or in other qualifying jurisdictions such as Puerto Rico,
the U.S. Virgin Islands and Guam.
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 may invest up to 20% of its total assets in high yield ("junk") bonds.
These bonds are generally more speculative and involve greater price
fluctuations than investment grade securities.
The Fund will invest at least 80% of its total assets in obligations that pay
interest exempt from Federal income tax and at least 65% of its total assets in
Michigan municipal bonds. Under normal conditions, the Fund's weighted average
maturity will be more than ten years. For temporary periods, however, the Fund
may invest up to 35% of its total assets in short term tax exempt or taxable
money market obligations, although the Fund will not generally invest more than
20% of its net assets in taxable money market obligations. As a temporary
measure for defensive purposes, the Fund may invest without limitation in short
term tax-exempt or taxable money market obligations. These short term
investments may limit the potential for the Fund to achieve its objective.
The Fund may use derivatives including futures, options, indexed securities and
inverse securities. Derivatives are financial instruments whose value is derived
from another security 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 a Federal alternative minimum tax.
Michigan's economy is influenced by numerous factors, including automobile
production, especially consolidation and plant closings resulting from
competitive pressures and overcapacity. The Manager believes that current
economic conditions in Michigan will enable the Fund to continue to invest in
high quality Michigan municipal bonds.
8 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<PAGE>
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 weighted 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.
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.
State Specific Risk -- The Fund will invest primarily in Michigan municipal
bonds. As a result, the Fund is more exposed to risks affecting
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND 9
<PAGE>
[Clip Art] Details About the Fund
issuers of Michigan municipal bonds than is a municipal bond fund that invests
more widely.
Michigan's economy is closely tied to the economic cycles of the automobile
industry. Current increased automobile production and an increasingly
diversified economy have led to an unemployment rate that for the last three
years, has been below the national average. Michigan has reported balanced
budgets and year-end General Fund surpluses for six of the last seven years.
Moody's, Standard & Poor's, and Fitch's currently rate the State of Michigan's
general obligation bonds Aa1, AA+, and AA+, respectively.
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.
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.
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 issuer of
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 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.
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
10 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<PAGE>
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, 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. Insured bonds are subject to
market risk.
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. The Fund does not intend to
purchase debt securities that are in default or which Fund management believes
will be in default. 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 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.
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND 11
<PAGE>
[Clip Art] Details About the Fund
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 -- The Fund may use derivative instruments including indexed and
inverse securities, options on portfolio positions, options on securities or
other financial indices, financial futures and options on such futures.
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:
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.
Leverage Risk -- the risk associated with certain types of
investments or trading strategies that relatively small market
movements may result in large changes in the value of an investment.
Certain investments or trading strategies that involve leverage can
result in losses that greatly exceed the amount originally invested.
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.
12 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<PAGE>
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.
7Indexed 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.
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 MICHIGAN MUNICIPAL BOND FUND 13
<PAGE>
Your Account [CLIP ART]
MERRILL LYNCH SELECT PRICING(SM) 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
reduction or 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 0.25% on Class
B shares or 0.35% on Class C shares and an account maintenance fee of 0.25% on
both classes. 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 Multi-State Municipal Series Trust.
14 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<PAGE>
The table below summarizes key
features of the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill Lynch. through Merrill Lynch. through Merrill Lynch.
o Current Class A Limited availability Limited availability Limited availability
shareholders through other through other through other
o Participants in securities dealers. securities dealers. securities dealers.
certain Merrill 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 available shares of the Fund. shares of the Fund. sales charges available
for larger investments. for larger 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 four redeem within one for purchases over
$1 million that are years of purchase. year of purchase. $1 million that are
redeemed within redeemed within
one year.) one year.)
- ------------------------------------------------------------------------------------------------------------------------------------
Account No. 0.25% Account 0.25% Account 0.10% Account
Maintenance and Maintenance Fee Maintenance Fee Maintenance Fee
Distribution Fees? 0.25% Distribution 0.35% Distribution No Distribution Fee.
Fee. Fee.
- ------------------------------------------------------------------------------------------------------------------------------------
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
ten years.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND 15
<PAGE>
[Clip Art] 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(SM)
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> <C>
Less than $25,000 4.00% 4.17% 3.75%
- -----------------------------------------------------------------------------------
$25,000 but less
than $50,000 3.75% 3.90% 3.50%
- -----------------------------------------------------------------------------------
$50,000 but less
than $100,000 3.25% 3.36% 3.00%
- -----------------------------------------------------------------------------------
$100,000 but less
than $250,000 2.50% 2.56% 2.25%
- -----------------------------------------------------------------------------------
$250,000 but less
than $1,000,000 1.50% 1.52% 1.25%
- -----------------------------------------------------------------------------------
$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.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
o Purchases under a Right of Accumulation or Letter of Intent
o TMA(SM) Managed Trusts
o Certain Merrill Lynch investment or central asset accounts
o Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances
o Certain investors, including directors or trustees of Merrill Lynch
mutual funds and Merrill Lynch employees
o Certain Merrill Lynch fee-based programs
16 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<PAGE>
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.
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
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 shares within four
years after purchase, or your 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 0.25% for Class B shares and 0.35% for Class C shares and account
maintenance fees of 0.25% for Class B and Class C shares each year under
distribution plans that the Fund has adopted under Rule 12b-1. 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.
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND 17
<PAGE>
[Clip Art] Your Account
Class B Shares
If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually decreases as
you hold your shares over time, according to the following schedule:
Years Since Purchase Sales Charge*
---------------------------------------------------------------
0 - 1 4.00%
---------------------------------------------------------------
1 - 2 3.00%
---------------------------------------------------------------
2 - 3 2.00%
---------------------------------------------------------------
3 - 4 1.00%
---------------------------------------------------------------
4 and thereafter 0.00%
---------------------------------------------------------------
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends are not subject to a deferred sales charge.
Not all Merrill Lynch funds have identical deferred sales charge schedules.
If you exchange your shares for shares of another fund, the higher charge
will apply.
The deferred sales charge relating to Class B shares may be reduced or waived
in certain circumstances, such as:
o Redemption in connection with participation in certain Merrill Lynch
fee-based programs
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 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.
18 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<PAGE>
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund typically
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.
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. The deferred sales charge
relating to Class C shares may be reduced or waived in connection with
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 on the following page 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, selling,
transferring and exchanging 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 MICHIGAN MUNICIPAL BOND FUND 19
<PAGE>
[Clip Art] Your Account
<TABLE>
<CAPTION>
<S> <C> <C>
If You Want to Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------------------------------------
Buy Shares First, select the share class Refer to the Merrill Lynch Select Pricing table on page 15.
appropriate for you Be sure to read this Prospectus carefully.
------------------------------------------------------------------------------------------------------------
Next, determine the amount The minimum initial investment for the Fund is $1,000 for all
your investment 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.)
------------------------------------------------------------------------------------------------------------
Have your Merrill Lynch The price of your shares is based on the next calculation of net
Financial Consultant or asset value after your order is placed. Any purchase orders placed
securities dealer submit prior to the close of business on the New York Stock Exchange
your purchase order (generally 4:00 p.m Eastern time) 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.
------------------------------------------------------------------------------------------------------------
Or contact the Transfer To purchase shares directly, call the Transfer Agent at
Agent 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 Purchase additional shares The minimum investment for additional purchases is generally $50
Investment except that certain programs, such as automatic investment plans,
may have higher minimums.
(The minimum for additional purchases may be waived under
certain circumstances.)
------------------------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested without
through the automatic a sales charge.
dividend reinvestment plan
------------------------------------------------------------------------------------------------------------
Participate in the You may invest a specific amount on a periodic basis through
automatic investment plan certain Merrill Lynch investment or central asset accounts.
- ------------------------------------------------------------------------------------------------------------------------------------
Transfer Shares Transfer to a participating You may transfer your Fund shares only to another securities
to Another securities dealer dealer that has entered into an agreement with Merrill
Securities Dealer Lynch. Certain shareholder services may not 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.
------------------------------------------------------------------------------------------------------------
Transfer to a non-participating You must either:
securities dealer o Transfer your shares to an account with the Transfer
Agent; or
o Sell your shares, paying any applicable deferred sales charge.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
If You Want to Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------------------------------------
Sell Your Shares Have Your Consultant The price of your shares is based on the next calculation of
or securities dealer net asset value after your order is placed. For your
submit your sales order redemption request to be priced at the net asset value on
the day of your request, you must submit your request to
your dealer prior to 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 Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter. A signature guarantee will generally be
required but may be waived in certain limited circumstances.
You can obtain a signature guarantee from a bank, securities
dealer, securities broker, credit union, savings
association, national securities exchange or registered
securities association. A notary public seal will not be
acceptable. 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 hold your
Fund shares in a Merrill Lynch CMA(R) or CBA(R) 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 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 MICHIGAN MUNICIPAL BOND FUND 21
<PAGE>
[CLIP ART] Your Account
<TABLE>
<CAPTION>
<S> <C> <C>
If You Want to Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------------------------------------
Exchange Your Shares Select the fund into You can exchange your shares of the Fund for shares of many
which you want to other Merrill Lynch mutual funds. You must have held the
exchange. Be sure to shares used in the exchange for at least 15 calendar days
read that fund's before you can exchange to another fund.
prospectus
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 (and are not eligible to purchase 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>
22 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<PAGE>
Net Asset Value -- the market
value of the Fund's total assets after
deducting liabilities, divided by the
number of shares outstanding.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
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 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. Class B shares will have a higher net
asset value than Class C shares because Class B shares have lower distribution
expenses than 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 MICHIGAN MUNICIPAL BOND FUND 23
<PAGE>
[Clip Art] Your Account
Dividends -- exempt-interest,
ordinary income and capital gains
paid to shareholders. Dividends
may be reinvested in additional
Fund shares as they are
paid.
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 AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute any net investment income monthly and any net realized
long or short term 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 dividends 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 but may be subject to
state or local income taxes. Certain investors may be subject to a Federal
alternative minimum tax on dividends received from the Fund. To the extent that
the dividends distributed by the Fund are derived from Michigan municipal bond
interest income, they are also exempt from Michigan income taxes. Interest
income from other investments may produce taxable dividends. Dividends derived
from capital gains realized by the Fund will be subject to Federal income tax,
and generally will be subject to Michigan income tax as well. If you are subject
to income tax in a state other than Michigan, the dividends derived from
Michigan municipal bonds will not be exempt from income tax in that state.
