<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1996
SECURITIES ACT FILE NO. 33-44500
INVESTMENT COMPANY ACT FILE NO. 811-4375
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 6
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 134
(Check appropriate box or boxes)
----------------
MERRILL LYNCH OHIO 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) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
----------------
COUNSEL FOR THE TRUST: COPIES TO:
PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP FUND ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ.
----------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[_] immediately upon filing pursuant to paragraph (b)
[X] on November 15, 1996 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
----------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24f-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940. THE NOTICE REQUIRED FOR THE REGISTRANT'S MOST RECENT FISCAL YEAR WAS
FILED ON SEPTEMBER 25, 1996.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT OF MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES SHARES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial In-
terest
(par value $0.10 per
share)................. 108,329 $11.20 $329,997* $100
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
*(1) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during Registrant's
previous fiscal year was 1,458,805 Shares of Beneficial Interest.
(3) 1,379,940 of the Shares described in (2) above have been used for
reduction pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment
Company Act of 1940 in previous filings during Registrant's current fiscal
year.
(4) 78,865 of the Shares redeemed during Registrant's previous fiscal year are
being used for the reduction of the registration fee in this amendment to
the Registration Statement.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH OHIO MUNICIPAL BOND FUND OF
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<C> <S> <C>
PART A
Item 1. Cover Page.............. Cover Page
Item 2. Synopsis................ Fee Table
Condensed Financial
Item 3. Information............. Financial Highlights; Performance Data
Item 4. General Description of Investment Objective and Policies;
Registrant.............. Additional Information
Item 5. Management of the Fund.. Fee Table; Management of the Trust;
Inside Back Cover Page
Item 5A. Management's Discussion
of Fund Performance.... Not Applicable
Item 6. Capital Stock and Other Cover Page; Merrill Lynch Select
Securities.............. PricingSM System; Additional
Information
Item 7. Purchase of Securities Cover Page; Fee Table; Merrill Lynch
Being Offered........... Select Pricing SM System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Fee Table; Merrill Lynch Select
Repurchase.............. PricingSM System; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Not Applicable
Proceedings.............
PART B
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Back Cover Page
Item 12. General Information and Additional Information
History.................
Item 13. Investment Objective and Investment Objective and Policies
Policies................
Item 14. Management of the Fund.. Management of the Trust
Item 15. Control Persons and
Principal Holders of Management of the Trust; General
Securities............. Information--Additional Information
Item 16. Investment Advisory and Management of the Trust; Purchase of
Other Services.......... Shares; General Information
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices.........
Item 18. Capital Stock and Other General Information--Description of
Securities.............. Series and Shares
Item 19. Purchase, Redemption and
Pricing of Securities Purchase of Shares; Redemption of
Being Offered.......... Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status.............. Distributions and Taxes
Item 21. Underwriters............ Purchase of Shares
Item 22. Calculation of Performance Data
Performance Data........
Item 23. Financial Statements.... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
NOVEMBER 15, 1996
MERRILL LYNCH OHIO MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
Merrill Lynch Ohio Municipal Bond Fund (the "Fund") is a mutual fund seeking
to provide shareholders with as high a level of income exempt from Federal and
Ohio income taxes as is consistent with prudent investment management. The
Fund invests primarily in a portfolio of long-term, investment grade
obligations issued by or on behalf of the State of Ohio, its political
subdivisions, agencies and instrumentalities and of other qualifying issuers,
such as issuers located in Puerto Rico, the Virgin Islands and Guam, the
interest on which, in the opinion of bond counsel to the issuer, is exempt
from Federal and Ohio income taxes ("Ohio Municipal Bonds"). Dividends paid by
the Fund are exempt from Federal and Ohio income taxes to the extent they are
derived from Ohio Municipal Bonds. The Fund may invest in certain tax-exempt
securities classified as "private activity bonds" that may subject certain
investors in the Fund to an alternative minimum tax. At times, the Fund may
seek to hedge its portfolio through the use of futures transactions and
options. There can be no assurance that the investment objective of the Fund
will be realized. For more information on the Fund's investment objective and
policies, see "Investment Objective and Policies" on page 10.
----------------
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers which have entered into dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50. Merrill Lynch may charge its
customers a processing fee (presently $4.85) for confirming purchases and
repurchases. Purchases and redemptions directly through the Fund's Transfer
Agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated November 15, 1996 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing
Merrill Lynch Multi-State Municipal Series Trust (the "Trust") at the above-
referenced telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus. The Fund
is a separate series of the Trust, an open-end management investment company
organized as a Massachusetts business trust.
----------------
FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- -------------------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION EX-
PENSES:
Maximum Sales
Charge Imposed
on Purchases
(as a percent-
age of offer-
ing price).... 4.00%(c) None None 4.00%(c)
Sales Charge
Imposed on
Dividend
Reinvestments.. None None None None
Deferred Sales
Charge (as a
percentage of
original pur-
chase price or
redemption
proceeds,
whichever is 4.0% during the first
lower)........ None(d) year, 1.0% for one year(f) None(d)
decreasing 1.0% annually
thereafter to 0.0% after
the
fourth year(e)
Exchange Fee... None None None None
ANNUAL FUND OP-
ERATING EX-
PENSES (AS A
PERCENTAGE OF
AVERAGE NET AS-
SETS):
Investment Ad-
visory
Fees(g)....... 0.55% 0.55% 0.55% 0.55%
Rule 12b-1
Fees(h):
Account Mainte-
nance Fees.... None 0.25% 0.25% 0.10%
Distribution
Fees.......... None 0.25% 0.35% None
(Class B shares convert
to
Class D shares
automatically
after approximately ten
years,
cease being subject to
distribution fees and
become
subject to lower account
maintenance fees)
Other Expenses:
Custodial
Fees.......... 0.01% 0.01% 0.01% 0.01%
Shareholder
Servicing
Costs(i)...... 0.05% 0.06% 0.06% 0.05%
Miscellaneous.. 0.26% 0.26% 0.27% 0.26%
----- ----- ----- -----
Total Other
Expenses..... 0.32% 0.33% 0.34% 0.32%
----- ----- ----- -----
Total Fund Op-
erating Ex-
penses........ 0.87% 1.38% 1.49% 0.97%
===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain participants in fee-based programs. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 24 and "Shareholder Services--Fee-Based Programs"--page
35.
(b) Class B shares convert to Class D shares automatically approximately 10
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 25.
(c) Reduced for purchases of $25,000 and over and waived for purchases of
Class A shares in connection with certain fee-based programs. Class A and
Class D purchases of $1,000,000 or more may not be subject to an initial
sales charge. See "Purchase of Shares--Initial Sales Charge Alternatives--
Class A and Class D Shares"--page 24.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% if redeemed within the first year after purchase. Such CDSC
may be waived in connection with redemptions to fund participation in
certain fee-based programs. See "Shareholder Services--Fee-Based
Programs"--page 35.
(Footnotes continued on next page)
2
<PAGE>
(e) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder Services--
Fee-Based Programs"--page 35.
(f) The CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder Services--
Fee-Based Programs"--page 35.
(g) See "Management of the Trust--Management and Advisory Arrangements"--page
20.
(h) See "Purchase of Shares--Distribution Plans"--page 28.
(i) See "Management of the Trust--Transfer Agency Services"--page 21.
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
An investor would pay the
following expenses on a
$1,000 investment
including the maximum $40
initial sales charge
(Class A and Class D
shares only) and assuming
(1) the Total Fund
Operating Expenses for
each class set forth on
page 2, (2) a 5% annual
return throughout the
periods and (3) redemption
at the end of the period:
Class A.................. $ 49 $ 67 $ 86 $ 143
Class B.................. $ 54 $ 64 $ 76 $ 166
Class C.................. $ 25 $ 47 $ 81 $ 178
Class D.................. $ 50 $ 70 $ 91 $ 154
An investor would pay the
following expenses on the
same $1,000 investment
assuming no redemption at
the end of the period:
Class A.................. $ 49 $ 67 $ 86 $ 143
Class B.................. $ 14 $ 44 $ 76 $ 166
Class C.................. $ 15 $ 47 $ 81 $ 178
Class D.................. $ 50 $ 70 $ 91 $ 154
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATE OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charge permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$4.85) for confirming purchases and repurchases. Purchases and redemptions
directly through the Fund's Transfer Agent are not subject to the processing
fee. See "Purchase of Shares" and "Redemption of Shares".
3
<PAGE>
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select PricingSM System is used
by more than 50 registered investment companies advised by Merrill Lynch Asset
Management, L.P. ("MLAM") or its affiliate, Fund Asset Management, L.P. ("FAM"
or the "Manager"). Funds advised by MLAM or FAM which utilize the Merrill
Lynch Select Pricing SM System are referred to herein as "MLAM-advised mutual
funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on the Class D shares, are imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each
class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Each class has different exchange privileges.
See "Shareholder Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The distribution-
related revenues paid with respect to a class will not be used to finance the
distribution expenditures of another class. Sales personnel may receive
different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of
Shares".
4
<PAGE>
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(/2/)(/3/)
- ------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.25% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) ten years(/5/)
- ------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.35% No
- ------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.10% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A and Class
D share purchases of $1,000,000 or more may not be subject to an initial
sales charge but instead may be subject to a CDSC of 1.0% if redeemed
within one year. Such CDSC may be waived in connection with redemptions to
fund participation in certain fee-based programs. See "Class A" and "Class
D" below.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-
based programs may be modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an eight
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A
shares of the Fund in that account. Other eligible investors include
participants in certain fee-based programs. In addition, Class A
shares will be offered at net asset value to Merrill Lynch & Co.,
Inc. ("ML & Co.") and its subsidiaries (the term "subsidiaries", when
used herein with respect to ML & Co., includes MLAM, the Manager and
certain other entities directly or indirectly wholly-owned and
controlled by ML & Co.) and their directors and employees and to
members of the Boards of MLAM-advised mutual funds. The maximum
initial sales charge is 4.00%, which is reduced for purchases of
$25,000 and over and waived for purchases of Class A shares in
connection with certain fee-based programs. Purchases of $1,000,000
or more may not be subject to an initial sales charge, but if the
initial sales charge is waived, such purchases may be subject to a
1.0% CDSC if the shares are redeemed within one year after purchase.
Such CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. Sales charges also are
reduced under a right of accumulation which takes into account the
investor's
5
<PAGE>
holdings of all classes of all MLAM-advised mutual funds. See "Purchase
of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares".
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%,
an ongoing distribution fee of 0.25% of the Fund's average net assets
attributable to Class B shares, as well as a CDSC if they are redeemed
within four years of purchase. Such CDSC may be modified in connection
with redemptions to fund participation in certain fee-based programs.
Approximately ten years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to a
lower account maintenance fee of 0.10% and no distribution fee. Class
B shares of certain other MLAM-advised mutual funds into which
exchanges may be made convert into Class D shares automatically after
approximately eight years. If Class B shares of the Fund are exchanged
for Class B shares of another MLAM-advised mutual fund, the conversion
period applicable to the Class B shares acquired in the exchange will
apply, as will the Class D account maintenance fee of the acquired
fund upon the conversion, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net
asset values of the shares of the two classes on the conversion date,
without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also
will convert automatically to Class D shares. The conversion period
for dividend reinvestment shares is modified as described under
"Purchase of Shares--Deferred Sales Charge Alternatives--Class B and
Class C Shares--Conversion of Class B Shares to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.35% of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a CDSC of 1.0% if they are redeemed within one year after purchase.
Such CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. Although Class C shares
are subject to a CDSC for only one year (as compared to four years for
Class B shares), Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject
to account maintenance fees and higher distribution fees that will be
imposed on Class C shares for an indefinite period subject to annual
approval by the Fund's Board of Trustees and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge, but if the initial sales charge is waived
such purchases may be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with redemptions to fund participation in certain fee-based
programs. The schedule of initial sales charges and reductions for the
Class D shares is the same as the schedule for Class A shares, except
that there is no waiver for purchases of Class D shares in connection
with certain fee-based programs. Class D shares also will be issued
upon conversion of Class B shares as described above under "Class B"
above. See "Purchase of Shares--Initial Sales Charge Alternatives--
Class A and Class D Shares".
6
<PAGE>
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the CDSCs 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 charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that previously
purchased Class A shares may no longer be eligible to purchase Class A shares
of other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation which may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends and have
lower total returns than the initial sales charge shares. The ongoing Class D
account maintenance fees will cause Class D shares to have a higher expense
ratio, pay lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of 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 who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately ten years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they are subject to higher
distribution fees and forgo the Class B conversion feature, making their
investment subject to account maintenance and distribution fees for an
indefinite period of time. In addition, while both Class B and Class C
distribution fees are subject to the limitations on asset-based sales charges
imposed by the NASD, the Class B distribution fees are further limited under a
voluntary waiver of asset-based sales charges. See "Purchase of Shares--
Limitations on the Payment of Deferred Sales Charges".
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in connection
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the year ended July
31, 1996 and the independent auditors' report thereon are included in the
Statement of Additional Information. The following per share data and ratios
have been derived from information provided in the Fund's audited financial
statements. Further information about the performance of the Fund is contained
in the Fund's most recent annual report to shareholders which may be obtained,
without charge, by calling or by writing the Trust at the telephone number or
address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------------- ------------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FEBRUARY 28, FOR THE YEAR FEBRUARY 28,
FOR THE YEAR ENDED JULY 31, 1992+ TO ENDED JULY 31, 1992+ TO
-------------------------------- JULY 31, ---------------------------------- JULY 31,
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
------- ------- ------ ------ ------------ ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 10.56 $ 10.50 $11.02 $10.56 $10.00 $ 10.56 $ 10.50 $ 11.02 $ 10.56 $ 10.00
------- ------- ------ ------ ------ ------- ------- ------- ------- -------
Investment income--net.. .54 .55 .56 .58 .25 .49 .49 .50 .52 .23
Realized and unrealized
gain (loss) on
investments--net....... .14 .06 (.43) .49 .56 .14 .06 (.43) .49 .56
------- ------- ------ ------ ------ ------- ------- ------- ------- -------
Total from investment
operations............. .68 .61 .13 1.07 .81 .63 .55 .07 1.01 .79
------- ------- ------ ------ ------ ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net.. (.54) (.55) (.56) (.58) (.25) (.49) (.49) (.50) (.52) (.23)
Realized gain on
investments--net....... -- -- -- (.03) -- -- -- -- (.03) --
In excess of realized
gain on investments--
net.................... -- -- (.09) -- -- -- -- (.09) -- --
------- ------- ------ ------ ------ ------- ------- ------- ------- -------
Total dividends and
distributions.......... (.54) (.55) (.65) (.61) (.25) (.49) (.49) (.59) (.55) (.23)
------- ------- ------ ------ ------ ------- ------- ------- ------- -------
Net asset value, end of
period................. $ 10.70 $ 10.56 $10.50 $11.02 $10.56 $ 10.70 $ 10.56 $ 10.50 $ 11.02 $ 10.56
======= ======= ====== ====== ====== ======= ======= ======= ======= =======
TOTAL INVESTMENT
RETURN**:
Based on net asset value
per share.............. 6.56% 6.03% 1.10% 10.51% 8.21%# 6.01% 5.49% .59% 9.95% 7.98%#
======= ======= ====== ====== ====== ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement.......... .87% .86% .65% .51% .16%* 1.38% 1.37% 1.16% 1.02% .67%*
======= ======= ====== ====== ====== ======= ======= ======= ======= =======
Expenses................ .87% .89% .89% 1.04% 1.36%* 1.38% 1.40% 1.39% 1.55% 1.86%*
======= ======= ====== ====== ====== ======= ======= ======= ======= =======
Investment income--net.. 5.03% 5.30% 5.12% 5.44% 5.75%* 4.52% 4.79% 4.61% 4.93% 5.26%*
======= ======= ====== ====== ====== ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $ 7,281 $ 7,270 $9,373 $8,446 $4,209 $64,397 $64,068 $65,610 $53,341 $26,244
======= ======= ====== ====== ====== ======= ======= ======= ======= =======
Portfolio Turnover...... 118.21% 169.34% 44.83% 41.51% 13.21% 118.21% 169.34% 44.83% 41.51% 13.21%
======= ======= ====== ====== ====== ======= ======= ======= ======= =======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
8
<PAGE>
<TABLE>
<CAPTION>
CLASS C CLASS D
--------------------- ---------------------
FOR THE FOR THE
FOR THE PERIOD FOR THE PERIOD
YEAR OCTOBER 21, YEAR OCTOBER 21,
ENDED 1994+ TO ENDED 1994+ TO
JULY 31, JULY 31, JULY 31, JULY 31,
1996 1995 1996 1995
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $ 10.56 $ 10.09 $ 10.56 $ 10.09
------- ------- ------- -------
Investment income--net.......... .48 .37 .53 .41
Realized and unrealized gain on
investments--net............... .14 .47 .14 .47
------- ------- ------- -------
Total from investment
operations..................... .62 .84 .67 .88
------- ------- ------- -------
Less dividends from investment
income--net.................... (.48) (.37) (.53) (.41)
------- ------- ------- -------
Net asset value, end of period.. $ 10.70 $ 10.56 $ 10.70 $ 10.56
======= ======= ======= =======
TOTAL INVESTMENT RETURN**:
Based on net asset value per
share.......................... 5.90% 8.50%# 6.45% 8.93%#
======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses........................ 1.49% 1.50%* .97% .99%*
======= ======= ======= =======
Investment income--net.......... 4.42% 4.62%* 4.93% 5.17%*
======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)..................... $ 2,720 $ 874 $ 3,513 $ 3,234
======= ======= ======= =======
Portfolio Turnover.............. 118.21% 169.34% 118.21% 169.34%
======= ======= ======= =======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as high
a level of income exempt from Federal and Ohio income taxes as is consistent
with prudent investment management. The Fund seeks to achieve its objective
while providing investors with the opportunity to invest in a portfolio of
securities consisting primarily of long-term obligations issued by or on behalf
of the State of Ohio, its political subdivisions, agencies and
instrumentalities and obligations of other qualifying issuers, such as issuers
located in Puerto Rico, the Virgin Islands and Guam, which pay interest exempt,
in the opinion of bond counsel to the issuer, from Federal and Ohio income
taxes. Obligations exempt from Federal income taxes are referred to herein as
"Municipal Bonds" and obligations exempt from both Federal and Ohio income
taxes are referred to as "Ohio Municipal Bonds." Unless otherwise indicated,
references to Municipal Bonds shall be deemed to include Ohio Municipal Bonds.
The Fund at all times, except during temporary defensive periods, will maintain
at least 65% of its total assets invested in Ohio Municipal Bonds. The
investment objective of the Fund as set forth in the first sentence of this
paragraph is a fundamental policy and may not be changed without shareholder
approval.
Municipal Bonds may include several types of bonds. The Fund may also invest
in variable rate demand obligations ("VRDOs"). The interest on Municipal Bonds
may bear a fixed rate or be payable at a variable or floating rate. At least
80% of the Municipal Bonds purchased by the Fund primarily will be what are
commonly referred to as "investment grade" securities, which are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Moody's Investors Service, Inc. ("Moody's") (currently
Aaa, Aa, A and Baa), Standard & Poor's Ratings Corporation ("Standard &
Poor's") (currently AAA, AA, A and BBB) or Fitch Investors Service, Inc.
("Fitch") (currently AAA, AA, A and BBB). If Municipal Bonds are unrated, such
securities will possess creditworthiness comparable, in the opinion of the
Manager, to obligations in which the Fund may invest. Municipal Bonds rated in
the fourth highest rating category, while considered "investment grade", have
certain speculative characteristics and are more likely to be downgraded to
non-investment grade than obligations rated in one of the top three rating
categories. See Appendix II--"Ratings of Municipal Bonds" in the Statement of
Additional Information for more information regarding ratings of debt
securities. An issue of rated Municipal Bonds may cease to be rated or its
rating may be reduced below "investment grade" subsequent to its purchase by
the Fund. If an obligation is downgraded below investment grade, the Manager
will consider factors such as price, credit risk, market conditions, financial
condition of the issuer and interest rates to determine whether to continue to
hold the obligation in the Fund's portfolio.
The Fund may invest up to 20% of its total assets in Municipal Bonds that are
rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch, or which
in the Manager's judgment, possess similar credit characteristics. Such
securities, sometimes referred to as "high yield" or "junk" bonds, are
predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. The market prices of high-yielding, lower-rated securities may
fluctuate more than higher-rated securities and may decline significantly in
periods of general economic difficulty, which may follow periods of rising
interest rates. In purchasing such securities, the Fund will rely on the
Manager's judgment, analysis and experience in evaluating the creditworthiness
of the issuer of such securities. The Manager will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and
10
<PAGE>
trends, its operating history, the quality of its management and regulatory
matters. See "Investment Objective and Policies" in the Statement of Additional
Information for a more detailed discussion of the pertinent risk factors
involved in investing in "high yield" or "junk" bonds and Appendix II--"Ratings
of Municipal Bonds" in the Statement of Additional Information for additional
information regarding ratings of debt securities. The Fund does not intend to
purchase debt securities that are in default or which the Manager believes will
be in default.
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.
The Fund's investments may also include VRDOs and VRDOs in the form of
participation interests ("Participating VRDOs") in variable rate tax-exempt
obligations held by a financial institution. The VRDOs in which the Fund will
invest are tax-exempt obligations which contain a floating or variable interest
rate adjustment formula and an unconditional right of demand on the part of the
holder thereof to receive payment of the unpaid principal balance plus accrued
interest on a short notice period not to exceed seven days. Participating VRDOs
provide the Fund with a specified undivided interest (up to 100%) of the
underlying obligation and the right to demand payment of the unpaid principal
balance plus accrued interest on the Participating VRDOs from the financial
institution on a specified number of days' notice, not to exceed seven days.
There is, however, the possibility that because of default or insolvency, the
demand feature of VRDOs or Participating VRDOs may not be honored. The Fund has
been advised by its counsel that the Fund should be entitled to treat the
income received on Participating VRDOs as interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of the
unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed illiquid securities. A VRDO with a demand notice
period exceeding seven days will therefore be subject to the Fund's restriction
on illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and be ultimately responsible for
such determinations.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal and Ohio income taxes. However, to the extent that suitable Ohio
Municipal Bonds are not available for 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, from Federal, but not Ohio, 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 may also include securities
issued by other investment companies that invest in municipal bonds, to the
extent such investments are permitted by the Investment Company Act of 1940, as
amended (the "1940 Act"). Other Non-Municipal Tax-Exempt Securities could
include trust certificates or other instruments evidencing interests in one or
more long-term municipal securities.
11
<PAGE>
Under normal circumstances, except when acceptable securities are unavailable
as determined by the Manager, the Fund will invest at least 65% of its total
assets in Ohio Municipal Bonds. For temporary defensive 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 Temporary Investments, VRDOs and
Participating VRDOs in which the Fund may invest also will be in the following
rating categories at the time of purchase: MIG-1/VMIG-1 through MIG-4/VMIG-4
for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as
determined by Moody's), SP-1 through SP-2 for notes and A-1 through A-3 for
VRDOs and commercial paper (as determined by Standard & Poor's), or F-1 through
F-3 for notes, VRDOs and commercial paper (as determined by Fitch) or, if
unrated, of comparable quality in the opinion of the Manager. The Fund 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 which are classified as "private
activity bonds" (in general, bonds that benefit non-governmental entities) may
be subject to Federal alternative minimum tax. The percentage of the Fund's net
assets invested in "private activity bonds" will vary during the year. See
"Distributions and Taxes". 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. The investment objective of the Fund is a fundamental policy of the
Fund which may not be changed without a vote of a majority of the outstanding
shares of the Fund. 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.