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 for Federal income
tax purposes 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.
24 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<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 a fund has realized
but not yet distributed taxable
ordinary 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 taxable dividend. 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 or if
the number you have provided is incorrect.
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 and Michigan 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 MICHIGAN MUNICIPAL BOND FUND 25
<PAGE>
Management of the Fund [Clip Art]
FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Fund 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 pays the Manager a fee at the annual rate of 0.55% of the
average daily net assets of the Fund for the first $500 million; 0.525% of the
average daily net assets from $500 million to $1 billion; and 0.50% of the
average daily net assets above $1 billion. For the fiscal year ended July 31,
1999, the Manager received a fee equal to 0.55% of the Fund's average daily net
assets.
Fund Asset Management was organized as an investment adviser in 1977 and offers
investment advisory services to more than 50 registered investment companies.
Fund Asset Management is part of the Asset Management Group of ML & Co. The
Asset Management Group had approximately $518 billion in investment company and
other portfolio assets under management as of October 1999. 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 Fund management or other Fund service
providers do not properly address this problem before January 1, 2000. Fund
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 Fund management that they also expect to
resolve the Year 2000 Problem, and 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.
26 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. 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). This information has been audited by
Deloitte & Touche llp, whose report, along with the Fund's financial statements,
is included in the Fund's annual report to shareholders, which is available upon
request.
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------ -----------------------------------------------
For the Year Ended July 31, For the Year Ended July 31,
------------------------------------------ -----------------------------------------------
Increase (Decrease) in
Net Asset Value: 1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $10.33 $ 10.34 $ 9.92 $ 9.85 $ 9.84 $ 10.33 $ 10.34 $ 9.92 $ 9.85 $ 9.84
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .46 .50 .52 .54 .53 .41 .45 .47 .49 .49
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net (.42) (.01) .42 .07 .01 (.42) (.01) .42 .07 .01
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .04 .49 .94 .61 .54 .01 .44 .89 .56 .50
- ------------------------------------------------------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.46) (.50) (.52) (.54) (.53) (.41) (.45) (.47) (.49) (.49)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 9.91 $ 10.33 $ 10.34 $ 9.92 $ 9.85 $ 9.91 $ 10.33 $ 10.34 $ 9.92 $ 9.85
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- ------------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share .34% 4.84% 9.79% 6.25% 5.79% (.17)% 4.31% 9.23% 5.70% 5.25%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement .93% .80% .57% .49% .50% 1.44% 1.31% 1.08% 1.00% 1.02%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses .93% .83% .80% .82% .88% 1.44% 1.34% 1.31% 1.33% 1.40%
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 4.51% 4.81% 5.21% 5.35% 5.57% 4.00% 4.30% 4.70% 4.84% 5.05%
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 9,384 $11,762 $11,841 $11,468 $11,838 $54,259 $61,918 $65,166 $67,770 $60,699
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 129.08% 65.39% 35.09% 69.34% 123.61% 129.08% 65.39% 35.09% 69.34% 123.61%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales charges.
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND 27
<PAGE>
[Clip Art] Management of the Fund
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class D
--------------------------------------------------------------------------------------------
For the For the
Period Period
For the Year Ended October For the Year Ended October
July 31, 21, 1994 July 31, 21, 1994
------------------------------- to ------------------------------- to
Increase (Decrease) in July 31, July 31,
Net Asset Value: 1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.32 $ 10.33 $ 9.92 $ 9.85 $ 9.44 $10.32 $ 10.33 $ 9.91 $ 9.85 $ 9.44
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income-- net .40 .43 .46 .48 .37 .45 .49 .51 .53 .41
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments-- net (.41) (.01) .41 .07 .41 (.41) (.01) .42 .06 .41
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.01) .42 .87 .55 .78 .04 .48 .93 .59 .82
- ------------------------------------------------------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.40) (.43) (.46) (.48) (.37) (.45) (.49) (.51) (.53) (.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.91 $ 10.32 $ 10.33 $ 9.92 $ 9.85 $ 9.91 $ 10.32 $ 10.33 $ 9.91 $ 9.85
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Return:**
- ------------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share (.17)% 4.20% 9.01% 5.59% 8.39%# .34% 4.74% 9.69% 6.04% 8.84%#
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 1.55% 1.42% 1.18% 1.11% 1.16%* 1.04% .90% .68% .59% .63%*
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses 1.55% 1.45% 1.41% 1.43% 1.51%* 1.04% .93% .90% .91% .98%*
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 3.89% 4.18% 4.60% 4.73% 4.91%* 4.40% 4.71% 5.11% 5.24% 5.46%*
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $3,950 $2,802 $1,319 $1,871 $ 839 $4,312 $ 3,806 $ 3,494 $ 1,842 $1,045
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 129.08% 65.39% 35.09% 69.34% 123.61% 129.08% 65.39% 35.09% 69.34% 123.61%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
* Annualized.
** Total investment returns exclude the effects of sales charges.
# Aggregate total investment return.
28 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
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MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<PAGE>
(This page intentionally left blank)
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND
<PAGE>
-----------------------------
POTENTIAL
INVESTORS
Open an account (two options)
-----------------------------
(1) (2)
`-------------------------- --------------------------------
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT Financial Data Services. Inc.
or SECURITIES DEALER
ADMINISTRATIVE OFFICES
Advises shareholders on 4800 Deer Lake Drive East
their Fund investments. Jacksonville, Florida 32246-6484
- --------------------------
MAILING ADDRESS
P.O. Box 45289
Jacksonville, Florida 32232-5289
Performs recordkeeping and
reporting services.
--------------------------------
-----------------------------------------------
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.
-----------------------------------------------
- ------------------------------ --------------------------------
COUNSEL CUSTODIAN
Brown & Wood LLP State Street Bank
One World Trade Center and Trust Company
New York, New York 10048-0557 P.O. Box 351
Boston, Massachusetts 02101
Provides legal advice -------------- Holds the Fund's assets
to the Fund. THE FUND for safekeeping.
- ------------------------------ --------------------------------
The Board of
Trustees
oversees the Fund.
------------------
- ----------------------------------- ------------------------------------
INDEPENDENT AUDITORS MANAGER
Deloitte & Touche LLP Fund Asset Management, L.P.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders. 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 MICHIGAN MUNICIPAL BOND FUND
<PAGE>
For More Information [Clip Art]
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 #811-4375
Code #16560-11-99
(C)Fund Asset Management, L.P.
Prospectus
[LOGO] Merrill Lynch
Merrill Lynch Michigan
Municipal Bond Fund
of Merrill Lynch Multi-State
Municipal Series Trust
November 29, 1999
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch Michigan Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800
Merrill Lynch Michigan Municipal Bond Fund (the "Fund") is a series of
Merrill Lynch Multi-State Municipal Series Trust (the "Trust"), an open-end
investment company organized as a Massachusetts business trust. The investment
objective of the Fund is to provide shareholders with income exempt from Federal
and Michigan income taxes. The Fund invests primarily in a portfolio of
long-term investment grade obligations issued by or on behalf of the State of
Michigan, its political subdivisions, agencies and instrumentalities and
obligations of other qualifying issuers, such as issuers located in Puerto Rico,
the U.S. Virgin Islands and Guam, that pay interest exempt, in the opinion of
bond counsel to the issuer, from Federal and Michigan income taxes. 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 Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"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
November 29, 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
1999 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.
--------------------
Fund Asset Management -- Manager
Merrill Lynch Funds Distributor -- Distributor
The date of this Statement of Additional Information is November 29, 1999.
--------------------
<PAGE>
TABLE OF CONTENTS
Page
----
Investment Objective and Policies ...................................... 2
Risk Factors and Special Considerations Relating to Municipal Bonds . 3
Description of Municipal Bonds ...................................... 3
Financial Futures Transactions and Options .......................... 7
Description of Temporary Investments ................................ 10
Investment Restrictions ............................................. 12
Portfolio Turnover .................................................. 14
Management of the Trust ................................................ 14
Trustees and Officers ............................................... 14
Compensation of Trustees ............................................ 15
Management and Advisory Arrangements ................................ 16
Code of Ethics ...................................................... 17
Purchase of Shares ..................................................... 17
Initial Sales Charge Alternatives -- Class A and Class D Shares ..... 18
Reduced Initial Sales Charges ....................................... 19
Deferred Sales Charge Alternatives -- Class B and Class C Shares .... 22
Distribution Plans .................................................. 24
Limitations on the Payment of Deferred Sales Charges ................ 26
Redemption of Shares ................................................... 27
Redemption .......................................................... 27
Repurchase .......................................................... 27
Reinstatement Privilege -- Class A and Class D Shares ............... 28
Pricing of Shares ...................................................... 28
Determination of Net Asset Value .................................... 28
Computation of Offering Price Per Share ............................. 29
Portfolio Transactions ................................................. 29
Transactions in Portfolio Securities ................................ 29
Shareholder Services ................................................... 30
Investment Accounts ................................................. 31
Exchange Privilege .................................................. 31
Fee-Based Programs .................................................. 33
Automatic Investment Plans .......................................... 33
Automatic Dividend Reinvestment Plan ................................ 33
Systematic Withdrawal Plan .......................................... 34
Dividends and Taxes .................................................... 35
Dividends ........................................................... 35
Taxes ............................................................... 35
Tax Treatment of Options and Futures Transactions ................... 38
Performance Data ....................................................... 38
General Information .................................................... 40
Description of Shares ............................................... 40
Independent Auditors ................................................ 42
Custodian ........................................................... 42
Transfer Agent ...................................................... 42
Legal Counsel ....................................................... 42
Reports to Shareholders ............................................. 42
Shareholder Inquiries ............................................... 42
Additional Information .............................................. 42
Financial Statements ................................................... 43
Appendix I -- Economic and Other Conditions in Michigan ................ I-1
Appendix II -- Ratings of Municipal Bonds ..............................II-1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with income
exempt from Federal and Michigan income taxes. The Fund seeks to achieve its
objective by investing primarily in a portfolio of long-term investment grade
obligations issued by or on behalf of the State of Michigan, its political
subdivisions, agencies and instrumentalities and obligations of other qualifying
issuers, such as issuers located in Puerto Rico, the U.S. Virgin Islands and
Guam, which pay interest exempt, in the opinion of bond counsel to the issuer,
from Federal and Michigan income taxes. Obligations exempt from Federal income
taxes are referred to herein as "Municipal Bonds," and obligations exempt from
Federal and Michigan income taxes are referred to as "Michigan Municipal Bonds."