POTENTIAL BENEFITS
Investment in shares of the Fund offers several benefits. The Fund offers
investors the opportunity to receive income exempt from Federal and Ohio income
taxes by investing in a professionally managed portfolio consisting primarily
of long-term Ohio Municipal Bonds. The Fund also provides liquidity because of
its redemption features and relieves the investor of the burdensome
administrative details involved in managing a portfolio of tax-exempt
securities. The benefits are at least partially offset by the expenses involved
in operating an investment company. Such expenses primarily consist of the
management fee and operational costs and, in the case of certain classes of
shares, the account maintenance and distribution costs.
SPECIAL AND RISK CONSIDERATIONS RELATING TO MUNICIPAL BONDS
The risks and special considerations involved in investments 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 "Description of Municipal Bonds"
and "Financial Futures Transactions and Options".
Moreover, the Fund ordinarily will invest at least 65% of its total assets in
Ohio Municipal Bonds, and therefore it is more susceptible to factors adversely
affecting issuers of Ohio Municipal Bonds than is a municipal bond mutual fund
that is not concentrated in issuers of Ohio Municipal Bonds to this degree. The
Ohio State General Revenue Fund had positive fund and cash balances at the end
of the 1995 Fiscal Year of
12
<PAGE>
$928 million and $1,312.2 million, respectively, and as of the end of June
1996, that Fund had a fund balance in excess of $781 million. Economic activity
in the State, as in many other industrially developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Currently, the
State of Ohio's general obligation bonds are rated AA+, Aa1 and AA+ by Fitch,
Moody's and Standard & Poor's, respectively. The Manager does not believe that
the current economic conditions in Ohio will have a significant adverse effect
on the Fund's ability to invest in high quality Ohio Municipal Bonds. See
"Description of Municipal Bonds" in the Statement of Additional Information and
see also Appendix I --"Economic and Financial Conditions in Ohio" in the
Statement of Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction and equipping of a wide range of public
facilities (including water, sewer, gas, electricity, solid waste, health care,
transportation, education and housing 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
industrial development bonds ("IDBs") are issued by or on behalf of public
authorities to finance various privately operated facilities, including certain
facilities for local furnishing of electric energy or gas, sewage facilities,
solid waste disposal facilities and other specialized facilities. For purposes
of this Prospectus, such obligations are referred to as Municipal Bonds if the
interest paid thereon is excluded from gross income for purposes of Federal
income taxation and as Ohio Municipal Bonds if the interest thereon is exempt
from both Federal income tax and Ohio income tax, even though such bonds may be
"private activity bonds" as discussed below.
The two principal classifications of Municipal Bonds are "general obligation"
bonds and "revenue" bonds which latter category includes IDBs and, for bonds
issued after August 15, 1986, private activity bonds. General obligation bonds
are secured by the issuer's pledge of its faith, credit and taxing power for
the payment of principal and interest. The taxing power of any governmental
entity may be limited, however, by provisions of its state constitution or
laws, and an entity's creditworthiness will depend on many factors, including
potential erosion of the tax base due to population declines, natural
disasters, declines in the state's industrial base or inability to attract new
industries, economic limits on the ability to tax without eroding the tax base,
state legislative proposals or voter initiatives to limit ad valorem real
property taxes, and the extent to which the entity relies on Federal or state
aid, access to capital markets or other factors beyond the state or entity's
control. 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 are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as payments from the
user of the facility being financed; accordingly, the timely payment of
interest and the repayment of principal in accordance with the terms of the
revenue or special obligation bond is a function of the economic viability of
such facility or such revenue source. The Fund will not invest in revenue bonds
where the entity supplying the revenues from which the issuer is paid,
including predecessors, has a record of less than three years of continuous
business operations if such investments, together with investments in other
unseasoned issuers, would exceed 5% of the Fund's total assets. Investments
involving entities with less than three years of continuous business operations
may pose somewhat greater risks due to the lack of a substantial operating
history for such entities. The Manager believes, however, that the potential
benefits of such investments outweigh the potential risks, particularly given
the Fund's limitations on such investments.
13
<PAGE>
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 are generally 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 corporation's dependence on revenues for the
operation of the particular facility being financed. The Fund may invest more
than 25% of its total assets in IDBs and private activity bonds. The Fund may
also invest in so called "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, repayment of such bonds becomes a moral
commitment, but not a legal obligation, of the state or municipality in
question.
The Fund may invest in Municipal Bonds (and Non-Municipal Tax-Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an index.
To the extent the Fund invests in these types of Municipal Bonds, the Fund's
return on such Municipal Bonds will be subject to risk with respect to the
value of the particular index. Interest and principal payable on Municipal
Bonds must also be based on relative changes among particular indices. Also,
the Fund may invest in so-called "inverse floating obligations" or "residual
interest bonds" on which the interest rates typically decline as market rates
increase and increase as market rates decline. The Fund's return on such types
of Municipal Bonds (and Non-Municipal Tax-Exempt Securities) will be subject to
risk with respect to the value of the particular index, which may include
reduced or eliminated interest payments and losses of invested principal. Such
securities have the effect of providing a degree of investment leverage, since
they may increase or decrease in value in response to changes, as an
illustration, in market interest rates at a rate which is a multiple (typically
two) of the rate at which fixed-rate long-term tax-exempt securities increase
or decrease in response to such changes. As a result, the market values of such
securities will generally be more volatile than the market values of fixed-rate
tax-exempt securities. To seek to limit the volatility of these securities, the
Fund may purchase inverse floating obligations with shorter-term maturities or
which contain limitations on the extent to which the interest rate may vary.
Certain investments in such obligations may be illiquid. The Fund may not
invest in such illiquid obligations if such investments, together with other
illiquid investments, would exceed 15% of the Fund's total assets. The Manager
believes, however, 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.
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
14
<PAGE>
sales contract (hereinafter collectively called "lease obligations") relating
to such equipment, land or facilities. Although lease obligations do not
constitute general obligations of the issuer for which the issuer's unlimited
taxing power is pledged, a lease obligation is frequently backed by the
issuer's covenant to budget for, appropriate and make the payments due under
the lease obligation. However, certain lease obligations contain "non-
appropriation" clauses which provide that the issuer has no obligation to make
lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional securities. Certain
investments in lease obligations may be illiquid. The Fund may not invest in
illiquid lease obligations if such investments, together with all other
illiquid investments would exceed 15% of the Fund's total assets. The Fund may,
however, invest without regard to such limitation in lease obligations which
the Manager, pursuant to guidelines which have been adopted by the Board of
Trustees and subject to the supervision of the Board, determines to be liquid.
The Manager will deem lease obligations to be liquid if they are publicly
offered and have received an investment grade rating of Baa or better by
Moody's, or BBB or better by Standard & Poor's or Fitch. Unrated lease
obligations, or those rated below investment grade, will be considered liquid
if the obligations come to the market through an underwritten public offering
and at least two dealers are willing to give competitive bids. In reference to
the obligations rated below investment grade, the Manager must, among other
things, also review the creditworthiness of the municipality obligated to make
payment under the lease obligation and make certain specified determinations
based on such factors as the existence of a rating or credit enhancement such
as insurance, the frequency of trades or quotes for the obligation and the
willingness of dealers to make a market in the obligation.
The value of bonds and other fixed-income obligations may fall when interest
rates rise and rise when interest rates fall. In general, bonds and other
fixed-income obligations with longer maturities will be subject to greater
volatility resulting from interest rate fluctuations than will similar
obligations with shorter maturities. Under normal conditions, it is generally
anticipated that the Fund's average weighted maturity would be in excess of ten
years.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
CALL RIGHTS
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to that
of holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's total assets.
15
<PAGE>
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase or sell Municipal Bonds on a delayed delivery basis or
a when-issued basis at fixed purchase terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund enters
into the commitment and the value of the obligation will thereafter be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery date may be more or less than its purchase price. A
separate account of the Fund will be established with its custodian consisting
of cash, cash equivalents or liquid securities having a market value at all
times at least equal to the amount of the forward commitment.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
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. 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. 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 "Distributions and Taxes--Taxes".
The Fund may deal in financial futures contracts traded on the Chicago Board
of Trade based on The Bond Buyer Municipal Bond Index, a price-weighted measure
of the market value of 40 large, recently issued tax-exempt bonds. There can be
no assurance, however, that a liquid secondary market will exist to terminate
any particular financial futures contract at any specific time. If it is not
possible to close a financial futures position entered into by the Fund, the
Fund would continue to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such a situation, if the
Fund has insufficient cash, it may have to sell portfolio securities to meet
daily variation margin requirements at a time when it may be disadvantageous to
do so. The inability to close financial futures positions also could have an
adverse impact on the Fund's ability to hedge effectively. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a financial futures contract.
The Fund may purchase and sell financial futures contracts on U.S. Government
securities and write and purchase put and call options on such futures
contracts as a hedge against adverse changes in interest rates as described
more fully in the Statement of Additional Information. With respect to U.S.
Government securities, currently there are financial futures contracts based on
long-term U.S. Treasury bonds, Treasury notes, Government National Mortgage
Association ("GNMA") Certificates and three-month U.S. Treasury bills.
16
<PAGE>
Subject to policies adopted by the Trustees, the Fund also may engage in
other financial futures contracts transactions and options thereon, such as
financial futures contracts or options on other municipal bond indexes which
may become available if the Manager of the Fund and the Trustees of the Trust
should determine that there is normally a sufficient correlation between the
prices of such futures contracts and the Municipal Bonds in which the Fund
invests to make such hedging appropriate.
Utilization of futures transactions and options thereon involves the risk of
imperfect correlation in movements in the price of futures contracts and
movements in the price of the security which is the subject of the hedge. If
the price of the futures contract moves more or less than the price of the
security that is the subject of the hedge, the Fund will experience a gain or
loss which will not be completely offset by movements in the price of such
security. There is a risk of imperfect correlation where the securities
underlying futures contracts have different maturities, ratings or geographic
mixes than the security being hedged. In addition, the correlation may be
affected by additions to or deletions from the index which serves as a basis
for a financial futures contract. Finally, in the case of futures contracts on
U.S. Government securities and options on such futures contracts, the
anticipated correlation of price movements between the U.S. Government
securities underlying the futures or options and Municipal Bonds may be
adversely affected by economic, political, legislative or other developments
which have a disparate impact on the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission, the futures
trading activities described herein will not result in the Fund being deemed to
be a "commodity pool", as defined under such regulations, provided that the
Fund adheres to certain restrictions. In particular, the Fund may purchase and
sell futures contracts and options thereon (i) only for bona fide hedging
purposes, and (ii) for non-hedging purposes, if the aggregate initial margins
and premiums required to establish positions in such contracts and options 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, as stated above, the Fund intends to engage in
options and futures transactions only for hedging purposes.) Manager 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.
Although certain risks are involved in options and futures transactions, the
Manager believes that, because the Fund will engage in futures transactions
only for hedging purposes, the futures portfolio strategies of the Fund will
not subject the Fund to certain risks frequently associated with speculation in
futures transactions. The Fund must meet certain Federal income tax
requirements under the Internal Revenue Code of 1986, as amended (the "Code"),
in order to qualify for the special tax treatment afforded regulated investment
companies, including a requirement that less than 30% of its gross income be
derived from the sale or other disposition of securities held for less than
three months. Additionally, the Fund is required to meet certain
diversification requirements under the Code.
17
<PAGE>
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 successful use of transactions in futures also depends on the ability of
the Manager to forecast correctly the direction and extent of interest rate
movements within a given time frame. To the extent these rates remain stable
during the period in which a futures contract is held by the Fund or moves in a
direction opposite to that anticipated, the Fund may realize a loss on the
hedging transaction which is not fully or partially offset by an increase in
the value of portfolio securities. As a result, the Fund's total return for
such period may be less than if it had not engaged in the hedging transaction.
Furthermore, the Fund will only engage in hedging transactions from time to
time and may not necessarily be engaging in hedging transactions when movements
in interest rates occur.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts and certain options thereon.
REPURCHASE AGREEMENTS
As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security from
the Fund 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. The Fund may not invest
in repurchase agreements maturing in more than seven days if such investments,
together with the Fund's other illiquid investments, exceed 15% of the Fund's
total assets. In the event of default by the seller under a repurchase
agreement, the Fund may suffer time delays and incur costs or possible losses
in connection with the disposition of the underlying securities.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that are
described in the Statement of Additional Information. Investment restrictions
and policies which are fundamental policies may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the 1940 Act which means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares. Among
its fundamental policies, the Fund may not invest more than 25% of its assets,
taken at market value at the time of each investment, in the securities of
issuers in any particular industry (excluding the U.S. Government and its
agencies and instrumentalities) (For purposes of this restriction, states,
municipalities and their political subdivisions are not considered to be part
of any industry). Investment restrictions and policies that are non-fundamental
policies may be changed by the Board of Trustees without shareholder approval.
As a non-fundamental policy, the Fund may not 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.
18
<PAGE>
As a non-fundamental policy, the Fund will not 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.]
The Fund is classified as non-diversified within the meaning of the 1940 Act,
which means that the Fund is not limited by the 1940 Act in the proportion of
its assets that it may invest in obligations of a single issuer. However, the
Fund's investments will be limited so as to qualify for the special tax
treatment afforded regulated investment companies under the Code. See
"Distributions and Taxes--Taxes". To qualify, among other requirements, the
Trust will limit the Fund's 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. 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
1940 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
obligations of a small number of issuers, the Fund's total return may fluctuate
to a greater extent than that of a diversified company as a result of changes
in the financial condition or in the market's assessment of the issuers.
Investors are referred to the Statement of Additional Information for a
complete description of the Fund's investment restrictions.
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
19
<PAGE>
The Trustees are:
Arthur Zeikel*--President of the Manager and its affiliate, MLAM; President
and Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice
President of ML & Co.; and Director of the Distributor.
James H. Bodurtha--Director and Executive Vice President, The China Business
Group, Inc.
Herbert I. London--John M. Olin Professor of Humanities, New York University.
Robert R. Martin--Former Chairman, Kinnard Investments, Inc.
Joseph L. May--Attorney in private practice.
Andre F. Perold--Professor, Harvard Business School.
- --------
* Interested person, as defined in the Investment Company Act of 1940, of the
Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, which is an affiliate of MLAM and is owned and controlled by ML
& Co., a financial services holding company, acts as the manager for the Fund
and provides the Fund with management services. The Manager or MLAM acts as the
investment adviser for more than 130 registered investment companies. MLAM also
provides investment advisory services to individual and institutional accounts.
As of September 30, 1996, the Manager and MLAM had a total of approximately
$214.1 billion in investment company and other portfolio assets under
management, including accounts of certain affiliates of the Manager.
Subject to the direction 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 Fund.
Fred K. Stuebe is the Portfolio Manager of the Fund and is responsible for
the day-to-day management of the Fund's investment portfolio. He has been a
Vice President of MLAM since 1989.
Pursuant to the management agreement between the Manager and the Trust on
behalf of the Fund (the "Management Agreement"), the Manager is entitled to
receive from the Fund a monthly fee based upon the average daily net assets of
the Fund at the following annual rates: 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. For the fiscal year ended July 31, 1996, the
total fee paid by the Fund to the Manager was $431,325 (based upon average net
assets of approximately $78.4 million).
20
<PAGE>
The Management Agreement obligates the Trust on behalf of the Fund to pay
certain expenses incurred in the Fund's operations, including, among other
things, the management fee, legal and audit fees, unaffiliated Trustees' fees
and expenses, registration fees, custodian and transfer agency fees, accounting
and pricing costs, and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information. Accounting
services are provided to the Fund by the Manager and the Fund reimburses the
Manager for its costs in connection with such services. For the fiscal year
ended July 31, 1996, the Fund reimbursed the Manager $68,930 for accounting
services. For the fiscal year ended July 31, 1996, the ratio of total expenses
to average net assets was .87% for Class A shares, 1.38% for Class B shares,
1.49% for Class C shares and .97% for Class D shares.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act which incorporates the Code of Ethics of the Manager
(together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which is
a wholly-owned subsidiary of ML & Co., acts as the Trust's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Fund pays
the Transfer Agent an annual fee of $11.00 per Class A or Class D shareholder
account and $14.00 per Class B or Class C shareholder account, and the Transfer
Agent is entitled to reimbursement from the Fund for out-of-pocket expenses
incurred by the Transfer Agent under the Transfer Agency Agreement. For the
fiscal year ended July 31, 1996, the Fund paid the Transfer Agent a total fee
of $47,002 pursuant to the Transfer Agency Agreement for providing transfer
agency services. At September 30, 1996, the Fund had 233 Class A shareholder
accounts, 2,175 Class B shareholder accounts, 88 Class C shareholder accounts
and 61 Class D shareholder accounts. At this level of accounts, the annual fee
payable to the Transfer Agent would aggregate approximately $34,916, plus out
of pocket expenses.
21
<PAGE>
PURCHASE OF SHARES
The Distributor, an affiliate of the Manager, MLAM and Merrill Lynch, acts
as the distributor of the shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000 and the minimum subsequent purchase is $50.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
Pricing SM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (the "NYSE") (generally 4:00 P.M., New York time), which
includes orders received after the close of business on the previous day, the
applicable offering price will be based on the net asset value determined as
of 15 minutes after the close of business on the NYSE on that day, provided
the Distributor in turn receives the order from the securities dealer prior to
30 minutes after the close of business on the NYSE, on that day. If the
purchase orders are not received by the Distributor prior to 30 minutes after
the close of business on the NYSE, such orders shall be deemed received on the
next business day. The Trust 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 Distributor
or the Trust. Neither the Distributor nor the dealers are permitted to
withhold placing orders to benefit themselves by a price change. Merrill Lynch
may charge its customers a processing fee (presently $4.85) to confirm a sale
of shares to such customers. Purchases directly through the Fund's Transfer
Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the
investment thereafter being subject to a CDSC and ongoing distribution fees
and higher account maintenance fees. A discussion of the factors that
investors should consider in determining the method of purchasing shares under
the Merrill Lynch Select Pricing SM System is set forth under "Merrill Lynch
Select Pricing SM System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares,
22
<PAGE>
will be imposed directly against those classes and not against all assets of
the Fund and, accordingly, such charges will not affect the net asset value of
any other class or have any impact on investors choosing another sales charge
option. Dividends paid by the Fund for each class of shares will be calculated
in the same manner at the same time and will differ only to the extent that
account maintenance and distribution fees and any incremental transfer agency
costs relating to a particular class are borne exclusively by that class.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid. See
"Distribution Plans" below. Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(/2/)(/3/)
- ---------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.25% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) ten years(/5/)
- ---------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.35% No
- ---------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.10% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A and Class
D share purchases of $1,000,000 or more may not be subject to an initial
sales charge but instead may be subject to a 1.0% CDSC if redeemed within
one year. Such CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-
based programs may be modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an eight
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs.
23
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DISCOUNT TO
AS PERCENTAGE AS PERCENTAGE* SELECTED DEALERS
OF OFFERING OF THE NET AS PERCENTAGE OF THE
AMOUNT OF PURCHASE PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------ ------------- --------------- --------------------
<S> <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.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases in connection with certain fee-
based programs. If the sales charge is waived in connection with a purchase
of $1,000,000 or more, such purchases may be subject to a CDSC of 1% if the
shares are redeemed within one year after purchase. Such CDSC may be waived
in connection with redemptions to fund participation in certain fee-based
programs. The charge will be assessed on an amount equal to the lesser of
the proceeds of redemption or the cost of the shares being redeemed.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended (the "Securities Act"). For the fiscal year ended July 31, 1996, the
Fund sold 86,942 Class A shares for aggregate net proceeds of $941,587. The
gross sales charges for the sale of Class A shares of the Fund for the year
were $985, of which $92 and $893 were received by the Distributor and Merrill
Lynch, respectively. For the fiscal year ended July 31, 1996, the Distributor
received no CDSCs with respect to redemption within one year after purchase of
Class A shares purchased subject to a front-end sales charge waiver. For the
fiscal year ended July 31, 1996, the Fund sold 91,966 Class D shares for
aggregate net proceeds of $997,428. The gross sales charge for the sale of
Class D shares of the Fund for the year were $1,557, of which $218 and $1,339
were received by the Distributor and Merrill Lynch, respectively. For the
fiscal year ended July 31, 1996, the Distributor received no CDSCs with respect
to redemption within one year after purchase of Class D shares purchased
subject to a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares of the
Fund in
24
<PAGE>
that account. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs provided that the program has $3
million or more initially invested in MLAM-advised mutual funds. Also eligible
to purchase Class A shares at net asset value are participants in certain
investment programs including 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 purchases
made in connection with certain fee-based programs. In addition, Class A
shares are offered at net asset value to ML & Co., and its subsidiaries and
their directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Trust. Certain persons who acquired shares
of certain MLAM-advised closed-end funds in their initial offerings who wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund also may purchase Class A shares of the
Fund if certain conditions set forth in the Statement of Additional
Information are met. In addition, Class A shares of the Fund and certain other
MLAM-advised mutual funds are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions set
forth in the Statement of Additional Information are met, to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted
by such funds in shares of the Fund and certain other MLAM-advised mutual
funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors". See
"Shareholder Services--Fee-Based Programs". Class A and Class D shares are
offered at net asset value to Employee Access Accounts SM available through
qualified employers which provide employer-sponsored retirement and savings
plans that are eligible to purchase such shares at net asset value. Class A
and Class D shares are offered at net asset value to shareholders of Merrill
Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal
Bond Fund, Inc. who wish to reinvest in shares of the Fund the net proceeds
from a sale of certain of their shares of common stock, pursuant to tender
offers conducted by those funds.
Class D shares are offered at net asset value, without a sales charge, to an
investor who has a business relationship with a Merrill Lynch financial
consultant if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
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 MLAM-advised mutual funds.
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
25
<PAGE>
time of purchase. As discussed below, Class B shares are subject to a four-year
CDSC, while Class C shares are subject only to a one-year 1.0% CDSC. On the
other hand, approximately ten years after Class B shares are issued, such Class
B shares, together with shares issued upon dividend reinvestment with respect
to those shares, are automatically converted into Class D shares of the Fund
and thereafter will be subject to lower continuing fees. See "Conversion of
Class B Shares to Class D Shares" below. Both Class B and Class C shares are
subject to an account maintenance fee of 0.25% of net assets and Class B and
Class C shares are subject to distribution fees of 0.25% and 0.35%,
respectively, of net assets as discussed below under "Distribution Plans". The
proceeds from the account maintenance fees are used to compensate Merrill Lynch
for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares, from the dealer's own funds. The
combination of the CDSC and the ongoing distribution fee facilitates the
ability of the Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. Approximately ten years after
issuance, Class B shares will convert automatically into Class D shares of the
Fund, which are subject to a lower account maintenance fee and no distribution
fee. Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made convert into Class D shares automatically after
approximately eight years. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and the
holding period for the shares exchanged will be tacked onto the holding period
for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services--
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule, if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which are
redeemed within 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.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
26
<PAGE>
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B
CDSC AS A
PERCENTAGE OF
DOLLAR AMOUNT
SUBJECT TO
YEAR SINCE PURCHASE PAYMENT MADE CHARGE
-------------------------------- -------------
<S> <C>
0-1.......................................................... 4.0%
1-2.......................................................... 3.0%
2-3.......................................................... 2.0%
3-4.......................................................... 1.0%
4 and thereafter............................................. None
</TABLE>
For the fiscal year ended July 31, 1996, the Distributor received CDSCs of
$136,374 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest applicable rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as redemption.
To provide an example, assume an investor purchased 100 Class B 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 first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the CDSC is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Code) of a shareholder. Additional information
concerning the waiver of the Class B CDSC is set forth in the Statement of
Additional Information. The terms of the CDSC may be modified in connection
with redemptions to fund participation in certain fee-based programs. See
"Shareholder Services--Fee-Based Programs".
Contingent Deferred Sales Charges--Class C Shares. Class C shares which 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. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no Class C CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
Class C CDSC will be assessed on shares derived from reinvestment of dividends
or capital gains distributions. For the fiscal year ended July 31, 1996, the
Distributor received CDSCs of $863 with respect to redemptions of Class C
shares, all of which were paid to Merrill Lynch. No Class C CDSC will be
assessed in connection with redemptions to fund participation in certain fee-
based programs. See "Shareholder Services--Fee-Based Programs".