Unless otherwise indicated, references to Municipal Bonds shall be deemed to
include Michigan Municipal Bonds. The investment objective as set forth in the
first sentence of this paragraph is a fundamental policy and may not be changed
without a vote of a majority of the outstanding shares of the Fund. See "How the
Fund Invests" in the Prospectus for a general discussion of the Fund's goals,
main investment strategies and main risks. The Fund is classified as a
non-diversified fund under the Investment Company Act of 1940, as amended (the
"Investment Company Act").
Under normal circumstances, except when acceptable securities are
unavailable as determined by Fund Asset Management, L.P. (the "Manager" or
"FAM"), the Fund's manager, or for temporary defensive purposes the Fund will
invest at least 65% of its total assets in Michigan 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 weighted average maturity will be in excess of ten years. For
temporary periods or to provide liquidity, the Fund has the authority to invest
as much as 35% of its total assets in tax-exempt or taxable money market
obligations with a maturity of one year or less (such short-term obligations
being referred to herein as "Temporary Investments"), except that taxable
Temporary Investments shall not exceed 20% of the Fund's net assets.
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 Fund's total assets will be invested in Municipal Bonds
that 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, 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.
Securities rated in the lowest investment grade rating category may be
considered to have speculative characteristics.
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 that, 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 that 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 and Michigan income taxes. However, to the extent that
suitable Michigan Municipal Bonds are not available for
2
<PAGE>
investment by the Fund, the Fund may purchase Municipal Bonds issued by other
states, their agencies and instrumentalities, the interest income on which is
exempt, in the opinion of bond counsel to the issuer, from Federal income tax,
but not Michigan income taxation. The Fund also may invest in securities not
issued by or on behalf of a state or territory or by an agency or
instrumentality thereof, if the Fund nevertheless believes such securities to be
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities could include trust certificates or other
instruments evidencing interest in one or more long-term Michigan Municipal
Bonds or Municipal Bonds. Non-Municipal Tax-Exempt Securities also may include
securities issued by other investment companies that invest in Michigan
Municipal Bonds or Municipal Bonds, to the extent such investments are permitted
by the Investment Company Act. Certain Non-Municipal Tax-Exempt Securities may
be characterized as derivative instruments. For purposes of the Fund's
investment objective and policies, Non-Municipal Tax-Exempt Securities that pay
interest that is exempt from Federal income tax will be considered "Municipal
Bonds" and Non-Municipal Tax-Exempt Securities that pay interest that is exempt
from Federal income tax and Michigan income tax will be considered "Michigan
Municipal Bonds." 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 a 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 "Dividends 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 Fund ordinarily will invest at least 65% of its assets in Michigan
Municipal Bonds, and therefore it is more susceptible to factors adversely
affecting issuers of Michigan Municipal Bonds than is a municipal bond fund that
is not concentrated in issuers of Michigan Municipal Bonds to this degree.
The Manager does not believe that the current economic conditions in
Michigan will have a significant adverse effect on the Fund's ability to invest
in high quality Michigan Municipal Bonds. Because the Fund's portfolio will be
comprised primarily of investment grade securities, the Fund is expected to be
less subject to market and credit risks than a fund that invests primarily in
lower quality Michigan Municipal Bonds. For a discussion of economic and other
conditions in the State of Michigan, see Appendix I "Economic and Other
Conditions in Michigan."
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 or the Michigan Municipal Bonds in which the Fund invests.
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 II to this Statement of Additional Information.
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
3
<PAGE>
thereon is excluded from gross income for Federal income tax purposes and,
in the case of Michigan Municipal Bonds, exempt from Michigan income taxes.
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.
"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.
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 note may not be fully repaid and the Fund may lose
money.
Municipal Commercial Paper. Municipal commercial paper is generally
unsecured and issued to meet short-term financing needs. The lack of security
presents some risk of loss to the Fund.
Municipal 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
4
<PAGE>
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 net 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 Michigan
Municipal Bonds and Municipal Bonds (and Non-Municipal Tax-Exempt Securities)
yielding a return based on a particular index of value or interest rates. For
example, the Fund may invest in Michigan Municipal Bonds and Municipal Bonds
that pay interest based on an index of Municipal Bond interest rates. The
principal amount payable upon maturity of certain Michigan Municipal Bonds and
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
Michigan Municipal Bonds and Municipal Bonds will be subject to risk with
respect to the value of the particular index. Interest and principal payable on
the Michigan Municipal Bonds and Municipal Bonds may also be based on relative
changes among particular indices. Also, the Fund may invest in so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates vary inversely with a short-term floating rate (which may be
reset periodically by a dutch auction, a remarketing agent, or by reference to a
short-term tax-exempt interest rate index). The Fund may purchase
synthetically-created inverse floating rate bonds evidenced by custodial or
trust receipts. Generally, income on inverse floating rate bonds will decrease
when short-term interest rates increase, and will increase when short-term
interest rates decrease. 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 net
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 Transactions 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 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
5
<PAGE>
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 and Redemption Risk. 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 net assets.
"High Yield" or "Junk" Bonds. 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. See Appendix II -- "Ratings of Municipal Bonds" for additional
information regarding ratings of debt securities. 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 debt 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 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.
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Financial Futures Transactions and Options
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain financial
futures contracts and options thereon. While the Fund's use of hedging
strategies is intended to reduce the volatility of the net asset value of the
Fund's shares, the net asset value of the Fund's shares will fluctuate. There
can be no assurance that the Fund's hedging transactions will be effective.
Furthermore, the Fund may only engage in hedging activities from time to time
and may not necessarily be engaging in hedging activities when movements in
interest rates occur. The Fund has no obligation to enter into hedging
transactions and may choose not to do so.
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.
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 "Dividends and Taxes -- Taxes" and "--
Tax Treatment of Options and Futures Transactions."
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 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.
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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 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 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.
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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 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.
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
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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.
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
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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 a 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.
VRDOs that contain a 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
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<PAGE>
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 net 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.
Suitability. The economic benefit of an investment in the Fund depends upon
many factors beyond the control of the Fund, the Manager and its
affiliates. Because of its emphasis on Michigan Municipal Bonds, the Fund should
be considered a vehicle for diversification and not as a balanced investment
program. The suitability for any particular investor of a purchase of shares in
the Fund will depend upon, among other things, such investor's tax situation,
investment objectives and ability to accept the risks associated with
investing in Michigan Municipal Bonds, including the risk of loss of principal
and the risk of receiving income that is not exempt from Federal and Michigan
income taxes.
Investment Restrictions
The Fund has adopted a number of fundamental and non-fundamental
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) Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities). For purposes of this
restriction, states, municipalities and their political subdivisions are not
considered part of any industry.
(2) Make investments for the purpose of exercising control or
management.
(3) Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
(4) 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.
(5) Issue senior securities to the extent such issuance would violate
applicable law.
(6) 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, to the extent
permitted by applicable law, 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.
(7) Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended ("Securities Act"), in selling portfolio securities.
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(8) Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and the
Fund's Prospectus and Statement of Additional Information, as they may be
amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, which may be changed by
the Board of Trustees without shareholder approval, 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 which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Trustees of the 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, the Fund will not purchase
securities while borrowings are outstanding.
Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Fund is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. The Fund's investments will be limited, however,
in order to qualify for special tax treatment afforded regulated investment
companies under the Code. See "Dividends and Taxes -- Taxes." To qualify, the
Fund will comply with certain requirements, including limiting its investments
so that at the close of each quarter of the taxable year (i) not more than 25%
of the market value of the Fund's total assets will be invested in the
securities of a single issuer and (ii) with respect to 50% of the market value
of its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer, and the Fund will not own
more than 10% of the outstanding voting securities of a single issuer. Foreign
government securities (unlike U.S. Government securities) are not exempt from
the diversification requirements of the Code and the securities of each foreign
government issuer are considered to be obligations of a single issuer. For
purposes of this restriction, the Fund will regard each state and each political
subdivision, agency or instrumentality of such state and each multi-state agency
of which such state is a member and each public authority which issues
securities on behalf of a private entity as a separate issuer, except that if
the security is backed only by the assets and revenues of a non-government
entity then the entity with the ultimate responsibility for the payment of
interest and principal may be regarded as the sole issuer. These tax-related
limitations may be changed by the Trustees of the Trust to the extent necessary
to comply with changes to the Federal tax requirements. A fund which elects to
be classified as "diversified" under the Investment Company Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets. To
the extent that the Fund assumes large positions in the securities of a small
number of issuers, the Fund's net asset value may fluctuate to a greater extent
than that of a diversified investment company as a result of changes in the
financial condition or in the market's assessment of the issuers, and the Fund
may be more susceptible to any single economic, political or regulatory
occurrence than a diversified investment company.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("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.
13
<PAGE>
Portfolio Turnover
The Manager will effect portfolio transactions without regard to the time
the securities have been held, if, in its judgment, such transactions are
advisable in light of a change in circumstances of a particular issuer or in
general market, financial or economic conditions. As a result of its investment
policies, the Fund may engage in a substantial number of portfolio transactions
and the Fund's portfolio turnover rate may vary greatly from year to year or
during periods within a year. The portfolio turnover rate is calculated by
dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. A high portfolio turnover may
result in negative tax consequences, such as an increase in capital gain
dividends and in ordinary income dividends of accrued market discount. See
"Dividends and Taxes -- Taxes." High portfolio turnover may also involve
correspondingly greater transaction costs, which are borne directly by the Fund.
MANAGEMENT OF THE TRUST
Trustees and Officers
The Trustees of the Trust consist of seven 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, 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.