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. Therefore, it will be assumed that the
27
<PAGE>
redemption is first of shares held for over one year or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the one-year period. The charge will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately ten years
(the "Conversion Period"), Class B shares will be converted automatically into
Class D shares of the Fund. Class D shares are subject to an ongoing account
maintenance fee of 0.10% of net assets but are not subject to the distribution
fee that is borne by Class B shares. Automatic conversion of Class B shares
into Class D shares will occur at least once each month (on the "Conversion
Date") on the basis of the relative net asset values of the shares of the two
classes on the Conversion Date, without the imposition of any sales load, fee
or other charge. Conversion of Class B shares to Class D shares will not be
deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
The Conversion Period may be modified for certain fee-based programs. See
"Shareholder Services--Fee-Based Programs".
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the 1940 Act (each, a "Distribution
Plan") with respect to the account maintenance and/or distribution fees paid by
the Fund to the Distributor with respect to such classes. The Class B and Class
C Distribution Plans provide for the payment of account maintenance fees and
distribution fees, and the Class D Distribution Plan provides for the payment
of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid
28
<PAGE>
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.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.25% 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. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended July 31, 1996, the Fund paid the Distributor
$330,142 pursuant to the Class B Distribution Plan (based on average net assets
subject to such Class B Distribution Plan of approximately $66 million), all of
which were 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, 1996, the Fund paid the Distributor $10,407
pursuant to the Class C Distribution Plan (based on average net assets subject
to such Class C Distribution Plan of approximately $1.7 million), all of which
were 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, 1996, the Fund paid the Distributor $3,267 pursuant
to the Class D Distribution Plan (based on average net assets subject to such
Class D Distribution Plan of approximately $3.3 million), all of which were
paid to Merrill Lynch for providing account maintenance activities in
connection with Class D shares. At September 30, 1996, the net assets of the
Fund subject to the Class B Distribution Plan aggregated approximately $63.4
million. At this asset level, the annual fee payable pursuant to such Class B
Distribution Plan would aggregate approximately $317,092. At September 30,
1996, the net assets of the Fund subject to the Class C Distribution Plan
aggregated $2.7 million. At this asset level, the annual fee payable pursuant
to such Class C Distribution Plan would aggregate approximately $16,280. At
September 30, 1996, the net assets of the Fund subject to the Class D
Distribution Plan aggregated approximately $3.6 million. At this asset level,
the annual fee payable pursuant to such Class D Distribution Plan would
aggregate approximately $3,584.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Trustees for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated
29
<PAGE>
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, 1995, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated accrual revenues by
approximately $1,227,000 (1.79% of Class B net assets at that date). As of July
31, 1996, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $396,162 (.62% of
Class B net assets at that date). Similar fully allocated accrual data for
Class C shares is not presented because such revenues and expenses for the
period from October 21, 1994 (commencement of operations) to December 31, 1995
are de minimis. As of July 31, 1996, direct cash revenues for the period since
the commencement of operations of Class C shares exceeded direct cash expenses
by $3,832 (.14% of Class C net assets at that date).
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee
and the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges) plus (2) interest on the unpaid balance for the respective
class, computed separately at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances
payments in excess of the amount payable under the NASD formula will not be
made.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Trustees of the Trust will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Trustees, will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on
30
<PAGE>
Class B shares will terminate upon conversion of those Class B shares into
Class D shares as set forth under "Deferred Sales Charge Alternatives--Class B
and Class C Shares--Conversion of Class B Shares to Class D Shares".
REDEMPTION OF SHARES
The Trust is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset
value per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by tendering
the shares directly to the Transfer Agent, Merrill Lynch Financial Data
Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption
requests delivered other than by mail should be delivered to Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited with
the Transfer Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares for which
certificates have been issued may be accomplished by a written letter as noted
above accompanied by certificates for the shares to be redeemed. Redemption
requests should not be sent to the Trust. The notice 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(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may require additional documents such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payments will be mailed within seven days of receipt of a
proper notice of redemption.
At various times the Trust may be requested to redeem Fund shares for which
it has not yet received good payment (e.g., cash, Federal funds or certified
check drawn on a United States bank). The Trust may delay or cause to be
delayed the mailing of a redemption check until such time as it has assured
itself that good payment has been collected for the purchase of such Fund
shares, which will not exceed 10 days.
REPURCHASE
The Trust also will repurchase Fund shares through a shareholder's listed
securities dealer. The Trust normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after receipt of the order by the dealer, provided that the
request for repurchase is received by the dealer prior to the close of business
on the NYSE (generally, 4:00 P.M., New
31
<PAGE>
York time) on the day received, and such request is received by the Trust 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 Trust (other than any applicable CDSC).
Securities firms which 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 Trust. Merrill Lynch may charge
its customers a processing fee (presently $4.85) to confirm a repurchase of
shares of such customers. Repurchases directly through the Fund's Transfer
Agent are not subject to the processing fee. The Trust reserves the right to
reject any order for repurchase, which right of rejection might adversely
affect shareholders seeking redemption through the repurchase procedure.
However, a shareholder whose order for repurchase is rejected by the Trust may
redeem Fund shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. 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.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to
each of such services, copies of the various plans described below and
instructions as to how to participate in the various services or plans, or to
change options with respect thereto can be obtained from the Trust by calling
the telephone number on the cover page hereof or from the Distributor or
Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestments of ordinary income
32
<PAGE>
dividends and long-term capital gains distributions. A shareholder may make
additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent. Shareholders may also maintain their accounts
through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch
brokerage account, an Investment Account in the transferring shareholder's
name will be opened automatically at the Transfer Agent. Shareholders
considering transferring their Class A or Class D shares from Merrill Lynch to
another brokerage firm or financial institution should be aware that, if the
firm to which the Class A or Class D shares are to be transferred will not
take delivery of shares of the Fund, a shareholder either must redeem the
Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the Transfer Agent for
those Class A or Class D shares. Shareholders interested in transferring their
Class B or Class C shares from Merrill Lynch and who do not wish to have an
Investment Account maintained for such shares at the Transfer Agent may
request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated at any time in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-
advised mutual fund if the shareholder holds any Class A shares of the second
fund in his 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 MLAM-advised mutual fund, and the shareholder 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 MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares
of the Fund is "tacked" to the holding period for the newly acquired shares of
the other fund.
33
<PAGE>
Class A, Class B, Class C and Class D shares also are exchangeable for shares
of certain MLAM-advised money market funds specifically designated as available
for exchange by holders of Class A, Class B, Class C or Class D shares. The
period of time that Class A, Class B, Class C or Class D shares are held in a
money market fund, however, will not count toward satisfaction of the holding
period requirement for reduction of any CDSC imposed on such shares, if any,
and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically in
full and fractional shares of the Fund, without a sales charge, at the net
asset value per share at the close of business on the monthly payment date for
such dividends and distributions. A shareholder may at any time, by written
notification or by telephone (1-800-MER-FUND) to the Transfer Agent, elect to
have subsequent dividends or both dividends and capital gains distributions
paid in cash, rather than reinvested, in which event payment will be mailed or
direct deposited monthly. Cash payments can also be directly deposited to the
shareholder's bank account. No CDSC will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his or her Investment Account through automatic payment by check
or through automatic payment by direct deposit to his or her bank account on
either a monthly or quarterly basis. Alternatively, a Class A or Class D
shareholder whose shares are held within a CMA(R) or CBA(R) account may elect
to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or
annual basis through the CMA(R) or CBA(R) Systematic Redemption Program,
subject to certain conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be made
to an investor's Investment Account by prearranged charges of $50 or more to
his or her regular bank account. Alternatively, investors who maintain CMA(R)
or CBA(R) accounts may arrange to have periodic investments made in the Fund in
their CMA(R) or CBA(R) account or in certain related accounts in amounts of
$100 or more through the CMA(R) or CBA(R) Automated Investment Program.
34
<PAGE>
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions, (each referred to in this paragraph as a "Program")
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND (637-3863).
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. Municipal
Bonds and other securities in which the Fund invests are traded primarily in
the over-the-counter market. Where possible, the Trust deals directly with the
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Trust to obtain the best net results in conducting portfolio
transactions for the Fund, taking into account such factors as price (including
the applicable dealer spread), the size, type and difficulty of the
transactions involved, the firm's general execution and operations facilities,
and the firm's risk in positioning the securities involved and the provision of
supplemental investment research by the firm. While reasonably competitive
spreads or commissions are sought, the Fund will not necessarily be paying the
lowest spread or commission available. The sale of shares of the Fund may be
taken into consideration as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Fund. The portfolio securities of the
Fund generally are traded on a net basis and normally do not involve either
brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Fund primarily consists of dealer or underwriter spreads.
Under the 1940 Act, persons affiliated with the Trust, including Merrill Lynch,
are prohibited from dealing with the Trust as a principal in the purchase and
sale of securities unless such trading is permitted by an exemptive order
issued by the Commission. The Trust has obtained an exemptive order permitting
it to engage in certain principal transactions with Merrill Lynch involving
high quality short-term municipal bonds subject to certain conditions. In
addition, the Trust may not purchase securities, including Municipal Bonds, for
the Fund during the existence of any underwriting syndicate of which Merrill
Lynch is a member except pursuant to procedures approved by the Trustees of the
Trust which comply with rules adopted by the Commission. The Trust has applied
for an exemptive order permitting it to, among other things, (i) purchase high
quality tax-exempt securities from Merrill Lynch when
35
<PAGE>
Merrill Lynch is a member of an underwriting syndicate and (ii) purchase tax-
exempt securities from and sell tax-exempt securities to Merrill Lynch in
secondary market transactions. Affiliated persons of the Trust may serve as its
broker in over-the-counter transactions conducted for the Fund on an agency
basis only.
Portfolio Turnover. Generally, the Fund does not purchase securities for
short-term trading profits. However, the Fund may dispose of securities without
regard to the time they have been held when such action, for defensive or other
reasons, appears advisable to the Manager. As a result of the investment
policies of the Fund, the Fund's portfolio turnover may be higher than that of
other investment companies; however, it is extremely difficult to predict
portfolio turnover rates with any degree of accuracy. Higher portfolio turnover
may contribute to higher transactional costs and negative tax consequences,
such as an increase in capital gain dividends or in ordinary income dividends
of accrued market discount, as well as greater difficulty meeting the
requirement for qualification as a regulated investment company that less than
30% of its gross income be derived from the sale or other disposition of
securities held for less than three months. See "Distributions and Taxes--
Taxes". (The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by
the monthly average of the value of the portfolio securities owned by the Fund
during the particular fiscal year. For purposes of determining this rate, all
securities whose maturities at the time of acquisition are one year or less are
excluded.) The portfolio turnover rates for the fiscal years ended July 31,
1995 and 1996 were 169.34% and 118.21%, respectively. The yield volatility
exhibited by the municipal bond market has contributed to recent portfolio
turnover. The Fund's shift to a more defensive posture has necessitated a
significant portfolio restructuring which has led to increased trading activity
for the fiscal year ended July 31, 1995 and, to a lesser degree, for the fiscal
year ended July 31, 1996. High portfolio turnover involves corresponding
greater transaction costs in the form of dealer spreads and brokerage
commissions, which are borne directly by the Fund. Such turnover also has
certain tax consequences for the Fund. See "Distributions and Taxes".
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily prior to
the determination of the net asset value which is calculated 15 minutes after
the close of business on the NYSE (generally 4:00 P.M., New York time) on that
day. The net investment income of the Fund for dividend purposes consists of
interest earned on portfolio securities, less expenses, in each case computed
since the most recent determination of the net asset value. Expenses of the
Fund, including the management fees and the account maintenance and
distribution fees, are accrued daily. Dividends of net investment income are
declared daily and reinvested monthly in the form of additional full and
fractional shares of the Fund at net asset value as of the close of business on
the "payment date" unless the shareholder elects to receive such dividends in
cash. Shares will accrue dividends as long as they are issued and outstanding.
Shares are issued and outstanding from the settlement date of a purchase order
to the day prior to the settlement date of a redemption order.
All net realized long- or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders at least annually. Capital gains
distributions will be reinvested automatically in shares unless the shareholder
elects to receive such distributions in cash.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer
agency fees applicable to that class.
36
<PAGE>
See "Shareholder Services" for information as to how to elect either dividend
reinvestment or cash payments. Portions of dividends and distributions which
are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of the Fund or received in cash.
TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Code. If
it so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax to the extent that it distributes its net investment income
and net realized capital gains. The Trust intends to cause the Fund to
distribute substantially all of such income.
To the extent that the dividends distributed to the Fund's Class A, Class B,
Class C and Class D shareholders (together, the "shareholders") are derived
from interest income exempt from Federal tax under Code Section 103(a) and are
properly designated as "exempt-interest dividends" by the Trust, they will be
excludable from a shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends are included, however, in determining the portion, if
any, of a person's social security benefits and railroad retirement benefits
subject to Federal income taxes. The portion of such exempt-interest dividends
paid from interest received by the Fund from Ohio Municipal Bonds also will be
exempt from Ohio personal income taxes. Shareholders subject to income taxation
by states other than Ohio will realize a lower after-tax rate of return than
Ohio 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 as to the portion of the
Fund's distributions which constitutes exempt-interest dividends and the
portion which is exempt from Ohio personal income taxes. Interest on
indebtedness incurred or continued to purchase or carry Fund shares is not
deductible for Federal or Ohio income tax purposes to the extent attributable
to exempt-interest dividends. Persons who may be "substantial users" (or
"related persons" of substantial users) of facilities financed by industrial
development bonds or private activity bonds held by the Fund should consult
their tax advisors before purchasing Fund shares.
Distributions treated as investment income or as capital gains for Federal
income tax purposes, including exempt-interest dividends, may be subject to
local taxes imposed by certain cities within Ohio. Additionally, the value of
shares of the Fund will be included in (i) the net worth measure of the issued
and outstanding shares of corporations and financial institutions for purposes
of computing the Ohio corporate franchise tax, (ii) the value of the gross
estate for purposes of the Ohio estate tax, (iii) the value of capital and
surplus for purposes of the Ohio domestic insurance company franchise tax and
(iv) the value of shares of and capital employed by dealers in intangibles for
purposes of the Ohio tax on dealers in intangibles. Investors should consult
their tax advisers with respect to the application of such taxes to the receipt
of Fund dividends, the holding of shares in the Fund and as to their Ohio tax
situation in general.
Exempt-interest dividends paid to a corporate shareholder will be subject to
Ohio corporation excise tax, and shares of the Fund will be included in the net
worth base of such tax.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal income tax purposes. Distributions, if
any, from an excess of net long-term capital gains over net short-term capital
losses derived from the sale of
37
<PAGE>
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. Such capital gain dividends are also subject to the Ohio personal
income tax unless they are attributable to the sale of certain Ohio Municipal
Bonds issued pursuant to legislation which specifically exempts capital gains
on their sale from Ohio income taxation. 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 gain from the sale or redemption of tax-exempt
obligations purchased at a market discount will be treated as ordinary income
rather than capital gain. This rule may increase the amount of ordinary income
dividends received by shareholders. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset).
Any loss upon the sale or exchange of Fund shares held for six months or less
will be disallowed to the extent of any exempt-interest dividends received by
the shareholder. In addition, any such loss that is not disallowed under the
rule stated above will be treated as long-term capital loss to the extent of
any capital gain dividends received by the shareholder. If the Fund pays a
dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on 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 the Fund's taxable year-end the portion of its dividends declared
during the year which constitutes an item of tax preference for alternative
minimum tax purposes. The Code further provides that corporations are subject
to an alternative minimum tax based, in part, on certain differences between
taxable income as adjusted for other tax preferences and the corporation's
"adjusted current earnings", which more closely reflect a corporation's
economic income. Because an exempt-interest dividend paid by the Fund will be
included in adjusted current earnings, a corporate shareholder may be required
to pay alternative minimum tax on exempt-interest dividends paid by the Fund.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge such shareholder would have
owed
38
<PAGE>
upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and Ohio tax laws presently in
effect. For the complete provisions, reference should be made to the pertinent
Code sections, the Treasury regulations promulgated thereunder and the
applicable Ohio income tax laws. The Code and the Treasury regulations, as well
as the Ohio income tax laws, are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Shareholders are urged to consult their tax advisors regarding the
availability of any exemptions from state and local taxes (other than those
imposed by Ohio) 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, yield
and tax-equivalent yield for various specified time periods in advertisements
or information furnished to present or prospective shareholders. Average annual
total return, yield and tax-equivalent yield are computed separately for
Class A, Class B, Class C and Class D shares in accordance with formulas
specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such
as in the case of Class B and Class C shares and the maximum sales charge in
the case of Class A and Class D shares. Dividends paid by the Fund with respect
to all shares, to the extent any dividends are paid, will be calculated in the
same manner at the same time on the same day and will be in the same amount,
except that account maintenance fees and distribution charges
39
<PAGE>
and any incremental transfer agency costs relating to each class of shares will
be borne exclusively by that class. The Fund will include performance data for
all classes of shares of the Fund in any advertisement or information including
performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time. In advertisements distributed to investors whose
purchases are subject to waiver of the CDSC in the case of Class B and Class C
shares or to reduced sales charges in the case of Class A and Class D shares,
the performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the CDSC and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
CDSC, a lower amount of expenses is deducted. See "Purchase of Shares". The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price 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 yield for the 30-day period ended
July 31, 1996 was 4.69% for Class A shares, 4.38% for Class B shares, 4.29% for
Class C shares and 4.59% for Class D shares and the tax-equivalent yield for
the same period (based on a Federal income tax rate of 28%) was 6.51% for Class
A shares, 6.08% for Class B shares, 5.96% for Class C shares and 6.38% for
Class D shares.
Total return, yield and tax-equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance. The
Fund's total return, yield and tax-equivalent yield will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and the amount of realized and unrealized net capital gains
or losses during the period. The value of an investment in the Fund will
fluctuate and an investor's shares, when redeemed, may be worth more or less
than their original cost.
On occasion, the Fund may compare its performance to performance data
published by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar") and CDA Investment Technology, Inc. or to data contained in
publications such as Money Magazine, U.S. News & World Report, Business Week,
Forbes Magazine and Fortune Magazine. From time to time, the Fund may include
the Fund's Morningstar risk-adjusted performance ratings in advertisements or
supplemental sales literature. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
40
<PAGE>
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily 15 minutes after the close of business on the NYSE (approximately
4:00 P.M., New York time), on each day during which the NYSE is open for
trading. The net asset value per share is computed by dividing the sum of the
value of the securities held by the Fund plus any cash or other assets minus
all liabilities by the total number of shares outstanding at such time, rounded
to the nearest cent. Expenses, including the fees payable to the Manager and
the Distributor, are accrued daily.
The per share net asset value of Class A shares will generally be higher than
the per share net asset value of shares of the other classes, reflecting the
daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B and Class C shares
and the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares. Moreover, the per share net asset value of the Class
D shares generally will be higher than the per share net asset value of the
Class B and Class C shares, reflecting the daily expense accruals of the
distribution fees, higher account maintenance fees and higher transfer agency
fees applicable with respect to Class B and Class C shares. It is expected,
however, that the per share net asset value of the classes will tend to
converge (although not necessarily meet) immediately after the payment of
dividends or distributions which will differ by approximately the amount of the
expense accrual differentials between the classes.
ORGANIZATION OF THE TRUST
The Trust is an unincorporated 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
changed its name to "Merrill Lynch Multi-State Municipal Series Trust." The
Trust is an open-end management investment company comprised of separate series
("Series"), each of which is a separate portfolio offering shares to selected
groups of purchasers. Each of the Series is to be managed independently in
order to provide to shareholders who are residents of the state to which such
Series relates as high a level of income exempt from Federal, and in certain
cases, state and local income taxes as is consistent with prudent investment
management. The Trustees are authorized to create an unlimited number of Series
and, with respect to each Series, to issue an unlimited number of full and
fractional shares of beneficial interest of $.10 par value of different
classes. Shareholder approval is not required for the authorization of
additional Series or classes of a Series of the Trust. At the date of this
Prospectus, 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 related
to the account maintenance associated with such shares, and Class B and Class C
shares bear certain expenses related to the distribution of such shares. Each
class has exclusive voting rights with respect to matters relating to account
maintenance and distribution expenditures as applicable. See "Purchase of
Shares". The Trustees of the Trust may classify and reclassify any Series into
additional classes at a future date.
Shareholders are entitled to one vote for each full share and to fractional
votes for fractional shares held in the election of Trustees (to the extent
hereinafter provided) and on other matters submitted to the vote of
41
<PAGE>
shareholders. There normally will be no meeting of shareholders for the purpose
of electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Shareholders may, in accordance with the terms of the Declaration of
Trust, cause a meeting of shareholders to be held for the purpose of voting on
the removal of Trustees. Also, the Trust will be required to call a special
meeting of shareholders of a Series in accordance with the requirements of the
1940 Act to seek approval of new management and advisory arrangements, of a
material increase in distribution fees or of a change in the fundamental
policies, objectives or restrictions of a Series. Except as set forth above,
the Trustees shall continue to hold office and appoint successor Trustees. Each
issued and outstanding share is entitled to participate equally in dividends
and distributions declared by the respective Series and in net assets of such
Series upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities except that, as noted above, Class B, Class C and Class
D shares bear certain additional expenses. The obligations and liabilities of a
particular Series are restricted to the assets of that Series and do not extend
to the assets of the Trust generally. The shares of each Series, when issued,
will be fully-paid and non-assessable by the Trust.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
matter please call your Merrill Lynch Financial Consultant or Merrill Lynch
Financial Data Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Trust at the address or
telephone number set forth on the cover page of this Prospectus.
----------------
The Declaration of Trust establishing the Trust, dated August 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. 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.
42
<PAGE>
MERRILL LYNCH OHIO MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Ohio Municipal Bond Fund and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address..............................
...................................... Name and Address of Employer ........
(Zip Code)
Occupation........................... .....................................
...................................... .....................................
...................................... .....................................
...................................... .....................................
...................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(in the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
SELECT [_] Reinvest SELECT [_] Reinvest
ONE: [_] Cash ONE: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] Check
or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Ohio Municipal Bond Fund
Authorization Form.
Specify type of account (check one): [_] checking [_] savings
Name on your account ..........................................................
Bank Name .....................................................................
Bank Number ...................... Account Number ............................
Bank Address ..................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
43
<PAGE>
MERRILL LYNCH OHIO MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
[ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed in the Prospectus
under "Distribution and Taxes--Taxes") either because I have not been notified
that I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am
no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
...................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
..................., 19......
Dear Sir/Madam: Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Ohio Municipal Bond Fund or any other investment company with an initial
sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Ohio Municipal
Bond Fund Prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Ohio Municipal Bond Fund held as security.
By: ................................. ......................................
Signature of Owner Signature of Co-Owner
(If registered in joint
names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name..............................
Account Number....................... Account Number........................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
We hereby authorize Merrill Lynch
[ ] Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
shareholder's signature.
.....................................
Dealer Name and Address
By: .................................
This form, when completed, should Authorized Signature of Dealer
be mailed to:
Merrill Lynch Ohio [ ][ ][ ] [ ][ ][ ][ ]
Municipal Bond Fund Branch Code F/C No.
c/o Merrill Lynch Financial
Data Services, Inc. ...............
P.O. Box 45289 F/C Last Name
Jacksonville, Florida 32232-5289
[ ][ ][ ] [ ][ ][ ][ ][ ][ ]
Dealer's Customer A/C No.
44
<PAGE>
MERRILL LYNCH OHIO MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Name of Owner...................... [ ][ ][ ][ ][ ][ ][ ][ ][ ]
Social Security No. or
Name of Co-Owner (if any).......... Taxpayer Identification
Number
Address............................ Account Number ....................
(if existing account)
....................................