TERRY K. GLENN (59) -- President and Trustee (1)(2) -- Executive Vice
President of the Manager and Merrill Lynch Asset Management, L.P. ("MLAM")
(which terms as used herein include their corporate predecessors) since 1983;
Executive Vice President and Director of Princeton Services, Inc. ("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.
JAMES H. BODURTHA (55) -- Trustee (2)(3) -- 36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (60) -- Trustee (2)(3) -- 2 Washington Square Village,
New York, New York 10012. John M. Olin Professor of Humanities, New York
University since 1993 and Professor thereof since 1980; President, Hudson
Institute since 1997 and Trustee thereof since 1980; Dean, Gallatin Division of
New York University from 1976 to 1993; Distinguished Fellow, Herman Kahn Chair,
Hudson Institute from 1984 to 1985; Director, Damon Corporation from 1991 to
1995; Overseer, Center for Naval Analyses from 1983 to 1993; Limited Partner,
Hypertech LP since 1996.
ROBERT R. MARTIN (72) -- Trustee (2)(3) -- 513 Grand Hill, St. Paul,
Minnesota 55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc.
from 1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989;
Director, Carnegie Capital Management from 1977 to 1985 and Chairman thereof in
1979; Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC Industries
Inc. in 1994; Trustee, Northland College since 1992.
JOSEPH L. MAY (70) -- Trustee (2)(3) -- 424 Church Street, Suite 2000,
Nashville, Tennessee 37219. Attorney in private practice since 1984; President,
May and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to
1983; Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The
May Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
ANDRE F. PEROLD (47) -- Trustee (2)(3) -- Morgan Hall, Soldiers Field,
Boston, Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund since 1989;
Director, Quantec Limited from 1991 to 1999; Director, TIBCO from 1994 to 1996;
Director, Genbel Securities Limited and Gensec Bank since 1999.
14
<PAGE>
ARTHUR ZEIKEL (67) -- Trustee (1)(2) -- 300 Woodland Avenue, Westfield, New
Jersey 07090. Chairman of the Manager and MLAM from 1997 to 1999 and President
thereof from 1977 to 1997; Chairman of Princeton Services from 1997 to 1999,
Director thereof from 1993 to 1999 and President thereof from 1993 to 1997;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") from 1990 to
1999.
VINCENT R. GIORDANO (55)-- 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 (48) -- 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.
FRED K. STUEBE (48)-- Portfolio Manager and Vice President (1)(2)-- Vice
President of MLAM since 1989 and portfolio manager since
1995.
DONALD C. BURKE (39) -- Vice President and Treasurer (1)(2) -- Senior Vice
President and Treasurer of the Manager and MLAM since 1999; Senior Vice
President and Treasurer of Princeton Services since 1999; Vice President of PFD
since 1999; First Vice President of MLAM from 1997 to 1999; Vice President of
MLAM from 1990 to 1997; Director of Taxation of MLAM since 1990.
ALICE A. PELLEGRINO (39) -- Secretary (1)(2) -- Vice President of MLAM
since 1999; Attorney associated with MLAM since 1997; Associate with Kirkpatrick
& Lockhart LLP from 1992 to 1997.
- ----------
(1) Interested person, as defined in the Investment Company Act, of the Trust.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which the Manager or 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 November 1, 1999, 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 of the
Trust, Mr. Glenn, a Trustee and officer of the Trust and the other officers of
the Trust and 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 $10,000 per year plus
$1,000 per Board 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 $2,000 per year plus $500 per Committee
meeting attended. 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.
The following table shows the compensation earned by the non-interested
Trustees for the fiscal year ended July 31, 1999 and the aggregate compensation
paid to them from all registered investment companies advised by the Manager and
its affiliate, MLAM ("MLAM/FAM-advised funds"), for the calendar year ended
December 31, 1998.
<TABLE>
<CAPTION>
Aggregate
Pension or Estimated Compensation from
Retirement Benefits Annual Trust and Other
Position with Compensation Accrued as Part of Benefits upon MLAM/FAM-
Name Trust From Fund Fund Expense Retirement Advised Funds(1)
- ----- ------------- ------------ ------------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
James H. Bodurtha................ Trustee $914 None None $163,500
Herbert I. London................ Trustee $914 None None $163,500
Robert R. Martin................. Trustee $914 None None $163,500
Joseph L. May.................... Trustee $914 None None $163,500
Andre F. Perold.................. Trustee $914 None None $163,500
</TABLE>
- --------
(1) The Trustees serve on the boards of MLAM/FAM-advised funds as follows: Mr.
Bodurtha (29 registered investment companies consisting of 47 portfolios);
Mr. London (29 registered investment companies consisting of 47
portfolios); Mr. Martin (29 registered investment companies consisting of
47 portfolios); Mr. May (29 registered investment companies consisting of
47 portfolios); and Mr. Perold (29 registered investment companies
consisting of 47 portfolios).
Trustees of the Trust may purchase Class A shares of the Fund at net asset
value. See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A
and Class D Shares -- Reduced Initial Sales Charges -- Purchase Privilege of
Certain Persons."
15
<PAGE>
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. The Trust has entered into a management agreement on behalf
of the Fund with the Manager (the "Management Agreement"), pursuant to which the
Manager receives for its services to the Fund monthly compensation at the annual
rate of 0.55% of the average daily net assets not exceeding $500 million; 0.525%
of the average daily net assets exceeding $500 million but not exceeding $1.0
billion and 0.50% of the average daily net assets exceeding $1.0 billion. The
table below sets forth information about the total management fees paid by the
Fund to the Manager for the periods indicated.
Fiscal Year Ended July 31, Management Fee
----------------------- --------------
1999........................................ $431,736
1998........................................ $447,347
1997........................................ $459,955
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 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
16
<PAGE>
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 that incorporates the Code of Ethics of the
Manager (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager 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 alternatives and shares of Class B and Class C are sold
to investors choosing the deferred sales charge alternatives. 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
17
<PAGE>
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. Any order may be rejected by the Fund or the Distributor. 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.
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.
18
<PAGE>
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 in a shareholder account 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 and U.S. branches of foreign banking institutions provided that the
program or bank has $3 million or more initially invested in Select Pricing
Funds. Also eligible to purchase Class A shares in a shareholder account 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.
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
July 31, Collected Distributor Merrill Lynch Load-Waived Shares
----------------- ---------- ------------ ------------ ------------------
<S> <C> <C> <C> <C>
1999 $2,439 $237 $2,202 $0
1998 $2,609 $196 $2,413 $0
1997 $2,305 $263 $2,042 $0
<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
July 31, Collected Distributor Merrill Lynch Load-Waived Shares
----------------- ---------- ------------ ------------ ------------------
<S> <C> <C> <C> <C>
1999 $18,182 $ 675 $17,507 $0
1998 $12,369 $1,035 $11,334 $0
1997 $ 7,060 $ 578 $ 6,482 $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
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
to obtain such investments.
Reinvested Dividends. No initial sales charges are imposed upon Class A and
Class D shares issued as a result of the automatic reinvestment of dividends.
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
19
<PAGE>
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 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.
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/FAM-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. The Fund realizes economies of
scale and reduction of sales-related expenses by virtue of the familiarity of
these persons 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.
20
<PAGE>
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 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/FAM-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. Class D shares may be offered
at net asset value 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.
21
<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 and Class C shares if they 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 four years of purchase may be
subject to a CDSC at the rates set forth below 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. It will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends and then of shares held longest during the
four-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 following table sets forth the Class B CDSC:
CDSC as a Percentage
of Dollar Amount
Year Since Purchase Payment Made Subject to Charge
------------------------------- ----------------
0-1....................................... 4.0%
1-2....................................... 3.0%
2-3....................................... 2.0%
3-4....................................... 1.0%
4 and thereafter.......................... None
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to a CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC may be 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 or, if
later, reasonably promptly following completion of probate. The Class B CDSC may
be waived or its terms may be modified in connection with certain fee-based
programs. The Class B CDSC may also be waived in connection with involuntary
termination of an account in which Fund shares are held or for
22
<PAGE>
withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See
"Shareholder Services -- Fee-Based Programs" and "-- Systematic Withdrawal
Plan."
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 the average daily 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.
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. It will be assumed that the
redemption is first of shares held for over one year or shares acquired pursuant
to reinvestment of dividends 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 involuntary termination of an account in which
Fund shares are held and withdrawals through the Merrill Lynch Systematic
Withdrawal Plan. See "Shareholder Services -- Systematic Withdrawal Plan." The
Class C CDSC of the Fund and certain other Select Pricing Funds may be waived
with respect to Class C shares purchased by an investor with the net proceeds of
a tender offer made by certain MLAM/FAM-advised closed end funds, including
Merrill Lynch Senior Floating Rate Fund II, Inc. Such waiver is subject to the
requirement that the tendered shares shall have been held by the investor for a
minimum of one year and to such other conditions as are set forth in the
prospectus for the related closed end fund.
23
<PAGE>
Class B and Class C Sales Charge Information
Class B Shares*
----------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended July 31, by Distributor Merrill Lynch
------------------- -------------- --------------
1999 $ 66,089 $ 66,089
1998 $ 67,462 $ 67,462
1997 $123,455 $123,455
- -----------
* Additional Class B CDSCs payable to the Distributor may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs.
Class C Shares
----------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended July 31, by Distributor Merrill Lynch
------------------- -------------- -------------
1999 $2,977 $2,977
1998 $ 165 $ 165
1997 $1,235 $1,235
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 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 National Association of
Securities Dealers, Inc. (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 0.25%, 0.25% 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 0.25%
and 0.35%, respectively, 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,
24
<PAGE>
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 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, 1998, the last date for which fully allocated accrual
data is available, the fully allocated accrual expenses of the Distributor and
Merrill Lynch for the period since the commencement of operations of Class B
shares exceeded the fully allocated accrual revenues by approximately $1,367,000
(2.22% of Class B net assets at that date). As of July 31, 1999, direct cash
revenues for the period since the commencement of operations of Class B shares
exceeded direct cash expenses by $949,208 (1.75% of Class B net assets at that
date). As of December 31, 1998, 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 $27,000 (0.72% of Class C net assets at that date). As of July 31,
1999, direct cash revenues for the period since the commencement of operations
of Class C shares exceeded direct cash expenses by $32,217 (0.82% of Class C net
assets at that date).