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of [_] Class A or [_] Class D shares in Merrill Lynch Ohio Municipal Bond Fund
at cost or current offering price. Withdrawals to be made either (check one)
[_] Monthly on the 24th day of each month, or [_] Quarterly on the 24th day of
March, June, September and December. If the 24th falls on a weekend or
holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on____________or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [_] $
or [_] % of the current value of [_] Class A or [_] Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (please print)......................................................
Address .......................................................................
..........................................................................
Signature of Owner................................ Date..................
Signature of Co-Owner (if any)............................................
(b) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one) [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
........................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
45
<PAGE>
MERRILL LYNCH OHIO MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 2) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Ohio Municipal Bond Fund subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
DRAWN BY MERRILL LYNCH FINANCIAL
You are hereby authorized to draw an DATA SERVICES, INC.
ACH debit each month on my bank
account for investment in Merrill
Lynch Ohio Municipal Bond Fund, as To...............................Bank
indicated below: (Investor's Bank)
Amount of each ACH debit $........ Bank Address.........................
Account number ................... City...... State...... Zip Code......
As a convenience to me, I hereby
request and authorize you to pay and
charge to my account ACH debits
drawn on my account by and payable
to Merrill Lynch Financial Data
Services, Inc. I agree that your
rights in respect to each such debit
shall be the same as if it were a
check drawn on you and signed
personally by me. This authority is
to remain in effect until revoked
personally by me in writing. Until
you receive such notice, you shall
be fully protected in honoring any
such debit. I further agree that if
any such debit be dishonored,
whether with or without cause and
whether intentionally or
inadvertently, you shall be under no
liability.
Please date and invest ACH debits on ............ .....................
Date Signature of
the 20th of each month beginning Depositor
________ or as soon thereafter
(Month) as possible
I agree that you are drawing these ............ .....................
ACH debits voluntarily at my request Bank Signature of Depositor
and that you shall not be liable for Account (If joint account,
any loss arising from any delay in Number both must sign)
preparing or failure to prepare any
such debit. If I change banks or
desire to terminate or suspend this
program, I agree to notify you
promptly in writing. I hereby
authorize you to take any action to
correct erroneous ACH debits of my
bank account or purchases of fund
shares including liquidating shares
of the Fund and crediting my bank
account. I further agree that if a
check or debit is not honored upon
presentation, Merrill Lynch Financial
Data Services, Inc. is authorized to
discontinue immediately the Automatic
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
dishonored debit.
............. ........................
Date Signature of Depositor
.......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
46
<PAGE>
MANAGER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Merrill Lynch Select PricingSM System...................................... 4
Financial Highlights....................................................... 8
Investment Objective and Policies.......................................... 10
Potential Benefits........................................................ 12
Special and Risk Considerations Relating to Municipal Bonds............... 12
Description of Municipal Bonds............................................ 13
Call Rights............................................................... 15
When-Issued Securities and Delayed Delivery Transactions.................. 16
Financial Futures Transactions and Options................................ 16
Repurchase Agreements..................................................... 18
Investment Restrictions................................................... 18
Management of the Trust.................................................... 19
Trustees.................................................................. 19
Management and Advisory Arrangements...................................... 20
Code of Ethics............................................................ 21
Transfer Agency Services.................................................. 21
Purchase of Shares......................................................... 22
Initial Sales Charge Alternatives--Class A and
Class D Shares........................................................... 24
Deferred Sales Charge Alternatives--Class B and Class C Shares............ 25
Distribution Plans........................................................ 28
Limitations on the Payment of Deferred Sales Charges...................... 30
Redemption of Shares....................................................... 31
Redemption................................................................ 31
Repurchase................................................................ 31
Reinstatement Privilege--Class A and
Class D Shares........................................................... 32
Shareholder Services....................................................... 32
Investment Account........................................................ 32
Exchange Privilege........................................................ 33
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 34
Systematic Withdrawal Plans............................................... 34
Automatic Investment Plans................................................ 34
Fee-Based Programs........................................................ 35
Portfolio Transactions..................................................... 35
Distributions and Taxes.................................................... 36
Distributions............................................................. 36
Taxes..................................................................... 37
Performance Data........................................................... 39
Additional Information..................................................... 41
Determination of Net Asset Value.......................................... 41
Organization of the Trust................................................. 41
Shareholder Reports....................................................... 42
Shareholder Inquiries..................................................... 42
Authorization Form......................................................... 43
</TABLE>
Code #16154-1196
[LOGO] MERRILL LYNCH
Merrill Lynch
Ohio Municipal
Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
[ART]
PROSPECTUS
November 15, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH OHIO MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Ohio Municipal Bond Fund (the "Fund") is a series of Merrill
Lynch Multi-State Municipal Series Trust (the "Trust"), an open-end management
investment company organized as a Massachusetts business trust. The investment
objective of the Fund is to provide shareholders with as high a level of income
exempt from Federal and Ohio personal income taxes as is consistent with
prudent investment management. The Fund invests primarily in a portfolio of
long-term investment grade obligations issued by or on behalf of the State of
Ohio, its political subdivisions, agencies and instrumentalities and
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the Virgin Islands and Guam, which pay interest exempt, in the opinion of
bond counsel to the issuer, from Federal and Ohio income taxes ("Ohio Municipal
Bonds"). There can be no assurance that the investment objective of the Fund
will be realized.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
The 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
15, 1996 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
----------------
FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is November 15, 1996.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as high
a level of income exempt from Federal and Ohio personal income taxes as is
consistent with prudent investment management. The Fund seeks to achieve its
objective by investing primarily in a portfolio of long-term obligations issued
by or on behalf of Ohio, its political subdivisions, agencies and
instrumentalities and obligations of other qualifying issuers, such as issuers
located in Puerto Rico, the Virgin Islands and Guam, which pay interest exempt,
in the opinion of bond counsel to the issuer, from Federal and Ohio personal
income taxes. Obligations exempt from Federal income taxes are referred to
herein as "Municipal Bonds" and obligations exempt from both Federal and Ohio
income taxes are referred to as "Ohio Municipal Bonds." Unless otherwise
indicated, references to Municipal Bonds shall be deemed to include Ohio
Municipal Bonds. The Fund anticipates that at all times, except during
temporary defensive periods, it will maintain at least 65% of its total assets
invested in Ohio Municipal Bonds. At times, the Fund will seek to hedge its
portfolio through the use of futures transactions to reduce volatility in the
net asset value of Fund shares. Reference is made to "Investment Objective and
Policies" in the Prospectus for a discussion of the investment objective and
policies of the Fund.
Municipal Bonds (defined below) may include general obligation bonds of the
State and its political subdivisions, revenue bonds to finance utility systems,
highways, bridges, port and airport facilities, colleges, hospitals, housing
facilities, etc., and industrial development bonds ("IDBs") or private activity
bonds. The interest on such obligations may bear a fixed rate or be payable at
a variable or floating rate. The Municipal Bonds purchased by the Fund will be
primarily what are commonly referred to as "investment grade" securities, which
are obligations rated at the time of purchase within the four highest quality
ratings as determined by either Moody's Investors Service, Inc. ("Moody's")
(currently Aaa, Aa, A and Baa), Standard & Poor's Ratings Group ("Standard &
Poor's") (currently AAA, AA, A and BBB) or Fitch Investors Service, Inc.
("Fitch") (currently AAA, AA, A and BBB). If unrated, such securities will
possess creditworthiness comparable, in the opinion of the manager of the Fund,
Fund Asset Management, L.P. (the "Manager" or "FAM"), to other obligations in
which the Fund may invest.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal and Ohio income taxes. However, to the extent that suitable Ohio
Municipal Bonds are not available for 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, from Federal, but not Ohio, 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 may include securities issued
by other investment companies that invest in municipal bonds, to the extent
permitted by applicable law. Other Non-Municipal Tax-Exempt Securities could
include trust certificates or other derivative instruments evidencing interests
in one or more Municipal Bonds.
Except when acceptable securities are unavailable as determined by the
Manager, the Fund, under normal circumstances, will invest at least 65% of its
total assets in Ohio Municipal Bonds. For temporary periods or to provide
liquidity, the Fund has the authority to invest as much as 35% of its 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, together with such
other investments as are not exempt from Ohio taxation, shall not exceed 20% of
the Fund's net assets.
2
<PAGE>
The Fund at all times will have at least 80% of its net assets invested in
securities exempt from Federal income taxation. However, interest received on
certain otherwise tax-exempt securities which are classified as "private
activity bonds" (in general bonds that benefit non-governmental entities) may
be subject to an alternative minimum tax. The Fund may purchase such private
activity bonds. See "Distributions and Taxes". 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. The investment objectives of the Fund set forth in
this paragraph are fundamental policies of the Fund which may not be changed
without a vote of a majority of the outstanding shares of the Fund. The Fund's
hedging strategies are not fundamental policies and may be modified by the
Trustees of the Trust without the approval of the Fund's shareholders.
Municipal Bonds may at times be purchased or sold on a delayed delivery basis
or a when-issued basis. These transactions arise when securities are purchased
or sold by the Fund with payment and delivery taking place in the future, often
a month or more after the purchase. The payment obligation and the interest
rate are each fixed at the time the buyer enters into the commitment. The Fund
will make only commitments to purchase such securities with the intention of
actually acquiring the securities, but the Fund may sell these securities prior
to the settlement date if it is deemed advisable. Purchasing Municipal Bonds on
a when-issued basis involves the risk that the yields available in the market
when the delivery takes place may actually be higher than those obtained in the
transaction itself. If yields so increase, the value of the when-issued
obligation generally will decrease. The Fund will maintain a separate account
at its custodian bank consisting of cash, cash equivalents or high-grade,
liquid Municipal Bonds or Temporary Investments (valued on a daily basis) equal
at all times to the amount of the when-issued commitment.
The Fund may invest in Municipal Bonds (and Non-Municipal Tax-Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an index.
Also, the Fund may invest in so-called "inverse floating obligations" or
"residual interest bonds" on which the interest rates typically decline as
market rates increase and increase as market rates decline. To the extent the
Fund invests in these types of Municipal Bonds, the Fund's return on such
Municipal Bonds will be subject to risk with respect to the value of the
particular index, which may include reduced or eliminated interest payments and
losses of invested principal. Such securities have the effect of providing a
degree of investment leverage, since they may increase or decrease in value in
response to changes, as an illustration, in market interest rates at a rate
which is a multiple (typically two) the rate at which fixed-rate long-term tax
exempt securities increase or decrease in response to such changes. As a
result, the market values of such securities will generally be more volatile
than the market values of fixed-rate tax exempt securities. To seek to limit
the volatility of these securities, the Fund may purchase inverse floating
obligations with shorter term maturities or which contain limitations on the
extent to which the interest rate may vary. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's total assets. The Manager believes, however,
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.
3
<PAGE>
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's total assets.
The Fund may invest up to 20% of its total assets in Municipal Bonds which
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or
which, in the Manager's judgment, possess similar credit characteristics ("high
yield securities"). See Appendix II--"Ratings of Municipal Bonds" for
additional information regarding ratings of debt securities. The Manager
considers the ratings assigned by Standard & Poor's, Moody's or Fitch as one of
several factors in its independent credit analysis of issuers.
High yield securities are considered by Standard & Poor's, Moody's and Fitch
to have varying degrees of speculative characteristics. Consequently, although
high yield securities can be expected to provide higher yields, such securities
may be subject to greater market price fluctuations and risk of loss of
principal than lower yielding, higher rated debt securities. Investments in
high yield securities will be made only when, in the judgment of the Manager,
such securities provide attractive total return potential relative to the risk
of such securities, as compared to higher quality debt securities. The Fund
generally will not invest in debt securities in the lowest rating categories
(those rated CC or lower by Standard & Poor's or Fitch or Ca or lower by
Moody's) unless the Manager believes that the financial condition of the issuer
or the protection afforded the particular securities is stronger than would
otherwise be indicated by such low ratings. The Fund does not intend to
purchase debt securities that are in default or which the Manager believes will
be in default.
Issuers or obligors of high yield securities may be highly leveraged and may
not have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers or obligors
generally are greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield securities may be more likely to experience
financial stress, especially if such issuers are highly leveraged. In addition,
the market for high yield municipal securities is relatively new and has not
weathered a major economic recession, and it is unknown what effects such a
recession might have on such securities. During periods of economic recession,
such issuers may not have sufficient revenues to meet their interest payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific issuer developments, or the issuer's inability
to meet specific projected business forecasts, or the unavailability of
additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield securities frequently have call or redemption features that would
permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
secondary market for many of these securities, and the Fund anticipates that
such securities
4
<PAGE>
could be sold only to a limited number of dealers or institutional investors.
To the extent that a secondary trading market for high yield securities does
exist, it generally is not as liquid as the secondary market for higher rated
securities. Reduced secondary market liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular issues when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain securities also may make it
more difficult for the Fund to obtain accurate market quotations for purposes
of valuing the Fund's portfolio. Market quotations generally are available on
many high yield securities only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by the Fund will be purchased upon issuance, which may involve
special risks because the securities so acquired are new issues. In such
instances the Fund may be a substantial purchaser of the issue and therefore
have the opportunity to participate in structuring the terms of the offering.
Although this may enable the Fund to seek to protect itself against certain of
such risks, the considerations discussed herein would nevertheless remain
applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely
affecting the market value of high yield securities are likely to adversely
affect the Fund's net asset value. In addition, the Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default on
a portfolio holding or participate in the restructuring of the obligation.
DESCRIPTION OF MUNICIPAL BONDS AND TEMPORARY INVESTMENTS
Set forth below is a description of Municipal Bonds and Temporary
Investments which the Fund may invest. A more complete discussion concerning
futures and options transactions is set forth under "Investment Objective and
Policies" in the Prospectus. Information with respect to ratings assigned to
tax-exempt obligations which the Fund may purchase is set forth in Appendix
II--"Ratings of Municipal Bonds" in this Statement of Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including 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. Such obligations are
included within the term Municipal Bonds if the interest paid thereon is, in
the opinion of bond counsel, excluded from gross income for Federal income tax
purposes and, in the case of Ohio Municipal Bonds, exempt from Ohio personal
income taxes. Other types of IDBs 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.
5
<PAGE>
The two principal classifications of Municipal Bonds are "general obligation"
bonds and "revenue" bonds which latter category includes IDBs and, for bonds
issued after August 15, 1986, private activity bonds. General obligation bonds
are secured by the issuer's pledge of faith, credit and taxing power for the
payment of principal and interest. 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 or limited tax or other specific revenue
source such as payments from the user of the facility being financed. IDBs and,
in the case of bonds issued after August 15, 1986, private activity bonds are
in most cases revenue bonds and generally do not constitute the pledge of the
credit or taxing power of the issuer of such bonds. Generally, the payment of
the principal and interest on such bonds depends solely on the ability of the
user of the facility financed by the bonds to meet its financial obligations
and the pledge, if any, of real and personal property so financed as security
for such payment, unless a line of credit, bond insurance or other security is
furnished. The 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 the bond
becomes a moral commitment, but not a legal obligation, of the state or
municipality in question.
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. Certain investments in lease
obligations may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with all other illiquid investments,
would exceed 15% of the Fund's total assets. The Fund may, however, invest
without regard to such limitation in lease obligations which the Manager,
pursuant to guidelines which have been adopted by the Board of Trustees and
subject to the supervision of the Board, determines to be liquid. The Manager
will deem lease obligations to be liquid if they are publicly offered and have
received an investment grade rating of Baa or better by Moody's, or BBB or
better by Standard & Poor's or Fitch. Unrated lease obligations, or those rated
below investment grade, will be considered liquid if the obligations come to
the market through an underwritten public offering and at least two dealers are
willing to give competitive bids. In reference to the latter, the Manager must,
among other things, also review the creditworthiness of the municipality
obligated to make payment under the lease obligation and make certain specified
determinations based on such factors as the existence of a rating or credit
enhancement such as insurance, the frequency of trades or quotes for the
obligation and the willingness of dealers to make a market in the obligation.
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
general conditions of the Municipal Bond market, the maturity of the
obligation, and the rating of the issue. The ability of the Fund to achieve its
investment objective also is dependent on the continuing ability of the issuers
of the bonds in which the Fund invests to meet their obligations for the
payment of interest and principal when due. There are variations in the 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
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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.
DESCRIPTION OF TEMPORARY INVESTMENTS
The Fund may invest in short-term tax-free and taxable securities subject to
the limitations set forth under "Investment Objective and Policies." 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 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.
Variable rate demand obligations ("VRDOs") are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility that
because of default or insolvency the demand feature of VRDOs and Participating
VRDOs, described below, 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 VRDO at approximately the par value of the
VRDOs on the adjustment date. The adjustments typically are set at a rate
determined by the remarketing agent or based upon the 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.
The Fund also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank. Participating VRDOs provide
the Fund with a specified undivided interest (up to 100%) of the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the Participating VRDOs from the financial institution upon
a specified number of days' notice, not to exceed seven days. In addition, a
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 an unconditional right of demand to receive payment of the
unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed to be illiquid securities.
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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 determination.
The Trust has established the following standards with respect to money
market securities and VRDOs in which the Fund invests. Commercial paper
investments at the time of purchase must be rated "A-1" through "A-3" by
Standard & Poor's, "Prime-1" through "Prime-3" by Moody's or "F-1" through "F-
3" by Fitch or, if not rated, issued by companies having an outstanding debt
issue rated at least "A" by Standard & Poor's, Fitch or Moody's. Investments in
corporate bonds and debentures (which must have maturities at the date of
purchase of one year or less) must be rated at the time of purchase at least
"A" by Standard & Poor's, Moody's or Fitch. Notes and VRDOs at the time of
purchase must be rated SP-1/A-1 through SP-2/A-3 by Standard & Poor's, MIG-
l/VMIG-1 through MIG-4/VMIG-4 by Moody's or F-1 through F-3 by Fitch. Temporary
Investments, if not rated, must be of comparable quality to securities rated in
the above rating categories, in the opinion of the Manager. The Fund may not
invest in any security issued by a commercial bank or a savings institution
unless the bank or institution is organized and operating in the United States,
has total assets of at least one billion dollars and is a member of the Federal
Deposit Insurance Corporation ("FDIC"), except that up to 10% of total assets
may be invested in certificates of deposit of small institutions if such
certificates are fully insured by the FDIC.
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 a primary dealer in U.S. Government securities or an
affiliate thereof. Under such agreements, the seller agrees, upon entering into
the contract, to repurchase the security from the Fund at a mutually agreed
upon time and price, thereby determining the yield during the term of the
agreement. This results in a fixed rate of return insulated from market
fluctuations during such period. In the case of repurchase agreements, the
prices at which the trades are conducted do not reflect accrued interest on the
underlying obligations. Such agreements usually cover short periods, such as
under one week. Repurchase agreements may be construed to be collateralized
loans by the purchaser to the seller secured by the securities transferred to
the purchaser. In a repurchase agreement, the Fund will require the seller to
provide additional collateral if the market value of the securities falls below
the repurchase price at any time during the term of the repurchase agreement.
In the event of default by the seller under a repurchase agreement construed to
be a collateralized loan, the underlying securities are not owned by the Fund
but only constitute collateral for the seller's obligation to pay the
repurchase price. Therefore, the Fund may suffer time delays and incur costs or
possible losses in connection with the disposition of the collateral. In the
event of a default under such a repurchase agreement, instead of the
contractual fixed rate of return, the rate of return to the Fund will depend on
intervening fluctuations of the market value of such security and the accrued
interest on the security. In such event, the Fund would have rights against the
seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform. The Fund may not
invest in repurchase agreements maturing in more than seven days if such
investments, together with other illiquid securities, would exceed 15% of the
Fund's total assets.
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In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
Reference is made to the discussion concerning futures transactions under
"Investment Objective and Policies" in the Prospectus. Set forth below is
additional information concerning these transactions.
As described in the Prospectus, the Fund may purchase and sell exchange
traded financial futures contracts ("financial futures contracts") to hedge its
portfolio of Municipal Bonds against declines in the value of such securities
and to hedge against increases in the cost of securities the Fund intends to
purchase. However, any transactions involving financial futures or options (or
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. See "Investment Objective and Policies--
Investment Restrictions" in the Prospectus. To hedge its portfolio, the Fund
may take an investment position in a futures contract which will move in the
opposite direction from the portfolio position being hedged. While the Fund's
use of hedging strategies is intended to moderate capital changes in portfolio
holdings and thereby reduce the volatility of the net asset value of Fund
shares, the Fund anticipates that its net asset value will fluctuate. Set forth
below is information concerning futures transactions.
Description of Futures Contracts. A futures contract is an agreement between
two parties to buy and sell a security, or in the case of an index-based
futures contract, to make and accept a cash settlement for a set price on a
future date. A majority of transactions in futures contracts, however, do not
result in the actual delivery of 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
"mark 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 which
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 may deal 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 obligations bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
Standard & Poor's and must have a remaining maturity of 19 years or more. Twice
a month new issues satisfying the eligibility
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requirements are added to, and an equal number of old issues are deleted from,
the Municipal Bond Index. The value of the Municipal Bond Index is computed
daily according to a formula based on the price of each bond in the Municipal
Bond Index, as evaluated by six dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the
exchange membership which also is responsible for handling daily accounting of
deposits or withdrawals of margin.
As described in the Prospectus, the Fund may purchase and sell financial
futures contracts on U.S. Government securities as a hedge against adverse
changes in interest rates as described below. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-term
U.S. Treasury bonds, Treasury notes, Government National Mortgage Association
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
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 which may become available if the Manager and the
Trustees 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 which are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions, commissions on futures
transactions are lower than transaction costs incurred in the purchase and sale
of Municipal Bonds. In addition, the ability of the Fund to trade in the
standardized contracts available in the futures markets may offer a more
effective defensive position than a program to reduce the average maturity of
the portfolio securities due to the unique and varied credit and technical
characteristics of the municipal debt instruments available to the Fund.
Employing futures as a hedge also may permit the Fund to assume a defensive
posture without reducing the yield on its investments beyond any amounts
required to engage in futures trading.
When the Fund intends to purchase Municipal Bonds, the Fund may purchase
futures contracts as a hedge against any increase in the cost of such Municipal
Bonds, resulting from an increase in interest rates or otherwise, that may
occur before such purchases can be effected. Subject to the degree of
correlation between the Municipal Bonds and the futures contracts, subsequent
increases in the cost of Municipal Bonds should be reflected in the value of
the futures held by the Fund. As such purchases are made, an equivalent
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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 also may purchase and sell
exchange traded call and put options on financial futures contracts on U.S.
Government securities. The purchase of a call option on a 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 on which
it is based, or on 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 options on a futures
contract is analogous to the purchase of protective put options on portfolio
securities. The Fund will purchase put options on futures contracts to hedge
the Fund's portfolio against the risk of rising interest rates.
The writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the securities which are deliverable upon exercise
of the futures contract. If the futures price at expiration is higher than the
exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any increase in the price of Municipal
Bonds which the Fund intends to purchase.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option will be
included in initial margin. The writing of an option on a futures contract
involves risks similar to those relating to futures contracts.
----------------
The Trust has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "1940 Act"), in connection with its strategy of investing
in futures contracts. Section 17(f) relates to the custody of securities and
other assets of an investment company and may be deemed to prohibit certain
arrangements between the Trust and commodities brokers with respect to initial
and variation margin. Section 18(f) of the 1940 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 1940
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
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<PAGE>
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 futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or liquid securities will be deposited in a segregated account with
the Fund's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the futures contract, thereby ensuring that the use of such
futures is unleveraged.
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 Municipal Bonds held by
the Fund. As a result, the Fund's ability to hedge effectively all or a portion
of the value of its Municipal Bonds through the use of such financial futures
contracts will depend in part on the degree to which price movements in the
index underlying the financial futures contract correlate with the price
movements of the Municipal Bonds held by the Fund. The correlation may be
affected by disparities in the average maturity, ratings, geographical mix or
structure of the Fund's investments as compared to those comprising the
Municipal Bond Index, and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may
be subject to change over time as additions to and deletions from the Municipal
Bond Index alter its structure. The correlation between futures contracts on
U.S. Government securities and the Municipal Bonds held by the Fund may be
adversely affected by similar factors and the risk of imperfect correlation
between movements in the prices of such futures contracts and the prices of the
Municipal Bonds held by the Fund may be greater.