For the fiscal year ended July 31, 1999, the Fund paid the Distributor
$298,556 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $59.9
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 July 31, 1999, the Fund paid the
Distributor $22,268 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately $3.7
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 July 31, 1999, the Fund paid the
Distributor $4,335 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan of approximately $4.3
million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
25
<PAGE>
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 July 31, 1999
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.
<TABLE>
<CAPTION>
Data Calculated as of July 31, 1999
------------------------------------------------------------------------------------
(in thousands)
Annual
Distribution
Allowable Amounts Fee at
Eligible Allowable Interest on Maximum Previously Aggregate Current Net
Gross Aggregate Unpaid Amount Paid to Unpaid Asset
Sales(1) Sales Charges(2) Balance(3) Payable Distributor(4) Balance Level(5)
-------- ---------------- ---------- ------- -------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Class B Shares for the period
January 29, 1993 (commencement of
operations) to July 31, 1999
Under NASD Rule as Adopted........... $103,972 $6,498 $3,042 $9,540 $1,737 $7,803 $136
Under Distributor's Voluntary Waiver. $103,972 $6,498 $ 520 $7,018 $1,737 $5,281 $136
Class C Shares, for the period
October 21, 1994 (commencement of
operations) to July 31, 1999
Under NASD Rule as Adopted........... $ 5,466 $ 342 $ 68 $ 410 $ 37 $ 373 $ 14
</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) Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of
Summit can only be purchased by exchange from another fund (the "redeemed
fund"). Upon such an exchange, the maximum allowable sales charge payment
to the redeemed fund is reduced in accordance with the amount of the
redemption. this amount is then added to the maximum allowable sales charge
payment with respect to Summit. Upon an exchange out of Summit, the
remaining balance of this amount is deducted from the maximum allowable
sales charge payment to Summit and added to the maximum allowable sales
charge payment to the fund into which the exchange is made.
(3) 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.
(4) 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.
(5) 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).
26
<PAGE>
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 New York Stock Exchange (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 register. The
signature on the redemption request may require a guarantee by an "eligible
guarantor institution" as defined in Rule 17Ad-15 under the Securities Exchange
Act of 1934 (the "Exchange Act"), the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications. In the
event a signature guarantee is required, notarized signatures are not
sufficient. In general, signature guarantees are waived on redemptions of less
than $50,000 as long as the following requirements are met: (i) all requests
require the signature(s) of all persons in whose name(s) shares are recorded on
the Transfer Agent's register; (ii) all checks must be mailed to the stencil
address of record on the Transfer Agent's register and (iii) the stencil address
must not have changed within 30 days. Certain rules may apply regarding certain
account types such as but not limited to UGMA/UTMA accounts, Joint Tenancies
With Rights of Survivorship, contra broker transactions, and institutional
accounts. 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 U.S. 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 U.S. bank) has been
collected for the purchase of such Fund shares, which will usually 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 the close of business
on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) and such
request is
27
<PAGE>
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 after the close of business on
the NYSE on each day the NYSE is open for 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. The per share net asset value of Class C
shares will generally be lower than the per share net asset value of Class B
shares reflecting the daily expense accruals of the higher distribution fees
applicable with respect to Class C shares. 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, which will differ
by approximately the amount of the expense accrual differentials between the
classes.
The Michigan Municipal Bonds and 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
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<PAGE>
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 use 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 July 31, 1999 is set forth below.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets................................. $9,384,407 $54,258,949 $3,950,059 $4,311,870
========== =========== ========== ==========
Number of Shares Outstanding............... 946,786 5,474,191 398,541 435,313
========== =========== ========== ==========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)............................. $ 9.91 $ 9.91 $ 9.91 $ 9.91
Sales Charge (for Class A and Class D
shares: 4.00% of offering price; 4.17%
of net asset value per share)*........... .41 ** ** .41
========== =========== ========== ==========
Offering Price............................. $ 10.32 $ 9.91 $ 9.91 $ 10.32
========== =========== ========== ==========
</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.
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
29
<PAGE>
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. The Fund executed no transactions under the order for
the fiscal years ended July 31, 1997, 1998 and 1999.
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 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 MLAM.
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.
30
<PAGE>
Investment Accounts
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 dividends. 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
dividends. 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 may transfer their Fund shares from Merrill Lynch to another
securities dealer that has entered into a selected dealer agreement with Merrill
Lynch. Certain shareholder services may not be available for the transferred
shares. After the transfer, the shareholder may purchase additional shares of
funds owned before the transfer and all future trading of these assets must be
coordinated by the new firm. If a shareholder wishes to transfer his or her
shares to a securities dealer that has not entered into a selected dealer
agreement with Merrill Lynch, the shareholder must either (i) redeem his or her
shares, paying any applicable CDSC or (ii) continue to maintain an Investment
Account at the Transfer Agent for those shares. The shareholder may also request
the new securities dealer to maintain the shares in an account at the Transfer
Agent registered in the name of the securities dealer for the benefit of the
shareholder whether the securities dealer has entered into a selected dealer
agreement or not.
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 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
for 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
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<PAGE>
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. Certain Select Pricing Funds with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offer to exchange their Class B or Class C shares for Class B or Class C shares,
respectively, of certain other Select Pricing Funds 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 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
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 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 of a Fund
received in exchange for such money market fund shares will be aggregated with
the holding period for the fund shares originally exchanged for such money
market 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 also modified with respect to purchases of Class A and Class D shares by
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
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<PAGE>
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.
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.
An investor whose shares of the Fund are held within 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 Reinvestment Plan
Unless specific instructions are given as to the method of payment,
dividends 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 determined after the close of business on
the NYSE on the monthly payment date for such dividends. No CDSC will be imposed
upon redemption of shares issued as a result of the automatic reinvestment of
dividends.
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 paid in cash, rather
than
33
<PAGE>
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 dividend 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 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 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 net asset
value determined after the close of business on the NYSE on the following
business day. The check for the withdrawal payment will be mailed, or the direct
deposit of the withdrawal payment will be made, on the next business day
following redemption. When a shareholder is making systematic withdrawals,
dividends 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
34
<PAGE>
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 Automatic Investment Program. For
more information on the CMA(R) or CBA(R) Systematic Redemption Program, eligible
shareholders should contact their Merrill Lynch Financial Consultant.
DIVIDENDS AND TAXES
Dividends
The net investment income of the Fund is declared as dividends daily prior
to the determination of the net asset value which is calculated 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 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
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 gain dividends will be reinvested
automatically in shares of the Fund unless the shareholder elects to receive
such dividends in cash.
The per share dividends 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 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.
As discussed in "General Information -- Description of Shares," the Trust
has established other series in addition to the Fund (together with the Fund,
the "Series"). Each Series of the Trust is treated as a separate corporation for
Federal income tax purposes. Each Series, therefore, is considered to be a
separate entity in determining its treatment under the rules for RICs. Losses in
one Series do not offset gains in another Series, and the requirements (other
than certain organizational requirements) for qualifying for RIC status will be
determined at the Series level rather than at the Trust level.
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
35
<PAGE>
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 or for Michigan 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 "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.
The portion of the Fund's exempt-interest dividends paid from interest
received by the Fund from Michigan Municipal Bonds also will be exempt from
Michigan income taxes. To the extent the distributions from the Fund are
attributable to sources other than interest on Michigan Municipal Bonds, such
distributions, including, but not limited to, long-term or short-term capital
gains, but excluding any such capital gains from the obligations of the United
States or of its possessions, will not be exempt from Michigan income tax or the
single business tax. The intangibles tax was totally repealed effective January
1, 1998. The income tax rate will begin a gradual reduction beginning in year
2000, from the present 4.4%, down to 3.9% rate for year 2004 and beyond. The
single business tax is being phased out over a twenty-three year period at a
rate of one-tenth of one percent per year beginning in 1999. Shareholders
subject to income taxation by states other than Michigan will realize a lower
after-tax rate of return than Michigan shareholders since the dividends
distributed by the Fund generally will not be exempt, to any significant degree,
from income taxation by such other states. The Trust will inform shareholders
annually regarding the portion of the Fund's distributions that constitutes
exempt-interest dividends and the portion that is exempt from Michigan income
taxes. The Trust will allocate exempt-interest dividends among Class A, Class B,
Class C and Class D shareholders for Michigan income tax purposes based on a
method similar to that described above for Federal income tax purposes.
Distributions from income and capital gains of the Fund, including
exempt-interest dividends, may also be subject to state taxes in states other
than Michigan and may be subject to local taxes. Accordingly, investors in the
Fund should consult their tax advisers with respect to the application of such
taxes to the receipt of Fund dividends and to the holding of shares in 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 and Michigan 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, and for Michigan
income tax purposes, are treated as capital gains which are taxed at ordinary
income tax rates. 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,
36
<PAGE>
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 a Federal 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 a Federal 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 Federal 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 on
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund 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
37
<PAGE>
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, Treasury regulations and Michigan income tax laws
presently in effect. For the complete provisions, reference should be made to
the pertinent Code sections, the Treasury regulations promulgated thereunder and
Michigan income tax laws. The Code and the Treasury regulations, as well as the
Michigan tax laws, 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.
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
38
<PAGE>
various periods other than those noted below. Such data will be computed as
described above, except that (1) as required by the periods of the quotations,
actual annual, annualized or aggregate data, rather than average annual data,
may be quoted and (2) the maximum applicable sales charges will not be included
with respect to annual or annualized rates of return calculations. Aside from
the impact on the performance data calculations of including or excluding the
maximum applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
Set forth below is total return, yield and tax-equivalent yield information
for the Class A, Class B, Class C and Class D shares of the Fund for the periods
indicated.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
------------------------------------- ------------------------------------
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 charges)
One Year Ended July 31, 1999............ (3.68)% $ 963.20 (4.00)% $ 960.00
Five Years Ended July 31, 1999.......... 4.50% $1,246.40 4.82% $1,265.60
Inception (January 29, 1993) to
July 31, 1999......................... 4.51% $1,332.30 4.64% $1,342.70
Annual Total Return
(excluding maximum applicable sales charges)
Year ended July 31,
1999.................................... 0.34% $1,003.40 (0.17)% $ 998.30
1998.................................... 4.84% $1,048.40 4.31% $1,043.10
1997.................................... 9.79% $1,097.90 9.23% $1,092.30
1996.................................... 6.25% $1,062.50 5.70% $1,057.00
1995.................................... 5.79% $1,057.90 5.25% $1,052.50
1994.................................... 1.22% $1,012.20 0.71% $1,007.10
Inception (January 29, 1993) to
July 31, 1993........................ 5.61% $1,056.10 5.35% $1,053.50
Aggregate Total Return
(including maximum applicable sales charges)
Inception (January 29, 1993) to
July 31, 1999........................ 33.23% $1,332.30 34.27% $1,342.70
Yield
30 days ended July 31, 1999............. 4.35% -- 4.02% --
Tax Equivalent Yield*
30 days ended July 31, 1999............. 6.04% -- 5.58% --
- ---------
* Based on a Federal income tax rate of 28%.