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 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.
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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 on 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. 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 reflected fully in the value of the
option purchased.
Municipal Bond Index futures contracts were approved for trading in 1986.
Trading in such futures contracts may tend to be less liquid than that 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.
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 1940 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).
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
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<PAGE>
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 1940 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 in
selling portfolio securities.
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 proposed non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or to a third party, if at the time of acquisition
more than 15% of its total assets would be invested in such securities.
This restriction shall not apply to securities which mature within seven
days or securities which the Board of Trustees of the Fund has otherwise
determined to be liquid pursuant to applicable law.
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange (the "NYSE") or American Stock Exchange or a major
foreign exchange. For purposes of this restriction, warrants acquired by
the Fund in units or attached to securities may be deemed to be without
value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such
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<PAGE>
securities. This restriction will not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those individual
officers and Trustees of the Fund, the officers and general partner of the
Investment Adviser, the directors of such general partner or the officers
and directors of any subsidiary thereof each owning beneficially more than
one-half of one percent of the securities of such issuer own in the
aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (6) above, borrow
amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes.
In addition, to comply with Federal income tax requirements for qualification
as a "regulated investment company," the Fund's investments will be limited in
a manner such that, at the close of each quarter of each fiscal year, (a) no
more than 25% of the Fund's total assets are invested in the securities of a
single issuer, and (b) with regard to at least 50% of the Fund's total assets,
no more than 5% of its total assets are invested in the securities of a single
issuer. For purposes of this restriction, the Fund will regard each state and
each political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public authority
which issues securities on behalf of a private entity as a separate issuer,
except that if the security is backed only by the assets and revenues of a non-
government entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the Trustees of the Trust to the
extent necessary to comply with changes to the Federal tax requirements.
----------------
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Trust, the Trust is prohibited from
engaging in certain transactions involving Merrill Lynch except pursuant to a
permissive order or otherwise in compliance with the provisions of the 1940 Act
and the rules and regulations thereunder. Included among such restricted
transactions are purchases from or sales to Merrill Lynch of securities in
transactions in which it acts as principal and purchases of securities from
underwriting syndicates of which Merrill Lynch is a member.
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MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
Information about the Trustees and executive officers of the Trust, including
their ages and their principal occupations for at least the last five years, is
set forth below. Unless otherwise noted, the address of each Trustee and
executive officer is P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (64)--President and Trustee(1)(2)--President of the Manager
(which term, as used herein, includes the Manager's corporate predecessors)
since 1977; President of MLAM (which term, as used herein, includes MLAM's
corporate predecessors) since 1977; President and Director of Princeton
Services, Inc. ("Princeton Services") since 1993; Executive Vice President of
Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of Merrill Lynch
Funds Distributor, Inc. ("MLFD" or the "Distributor") since 1977.
James H. Bodurtha (52)--Trustee(2)--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 (57)--Trustee(2)--113-115 University Place, New York, New
York 10003. John M. Olin Professor of Humanities, New York University since
1993 and Professor thereof since 1980; Dean, Gallatin Division of New York
University from 1978 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Trustee, Hudson Institute since 1980; Director,
Damon Corporation since 1991; Overseer, Center for Naval Analyses from 1983 to
1993; Limited Partner, Hypertech L.P. since 1996.
Robert R. Martin (69)--Trustee(2)--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 (67)--Trustee(2)--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 (44)--Trustee(2)--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 since 1991.
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Terry K. Glenn (56)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of MLFD since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
Vincent R. Giordano (52)--Vice President(1)(2)--Portfolio Manager of the
Manager and MLAM since 1977 and Senior Vice President of the Manager and MLAM
since 1984; Vice President of MLAM from 1980 to 1984; Senior Vice President of
Princeton Services since 1993.
Kenneth A. Jacob (45)--Vice President(1)(2)--Vice President of the Manager
and MLAM since 1984.
Fred K. Stuebe (46)--Portfolio Manager(1)(2)--Vice President of MLAM since
1989.
Donald C. Burke (36)--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990; Employee at Deloitte & Touche LLP from 1982 to
1990.
Gerald M. Richard (47)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Manager and MLAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Treasurer of MLFD since 1984 and Vice President
thereof since 1981.
Jerry Weiss (38)--Secretary(1)(2)--Vice President of MLAM since 1990;
Attorney in private practice from 1982 to 1990.
- --------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At October 15, 1996, the Trustees and officers of the Trust as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of
Common Stock of ML & Co. and owned an aggregate of less than 1% of the
outstanding shares of the Fund.
COMPENSATION OF TRUSTEES
The Trust pays each Trustee not affiliated with the Manager (each a "non-
affiliated Trustee") a fee of $10,000 per year plus $1,000 per meeting
attended, together with such Trustee's actual out-of-pocket expenses relating
to attendance at meetings. The Trust also compensates members of its Audit
Committee and Nominating Committee (the "Committee"), which consists of all
the non-affiliated Trustees, an annual fee of $2,000 per year plus $500 per
Committee meeting attended. The Trust reimburses each non-affiliated 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. For the fiscal year
ended July 31, 1996, fees and expenses paid to the non-affiliated Trustees
which were allocated to the Fund aggregated $3,822.
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The following table sets forth for the fiscal year ended July 31, 1996,
compensation paid by the Fund to the non-affiliated Trustees and for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
registered investment companies (including the Fund) advised by the Manager
and its affiliate, MLAM ("FAM/MLAM Advised Funds") to the non-affiliated
Trustees:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
PENSION OR FROM FUND AND
RETIREMENT OTHER
BENEFITS FAM/MLAM
ACCRUED AS ADVISED FUNDS
COMPENSATION PART OF FUND'S PAID TO
NAME OF TRUSTEE FROM FUND EXPENSES TRUSTEE(1)
- --------------- ------------ -------------- -------------
<S> <C> <C> <C>
James H. Bodurtha..................... $719 None $157,500*
Herbert I. London..................... $719 None $157,500
Robert R. Martin...................... $719 None $157,500
Joseph L. May......................... $719 None $157,500
Andre F. Perold....................... $719 None $157,500
</TABLE>
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(1) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (22 registered investment companies consisting of 46 portfolios);
Mr. London (22 registered investment companies consisting of 46
portfolios); Mr. Martin (22 registered investment companies consisting of
46 portfolios); Mr. May (22 registered investment companies consisting of
46 portfolios); and Mr. Perold (22 registered investment companies
consisting of 46 portfolios).
* $157,500 represents the amount Mr. Bodurtha would have received if he had
been a Trustee for the entire calendar year ended December 31, 1995. Mr.
Bodurtha was elected to the Trust's Board of Trustees effective June 23,
1995.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the 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 its
affiliates. Because of different objectives or other factors, a particular
security may be bought for one or more clients when one or more clients are
selling the same security. If the Manager or its affiliate purchases or sells
securities for the Fund or other funds for which they act as manager or for
their advisory clients and such sales or purchases arise for consideration at
or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of
the Manager or its affiliates 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.
Pursuant to a management agreement between the Trust on behalf of the Fund
and the Manager (the "Management Agreement"), the Manager receives for its
services to the Fund monthly compensation based upon the average daily net
assets of the Fund at the following annual rates: 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. For the fiscal years ended
July 31, 1994 and 1995, the total advisory fees payable by the Fund to the
Manager aggregated $389,433 and $402,455, respectively, of which the Manager
voluntarily waived $165,672 and $19,871, respectively. For the fiscal year
ended July 31, 1996, the total advisory fees paid by the Fund to the Manager
aggregated $431,325.
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<PAGE>
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 compensation 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, among other things,
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 the Distributor as described below), fees for
legal and auditing services, Commission fees, interest, certain taxes, and
other expenses attributable to a particular Series. Expenses which will be
allocated on the basis of asset size of the respective Series include fees and
expenses of unaffiliated Trustees, state franchise taxes, costs of printing
proxies and other expenses related to shareholder meetings, and other expenses
properly payable by the Trust. The organizational expenses of the Trust were
paid by the Trust, and as additional Series are added to the Trust, the
organizational expenses are allocated among the Series (including the Fund) 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 Fund by the
Manager and the Fund reimburses the Manager for its costs in connection with
such services. For the fiscal years ended July 31, 1994, 1995 and 1996, the
Fund reimbursed the Manager $49,715, $32,847 and $68,930, respectively, for
accounting 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 shares will
be financed by the Fund pursuant to the Distribution Plan in compliance with
Rule 12b-1 under the 1940 Act. See "Purchase of Shares--Distribution Plan".
The Manager is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons"
of the Manager as defined under the 1940 Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management 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 1940 Act) of any such
party. Such contracts are not assignable and may be terminated without penalty
on 60 days' written notice at the option of either party thereto or by vote of
the shareholders of the Fund.
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<PAGE>
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C and Class D share of the Fund represents identical
interests in the investment portfolio of the Fund and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid. Each
class has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
The Merrill Lynch Select PricingSM System is used by more than 50 registered
investment companies advised by MLAM or its affiliate, the Manager. Funds
advised by MLAM or the Manager which utilize the Merrill Lynch Select
Pricing SM System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into four separate distribution agreements with the
Distributor in connection with the subscription and 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 prospective 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.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal year
ended July 31, 1994 were $40,014, of which the Distributor received $3,919 and
Merrill Lynch received $36,095. The gross sales charges for the sale of Class
A shares for the fiscal year ended July 31, 1995 were $2,561, of which the
Distributor received $310 and Merrill Lynch received $2,251. The gross sales
charges for the sale of Class A shares for the fiscal year ended July 31, 1996
were $985, of which the Distributor received $92 and Merrill Lynch received
$893. The gross sales charges for the sale of Class D shares for the period
October 21, 1994 (commencement of operations) to July 31, 1995 were $737, of
which the Distributor received $112 and Merrill Lynch received $625. The gross
sales charges for the sale of Class D shares for the fiscal year ended July
31, 1996 were $1,557, of which the Distributor received $218 and Merrill Lynch
received $1,339. For the fiscal years ended July 31, 1994, 1995 and 1996, the
Distributor received no CDSCs with respect to redemption within one year after
purchase of Class A shares purchased subject to a front-end sales charge
waiver. For the period October 21, 1994 (commencement of
20
<PAGE>
operations) to July 31, 1995 and for the fiscal year ended July 31, 1996, the
Distributor received no CDSCs with respect to redemption within one year after
purchase of Class D shares purchased subject to a front-end sales charge
waiver.
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as
that term is defined in the 1940 Act, but does not include purchases by any
such company which has not been in existence for at least six months or which
has no purpose other than the purchase of shares of the Fund or shares of
other registered investment companies at a discount; provided, however, that
it shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders
of a company, policyholders of an insurance company, customers of either a
bank or broker-dealer or clients of an investment adviser.
Closed-End Investment Option. Class A shares of the Fund and other MLAM-
advised mutual funds ("Eligible Class A shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or
MLAM who purchased such closed-end fund shares prior to October 21, 1994 and
wish to reinvest the net proceeds of a sale of their closed-end fund shares of
common stock in Eligible Class A shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to buy Class A shares) or Class D shares of the Fund and other MLAM-advised
mutual funds ("Eligible Class D Shares"), if the following conditions are met.
First, the sale of closed-end fund shares must be made through Merrill Lynch,
and the net proceeds therefrom must be immediately reinvested in Eligible
Class A or Class D shares. Second, the closed-end fund shares must either have
been acquired in the initial public offering or be shares representing
dividends from shares of common stock acquired in such offering. Third, the
closed-end fund shares must have been continuously maintained in a Merrill
Lynch securities account. Fourth, there must be a minimum purchase of $250 to
be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A shares and the
other requirements pertaining to the reinvestment privilege are met. In order
to exercise this investment option, a shareholder of one of the above-
referenced continuously offered closed-end funds (an "eligible fund") must
sell his or her shares of common stock of the eligible fund (the "eligible
shares") back to the eligible fund in connection with a tender offer conducted
by the eligible fund and reinvest
21
<PAGE>
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.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the offering price applicable
to the total of (a) the public offering price of the shares then being
purchased plus (b) an amount equal to the then current net asset value or cost,
whichever is higher, of the purchaser's combined holdings of all classes of
shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention
is not available to employee benefit plans for which Merrill Lynch provides
plan participant record-keeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares.
However, its execution will result in the purchaser paying a lower sales charge
at the appropriate quantity purchase level. A purchase not originally made
pursuant to a Letter of Intention may be included under a subsequent Letter of
Intention executed within 90 days of such purchase if the Distributor is
informed in writing of this intent within such 90-day period. The value of
Class A and Class D shares of the Fund and of other MLAM-advised mutual funds
presently held, at cost or maximum offering price (whichever is higher), on the
date of the first purchase under the Letter of Intention, may be included as a
credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in
the Letter of Intention (minimum of $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 five percent of
the intended amount will be held in escrow during the 13-month period (while
remaining registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intention must be at least five percent of the
dollar amount of such Letter. If a purchase during the term of such Letter
would otherwise be subject to a further reduced sales charge based on the right
for accumulation, the purchaser will be entitled on that purchase and
subsequent purchases to that further reduced percentage sales charge, but there
will be no retroactive reduction of the sales charges on any previous purchase.
The value of any shares redeemed or otherwise
22
<PAGE>
disposed of by the purchaser prior to termination or completion of the Letter
of Intention will be deducted from the total purchases made under such Letter.
An exchange from a MLAM-advised money market fund into the Fund that creates a
sales charge will count toward completing a new or existing Letter of Intention
from the Fund.
Employee Access AccountsSM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through qualified employers
that provide employer-sponsored retirement or savings plans that are eligible
to purchase such shares at net asset value. The initial minimum for such
accounts is $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
TMASM Managed Trusts. Class A shares are offered at net asset value to TMASM
Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services.
Purchase Privilege of Certain Persons. Trustees of the Trust, members of the
Boards of other MLAM-advised investment companies, ML & Co., and its
subsidiaries, (the term "subsidiaries", when used herein with respect to ML &
Co., includes MLAM, the Manager and certain other entities directly or
indirectly wholly-owned and controlled by ML & Co.), and their directors and
employees and any trust, pension, profit-sharing or other benefit plan for such
persons, may purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish that such redemption had
been made within 60 days prior to the investment in the Fund, and the proceeds
from the redemption had been maintained in the interim in cash or a money
market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund 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 such fund
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, such purchase of Class D shares must be made within 90 days
after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: First, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
other mutual funds and that such shares have been outstanding for a period of
no less than six months; 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.
23
<PAGE>
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund which might result from an acquisition of assets having net unrealized
appreciation which is disproportionately higher at the time of acquisition than
the realized or unrealized appreciation of the Fund. The issuance of Class D
shares for consideration other than cash is limited to bona fide
reorganizations, statutory mergers or other acquisitions of portfolio
securities which (i) meet the investment objectives and policies of the Fund;
(ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, which are not restricted as to
transfer either by law or liquidity of market (except that the Fund may acquire
through such transactions restricted or illiquid securities to the extent the
Fund does not exceed the applicable limits on acquisition of such securities
set forth under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
1940 Act (each a "Distribution Plan") with respect to the account maintenance
and/or distribution fees paid by the Fund to the Distributor with respect to
such classes.
Payments of account maintenance fees and/or distribution fees are subject to
the provisions of Rule 12b-1 under the 1940 Act. Among other things, each
Distribution Plan provides that the Distributor shall provide and the Trustees
shall review quarterly reports of the disbursement of the account maintenance
fees and/or distribution fees paid to the Distributor. In their consideration
of each Distribution Plan, the Trustees must consider all factors they deem
relevant, including information as to the benefits of the Distribution Plan to
the Fund and its related class of shareholders. Each Distribution Plan further
provides that, so long as the Distribution Plan remains in effect, the
selection and nomination of Trustees who are not "interested persons" of the
Trust, as defined in the 1940 Act (the "Independent Trustees"), shall be
committed to the discretion of the Independent Trustees then in office. In
approving each Distribution Plan in accordance with Rule 12b-1, the Independent
Trustees concluded that there is 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 Independent Trustees or by the vote of the holders of a
majority of the outstanding related class of voting securities of the Fund. A
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without the approval of the related class of shareholders,
and all material amendments are required to be approved by the vote of
Trustees, including a majority of the Independent Trustees who have no direct
or indirect financial interest in such Distribution Plan, cast in person at a
meeting called for that purpose. Rule 12b-1 further requires that the Trust
preserve copies of each Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of such Distribution
Plan or such report, the first two years in an easily accessible place.
24
<PAGE>
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the
contingent deferred sales charge ("CDSC") borne by 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, 1996
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, 1996
------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
CLASS B SHARES, FOR THE ALLOWABLE ALLOWABLE AMOUNTS FEE AT
PERIOD FEBRUARY 28, ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT
1992 (COMMENCEMENT OF GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
OPERATIONS) TO JULY 31, SALES (1) CHARGES BALANCE (2) PAYABLE DISTRIBUTOR (3) BALANCE LEVEL (4)
1996: --------- --------- ----------- ------- --------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $78,492 $4,906 $1,288 $6,194 $1,064 $5,130 $161
Under Distributor's
Voluntary Waiver....... $78,492 $4,906 $ 392 $5,298 $1,064 $4,234 $161
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO JULY 31,
1996:
Under NASD Rule as
Adopted................ $ 2,606 $ 163 $ 11 $ 174 $ 8 $ 166 $ 10
</TABLE>
- --------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the
NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.
25
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the
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.
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares", while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are any partial or complete redemption following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
Class B shareholder (including one who owns the Class B shares as joint tenant
with his or her spouse), provided the redemption is requested within one year
of the death or initial determination of disability. For the fiscal years ended
July 31, 1994, 1995 and 1996, the Distributor received CDSCs of $111,978,
$150,198 and $136,374, respectively, with respect to redemptions of Class B
shares, all of which were paid to Merrill Lynch. For the period October 21,
1994 (commencement of operations) to July 31, 1995 and for the fiscal year
ended July 31, 1996, the Distributor received CDSCs of $123 and $863,
respectively, with respect to redemptions of Class C shares, all of which were
paid to Merrill Lynch.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies--Other Investment
Policies and Practices" in the Prospectus.
Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Fund as a principal in the purchase and sale of securities
unless such trading is permitted by an exemptive order issued by the
Commission. Since over-the-counter transactions are usually principal
transactions, affiliated persons of the Trust, including Merrill Lynch, may not
serve as dealer in connection with transactions with the Fund. The Trust has
obtained an exemptive order permitting it to engage in certain principal
transactions with Merrill Lynch involving high quality short-term municipal
bonds subject to certain conditions. For the fiscal years ended July 31, 1994
and 1995, the Fund engaged in no transactions pursuant to such order. For the
fiscal year ended July 31, 1996, the Fund engaged in one transaction pursuant
to such order for an aggregate market value of $2,500,000. The Trust has
applied for an exemptive order permitting it to, among other things, (i)
purchase high quality tax-exempt securities from Merrill Lynch when Merrill
Lynch is a member of an underwriting syndicate and (ii) purchase tax-exempt
securities from and sell tax-exempt securities to Merrill Lynch in secondary
market transactions. An affiliated person of the Trust may serve as its broker
in
26
<PAGE>
over-the-counter transactions conducted by the Fund on an agency basis only.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the 1940 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.
As a non-fundamental restriction, the Trust will prohibit the purchase or
retention by the Fund of securities of any issuer of the officers and trustees
of the Trust, the officers and general partner of the Manager, the directors of
such general partner or the officers and directors of any subsidiary thereof
each owning beneficially more than one-half of one percent of the securities of
an issuer together own beneficially more than five percent of the securities of
that issuer. In addition, under the 1940 Act, the Fund may not purchase
securities from any underwriting syndicate of which Merrill Lynch is a member
except pursuant to an exemptive order or rules adopted by the Commission. Rule
10f-3 under the 1940 Act sets forth conditions under which the Fund may
purchase municipal bonds in such transactions. The rule sets forth requirements
relating to, among other things, the terms of an issue of municipal bonds
purchased by the Fund, the amount of municipal bonds which may be purchased in
any one issue and the assets of the Fund which may be invested in a particular
issue.
The Fund does not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who
provide supplemental investment research (such as information concerning tax-
exempt securities, economic data and market forecasts) to the Manager may
receive orders for transactions by the Fund. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Manager under its Management Agreement and the expenses of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information.
The Trust has no obligation to deal with any broker in the execution of
transactions for the Fund's portfolio securities. In addition, consistent with
the Rules of Fair Practice 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.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which
they manage unless the member (i) has obtained prior express authorization from
the account to effect such transactions, (ii) at least annually furnishes the
account with 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.
27
<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value of shares of all classes of the Fund is determined once
daily, Monday through Friday, as of 15 minutes after the close of business on
the NYSE (generally 4:00 P.M., New York time), on each day during which the
NYSE is open for trading. The NYSE is not open on New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. Net asset value per share is computed by dividing the sum of
the value of the securities held by the Fund plus any cash or other assets
minus all liabilities by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the
Manager and any account maintenance and/or distribution fees, 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 Class D shares. Moreover the per share net asset
value of 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, higher account maintenance fees and higher transfer agency
fees applicable with respect to Class B and Class C shares of the Fund. It is
expected, however, that per share net asset value of the four classes
eventually will tend to converge (although not necessarily meet) immediately
after the payment of dividends, which will differ by approximately the amount
of the expense accrual differentials between the classes.
The Municipal Bonds and other portfolio securities in which the Fund invests
are traded primarily in over-the-counter municipal bond and money markets and
are valued at the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers that make
markets in the securities. One bond is the "yield equivalent" of another bond
when, taking into account market price, maturity, coupon rate, credit rating
and ultimate return of principal, both bonds will theoretically produce an
equivalent return to the bondholder. Financial futures contracts and options
thereon, which are traded on exchanges, are valued at their settlement prices
as of the close of such exchanges. Short-term investments with a remaining
maturity of 60 days or less are valued on an amortized cost basis, which
approximates market value. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Trustees of the Trust, including valuations
furnished by a pricing service retained by the Trust, which may utilize a
matrix system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Trust under the general
supervision of the Trustees.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Fund. Full details as to
each of such services and copies of the various plans described below can be
obtained from the Trust, the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction
28
<PAGE>
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long- term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for
each purchase or sale transaction other than automatic investment purchases and
the reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his Investment Account at
any time by mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the specific
request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he or she be issued certificates for his or her shares and
then must turn the certificates over to the new firm for re-registration as
described in the preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if an eligible Class A investor as described in the
Prospectus) or Class B, Class C or Class D shares at the applicable public
offering price either through the shareholder's securities dealer, or by mail
directly to the Transfer Agent, acting as agent for such securities dealers.
Voluntary accumulation also can be made through a service known as the
Automatic Investment Plan whereby the Fund is authorized through pre-authorized
checks or automated clearing house debits of $50 or more to charge the regular
bank account of the shareholder on a regular basis to provide systematic
additions to the Investment Account of such shareholder. Alternatively,
investors who maintain CMA(R) or CBA(R) accounts may arrange to have periodic
investments made in the Fund in their CMA(R) or CBA(R) account or in certain
related accounts in amounts of $100 or more through the CMA(R) or CBA(R)
Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
automatically reinvested in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of
business on the monthly payment date for such dividends and distributions.
Shareholders may elect in writing to receive either their income dividends or
capital gains distributions, or both, in cash, in which event payment will be
mailed or direct deposited on or about the payment date.
29
<PAGE>
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or capital gains distributions reinvested in shares of the Fund or vice
versa and, commencing ten days after the receipt by the Transfer Agent of such
notice, such instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D shares of the Fund having a value, based on cost or the
current offering price, of $5,000 or more, and monthly withdrawals are
available for shareholders with Class A or Class D shares with such a value of
$10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A or Class D
shares. Redemptions will be made at net asset value as determined 15 minutes
after the close of business on the NYSE (generally 4:00 P.M., New York time) on
the 24th day of each month or the 24th day of the last month of each quarter,
whichever is applicable. If the NYSE is not open for business on such date, the
Class A or Class D shares will be redeemed at the close of business on the
following business day. The check for the withdrawal payment will be mailed, or
the direct deposit for the withdrawal payment will be made, on the next
business day following redemption. When a shareholder is making systematic
withdrawals, dividends and distributions on all Class A or Class D shares in
the Investment Account are reinvested automatically in the Fund's Class A or
Class D shares, respectively. A shareholder's Systematic Withdrawal Plan may be
terminated at any time, without charge or penalty, by the shareholder, the
Trust, the Transfer Agent or the Distributor. Withdrawal payments should not be
considered as dividends, yield or income. Each withdrawal is a taxable event.
If periodic withdrawals continuously exceed reinvested dividends, the
shareholder's original investment may be reduced correspondingly. Purchases of
additional Class A or Class D shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax
liabilities. The Trust will not knowingly accept purchase orders for Class A or
Class D shares of the Fund from investors who maintain a Systematic Withdrawal
Plan unless such purchase is equal to at least one year's scheduled withdrawals
or $1,200, whichever is greater. Periodic investments may not be made into an
Investment Account in which the shareholder has elected to make systematic
withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held within
a CMA(R) or CBA(R) account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$25. The proceeds of systematic redemptions will be posted to the shareholder's
account three business days after the date the shares are redeemed. Monthly
systematic redemptions will be made at net asset value on the first Monday of
each month, bimonthly systematic redemptions will be made at net asset value on
the first Monday of every other month, and quarterly, semiannual or annual
redemptions are made at net asset value on the first Monday of months selected
at the shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic
30
<PAGE>
Investment Program. For more information on the CMA(R) or CBA(R) Systematic
Redemption Program, eligible shareholders should contact their Financial
Consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. Under the Merrill Lynch Select
Pricing SM System, Class A shareholders may exchange Class A shares of the
Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his account in
which the exchange is made at the time of the exchange or is otherwise
eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
second fund in his account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares of the second fund as a result of the exchange. Class D
shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the
shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of
the second fund. Class B, Class C and Class D shares are exchangeable with
shares of the same class of other MLAM-advised mutual funds. For purposes of
computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares
of the Fund is "tacked" to the holding period for the newly acquired shares of
the other fund as more fully described below. Class A, Class B, Class C and
Class D shares also are exchangeable for shares of certain MLAM-advised money
market funds as follows: Class A shares may be exchanged for shares of Merrill
Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund
(available only for exchanges within certain retirement plans), Merrill Lynch
U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money Fund; Class
B, Class C and Class D shares may be exchanged for shares of Merrill Lynch
Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Institutional
Tax-Exempt Fund and Merrill Lynch Treasury Fund. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege, and any
shares utilized in an exchange must have been held by the shareholder for 15
days. It is contemplated that the exchange privilege may be applicable to
other new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have
taken place, the "sales charge previously paid" shall include the aggregate of
the sales charges paid with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A and 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 of the other funds or into shares
of certain money market funds with a reduced or without a sales charge.
31
<PAGE>
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its outstanding
Class B or Class C shares for Class B or Class C shares, respectively, of
another MLAM-advised mutual funds ("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 contingent deferred sales charge 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 deferred sales charge
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 sales charge that may be payable on a disposition of the new Class B or
Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period 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 the Fund's 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 new Class B shares for more than five
years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Manager or its affiliates, but the period of
time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or, with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund which were
acquired as a result of an exchange for Class B or Class C shares of the Fund
may, in turn, be exchanged back into Class B or Class C shares, respectively,
of any fund offering such shares, in which event the holding period for Class B
or Class C shares of the newly-acquired fund will be aggregated with previous
holding periods for purposes of reducing the CDSC. Thus, for example, an
investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") after having held the Class B shares
for two and a half years and three years later decide to redeem the shares of
Institutional Fund for cash. At the time of this redemption, the 2% CDSC that
would have been due had the Class B shares of the Fund been redeemed for cash
rather than exchanged for shares of Institutional Fund will be payable. If,
instead of such redemption the shareholder exchanged such shares for Class B
shares of a fund which the shareholder continues to hold for an additional two
and a half years, any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, 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 funds described above
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 at any time in accordance
32
<PAGE>
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.
DISTRIBUTIONS AND TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax to the
extent that it distributes its net investment income and net realized capital
gains. The Trust intends to cause the Fund to distribute substantially all of
such income.
As discussed in the Fund's Prospectus, the Trust 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 described in the Prospectus. Losses in one
Series do not offset gains in another Series, and the requirements (other than
certain organizational requirements) for qualifying for RIC status are
determined for each Series 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 its
total assets consists of obligations exempt from Federal income tax ("tax-
exempt obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be qualified
to pay exempt-interest dividends to its Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). Exempt-interest dividends are
dividends or any part thereof paid by the Fund which are attributable to
interest on tax-exempt obligations and designated by the Trust as exempt-
interest dividends in a written notice mailed to the Fund's shareholders within
60 days after the close of the Fund's taxable year. For this purpose, the Fund
will allocate interest from tax-exempt obligations (as well as ordinary income,
capital gains and tax preference items, discussed below) among the Class A,
Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission rule permitting the issuance and
sale of multiple classes of shares) that is based on the gross income that is
allocable to Class A, Class B, Class C and Class D shareholders during the
taxable year or such other method as the Internal Revenue Service may
prescribe. To the extent that the dividends distributed to the Fund's
shareholders are derived from interest income exempt from Federal income tax
under Code Section 103(a) and are properly designated as exempt-interest
dividends, they will be excludable from a shareholder's gross income for
Federal or Ohio income tax purposes. Exempt-interest dividends are included,
however, in
33
<PAGE>
determining the portion, if any, of a person's social security benefits and
railroad retirement benefits subject to Federal income taxes. Interest on
indebtedness incurred or continued to purchase or carry shares of a RIC, such
as the Fund, will not be deductible by the investor for Federal or Ohio 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 Ohio Municipal Bonds also will be exempt from Ohio
personal income taxes. Shareholders subject to income taxation by states other
than Ohio will realize a lower after tax rate of return than Ohio 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 which constitutes exempt-interest dividends and the portion which
is exempt from Ohio personal income taxes. The Fund will allocate exempt-
interest dividends among Class A, Class B, Class C and Class D shareholders for
Ohio income tax purposes based on a method similar to that described above for
Federal income tax purposes.
Distributions from investment income and capital gains of the Fund, including
exempt-interest dividends, will be subject to Ohio corporation excise tax, and
may also be subject to tax in states other than Ohio and local taxes in cities
other than those in Ohio.
Distributions treated as investment income or as capital gains for Federal
income tax purposes, including exempt-interest dividends, may be subject to
local taxes imposed by certain cities within Ohio. Additionally, the value of
shares of the Fund will be included in (i) the net worth measure of the issued
and outstanding shares of corporations and financial institutions for purposes
of computing the Ohio corporate franchise tax, (ii) the value of the gross
estate for purposes of the Ohio estate tax, (iii) the value of capital and
surplus for purposes of the Ohio domestic insurance company franchise tax and
(iv) the value of shares of and capital employed by dealers in intangibles for
purposes of the Ohio tax on dealers in intangibles. Accordingly, investors in
the Fund, including, in particular, corporate investors which may be subject to
the Ohio corporate excise tax, should consult their tax advisors with respect
to the application of such taxes to an investment in the Fund, the receipt of
Fund dividends, the holding of shares in the Fund and as to their Ohio tax
situation in general.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal and Ohio income tax purposes.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares. Distributions by the
Fund, whether from exempt-interest income, ordinary income or capital gains,
will not be eligible for the dividends received deduction allowed to
corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of tax-exempt
obligations purchased at a market discount will be treated as ordinary income
rather than capital gain. This rule may increase the
34
<PAGE>
amount of ordinary income dividends received by shareholders. Distributions in
excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming the shares are
held as a capital asset). Any loss upon the sale or exchange of Fund shares
held for six months or less will be disallowed to the extent of any exempt-
interest dividends received by the shareholder. In addition, any such loss that
is not disallowed under the rule stated above will be treated as long-term
capital loss to the extent of any capital gain dividends received by the
shareholder. If the Fund pays a dividend in January which was declared in the
previous October, November or December to shareholders of record on a specified
date in one of such months, then such dividend will be treated for tax purposes
as being paid by the Fund and received by its shareholders on December 31 of
the year in which such dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on certain "private activity bonds" issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference", which could subject certain investors in such bonds,
including shareholders of the Fund, to an alternative minimum tax. The Fund
will purchase such "private activity bonds" and the Trust will report to
shareholders within 60 days after the Fund's taxable year-end the portion of
the Fund's dividends declared during the year which constitutes an item of tax
preference for alternative minimum tax purposes. The Code further provides that
corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings", which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay alternative minimum tax on exempt-
interest dividends paid by the Fund.
The Fund may invest in high yield securities as described in the Prospectus.
Furthermore, the Fund may also invest in instruments the return on which
includes nontraditional features such as indexed principal or interest payments
("nontraditional 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 nontraditional instruments could be recharacterized as taxable ordinary
income.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge such 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
35
<PAGE>
beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisors concerning the applicability of the United States
withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
ENVIRONMENTAL TAX
The Code previously imposed a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed without
regard to the alternative tax net operating loss deduction and the deduction
for the Environmental Tax) at a rate of $12 per $10,000 (0.12%) of alternative
minimum taxable income in excess of $2,000,000. The Environmental Tax has
expired for tax years beginning after December 31, 1995, but may be reinstated
in the future. The Environmental Tax was imposed even if the corporation was
not required to pay an alternative minimum tax because the corporation's
regular income tax liability exceeded its minimum tax liability. The Code
provides, however, that a RIC, such as the Fund, would not be subject to the
Environmental Tax. However, exempt-interest dividends paid by the Fund that
create alternative minimum taxable income for corporate shareholders (as
described above) could subject corporate shareholders of the Fund to the
Environmental Tax.
TAX TREATMENT OF OPTION AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). The Fund 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
36
<PAGE>
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 and related options.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an options or financial futures contract.
OHIO INCOME TAX
Under present Ohio law, the Fund is not subject to any Ohio income taxation
or taxation measured by the capital assets of the Fund provided that the
appropriate annual report is timely filed with the Tax Commissioner of Ohio.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and Ohio tax laws presently in
effect. For the complete provisions, reference should be made to the pertinent
Code sections, the Treasury regulations promulgated thereunder and the
applicable Ohio income tax laws. The Code and the Treasury regulations, as well
as the Ohio tax laws, are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Shareholders are urged to consult their own tax advisors regarding the
availability of any exemptions from state or local taxes (other than those
imposed by Ohio) 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.
From time to time, the Fund may include the Fund's Morningstar risk-adjusted
Performance Ratings in advertisements or supplemental sales literature. Total
return, yield and tax-equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return yield and tax equivalent yield are determined
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital
37
<PAGE>
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 the Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
38
<PAGE>
Set forth below is the total return, yield and tax-equivalent yield
information for 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 CLASS C SHARES CLASS D SHARES
-------------------------- ---------------------------- -------------------------- ----------------------------
REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE
EXPRESSED AS VALUE OF A EXPRESSED AS A VALUE OF A EXPRESSED AS VALUE OF A EXPRESSED AS A VALUE OF A
A PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL A PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT
$1,000 AT THE END OF $1,000 AT THE END OF $1,000 AT THE END OF $1,000 AT THE END OF
INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
------------ ------------- -------------- ------------- ------------ ------------- -------------- -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One year ended
July 31, 1996... 2.30% $1,023.00 2.01% $1,020.10 4.90% $1,049.00 2.19% $1,021.90
Inception
(February 28,
1992) to July
31, 1996........ 6.32% $1,311.30 6.76% $1,335.60
Inception
(October 21,
1994) to July
31, 1996........ 8.12% $1,149.00 6.22% $1,113.20
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended July
31, 1996........ 6.56% $1,065.60 6.01% $1,060.10 5.90% $1,059.00 6.45% $1,064.50
Year ended July
31, 1995........ 6.03% $1,060.30 5.49% $1,054.90
Year ended July
31, 1994........ 1.10% $1,011.00 0.59% $1,005.90
Year ended July
31, 1993........ 10.51% $1,105.10 9.95% $1,099.50
Inception
(February 28,
1992) to July
31, 1992........ 8.21% $1,082.10 7.98% $1,079.80
Inception
(October 21,
1994) to July
31, 1995........ 8.50% $1,085.00 8.93% $1,089.30
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(February 28,
1992) to July
31, 1996........ 31.13% $1,311.30 33.56% $1,335.60
Inception
(October 21,
1994) to July
31, 1996........ 14.90% $1,149.00 11.32% $1,113.20
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended
July 31, 1996... 4.69% 4.38% 4.29% 4.59%
<CAPTION>
TAX EQUIVALENT YIELD*
<S> <C> <C> <C> <C>
30 days ended
July 31, 1996... 6.51% 6.08% 5.96% 6.38%
</TABLE>
- ----
* Based on a Federal income tax rate of 28%.
39
<PAGE>
In order to reflect the reduced sales charges in the case of Class A or Class
D shares or the waiver of the CDSC in the case of Class B or Class C shares
applicable to certain investors, as described under "Purchase of Shares" and
"Redemption of Shares", respectively, the total return data quoted by the Fund
in advertisements directed to such investors may take into account the reduced,
and not the maximum, sales charge or may take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charge or the waiver of sales charges, a lower amount of expenses is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust provides that the Trust shall be comprised of
separate Series each of which will consist of a separate portfolio which will
issue separate shares. 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 Michigan 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 Oregon Municipal Bond Fund,
Merrill Lynch Pennsylvania Municipal Bond Fund and Merrill Lynch Texas
Municipal Bond Fund. The Trustees are authorized to create an unlimited number
of Series and, with respect to each Series, to issue an unlimited number of
full and fractional shares of beneficial interest, par value $.10 per share, of
different classes and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial
interests in the Series. Shareholder approval is not necessary for the
authorization of additional Series or classes of a Series of the Trust. At the
date of this Statement of Additional Information, the shares of the Fund are
divided into Class A, Class B, Class C and Class D shares. Class A, Class B,
Class C and Class D shares represent an interest in the same assets of the Fund
and are identical in all respects except that the Class B, Class C and Class D
shares bear certain expenses related to the account maintenance and/or
distribution expenditures. The Board of Trustees of the Trust may classify and
reclassify the shares of any Series into additional classes at a future date.
All shares of the Trust have equal voting rights, except that only shares of
the respective Series are entitled to vote on matters concerning only that
Series and, as noted above, Class B, Class C and Class D shares will have
exclusive voting rights with respect to matters relating to the account
maintenance and/or distribution expenses being borne solely by such class. Each
issued and outstanding share is entitled to one vote and to participate equally
in dividends and distributions declared by the Fund and in the net assets of
such Series upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities, except that, as noted above, expenses related to the
account maintenance and/or distribution of the Class B, Class C and Class D
shares are borne solely by such class. There normally will be no meetings of
shareholders for the purposes 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
40
<PAGE>
Trust will be required to call a special meeting of shareholders in accordance
with the requirements of the 1940 Act to seek approval of new management and
advisory arrangements, of a material increase in distribution fees or of a
change in the fundamental policies, objectives or restrictions of a Series.
The obligations and liabilities of a particular Series are restricted to the
assets of that Series and do not extend to the assets of the Trust generally.
The shares of each Series, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange or similar rights, and are
freely transferable. Holders of shares of any Series are entitled to redeem
their shares as set forth elsewhere herein and in the Prospectus. Shares do not
have cumulative voting rights and the holders of more than 50% of the shares of
the Trust voting for the election of Trustees can elect all of the Trustees if
they choose to do so and in such event the holders of the remaining shares
would not be able to elect any Trustees. No amendments may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust.
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. The organizational expenses of the Fund
were paid by the Fund and are being amortized over a period not exceeding five
years. The proceeds realized by the Manager (or any subsequent holder) upon the
redemption of any of the shares initially purchased by it will be reduced by
the proportionate amount of unamortized organizational expenses which the
number of shares redeemed bears to the number of shares initially purchased.
Such organizational expenses include certain of the initial organizational
expenses of the Trust which have been allocated to the Fund by the Trustees. 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.
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, 1996, as calculated, is set
forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets....................... $7,280,847 $64,397,021 $2,720,150 $3,512,985
========== =========== ========== ==========
Number of Shares Outstanding..... 680,340 6,017,388 254,200 328,390
========== =========== ========== ==========
Net Asset Value Per Share (net
assets divided by number of
shares outstanding)............. $ 10.70 $ 10.70 $ 10.70 $ 10.70
Sales Charge (for Class A and
Class D shares: 4.00% of
offering price; 4.17% of net
asset value per share)*......... .45 ** ** .45
---------- ----------- ---------- ----------
Offering Price................... $ 11.15 $ 10.70 $ 10.70 $ 11.15
========== =========== ========== ==========
</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" in the
Prospectus and "Redemption of Shares--Deferred Sales Charges--Class B and
Class C Shares" herein.
41
<PAGE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The independent
auditors are responsible for auditing the annual financial statements of the
Fund.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101, acts as the custodian of the Fund's assets. The custodian is responsible
for safeguarding and controlling the Fund's cash and securities, handling the
delivery of securities and collecting interest on the Fund's investments.
TRANSFER AGENT
Merrill Lynch 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
"Management of the Trust--Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORT TO SHAREHOLDERS
The fiscal year of the Fund ends on July 31 of each year. The Trust sends to
shareholders of the Fund at least semiannually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Commission, Washington,
D.C., under the Securities Act of 1933, as amended, and the 1940 Act, to which
reference is hereby made.
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.
To the knowledge of the Trust, no person or entity owned beneficially 5% or
more of the Fund's shares on November 1, 1996.
42
<PAGE>
APPENDIX I
ECONOMIC AND FINANCIAL CONDITIONS IN OHIO
The following information is a brief summary of factors affecting the economy
of 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, however, it has not been updated nor will it be updated during the
year. The Trust has not independently verified the information.
The State of Ohio (the "State") operates on a fiscal biennium for its
appropriations and expenditures. The State finances the majority of its
operations through the State's General Revenue Fund (the "GRF"). The GRF is
funded mainly by the State's personal income tax, sales and use tax, various
other taxes and grants from the Federal government. The State is precluded by
law from ending a fiscal year or a biennium in a deficit position. In 1981 the
State created the Budget Stabilization Fund ("BSF") for purposes of cash
management.
The GRF ending fund and cash balances for the State's 1984-85 through 1994-95
bienniums were as follows:
<TABLE>
<CAPTION>
ENDING FUND ENDING CASH
BEGINNING ENDING BALANCE BALANCE
BIENNIUM JULY 1 JUNE 30 (IN THOUSANDS) (IN THOUSANDS)
-------- --------- ------- -------------- --------------
<S> <C> <C> <C> <C>
1984-85.................... 1983 1985 $297,600 $ 849,900
1986-87.................... 1985 1987 226,300 632,700
1988-89.................... 1987 1989 475,100 784,268
1990-91.................... 1989 1991 135,365 326,576
1992-93.................... 1991 1993 111,013 393,634
1994-95.................... 1993 1995 928,000 1,312,200
</TABLE>
Based on year-to-date financial results and a then current economic forecast
for the State, both in light of the continuing uncertain nationwide economic
situation, the State's Office of the Budget and Management ("OBM") projected a
Fiscal Year 1992 imbalance in GRF resources and expenditures which was
subsequently timely addressed. As an initial action, the Governor of the State
ordered most State agencies to reduce GRF appropriations spending in the final
six months of Fiscal Year 1992 by a total of approximately $184,000,000. (Debt
service and lease rental obligations were not affected by the order.) Then,
with General Assembly authorization, in June 1992 the entire $100,400,000 BSF
balance and additional amounts from certain other funds were transferred to the
GRF. Other administration revenue and spending actions resolved the remaining
GRF imbalance for Fiscal Year 1992.
As a first step toward addressing a projected Fiscal Year 1993 GRF shortfall,
then estimated by OBM at approximately $520,000,000, the Governor ordered,
effective July 1, 1992, selected reductions in Fiscal Year 1993 GRF
appropriations spending totaling $300,000,000. Those selected GRF reductions
included appropriations for higher education but expressly excluded
appropriations for debt service (including lease rental appropriations) and for
primary and secondary education. Subsequent executive and legislative actions--
including tax revisions that produced an additional $194,500,000 and additional
appropriations spending reductions totalling approximately $50,000,000--
provided for positive biennium-ending GRF balances and a
43
<PAGE>
better basis for appropriations for the next biennium. As a first step toward
BSF replenishment, $21,000,000 was deposited in the BSF as contemplated by
applicable law, being the amount of the GRF ending balance in excess of
$90,000,000.
The GRF budget for the 1994-95 biennium provided for total GRF expenditures
of approximately $30.7 billion, with Fiscal Year 1994 expenditures 9.2% higher
than in Fiscal Year 1993, and Fiscal Year 1995 expenditures 6.6% higher than in
Fiscal Year 1994.
As noted above, the GRF ended the 1994-95 biennium with a fund balance of
$928 million and cash balance of $1,312.2 million. As an additional step toward
BSF replenishment, OBM transferred $260.3 million to the BSF at the end of
Fiscal Year 1994 and $535.2 million in July 1995, for a balance in the BSF of
$828.3 million.
The General Appropriations Act for the 1996-97 biennium provides for total
GRF biennial expenditures of approximately $33.5 billion, an increase over
those for the 1994-95 fiscal biennium. Authorized expenditures in Fiscal Year
1996 are higher than in Fiscal Year 1995 and for Fiscal Year 1997 are higher
than in Fiscal Year 1996. Necessary GRF debt service appropriations for the
entire biennium were requested in the budget document and incorporated in the
related appropriations bill as introduced and in the versions as passed by the
House and the Senate and in the act as passed and signed. In addition to the
transfer to the BSF described above, the Act transferred $322.8 million from
the GRF to a variety of funds (including school assistance funds and, in
anticipation of possible Federal program changes, a human service stabilization
fund), leaving an unreserved and undesignated balance in the GRF of $70
million.
As of the end of June 1996, the GRF had a fund balance of over $781 million.
In accordance with General Assembly directions, $100,000,000 was promptly
transferred from the GRF to the fund providing for the elementary and secondary
school computer network and $30,000,000 to a new fund for State transportation
infrastructure. Approximately $400,800,000 is serving as a basis for a
temporary 1996 personal income tax reduction equalling that amount.
Litigation pending in Federal district court contests the Ohio Department of
Human Services' ("ODHS") former Medicaid financial eligibility rules for
married couples where one spouse is living in a nursing facility and the other
spouse resides in the community. ODHS promulgated new eligibility rules
effective January 1, 1996. It is appealing a court order directing it to
provide notice to persons potentially affected by the former rules from 1990
through 1995. It is not possible at this time to state whether this appeal will
be successful or, should plaintiffs prevail, the period, beyond the current
fiscal year, during which necessary additional Medicaid expenditures would have
to be made. Plaintiffs have estimated total additional Medicaid expenditures at
$600 million for the retroactive period and, based on current law, it is
estimated that the State's share of those additional expenditures is
approximately $240 million.
Because the schedule of GRF cash receipts and disbursements do not precisely
coincide, temporary GRF cash flow deficiencies may occur in some months of a
Fiscal Year. Statutory provisions provide for effective management of these
temporary GRF cash deficiencies by permitting the adjustment of payment
schedules and the use of a "Total Operating Fund" ("TOF"). The State has not
and does not do external revenue anticipation borrowing.