</TABLE>
39
<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 charges)
One year ended July 31, 1999........... (1.13)% $ 988.70 (3.68)% $ 963.20
Inception (October 21, 1994) to
July 31, 1999....................... 5.61% $1,297.90 5.26% $1,277.10
Annual Total Return
(excluding maximum applicable sales charges)
Year Ended July 31,
1999................................... (0.17)% $ 998.30 0.34% $1,003.40
1998................................... 4.20% $1,042.00 4.74% $1,047.40
1997................................... 9.01% $1,090.10 9.69% $1,096.90
1996................................... 5.59% $1,055.90 6.04% $1,060.40
Inception (October 21, 1994) to
July 31, 1995....................... 8.39% $1,083.90 8.84% $1,088.40
Aggregate Total Return
(including maximum applicable sales charges)
Inception (October 21, 1994) to
July 31, 1999....................... 29.79% $1,297.90 27.71% $1,277.10
Yield
30 days ended July 31, 1999............. 3.92% -- 4.25% --
Tax Equivalent Yield*
30 days ended July 31, 1999............. 5.44% -- 5.90% --
</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, 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 Morningstar risk-adjusted performance ratings
in advertisements or supplemental sales literature. As with other performance
data, performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return, yield and
tax-equivalent yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The value
of an investment in the Fund will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
40
<PAGE>
GENERAL INFORMATION
Description of Shares
The Trust is a business trust organized on August 2, 1985 under the laws of
Massachusetts. On October 1, 1987, the Trust changed its name from "Merrill
Lynch Multi-State Tax-Exempt Series Trust" to "Merrill Lynch Multi-State
Municipal Bond Series Trust," and on December 22, 1987 the Trust again changed
its name to "Merrill Lynch Multi-State Municipal Series Trust." 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 with income exempt
from Federal, and in certain cases state and local, income taxes. 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 of the Fund, Merrill Lynch Arizona Municipal Bond Fund,
Merrill Lynch Arkansas Municipal Bond Fund, Merrill Lynch Colorado Municipal
Bond Fund, Merrill Lynch Connecticut Municipal Bond Fund, Merrill Lynch Florida
Municipal Bond Fund, Merrill Lynch Maryland Municipal Bond Fund, Merrill Lynch
Massachusetts Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund,
Merrill Lynch New Jersey Municipal Bond Fund, Merrill Lynch New Mexico Municipal
Bond Fund, Merrill Lynch New York Municipal Bond Fund, Merrill Lynch North
Carolina Municipal Bond Fund, Merrill Lynch Ohio Municipal Bond Fund, Merrill
Lynch Oregon Municipal Bond Fund, Merrill Lynch Pennsylvania Municipal Bond Fund
and Merrill Lynch Texas Municipal Bond 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 or similar rights and will be
freely transferable. Redemption and conversion privileges are 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
41
<PAGE>
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 2, 1985, 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 Multi-State 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 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 (the "Custodian"), 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 July 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.
42
<PAGE>
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.
Under a separate agreement, ML & Co. has granted the Trust the right to use
the "Merrill Lynch" name and has reserved the right to withdraw its consent to
the use of such name by the Trust at any time or to grant the use of such name
to any other company, and the Trust has granted ML & Co. under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by ML & Co.
To the knowledge of the Trust, the following persons or entities owned
beneficially 5% or more of any class of the Fund's shares as of November 1,
1999:
<TABLE>
<CAPTION>
Percent
Name Address of Class
- ------------------------------------ ------------------------- ------------------
<S> <C> <C>
J. Lawrence Tishman, Trustee 358 Lakewood Drive 26.84 of Class A
by J. Lawrence Tishman Bloomfield, MI 48304
David Karam and Carole Karam, Execs. 32030 Welston Drive 20.91% of Class C
Estate of Abraham Karam, Jr. Warren, MI 48093
Diane M.Walsh, Trustee 1117 Oxford Road 12.58% of Class C
by Diane M. Walsh Revocable Trust Berkley, MI 48072
Peter A. Schweitzer,Trustee 99 Lothrop Road 5.27% of Class C
by Peter A. Schweitzer Grosse Pointe, MI 48236
Elaine A. Schweitzer, Trustee 99 Lothrop Road 5.24% of Class C
by Elaine A. Schweitzer Grosse Pointe, MI 48236
Weber Holding Company 429 Mary Lane 30.98% of Class D
Frankenmuth, MI 48734
Craig A. Miller Trustee P.O. Box 1027 5.11% of Class D
by Barbara Miller Family Leland, MI 49654
Francis M. Messner and 2101 Country Club Road 5.08% of Class D
Constance A. Messner, Trustees Ann Arbor, MI 48105
Francis M. Messner Trust
</TABLE>
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1999 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.
43
<PAGE>
APPENDIX I
ECONOMIC AND OTHER CONDITIONS IN MICHIGAN
The following information is a brief summary of factors affecting the
economy of the State of Michigan (the "State") and does not purport to be a
complete description of such factors. Other factors will affect issuers. The
summary is based primarily upon one or more publicly available offering
statements relating to debt offerings of state issuers. The Fund has not
independently verified the information.
Economic activity in the State of Michigan has tended to be more cyclical
than in the nation as a whole. The State's efforts to diversify its economy have
proven successful, as reflected by the fact that the share of employment in the
State in the durable goods sector has fallen from 33.1% in 1960 to 16.0% in
1998. While durable goods manufacturing still represents a sizable portion of
the State's economy, the service sector now represents 27.51% of the State's
economy. Any substantial national economic downturn may have an adverse effect
on the economy of the State and on the revenues of the State and some of its
local government units. Although historically, the average monthly unemployment
rate in the State has been higher than the average figures for the United
States, for the last three years, the unemployment rate in the State has been at
or below the national average. During 1998, the average monthly unemployment
rate in the State was 3.9% compared to a national average of 4.5%.
The State's economy could continue to be affected by changes in the auto
industry resulting from competitive pressures, overcapacity and labor disputes.
Such actions could adversely affect State revenues and the financial impact on
the local units of government in the areas in which plants are located could be
more severe.
The Michigan Constitution limits the amount of total revenues of the State
raised from taxes and certain other sources to a level for each fiscal year
equal to a percentage of the State's personal income for the prior calendar
year. In the event the State's total revenues exceed the limit by 1% or more,
the Constitution requires that the excess be refunded to taxpayers. To avoid
exceeding the revenue limit in the State's 1994-95 fiscal year, the State
refunded approximately $113 million through income tax credits for the 1995
calendar year. The State Constitution does not prohibit the increasing of taxes
so long as expected revenues do not exceed the revenue limit and authorizes
exceeding the limit for emergencies. The State Constitution further provides
that the proportion of State spending paid to all local units to total spending
may not be reduced below the proportion in effect for the 1978-79 fiscal year.
The Constitution requires that if spending does not meet the required level in a
given year an additional appropriation for local units is required for the
following fiscal year. The State Constitution also requires the State to finance
any new or expanded activity of local units mandated by State law. Any
expenditures required by this provision would be counted as State spending for
local units for purposes of determining compliance with the provisions stated
above.
The State Constitution limits the purposes for which State general
obligation debt may be issued. Such debt is limited to short-term debt for State
operating purposes, short- and long-term debt for the purposes of making loans
to school districts and long-term debt for voter approved purposes. In addition
to the foregoing, the State authorizes special purpose agencies and authorities
to issue revenue bonds payable from designated revenues and fees. Revenue bonds
are not obligations of the State and in the event of shortfalls in
self-supporting revenues, the State has no legal obligation to appropriate money
to these debt service payments. The State's Constitution also directs or
restricts the use of certain revenues.
The State finances its operations through the State's General Fund and
Special Revenue Funds. The General Fund receives revenues of the State that are
not specifically required to be included in the Special Revenue Fund. General
Fund revenues are obtained approximately 55% from the payment of State taxes and
45% from federal and non-tax revenue sources. The majority of the revenues from
State taxes are from the State's personal income tax, single business tax, use
tax, sales tax and various other taxes. Approximately two-thirds of total
General Fund expenditures are for State support of public education and for
social services programs. Other significant expenditures from the General Fund
provide funds for law enforcement, general State government, debt service and
capital outlay. The State Constitution requires that any prior year's surplus or
deficit in any fund must be included in the next succeeding year's budget for
that fund.
The State of Michigan reports its financial results in accordance with
generally accepted accounting principles. The State ended the five fiscal years
1992-96 with its General Fund in balance after substantial transfers from the
General Fund to the Budget Stabilization Fund. For the 1997 fiscal year, the
State closed its
I-1
<PAGE>
books with its general fund in balance. During the 1997-98 fiscal year, an error
was identified pertaining to the Medicaid program administered by the Department
of Community Health ("DCH"). Over a ten-year period. DCH did not properly record
all Medicaid expenditures and revenues on a modified accrual basis as required
by GAAP. For the fiscal year ended September 30, 1997, the General Fund did not
reflect Medicaid expenditures of $178.7 million, and federal revenue of $24.6
million. As a result, the ending General Fund balance for the fiscal year ended
September 30, 1997, has been reduced by $154.1 million to account for the
correction of the prior period error. The General Fund was in balance as of
September 30, 1998. The balance in the Budget Stabilization Fund as of September
30, 1998 was $1,000.5 million. In all but two of the last seven fiscal years the
State has borrowed between $500 million and $900 million for cash flow purposes.