The TOF includes the total consolidated cash balances, revenues,
disbursements and transfers of the GRF and several other specified funds
(including the BSF). The TOF cash balance at May 30, 1996 was
44
<PAGE>
$4.7076 billion. Those cash balances are consolidated only for the purpose of
meeting cash flow requirements, and, except for the GRF, a positive cash
balance must be maintained for each discrete fund included in the TOF. The GRF
is permitted to incur a temporary cash deficiency by drawing upon the available
consolidated cash balance in the TOF. The amount of that permitted GRF cash
deficiency at any time is limited to 10% of GRF revenues for the then preceding
Fiscal Year (raised from 7% by December 1992 legislation in order to better
avoid the need for even short delays in payments).
Cash flow deficiencies occurred in ten months of Fiscal Year 1992, with the
highest month requiring a drawdown of $743.14 million from the TOF, in ten
months of Fiscal Year 1993, with the highest month requiring a drawdown of
$768.64 million from the TOF, in six months of Fiscal Year 1994, with the
highest month requiring a drawdown of $500.64 million from the TOF, and in four
months of Fiscal Year 1995, with the highest month requiring a drawdown of
$337.96 million from the TOF. OBM reports the GRF had cash flow deficiencies in
seven months of Fiscal Year 1996.
All cash flow deficiencies have been within the TOF limitations discussed
above. Often, the GRF balancing steps described above ameliorated deficiencies
in later months of a Fiscal Year, significantly assisting in producing the
projected positive year-end GRF balances.
The State's Constitution directs or restricts the use of certain revenues.
Highway fees and excise taxes, including gasoline taxes, are limited in use to
highway-related purposes including the payment of interest on certain
securities issued for purposes related to the State's highways. Not less than
50% of the receipts from State income and estate and inheritance taxes must be
returned to the political subdivisions and school districts where such receipts
originated. Since 1987 all net State lottery profits are allocated to
elementary, secondary, vocational and special education program purposes.
Litigation contesting the State's system of school funding is pending on
appeal in the Ohio Supreme Court, with defendants being the State and several
State agencies and officials. Among other relief sought, the complaints
essentially request a declaratory judgment that the State's statutory system of
funding public elementary and secondary education (including the State's basic
aid funding system known as the "Foundation Program") violates various
provisions of the Ohio Constitution, with a remedy requested being decrees as
may be required to compel the State and the General Assembly to devise and
enact a constitutionally acceptable system of school funding. The trial court
in July 1994 concluded that certain provisions of current law (including those
relating to the Foundation Program and certain school district borrowing
authorizations) violated provisions of the Ohio Constitution and directed the
State "forthwith to provide for and fund a system of funding public elementary
and secondary education in compliance with the Ohio Constitution". The State
appealed, and the trial court granted a stay of its findings and conclusions
and a stay of its orders except for requirements that officials prepare and
present to the General Assembly proposals for a school funding system complying
with the court-specified criteria and except for periodic reports to the court
on steps taken to eliminate wealth-based disparities among districts. In August
1995, a court of appeals reversed the trial court's findings for plaintiff
districts.
In prior litigation, the Ohio Supreme Court in 1979 upheld what was
essentially the then existing Foundation Program against similar claims that
the school funding system violated provisions of the Ohio Constitution.
Applying that 1979 decision to the present case, the court of appeals found no
constitutional violation, and reversed the trial court's negative rulings and
vacated its remedial orders.
45
<PAGE>
It is not possible at this time to state whether the suit will ultimately be
successful if appealed or, should plaintiffs prevail on appeal, the effect on
the State's present school funding system, including the amount of and criteria
for State basic aid allocations to school districts. It cannot be predicted if
the 1979 Supreme Court decision will be considered by the Supreme Court, as it
was by the court of appeals, to be determinative of any or all of the issues
raised in this current litigation.
Federal courts have ruled that the State shared joint liability with the
local school districts for segregation in public schools in Cincinnati,
Cleveland, Columbus, Dayton and Lorain. Subsequent trial court orders directed
that remedial costs be shared equally by the State and the respective local
districts. For that purpose $75,752,659 was expended in the 1992-93 biennium,
$119,382,294 was expended in the 1994-95 biennium, and $144,759,340 has been
appropriated for the current biennium.
The State's Constitution expressly provides that the State General Assembly
has no power to pass laws impairing the obligations of contracts.
At the present time, the State does not levy any ad valorem taxes on real or
tangible personal property. Local taxing districts and political subdivisions
currently levy such taxes. The State's Constitution limits the amount of the
aggregate levy of ad valorem property taxes, without a vote of the electors or
municipal charter provision, to 1% of true value in money. Statutes also limit
the amount of the aggregate levy, without a vote or charter provision.
Economic activity in the State, as in many other industrially developed
states, tends to be more cyclical than in some other states and in the nation
as a whole. Although manufacturing (including auto-related manufacturing)
remains an important part of the State's economy, the greatest growth in Ohio
employment in recent years, consistent with national trends, has been in the
nonmanufacturing area. Ohio ranked third in the nation in 1990 gross state
product derived from manufacturing. That income was 26.3% of total Ohio gross
state product, compared to 17.1% of that total being from "services". In
addition, agriculture and "agribusiness" continue as important elements of the
Ohio economy. Ohio continues as a major "headquarters" state. Of the top 500
corporations (industrial and service) as reported in 1996 by Fortune magazine,
30 had headquarters in Ohio, placing Ohio sixth as "headquarters" state for
corporations. Payroll employment in Ohio, in the diversifying employment base,
showed a steady upward trend until 1979, then decreased until 1982. It reached
an all-time high in the summer of 1993 after a slight decrease early in 1992
and then decreased slightly, and has reached a new high in 1996. Growth in
recent years has been concentrated among nonmanufacturing industries, with
manufacturing employment tapering off since its 1969 peak. Nonmanufacturing
industries now employ approximately 78.6% of all payroll workers (non-
agricultural) in Ohio. Historically, the average monthly unemployment rate in
Ohio has been higher than the average figures for the United States, although
for 1994 the average monthly unemployment rate in Ohio was 5.5% as compared to
a national average of 6.1% in the United States and in 1995, the Ohio rate was
4.8% compared to 5.6% for the United States. Ohio has been below the national
rate through August 1996, as well.
Ohio's 1990 decennial census population of over 10,840,000 indicated a 0.5%
population growth since 1980 and Ohio as ranking seventh among the states in
population. In 1980 it ranked sixth. The State's 1995 population was estimated
at 11,150,000, still seventh among the United States.
Currently, the State's general obligation bonds are rated Aa1, AA+ and AA+ by
Moody's, Standard & Poor's and Fitch, respectively.
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<PAGE>
APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
<TABLE>
<C> <S>
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 edge". Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
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 payment 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.
</TABLE>
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<PAGE>
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 four ratings of Moody's for short-term notes are MIG
1/VMIG1, MIG 2/VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes "best
quality . . . strong protection by established cash flows"; MIG 2/VMIG2 denotes
"high quality" with ample margins of protection; MIG 3/VMIG3 notes are of
"favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades"; MIG 4/VMIG4 notes are of "adequate quality . . .
[p]rotection commonly regarded as required of an investment security is present
.. . . there is specific risk."
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa--judged
to be the best quality, carry the smallest degree of investment risk; Aa--
judged to be of high quality by all standards; A--possess many favorable
investment attributes and are to be considered as upper medium grade
obligations; Baa--considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity 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, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
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<PAGE>
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP ("STANDARD & POOR'S") MUNICIPAL
DEBT RATINGS
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-by 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.
<TABLE>
<C> <S>
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.
BB Bonds rated "BB", "B", "CCC" and "CC" are regarded, on balance, as
B predominately speculative with respect to capacity to pay interest
CCC and repay principal in accordance with the terms of the obligations.
CC "BB" indicates the lowest degree of speculation and "C" the highest
C degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during
such grace period. The "D" rating also will be used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
</TABLE>
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 CORPORATE BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong. Debt rated "AA" has a
very strong capacity to pay interest and to repay principal and differs from
the highest rated issues only in small degree. Debt rated "A" has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than a debt of a higher rated category. Debt rated "BBB" is regarded
as having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in higher
rated categories.
The ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-1"
for the highest quality obligations to "D" for the lowest. These categories are
as follows:
<TABLE>
<C> <S>
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a 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 adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
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.
</TABLE>
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 municipal note rating reflects the liquidity concerns and
market access risks unique to such 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:
<TABLE>
<C> <S>
SP-1 A very strong or strong capacity to pay principal and interest. Issues
that possess overwhelming safety characteristics will be given a "+"
designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
</TABLE>
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuers belongs to a group of securities that is not rated as
a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Standard & Poor's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date information to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
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<PAGE>
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same ratings 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.
<TABLE>
<C> <S>
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 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.
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.
</TABLE>
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<PAGE>
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
Improving Up Arrow
Stable Left/Right Arrow
Declining Down Arrow
Uncertain Up/Down Arrow
Credit trend indicators are not predictions that any rating change will
occur, and have a longer-term time frame than issues placed on FitchAlert.
<TABLE>
<C> <S>
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.
</TABLE>
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
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<PAGE>
Bonds that have the same rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
<TABLE>
<C> <S>
BB Bonds are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time
by adverse economic changes. However, business and financial
alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if
not remedied, may lead to default. The ability to meet
obligations requires an advantageous business and economic
environment.
CC Bonds are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
</TABLE>
DDD, DD and D Bonds are in default of interest and/or principal payments.
Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents the
lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD", "DD", or "D" categories.
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
<TABLE>
<C> <S>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
</TABLE>
54
<PAGE>
<TABLE>
<C> <S>
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 the "F-1+" and "F-1"
categories.
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.
</TABLE>
55
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Ohio Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Ohio Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust as of July 31, 1996, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the four-year period then ended
and for the period February 28, 1992 (commencement of operations) to July 31,
1992. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at July
31, 1996 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Ohio
Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust as of
July 31, 1996, the results of its operations, the changes in its net assets,
and the financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 10, 1996
56
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Ohio--94.7%
<C> <C> <C> <S> <C>
NR* Baa1 $ 900 Ashtabula County, Ohio, IDR, Refunding (Ashland Oil Inc. Project),
Series A, 6.90% due 5/01/2010 $ 942
NR* A 4,000 Barberton, Ohio, Hospital Facilities Revenue Bonds (Barberton Citizens
Hospital Co. Project), 7.25% due 1/01/2012 4,282
AAA Aaa 2,370 Brecksville-Broadview Heights, Ohio, City School District, UT, 5.25% due
12/01/2021 (c) 2,234
AAA Aaa 1,000 Buckeye Valley, Ohio, Local School District (Delaware County), Series A, UT,
6.85% due 12/01/2015 (d) 1,146
NR* NR* 710 Cincinnati, Ohio, Student Loan Funding Corporation, Revenue Refunding Bonds,
AMT, Sub-Series B, 6.75% due 1/01/2007 734
AAA Aaa 2,000 Cleveland, Ohio, Regional Sewer District, Water Resources Revenue Refunding
Bonds, 6.75% due 5/15/2004 (b)(g) 2,241
AAA Aaa 3,665 Cleveland, Ohio, Water Works Revenue Bonds, Series F-92A, 6.25% due
1/01/2015 (b) 3,830
NR* VMIG1++ 800 Cuyahoga County, Ohio, Hospital Revenue Improvement Bonds (Cleveland
University Hospital), VRDN, 3.65% due 1/01/2016 (a) 800
Cuyahoga County, Ohio, M/F Revenue Bonds (Dalebridge Apartments), AMT (e):
NR* Aaa 1,000 6.50% due 10/20/2020 1,021
NR* Aaa 2,850 6.60% due 10/20/2030 2,936
NR* A1 3,100 Dayton, Ohio, Special Facilities Revenue Bonds (Emery Air Freight Project),
VRDN, Series C, 3.60% due 10/01/2009 (a) 3,100
A- A 1,220 Erie County, Ohio, Hospital Improvement Revenue Refunding Bonds (Firelands
Community Hospital Project), 6.75% due 1/01/2015 1,281
AAA Aaa 1,000 Franklin County, Ohio, Convention Facilities Authority, Tax and Lease Bonds,
RAN, 7% due 12/01/2000 (d)(g) 1,112
NR* Aa 1,500 Franklin County, Ohio, Hospital Revenue Refunding and Improvement Bonds
(Childrens Hospital Project), Series A, 5.75% due 11/01/2020 1,480
BBB Baa1 2,750 Hamilton County, Ohio, Health System Revenue Refunding Bonds
(Providence Hospital-Franciscan), 6.875% due 7/01/2015 2,786
AAA Aaa 1,200 Huron County, Ohio, Human Services Building Revenue Bonds, 7.25% due
12/01/2013 (d)(h) 1,374
NR* Aaa 5,530 Kent, Ohio, M/F Housing Mortgage Revenue Bonds (Silver Meadows), AMT,
7.30% due 12/20/2036 (e) 5,991
AAA Aaa 1,740 Lakota, Ohio, Local School District Revenue Bonds, GO, UT, 7% due
12/01/2010 (b) 2,025
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch Ohio Municipal Bond Fund's
portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list below and at right.
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
HFA Housing Finance Agency
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RAN Revenue Anticipation Notes
RIB Residual Interest Bonds
RITES Residual Interest Tax-Exempt Securities
S/F Single Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
57
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Ohio (concluded)
<C> <C> <C> <S> <C>
A NR* $1,660 Loveland, Ohio, City School District, GO, UT, 6.65% due 12/01/2015 $ 1,791
BBB+ NR* 2,000 Lucas County, Ohio, Hospital Revenue Bonds (Flower Hospital), 6.125% due
12/01/2003 (g) 2,179
AAA Aaa 1,500 Mahoning County, Ohio, Hospital Facilities Revenue Refunding Bonds (YHA Inc.
Project), Series A, 7% due 10/15/2014 (d) 1,628
A- A3 2,000 Moraine, Ohio, Solid Waste Disposal Revenue Bonds (General Motors Corp.
Project), AMT, 6.75% due 7/01/2014 2,171
AAA Aaa 3,000 North Canton, Ohio, City School District Improvement Bonds, GO, UT, 6.70%
due 12/01/2019 (b) 3,263
AAA NR* 995 Ohio HFA, Residential Mortgage Revenue Bonds, AMT, Series B-2, 6.70% due
3/01/2025 (e) 1,023
Ohio HFA, S/F Mortgage Revenue Bonds, AMT (e):
AAA Aaa 1,200 RIB, Series B-4, 9.872% due 3/31/2031 (f) 1,257
AAA Aaa 35 Series B, 6.903% due 3/31/2031 36
Ohio State Air Quality Development Authority, Revenue Refunding Bonds:
NR* Baa1 1,000 (Ashland Oil Inc. Project), 6.85% due 4/01/2010 1,028
AA- Aa3 4,200 (Coll-Dayton Power & Light Project), Series B, 6.40% due 8/15/2027 4,338
AAA Aaa 1,505 PCR (Ohio Edison), Series B, 7.10% due 6/01/2018 (c) 1,638
AAA Aaa 1,000 Ohio State Education Loan Revenue Bonds, AMT, Series A-1, 6.35% due
12/01/2014 (b) 1,020
AA- Aa 1,410 Ohio State Higher Educational Facility, Crossover Revenue Refunding Bonds
(Case Western Reserve University), 6.25% due 10/01/2016 1,525
A1+ P1 3,600 Ohio State PCR, Refunding (Sohio Water Project-BP Petroleum), VRDN,
3.45% due 5/01/2022 (a) 3,600
AAA Aaa 2,300 Ohio State Turnpike Commission, Turnpike Revenue Bonds, Series A, 5.50% due
2/15/2026 (d) 2,231
A A2 2,000 Ohio State Water Development Authority, Solid Waste Disposal Revenue Bonds
(North Star BHP Steel Project-Broken Hill), AMT, 6.45% due 9/01/2020 2,051
AAA Aaa 1,000 Upper Arlington, Ohio, City School District, UT, 5.25% due 12/01/2022 (d) 942
AAA Aaa 2,000 Westerville, Ohio, Minerva Park and Blendon Joint Township, Hospital
District Revenue Refunding Bonds (Saint Ann's Hospital), Series B, 7% due
9/15/2012 (b)(i) 2,239
NR* A1 475 Wood County, Ohio, Sewer District Water Assessment Improvement Bonds,
Issue II, 6.55% due 12/01/2014 (h) 516
Puerto Rico--4.4%
Puerto Rico Commonwealth, Highway and Transportation Authority, Highway
Revenue Bonds:
A1+ Baa1 2,500 RITES, Series X, 5.951% due 7/01/2004 (f) 2,472
A Baa1 1,000 Series Y, 5.50% due 7/01/2026 936
Total Investments (Cost--$74,016)--99.1% 77,199
Other Assets Less Liabilities--0.9% 712
-------
Net Assets--100.0% $77,911
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)GNMA Collateralized.
(f)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at July 31, 1996.
(g)Prerefunded.
(h)Bank Qualified.
(i)Escrowed to Maturity.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
58
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of July 31, 1996
<C> <S> <C> <C>
Assets: Investments, at value (identified cost--$74,016,498) (Note 1a) $ 77,198,535
Cash 130,669
Receivables:
Interest $ 950,703
Beneficial interest sold 40,376 991,079
------------
Deferred organization expenses (Note 1e) 6,777
Prepaid registration fees and other assets (Note 1e) 9,469
------------
Total assets 78,336,529
------------
Liabilities: Payables:
Beneficial interest redeemed 179,728
Dividends to shareholders (Note 1f) 92,325
Investment adviser (Note 2) 36,299
Distributor (Note 2) 28,954 337,306
------------
Accrued expenses and other liabilities 88,220
------------
Total liabilities 425,526
------------
Net Assets: Net assets $ 77,911,003
============
Net Assets Class A Shares of beneficial interest, $.10 par value,
Consist of: unlimited number of shares authorized $ 68,034
Class B Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 601,739
Class C Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 25,420
Class D Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 32,839
Paid-in capital in excess of par 75,766,291
Accumulated realized capital losses on investments--net (Note 5) (1,392,366)
Accumulated distributions in excess of realized capital
gains--net (Note 1f) (372,991)
Unrealized appreciation on investments--net 3,182,037
------------
Net assets $ 77,911,003
============
Net Asset Value: Class A--Based on net assets of $7,280,847 and 680,340
shares of beneficial interest outstanding $ 10.70
============
Class B--Based on net assets of $64,397,021 and 6,017,388
shares of beneficial interest outstanding $ 10.70
============
Class C--Based on net assets of $2,720,150 and 254,200
shares of beneficial interest outstanding $ 10.70
============
Class D--Based on net assets of $3,512,985 and 328,390
shares of beneficial interest outstanding $ 10.70
============
See Notes to Financial Statements.
</TABLE>
59
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended July 31, 1996
<C> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 4,640,782
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 431,325
Account maintenance and distribution fees--Class B (Note 2) 330,142
Accounting services (Note 2) 68,930
Professional fees 53,116
Printing and shareholder reports 44,477
Transfer agent fees--Class B (Note 2) 40,460
Registration fees (Note 1e) 15,097
Amortization of organization expenses (Note 1e) 11,868
Account maintenance and distribution fees--Class C (Note 2) 10,407
Pricing fees 5,663
Custodian fees 5,594
Trustees' fees and expenses 3,822
Transfer agent fees--Class A (Note 2) 3,756
Account maintenance fees--Class D (Note 2) 3,267
Transfer agent fees--Class D (Note 2) 1,674
Transfer agent fees--Class C (Note 2) 1,112
Other 2,467
------------
Total expenses 1,033,177
------------
Investment income--net 3,607,605
------------
Realized & Realized gain on investments--net 58,034
Unrealized Gain on Change in unrealized appreciation on investments--net 854,639
Investments--Net ------------
(Notes 1d & 3): Net Increase in Net Assets Resulting from Operations $ 4,520,278
============
</TABLE>
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended July 31,
Increase (Decrease) in Net Assets: 1996 1995
<C> <S> <C> <C>
Operations: Investment income--net $ 3,607,605 $ 3,552,858
Realized gain (loss) on investments--net 58,034 (1,392,365)
Change in unrealized appreciation on investments--net 854,639 1,835,744
------------ ------------
Net increase in net assets resulting from operations 4,520,278 3,996,237
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (373,206) (402,108)
(Note 1f): Class B (2,995,936) (3,039,531)
Class C (76,853) (15,289)
Class D (161,610) (95,930)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (3,607,605) (3,552,858)
------------ ------------
Beneficial Interest Net increase in net assets derived from beneficial interest
Transactions transactions 1,552,305 20,090
(Note 4): ------------ ------------
Net Assets: Total increase in net assets 2,464,978 463,469
Beginning of year 75,446,025 74,982,556
------------ ------------
End of year $ 77,911,003 $ 75,446,025
============ ============
See Notes to Financial Statements.
</TABLE>
60
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A
For the
Period
The following per share data and ratios have been derived Feb. 28,
from information provided in the financial statements. 1992++ to
For the Year Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<C> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.56 $ 10.50 $ 11.02 $ 10.56 $ 10.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .54 .55 .56 .58 .25
Realized and unrealized gain (loss) on
investments--net .14 .06 (.43) .49 .56
-------- -------- -------- -------- --------
Total from investment operations .68 .61 .13 1.07 .81
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.54) (.55) (.56) (.58) (.25)
Realized gain on investments--net -- -- -- (.03) --
In excess of realized gain on
investments--net -- -- (.09) -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.54) (.55) (.65) (.61) (.25)
-------- -------- -------- -------- --------
Net asset value, end of period $ 10.70 $ 10.56 $ 10.50 $ 11.02 $ 10.56
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 6.56% 6.03% 1.10% 10.51% 8.21%+++
Return:** ======== ======== ======== ======== ========
Ratios to Expenses, net of reimbursement .87% .86% .65% .51% .16%*
Average ======== ======== ======== ======== ========
Net Assets: Expenses .87% .89% .89% 1.04% 1.36%*
======== ======== ======== ======== ========
Investment income--net 5.03% 5.30% 5.12% 5.44% 5.75%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 7,281 $ 7,270 $ 9,373 $ 8,446 $ 4,209
Data: ======== ======== ======== ======== ========
Portfolio turnover 118.21% 169.34% 44.83% 41.51% 13.21%
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
61
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class B
For the Period
The following per share data and ratios have been derived Feb. 28,
from information provided in the financial statements. 1992++ to
For the Year Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<C> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.56 $ 10.50 $ 11.02 $ 10.56 $ 10.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .49 .49 .50 .52 .23
Realized and unrealized gain (loss) on
investments--net .14 .06 (.43) .49 .56
-------- -------- -------- -------- --------
Total from investment operations .63 .55 .07 1.01 .79
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.49) (.49) (.50) (.52) (.23)
Realized gain on investments--net -- -- -- (.03) --
In excess of realized gain on
investments--net -- -- (.09) -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.49) (.49) (.59) (.55) (.23)
-------- -------- -------- -------- --------
Net asset value, end of period $ 10.70 $ 10.56 $ 10.50 $ 11.02 $ 10.56
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 6.01% 5.49% .59% 9.95% 7.98%+++
Return:** ======== ======== ======== ======== ========
Ratios to Expenses, net of reimbursement 1.38% 1.37% 1.16% 1.02% .67%*
Average ======== ======== ======== ======== ========
Net Assets: Expenses 1.38% 1.40% 1.39% 1.55% 1.86%*
======== ======== ======== ======== ========
Investment income--net 4.52% 4.79% 4.61% 4.93% 5.26%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands). $ 64,397 $ 64,068 $ 65,610 $ 53,341 $ 26,244
Data: ======== ======== ======== ======== ========
Portfolio turnover 118.21% 169.34% 44.83% 41.51% 13.21%
======== ======== ======== ======== ========
<CAPTION>
Class C Class D
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Oct. 21, Year Oct. 21,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<C> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.56 $ 10.09 $ 10.56 $ 10.09
Operating -------- -------- -------- --------
Performance: Investment income--net .48 .37 .53 .41
Realized and unrealized gain on investments--net .14 .47 .14 .47
-------- -------- -------- --------
Total from investment operations .62 .84 .67 .88
-------- -------- -------- --------
Less dividends from investment income--net (.48) (.37) (.53) (.41)
-------- -------- -------- --------
Net asset value, end of period $ 10.70 $ 10.56 $ 10.70 $ 10.56
======== ======== ======== ========
Total Investment Based on net asset value per share 5.90% 8.50%+++ 6.45% 8.93%+++
Return:** ======== ======== ======== ========
Ratios to Expenses 1.49% 1.50%* .97% .99%*
Average Net ======== ======== ======== ========
Assets: Investment income--net 4.42% 4.62%* 4.93% 5.17%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 2,720 $ 874 $ 3,513 $ 3,234
Data: ======== ======== ======== ========
Portfolio turnover 118.21% 169.34% 118.21% 169.34%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
62
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Ohio Municipal Bond Fund (the "Fund") is part of
Merrill Lynch Multi-State Municipal Series Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940 as a non-
diversified, open-end management investment company. The Fund offers
four classes of shares under the Merrill Lynch Select Pricing SM
System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its
account maintenance and distribution expenditures. The following is
a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds and other portfolio
securities in which the Fund invests are traded primarily in the
over-the-counter municipal bond and money markets and are valued at
the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers
that make markets in the securities. 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 remaining maturities of sixty days or less are
valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Trust, including
valuations furnished by a pricing service retained by the Trust,
which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers
of the Trust under the general supervision of the Trustees.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(f) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates. Distributions in excess
of real-
63
<PAGE>
ized capital gains are primarily due to differing tax
treatments for futures transactions and post-October losses.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is a
limited partner. The Fund had also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets at the following annual rates: 0.55%
of the Fund's average daily net assets not exceeding $500 million;
0.525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and 0.50% of average daily net assets in
excess of $1 billion. The Investment Advisory Agreement obligates
FAM to reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed 2.5% of the Fund's
first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets, and 1.5% of the average daily
net assets in excess thereof. FAM's obligation to reimburse the Fund
is limited to the amount of the management fee. No fee payment will
be made to FAM during any fiscal year which will cause such expenses
to exceed expense limitations at the time of payment.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.25%
Class C 0.25% 0.35%
Class D 0.10% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended July 31, 1996, MLFD earned underwriting discounts
and MLPF&S earned dealer concessions on sales of the Fund's Class A
and Class D Shares as follows:
MLFD MLPF&S
Class A $ 92 $ 893
Class D $218 $1,339
For the year ended July 31, 1996, MLPF&S received contingent
deferred sales charges of $136,374 and $863 relating to transactions
in Class B and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended July 31, 1996 were $86,023,122 and $89,477,408,
respectively.