It borrowed $900 million in each of the 1996, 1997 and 1998 fiscal years. No
cash flow borrowing was required in the 1999 fiscal year or is planned for the
2000 fiscal year.
In November, 1997, the State Legislature adopted legislation to provide for
the funding of claims of local school districts, some of whom had alleged in a
lawsuit, Durant v. State of Michigan, that the State had, over a period of
years, paid less in school aid than required by the State's Constitution. Under
this legislation, the State paid to school districts which were plaintiffs in
the suit approximately $212 million from the Budget Stabilization Fund on April
15, 1998, and is required to pay to other school districts an estimated amount
of $632 million over time. These payments, commencing in fiscal year 1998-99,
are being paid out of the Budget Stabilization Fund and the General Fund, half
in annual payments over ten years and half in annual payments over fifteen
years.
Amendments to the Michigan Constitution which placed limitations on
increases in State taxes and local ad valorem taxes (including taxes used to
meet the debt service commitments on obligations of taxing units) were approved
by the voters of the State of Michigan in November 1978 and became effective on
December 23, 1978. To the extent that obligations in the Fund are tax supported
and are for local units and have not been voted by the taxing unit's electors,
the ability of the local units to levy debt service taxes might be affected.
State law provides for distributions of certain State collected taxes or
portions thereof to local units based in part on population as shown by census
figures and authorizes levy of certain local taxes by local units having a
certain level of population as determined by census figures. Reductions in
population in local units resulting from periodic census could result in a
reduction in the amount of State collected taxes returned to those local units
and in reductions in levels of local tax collections for such local units unless
the impact of the census is changed by State law. No assurance can be given that
any such State law will be enacted. In the 1991 fiscal year, the State deferred
certain scheduled payments to municipalities, school districts, universities and
community colleges. While such deferrals were made up at later dates, similar
future deferrals could have an adverse impact on the cash position of some local
units. Additionally, while total State revenue sharing payments have increased
in each of the last five years, the State has reduced revenue sharing payments
to municipalities below the level otherwise provided under formulas in each of
those years.
On March 15, 1994, the electors of the State voted to amend the State's
Constitution to increase the State sales tax rate from 4% to 6% and to place an
annual cap on property assessment increases for all property taxes. Companion
legislation also cut the State's income tax rate from 4.6% to 4.4%, reduced some
property taxes and shifted the balance of school funding sources among property
taxes and State revenues, some of which are being provided from new or increased
State taxes. The legislation also contains other provisions that may reduce or
alter the revenues of local units of government and tax increment bonds could be
particularly affected. While the ultimate impact of the constitutional amendment
and related legislation cannot yet be accurately predicted, investors should be
alert to the potential effect of such measures upon the operations and revenues
of Michigan local units of government.
The State is a party to various legal proceedings seeking damages or
injunctive or other relief. In addition to routine litigation, certain of these
proceedings could, if unfavorably resolved from the point of view of the State,
substantially affect State or local programs or finances. These lawsuits involve
programs generally in the areas of corrections, highway maintenance, social
services, tax collection, commerce and budgetary reductions to school districts
and government units and court funding.
Currently, the State's general obligation bonds are rated Aa1 by Moody's,
AA+ by Standard & Poor's and AA+ by Fitch. The State received upgrades in
January 1998 from Standard & Poor's, in March 1998 from Moody's and in April
1998 from Fitch.
I-2
<PAGE>
APPENDIX II
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 MIG
1/VMIG 1, MIG 2/VMIG 2 and MIG 3/VMIG 3; MIG 1/VMIG 1 denotes "best quality
strong protection from established cash flows"; MIG 2/VMIG 2 denotes "high
quality" with "ample margins of protection"; MIG 3/VMIG 3 instruments are of
"favorable quality but lacking the undeniable strength of the preceding grades."
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
II-1
<PAGE>
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and well established access to a
range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of short-term promissory 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 short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to 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, a Division of The McGraw-Hill Companies, Inc.
("Standard & Poor's"), Municipal Debt Ratings
A Standard & Poor's municipal debt 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 program. It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation.
The debt 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.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to meet its financial commitment on the obligation is extremely
strong.
AA Debt rated "AA" differs from the highest rated issues only in small
degree. The Obligor's capacity to meet its financial commitment on the
obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt 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.
II-2
<PAGE>
BB Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics.
B "BB" indicates the least degree of speculation and "C" the highest degree
of speculation. While such debt
CCC will likely have some quality and protective characteristics, these may be
outweighed by large
CC uncertainties or major risk exposures to adverse conditions.
C
D Debt 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 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.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A-1" for the
highest-quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired unless Standard & Poor's
believes that such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
-- Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
-- Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 Speculative capacity to pay principal and interest.
II-3
<PAGE>
c The "c" subscript is used to provide additional information to investors
that the bank may terminate its obligation to purchase tendered bonds if
the long-term credit rating of the issuer is below an investment-grade
level and/or the issuer's bonds are deemed taxable.
p The letter "p" indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the
debt being rated and indicates that payment of debt service requirements
is largely or entirely dependent upon the successful, timely completion of
the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the
likelihood of or the risk of default upon failure of such completion. The
investor should exercise his own judgment with respect to such likelihood
and risk.
* Continuance of the ratings is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
r The "r" highlights derivative, hybrid, and certain other obligations that
Standard & Poor's believes may experience high volatility or high
variability in expected returns as a result of noncredit risks. Examples
of such obligations are securities with principal or interest return
indexed to equities, commodities, or currencies; certain swaps and
options, and interest-only and principal-only mortgage securities. The
absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.
Description of Fitch IBCA, Inc.'s ("Fitch") Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds 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 ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in
the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
II-4
<PAGE>
BBB Bonds considered to be investment grade and of satisfactory-credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction
of any rating change over the intermediate term. It is described as "Positive"
or "Negative." The absence of a designation indicates a stable outlook.
Description of Fitch's Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service
requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
II-5
<PAGE>
DDD Bonds are in default on interest and/or principal payments. Such bonds
are extremely speculative and
DD should be valued on the basis of their ultimate recovery value in
liquidation or reorganization of the
D obligor. "DDD" represents the highest potential for recovery on these
bonds, and "D" represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
Description of Fitch's Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term ratings places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not
as great as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate;
however, near-term adverse changes could cause these securities to be
rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or imminent payment
default.
LOC The symbol "LOC" indicates that the rating is based on a letter of credit
issued by a commercial bank.
II-6
<PAGE>
Code # 16562-11-99
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. Exhibits
Exhibit
Number Description
------- -----------
1(a) -- Declaration of Trust of the Registrant, dated August 2,
1985.(a)
(b) -- Amendment to Declaration of Trust, dated September 18,
1987.(a)
(c) -- Amendment to Declaration of Trust, dated December 21,
1987.(a)
(d) -- Amendment to Declaration of Trust, dated October 3,
1988.(a)
(e) -- Amendment to Declaration of Trust, dated October 17, 1994
and instrument establishing Class C and Class D shares
of beneficial interest.(a)
(f) -- Instrument establishing Merrill Lynch Michigan Municipal
Bond Fund (the "Fund") as a series of the Registrant.(a)
(g) -- Instrument establishing Class A and Class B shares of
beneficial interest of the Fund.(a)
2 -- By-Laws of the Registrant.(a)
3 -- Portions of the Declaration of Trust, Certificate of
Establishment and Designation and By-Laws of the Registrant
defining the rights of holders of the Fund as a series of
the Registrant.(b)
4(a) -- Form of Management Agreement between the Registrant and Fund
Asset Management, L.P.(a)
(b) -- Supplement to Management Agreement between Registrant and
Fund Asset Management, L.P.(e)
5(a) -- Form of Revised Class A Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc.
(now known as Princeton Funds Distributor, Inc.) (the
"Distributor") (including Form of Selected Dealers
Agreement).(e)
(b) -- Form of Class B Distribution Agreement between the
Registrant and the Distributor (including Form of Selected
Dealers Agreement).(a)
(c) -- Form of Class C Distribution Agreement between the
Registrant and the Distributor (including Form of Selected
Dealers Agreement).(e)
(d) -- Form of Class D Distribution Agreement between the
Registrant and the Distributor (including Form of Selected
Dealers Agreement).(e)
(e) -- Letter Agreement between the Fund and the Distributor,
dated September 15, 1993, in connection with the Merrill
Lynch Mutual Fund Advisor Program.(c)
6 -- None.
7 -- Form of Custody Agreement between the Registrant and State
Street Bank and Trust Company.(d)
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.)(a)
9 -- Opinion of Brown & Wood LLP, counsel for the Registrant.(g)
10 -- Consent of Deloitte & Touche LLP, independent auditors for
the Registrant.
11 -- None.
12 -- Certificate of Fund Asset Management, L.P.(a)
13(a) -- Amended and Restated Class B Distribution Plan of the
Registrant and Amended and Restated Class B Distribution
Plan Sub-Agreement.(c)
(b) -- Form of Class C Distribution Plan of the Registrant and
Class C Distribution Plan Sub-Agreement.(e)
(c) -- Form of Class D Distribution Plan of the Registrant and
Class D Distribution Plan Sub-Agreement.(e)
14 -- Merrill Lynch Select Pricing(SM) System Plan pursuant to
Rule 18f-3.(f)
- -------
(a) Filed on October 26, 1995 as an Exhibit to Post-Effective Amendment No. 4
to the Registrant's Registration Statement on Form N-1A (File No. 33-55576)
under the Securities Act of 1933, as amended, relating to shares of the
Fund (the "Registration Statement").
(b) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's
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<PAGE>
Declaration of Trust, as amended, filed as Exhibits 1(a), 1(b), 1(c), 1(d)
and 1(e) with Post-Effective Amendment No. 4 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(f) and 1(g),
respectively, with Post-Effective Amendment No. 4 to the Registration
Statement; and to Articles I, V and VI of the Registrant's By-Laws, filed
as Exhibit 2 with Post-Effective Amendment No. 4 to the Registration
Statement.
(c) Filed on November 24, 1993 as an Exhibit to Post-Effective Amendment No. 2
to the Registration Statement.
(d) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933, filed on October 14, 1994, relating to shares of Merrill Lynch
Minnesota Municipal Bond Fund series of the Registrant (File No. 33-44734).
(e) Filed on October 17, 1994 as an Exhibit to Post-Effective Amendment No. 3
to the Registration Statement.
(f) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, filed on January 25, 1996, relating to shares of Merrill Lynch
New York Municipal Bond Fund series of the Registrant (File No. 2-99473).
(g) Filed on January 21, 1993 as an Exhibit to Pre-Effective Amendment No. 1 to
the Registration Statement.
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 or she may be
lawfully entitled; provided that no Person may satisfy any right of indemnity or
reimbursement granted herein or in Section 5.1 or to which he or she 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 moneys for actions
based upon the Investment Company Act of 1940 may be concerned, such payments
will be made only on the following conditions: (i) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a defense
to the action, including costs connected with the preparation of a settlement;
(ii) advances may be made only upon receipt of a written promise by, or on
behalf of, the recipient to repay that amount of the advance which exceeds the
amount which it is ultimately determined that he or she 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
C-2
<PAGE>
equivalent form of security which assures that any repayments may be obtained by
the Registrant without delay or litigation, which bond, insurance or other form
of security must be provided by the recipient of the advance, or (b) a majority
of a quorum of the Registrant's disinterested, non-party Trustees, or an
independent legal counsel in a written opinion, shall determine, based upon a
review of readily available facts that the recipient of the advance ultimately
will be found entitled to indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Shares
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. (the "Manager" or "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
California Insured Fund V, Inc., MuniHoldings Florida Insured Fund, MuniHoldings
Florida Insured Fund II, MuniHoldings Florida Insured Fund III, MuniHoldings
Florida Insured Fund IV, MuniHoldings Florida Insured Fund V, MuniHoldings
Insured Fund, Inc., MuniHoldings Insured Fund II, Inc., MuniHoldings Insured
Fund III, Inc., MuniHoldings Insured Fund IV, Inc., MuniHoldings Michigan
Insured Fund, Inc., MuniHoldings Michigan Insured Fund II, Inc., MuniHoldings
New Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc.,
MuniHoldings New Jersey Insured Fund III, Inc., MuniHoldings New Jersey Insured
Fund IV, 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., MuniHoldings New York Insured Fund IV, Inc.,
MuniHoldings Pennsylvania Insured Fund, 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,
C-3
<PAGE>
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"), an affiliate of the Manager,
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 Disciplined Equity Fund,
Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, 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
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 Index Funds, 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 U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series
Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a
division of MLAM); and for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Senior Floating Rate Fund, Inc. and Merrill Lynch Senior Floating Rate Fund II,
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 the Manager, 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
August 1, 1997 for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Glenn is President and Mr. Burke
is Vice President and Treasurer of all or of substantially all of the investment
companies described in the first two paragraphs of this Item 26, and Messrs.
Doll, Giordano and Monagle are 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
MLAM
Princeton Services General Partner General Partner of MLAM
Jeffrey M. Peek President President of MLAM; 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
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Position(s) with the Other Substantial Business,
Name Manager Profession, Vocation or Employment
- ----- -------------------- ----------------------------------
<S> <C> <C>
Terry K. Glenn............. Executive Vice Executive Vice President of MLAM; Executive Vice
President President and Director of Princeton Services; President
and Director of PFD; Director of FDS; President of
Princeton Administrators
Gregory A. Bundy........... Chief Operating Chief Operating Officer and Managing Director of MLAM;
Officer and Chief Operating Officer and Managing Director of
Managing Director Princeton Services; Co-CEO of Merrill Lynch Australia
from 1997 to 1999
Donald C. Burke............ Senior Vice President Senior Vice President, Treasurer and Director of Taxation
and Treasurer of MLAM; 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; Treasurer and Director of PFD; First
Vice President of MLAM from 1997 to 1999; Vice
President of MLAM from 1996 to 1997
Robert C. Doll............. Senior Vice President Senior Vice President of MLAM; Senior Vice President of
Princeton Services; Chief Investment Officer of
Oppenheimer Funds, Inc. in 1999 and Executive Vice
President thereof from 1991 to 1999
Linda L. Federici.......... Senior Vice President Senior Vice President of MLAM; Senior Vice President of
Princeton Services
Vincent R. Giordano........ Senior Vice President Senior Vice President of MLAM; Senior Vice President of
Princeton Services
Michael J. Hennewinkel..... Senior Vice President, Senior Vice President, Secretary and General Counsel of
Secretary and General MLAM; Senior Vice President of Princeton Services
Counsel
Philip L. Kirstein......... Senior Vice President Senior Vice President of MLAM; Senior Vice President,
Secretary, General Counsel and Director of Princeton Services
Debra W. Landsman-Yaros.... Senior Vice President Senior Vice President of MLAM; Senior Vice President of
Princeton Services; Vice President of PFDS
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 MLAM; Senior Vice President of
Princeton Services
Brian A. Murdock........... Senior Vice President Senior Vice President of MLAM; Senior Vice President of
Princeton Services
Gregory D. Upah............ Senior Vice President Senior Vice President of MLAM; 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. 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., Merrill Lynch Senior Floating Rate Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund II, Inc. A separate division of PFD acts
as the principal underwriter of a number of other investment companies.
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<PAGE>
(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) with
Name with PFD Registrant
- ----- ---------------------- ----------------------------------
<S> <C> <C>
Terry K. Glenn................ President and Director President and Trustee
Michael G. Clark.............. Treasurer and 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
Donald C. Burke............... Vice President Vice President and Treasurer
James T. Fatseas.............. Vice President None
Debra W. Landsman-Yaros....... Vice President None
Michelle T. Lau............... Vice President None
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 -- Fund
Asset Management" in the Prospectus constituting Part A of the Registration
Statement and under "Management of the Trust -- Management and Advisory
Arrangements" in the Statement of Additional Information constituting Part B of
the Registration Statement, the Registrant is not a party to any
management-related service contract.
Item 30. Undertakings.
Not applicable.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Registrant certifies that it meets all the requirements for
effectiveness of this Registration Statement under Rule 485(b) under the
Securities Act and has duly caused this Post-Effective Amendment to its
Registration Statement to be signed on its behalf by the undersigned, duly
authorized, in the Township of Plainsboro, and the State of New Jersey, on the
29th day of November, 1999.
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
(Registrant)
By: /s/ DONALD C. BURKE
-----------------------------------------------
(Donald C. Burke, Vice President and Treasurer)
Pursuant to the requirements of the Securities Act, this 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>
TERRY K. GLENN* President and Trustee
- -------------------------------------------- (Principal Executive Officer)
(Terry K. Glenn)
/s/ DONALD C. BURKE Vice President and Treasurer November 29, 1999
- -------------------------------------------- (Principal Financial and
(Donald C. Burke) Accounting Officer)
JAMES H. BODURTHA* Trustee
- --------------------------------------------
(James H. Bodurtha)
HERBERT I. LONDON* Trustee
- --------------------------------------------
(Herbert I. London)
ROBERT R. MARTIN* Trustee
- --------------------------------------------
(Robert R. Martin)
JOSEPH L. MAY* Trustee
- --------------------------------------------
(Joseph L. May)
ANDRE F. PEROLD* Trustee
- --------------------------------------------
(Andre F. Perold)
ARTHUR ZEIKEL* Trustee
- --------------------------------------------
(Arthur Zeikel)
*By: /s/DONALD C. BURKE November 29, 1999
- --------------------------------------------
(Donald C. Burke, Attorney-in-Fact)
</TABLE>
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<PAGE>
POWER OF ATTORNEY
The undersigned Directors/Trustees and officers of each of the registered
investment companies listed below hereby authorize Terry K. Glenn, Donald C.
Burke and Joseph T. Monagle, Jr., or any of them, as attorney-in-fact, to sign
on his or her behalf in the capacities indicated any Registration Statement or
amendment thereto (including post-effective amendments) for each of the
following registered investment companies and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission: Merrill Lynch
California Municipal Series Trust, Merrill Lynch Multi-State Municipal Series
Trust, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Convertible Fund, Inc., Merrill Lynch Consults International
Portfolio, Merrill Lynch Growth Fund, Merrill Lynch World Income Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings Florida Insured Fund III, MuniHoldings Michigan Insured Fund, Inc.,
MuniHoldings New York Fund, Inc., MuniHoldings New York Insured Fund II, Inc.,
MuniHoldings New York Insured Fund III, Inc., MuniHoldings Pennsylvania Insured
Fund, MuniVest Pennsylvania Insured Fund, MuniYield Fund, Inc., MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Michigan Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc.,
MuniYield Quality Fund, Inc. and MuniYield Quality Fund II, Inc.
Dated: April 7, 1999
/s/ TERRY K. GLENN
- --------------------------------------------------------
Terry K. Glenn
(President/Principal Executive Officer/Director/Trustee)
/s/ JAMES H. BODURTHA
- --------------------------------------------------------
James H. Bodurtha
(Director/Trustee)
/s/ HERBERT I. LONDON
- ---------------------------------------------------------
Herbert I. London
(Director/Trustee)
/s/ ROBERT R. MARTIN
- ---------------------------------------------------------
Robert R. Martin
(Director/Trustee)
/s/ JOSEPH L. MAY
- --------------------------------------------------------
Joseph L. May
(Director/Trustee)
/s/ ANDRE F. PEROLD
- ---------------------------------------------------------
Andre F. Perold
(Director/Trustee)
/s/ ARTHUR ZEIKEL
- ---------------------------------------------------------
Arthur Zeikel
(Director/Trustee)
/s/ DONALD C. BURKE
- ---------------------------------------------------------
Donald C. Burke
(Vice President/Treasurer/Principal Financial and
Accounting Officer)
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<PAGE>
EXHIBIT INDEX
Exhibit
Numbers Description
- -------- -----------
10 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant
EXHIBIT 10
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Michigan Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 9 to Registration Statement No. 33-55576 of our report dated September 16,
1999 appearing in the annual report to shareholders of Merrill Lynch Michigan
Municipal Bond Fund for the year ended July 31, 1999, and to the reference to us
under the caption "Financial Highlights" in the Prospectus, which is a part of
such Registration Statement.
/s/ Deloitte & Touche LLP
- ---------------------
Deloitte & Touche LLP
Princeton, New Jersey
November 24, 1999