Net realized and unrealized gains (losses) as of July 31, 1996 were
as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $ 41,381 $ 3,182,037
Short-term investments (117,170) --
Financial futures contracts 133,823 --
----------- -----------
Total $ 58,034 $ 3,182,037
=========== ===========
64
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
As of July 31, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $3,182,037, of which $3,283,792 related to
appreciated securities and $101,755 related to depreciated
securities. The aggregate cost of investments at July 31, 1996 for
Federal income tax purposes was $74,016,498.
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest
transactions was $1,552,305 and $20,090 for the years ended July 31,
1996 and July 31, 1995, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 86,942 $ 941,587
Shares issued to share-
holders in reinvestment
of dividends 14,338 153,697
----------- -----------
Total issued 101,280 1,095,284
Shares redeemed (109,186) (1,171,549)
----------- -----------
Net decrease (7,906) $ (76,265)
=========== ===========
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 181,071 $ 1,870,062
Shares issued to share-
holders in reinvestment of
dividends 17,661 181,209
----------- -----------
Total issued 198,732 2,051,271
Shares redeemed (403,178) (4,123,436)
----------- -----------
Net decrease (204,446) $(2,072,165)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 1,044,627 $11,201,909
Shares issued to share-
holders in reinvestment
of dividends 156,760 1,680,914
----------- -----------
Total issued 1,201,387 12,882,823
Automatic conversion
of shares (24,446) (258,404)
Shares redeemed (1,224,936) (13,097,953)
----------- -----------
Net decrease (47,995) $ (473,534)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 1,171,885 $12,053,962
Shares issued to share-
holders in reinvestment
of dividends 169,857 1,744,620
----------- -----------
Total issued 1,341,742 13,798,582
Automatic conversion
of shares (600) (6,397)
Shares redeemed (1,524,736) (15,586,483)
----------- -----------
Net decrease (183,594) $(1,794,298)
=========== ===========
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 193,104 $ 2,070,410
Shares issued to share-
holders in reinvestment
of dividends 4,969 53,252
----------- -----------
Total issued 198,073 2,123,662
Shares redeemed (26,599) (284,250)
----------- -----------
Net increase 171,474 $ 1,839,412
=========== ===========
Class C Shares for the Period
October 21, 1994++ to Dollar
July 31, 1995 Shares Amount
Shares sold 88,400 $ 911,000
Shares issued to share-
holders in reinvestment
of dividends 1,135 11,864
----------- -----------
Total issued 89,535 922,864
Shares redeemed (6,809) (71,984)
----------- -----------
Net increase 82,726 $ 850,880
=========== ===========
++Commencement of Operations.
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 91,966 $ 997,428
Automatic conversion
of shares 24,448 258,404
Shares issued to share-
holders in reinvestment
of dividends 3,739 40,076
----------- -----------
Total issued 120,153 1,295,908
Shares redeemed (98,084) (1,033,216)
----------- -----------
Net increase 22,069 $ 262,692
=========== ===========
65
<PAGE>
Class D Shares for the Period Dollar
Oct. 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 303,361 $ 3,004,430
Automatic conversion
of shares 600 6,397
Shares issued to share-
holders in reinvestment of
dividends 3,127 32,727
----------- -----------
Total issued 307,088 3,043,554
Shares redeemed (767) (7,881)
----------- -----------
Net increase 306,321 $ 3,035,673
=========== ===========
++Commencement of Operations.
5. Capital Loss Carryforward:
At July 31, 1996, the Fund had a net capital loss of approximately
$1,005,000, of which $750,000 expires in 2003 and $255,000 expires
in 2004. This amount will be available to offset like amounts of any
future taxable gains.
66
<PAGE>
[This Page Intentionally Left Blank.]
67
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Description of Municipal Bonds and Temporary Investments................... 5
Description of Municipal Bonds............................................ 5
Description of Temporary Investments...................................... 7
Repurchase Agreements..................................................... 8
Financial Futures Transactions and Options................................ 9
Investment Restrictions.................................................... 13
Management of the Trust.................................................... 16
Trustees and Officers..................................................... 16
Compensation of Trustees.................................................. 17
Management and Advisory Arrangements...................................... 18
Purchase of Shares......................................................... 20
Initial Sales Charge Alternatives--Class A and
Class D Shares........................................................... 20
Reduced Initial Sales Charges............................................. 22
Distribution Plans........................................................ 24
Limitations on the Payment of Deferred Sales Charges...................... 25
Redemption of Shares....................................................... 26
Deferred Sales Charges--Class B and Class C Shares........................ 26
Portfolio Transactions..................................................... 26
Determination of Net Asset Value........................................... 28
Shareholder Services....................................................... 28
Investment Account........................................................ 28
Automatic Investment Plans................................................ 29
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 29
Systematic Withdrawal Plans--Class A and
Class D Shares........................................................... 30
Exchange Privilege........................................................ 31
Distributions and Taxes.................................................... 33
Environmental Tax......................................................... 36
Tax Treatment of Option and Futures Transactions.......................... 36
Ohio Income Tax........................................................... 37
Performance Data........................................................... 37
General Information........................................................ 40
Description of Shares..................................................... 40
Computation of Offering Price Per Share................................... 41
Independent Auditors...................................................... 42
Custodian................................................................. 42
Transfer Agent............................................................ 42
Legal Counsel............................................................. 42
Report to Shareholders.................................................... 42
Additional Information.................................................... 42
Appendix I--Economic and Financial Conditions in Ohio...................... 43
Appendix II--Ratings of Municipal Bonds.................................... 47
Independent Auditors' Report............................................... 56
Financial Statements....................................................... 57
</TABLE>
Code # 16155-1196
[LOGO] MERRILL LYNCH
Merrill Lynch
Ohio Municipal
Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
November 15, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A)FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the years in the four-year period
ended July 31, 1996 and for the period February 28, 1992
(commencement of operations) to July 31, 1992.
Contained in Part B:
Schedule of Investments as of July 31, 1996.
Statement of Assets and Liabilities as of July 31, 1996.
Statement of Operations for the year ended July 31, 1996.
Statements of Changes in Net Assets for each of the years in the two-
year period ended July 31, 1996.
Financial Highlights for each of the years in the four-year period
ended July 31, 1996 and for the period February 28, 1992
(commencement of operations) to July 31, 1992.
(B)EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
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 Ohio Municipal Bond Fund (the
"Fund") as a series of Registrant.(a)
(g) --Instrument establishing Class A and Class B shares of beneficial
interest of the Fund.(a)
2 --By-Laws of Registrant.(a)
3 --None.
4 --Portions of the Declaration of Trust, Establishment and Designation
and By-Laws of the Registrant defining the rights of holders of the
Fund as a series of the Registrant.(b)
5(a) --Management Agreement between Registrant and Fund Asset Management,
L.P.(a)
(b) --Supplement to Management Agreement between Registrant and Fund Asset
Management, L.P.(e)
6(a) --Form of Revised Class A Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc. (including Form
of Selected Dealers Agreement).(e)
(b) --Form of Class B Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(a)
(c) --Form of Class C Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(e)
(d) --Form of Class D Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(e)
(e) --Letter Agreement between the Fund and Merrill Lynch Funds
Distributor, Inc., dated September 15, 1993, in connection with the
Merrill Lynch Mutual Fund Adviser program.(c)
7 --None.
8 --Custody Agreement between Registrant and State Street Bank & Trust
Company.(d)
9 --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Merrill Lynch
Financial Data Services, Inc.(f)
10 --Opinion of Brown & Wood LLP, counsel for the Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
12 --None.
13 --Certificate of Fund Asset Management, Inc.(a)
14 --None.
15(a) --Amended and Restated Class B Shares Distribution Plan of the
Registrant and Amended and Restated Class B Shares Distribution Plan
Sub-Agreement.(g)
(b) --Form of Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of Registrant.(e)
(c) --Form of Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of Registrant.(e)
16(a) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class A
Shares.(a)
(b) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class B
Shares.(a)
(c) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class C
Shares.(a)
(d) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class D
Shares.(a)
17(a) --Financial Data Schedule for Class A shares.
(b) --Financial Data Schedule for Class B shares.
(c) --Financial Data Schedule for Class C shares.
(d) --Financial Data Schedule for Class D shares.
18 --Merrill Lynch Select Pricing SM System Plan Pursuant to Rule 18f-
3.(h)
</TABLE>
- --------
(a) Filed on November 21, 1995 as an Exhibit to Post-Effective Amendment No. 5
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended, relating to shares of the Fund (File No. 33-44500)
(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 Declaration of Trust, as amended, filed as
Exhibits 1(a), 1(b), 1(c), 1(d) and 1(e) with Post-Effective Amendment No.
5 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. 5 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. 5 to the Registration Statement.
(c) Filed on November 8, 1993 as an Exhibit to Post-Effective Amendment No. 3
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, as amended, 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 19, 1994 as an Exhibit to Post-Effective Amendment No. 4
to the Registration Statement.
(f) Incorporated by reference to Exhibit 9 to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933, as amended, filed on October 20, 1995, relating to shares of
Merrill Lynch Arizona Municipal Bond Fund series of the Registrant (File
No. 33-41311).
(g) Incorporated by reference to Exhibit 15(a) to Post-Effective Amendment No.
4 to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended, filed on October 26, 1995, relating to shares of
Merrill Lynch Michigan Municipal Bond Fund series of the Registrant (File
No. 33-55576).
(h) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of
1933, as amended, filed on January 25, 1996, relating to shares of Merrill
Lynch New York Municipal Bond Fund series of the Registrant (File No. 2-
99473).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any other
person.
C-2
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1996*
-------------- -------------------
<S> <C>
Class A Shares of beneficial interest, par value
$0.10 per share................................... 233
Class B Shares of beneficial interest, par value
$0.10 per share................................... 2,175
Class C Shares of beneficial interest, par value
$0.10 per share................................... 88
Class D Shares of beneficial interest, par value
$0.10 per share................................... 61
</TABLE>
- --------
* The number of holders includes holders of record plus beneficial owners whose
shares are held of record by Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a shareholder,
creditor or otherwise) against all liabilities and expenses (including amounts
paid in satisfaction of judgments, in compromise, as fines and penalties and as
counsel fees) reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he may be involved or with which he may be threatened, while in office
or thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as to
any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of good faith and reasonable belief
as to the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no person may satisfy any right in indemnity or
reimbursement granted herein or in Section 5.1 or to which he may be otherwise
entitled except out of the property of the Trust, and no Shareholder shall be
personally liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in
connection with indemnification under this Section 5.3, provided that the
indemnified person shall have given a written undertaking to reimburse the
Trust in the event it is subsequently determined that he is not entitled to
such indemnification."
Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended, may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount which it is ultimately determined he is
entitled to receive from the Registrant by reason of indemnification; and (iii)
(a) such promise must be secured by a surety bond, other suitable insurance or
an equivalent form of security which assures that any repayments may be
obtained by the Registrant without delay or litigation, which bond, insurance
or other form of security must be provided by the recipient of the advance, or
(b) a majority of a quorum of the Registrant's disinterested, non-party
Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts that the recipient of
the advance ultimately will be found entitled to indemnification.
In Section 9 of the Distribution Agreements relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the "1933 Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or Prospectus
and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission
C-3
<PAGE>
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 28. 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 investment companies: CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc., Financial Institutions Series Trust, Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill
Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions Series,
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill
Lynch 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 the following closed-end investment companies: Apex
Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield New York Insured Fund III,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Taurus
MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, 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 investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Institutional Intermediate 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 Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income
Fund, Inc. and Merrill Lynch Variable Series Funds, Inc. and the following
closed-end investment companies: Convertible Holdings, Inc., Merrill Lynch High
Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund,
Inc.
C-4
<PAGE>
The address of each of these 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 Institutional Intermediate Fund
is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The
address of the Manager, MLAM, Princeton Services, Inc. ("Princeton Services")
and Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
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. The address of the Fund's transfer agent, Merrill Lynch
Financial Data Services, Inc. ("MLFDS"), is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
August 1, 1994 for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Glenn is
Executive Vice President and Mr. Richard is Treasurer of substantially all of
the investment companies described in the first two paragraphs of this Item and
Messrs. Giordano, Harvey, Hewitt, Kirstein and Monagle are directors, trustees
or officers of one or more of such companies.
Officers and partners of FAM are set forth as follows:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------------- ----------------------------------
<C> <C> <S>
ML & Co. ............... Limited Partner Financial Services Holding
Company; Limited Partner of
MLAM
Princeton Services...... General Partner General Partner of MLAM
Arthur Zeikel........... President President of MLAM; President
and Director of Princeton
Services; Director of MLFD;
Executive Vice President of
ML & Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of
President MLAM; Executive Vice
President and Director of
Princeton Services;
President and Director of
MLFD; Director of MLFDS;
President of Princeton
Administrators, L.P.
Vincent R. Giordano..... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of MLAM
Norman R. Harvey........ Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Michael J. Hennewinkel.. Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
N. John Hewitt.......... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President,
President, General General Counsel and
Counsel and Secretary of MLAM; Senior
Secretary Vice President, General
Counsel, Secretary and
Director of Princeton
Services; Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and
and Controller Controller of MLAM; Senior
Vice President and
Controller of Princeton
Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------------- ----------------------------------
<C> <C> <S>
Stephen M.M. Miller..... Senior Vice President Executive Vice President of
Princeton Administrators,
L.P.; Senior Vice President
of Princeton Services
Joseph T. Monagle, Senior Vice President Senior Vice President of
Jr. ................... MLAM; Senior Vice President
of Princeton Services
Michael L. Quinn........ Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services;
Managing Director and First
Vice President of Merrill
Lynch from 1989 to 1995
Richard L. Reller....... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Gerald M. Richard....... Senior Vice President Senior Vice President and
and Treasurer Treasurer of MLAM; Senior
Vice President and
Treasurer of Princeton
Services; Vice President
and Treasurer of MLFD
Ronald L. Welburn....... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., MuniAssets Fund, Inc. and The
Municipal Fund Accumulation Program, Inc. and MLFD also acts as the principal
underwriter for the following closed-end investment companies: Merrill Lynch
High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, Boston,
Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICES POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- ----------------------- -----------------------
<S> <C> <C>
Terry K. Glenn........... President and Director Executive Vice President
Arthur Zeikel............ Director President and Trustee
Philip L. Kirstein....... Director None
William E. Aldrich....... Senior Vice President None
Robert W. Crook.......... Senior Vice President None
Kevin P. Boman........... Vice President None
Michael J. Brady......... Vice President None
William M. Breen......... Vice President None
Mark A. DeSario.......... Vice President None
James T. Fatseas......... Vice President None
Debra W. Landsman-Yaros.. Vice President None
Michelle T. Lau.......... Vice President None
Gerald M. Richard........ Vice President and Treasurer Treasurer
Salvatore Venezia........ Vice President None
William Wasel............ Vice President None
Robert Harris............ Secretary None
</TABLE>
(c) Not applicable.
C-6
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and Merrill Lynch Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Trust--
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Trust--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a Prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the Township of
Plainsboro, and the State of New Jersey, on the 5th day of November, 1996.
Merrill Lynch Multi-State Municipal
Series Trust
(Registrant)
/s/ Gerald M. Richard
By: _________________________________
(GERALD M. RICHARD, TREASURER)
Pursuant to the requirements of the Securities Act of 1933, 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>
Arthur Zeikel* President and Trustee
- ------------------------------------- (Principal Executive Officer)
(ARTHUR ZEIKEL)
/s/ Gerald M. Richard Treasurer (Principal Financial November 5, 1996
- ------------------------------------- and Accounting Officer)
(GERALD M. RICHARD)
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)
/s/ Gerald M. Richard November 5, 1996
*By: ________________________________
(GERALD M. RICHARD, ATTORNEY-IN-FACT)
</TABLE>
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10 --Opinion of Brown & Wood LLP, counsel for the Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
17(a) --Financial Data Schedule for Class A shares.
(b) --Financial Data Schedule for Class B shares.
(c) --Financial Data Schedule for Class C shares.
(d) --Financial Data Schedule for Class D shares.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- --------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MERRILL LYNCH OHIO MUNICIPAL BOND FUND - Class A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 74016498
<INVESTMENTS-AT-VALUE> 77198535
<RECEIVABLES> 991079
<ASSETS-OTHER> 146915
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 78336529
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 425526
<TOTAL-LIABILITIES> 425526
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 76494323
<SHARES-COMMON-STOCK> 680340
<SHARES-COMMON-PRIOR> 688246
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1392366)
<OVERDISTRIBUTION-GAINS> (372991)
<ACCUM-APPREC-OR-DEPREC> 3182037
<NET-ASSETS> 7280847
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4640782
<OTHER-INCOME> 0
<EXPENSES-NET> (1033177)
<NET-INVESTMENT-INCOME> 3607605
<REALIZED-GAINS-CURRENT> 58034
<APPREC-INCREASE-CURRENT> 854639
<NET-CHANGE-FROM-OPS> 4520278
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (373206)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 86942
<NUMBER-OF-SHARES-REDEEMED> (109186)
<SHARES-REINVESTED> 14338
<NET-CHANGE-IN-ASSETS> 2464978
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1392366)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (431025)
<GROSS-ADVISORY-FEES> 431325
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1033177
<AVERAGE-NET-ASSETS> 7393114
<PER-SHARE-NAV-BEGIN> 10.56
<PER-SHARE-NII> .54
<PER-SHARE-GAIN-APPREC> .14
<PER-SHARE-DIVIDEND> (.54)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.70
<EXPENSE-RATIO> .87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MERRILL LYNCH OHIO MUNICIPAL BOND FUND - Class B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 74016498
<INVESTMENTS-AT-VALUE> 77198535
<RECEIVABLES> 991079
<ASSETS-OTHER> 146915
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 78336529
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 425526
<TOTAL-LIABILITIES> 425526
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 76494323
<SHARES-COMMON-STOCK> 6017388
<SHARES-COMMON-PRIOR> 6065383
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1392366)
<OVERDISTRIBUTION-GAINS> (372991)
<ACCUM-APPREC-OR-DEPREC> 3182037
<NET-ASSETS> 64397021
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4640782
<OTHER-INCOME> 0
<EXPENSES-NET> (1033177)
<NET-INVESTMENT-INCOME> 3607605
<REALIZED-GAINS-CURRENT> 58034
<APPREC-INCREASE-CURRENT> 854639
<NET-CHANGE-FROM-OPS> 4520278
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2995936)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1044627
<NUMBER-OF-SHARES-REDEEMED> (1249382)
<SHARES-REINVESTED> 156760
<NET-CHANGE-IN-ASSETS> 2464978
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1392366)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (431025)
<GROSS-ADVISORY-FEES> 431325
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1033177
<AVERAGE-NET-ASSETS> 66028373
<PER-SHARE-NAV-BEGIN> 10.56
<PER-SHARE-NII> .49
<PER-SHARE-GAIN-APPREC> .14
<PER-SHARE-DIVIDEND> (.49)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.70
<EXPENSE-RATIO> 1.38
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> MERRILL LYNCH OHIO MUNICIPAL BOND FUND - Class C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 74016498
<INVESTMENTS-AT-VALUE> 77198535
<RECEIVABLES> 991079
<ASSETS-OTHER> 146915
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 78336529
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 425526
<TOTAL-LIABILITIES> 425526
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 76494323
<SHARES-COMMON-STOCK> 254200
<SHARES-COMMON-PRIOR> 82726
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1392366)
<OVERDISTRIBUTION-GAINS> (372991)
<ACCUM-APPREC-OR-DEPREC> 3182037
<NET-ASSETS> 2720150
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4640782
<OTHER-INCOME> 0
<EXPENSES-NET> (1033177)
<NET-INVESTMENT-INCOME> 3607605
<REALIZED-GAINS-CURRENT> 58034
<APPREC-INCREASE-CURRENT> 854639
<NET-CHANGE-FROM-OPS> 4520278
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (76853)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 193104
<NUMBER-OF-SHARES-REDEEMED> (26599)
<SHARES-REINVESTED> 4969
<NET-CHANGE-IN-ASSETS> 2464978
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1392366)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (431025)
<GROSS-ADVISORY-FEES> 431325
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1033177
<AVERAGE-NET-ASSETS> 1734570
<PER-SHARE-NAV-BEGIN> 10.56
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> .14
<PER-SHARE-DIVIDEND> (.48)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.70
<EXPENSE-RATIO> 1.49
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> MERRILL LYNCH OHIO MUNICIPAL BOND FUND - Class D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 74016498
<INVESTMENTS-AT-VALUE> 77198535
<RECEIVABLES> 991079
<ASSETS-OTHER> 146915
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 78336529
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 425526
<TOTAL-LIABILITIES> 425526
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 76494323
<SHARES-COMMON-STOCK> 328390
<SHARES-COMMON-PRIOR> 306321
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1392366)
<OVERDISTRIBUTION-GAINS> (372991)
<ACCUM-APPREC-OR-DEPREC> 3182037
<NET-ASSETS> 3512985
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4640782
<OTHER-INCOME> 0
<EXPENSES-NET> (1033177)
<NET-INVESTMENT-INCOME> 3607605
<REALIZED-GAINS-CURRENT> 58034
<APPREC-INCREASE-CURRENT> 854639
<NET-CHANGE-FROM-OPS> 4520278
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (161610)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 116414
<NUMBER-OF-SHARES-REDEEMED> (98084)
<SHARES-REINVESTED> 3739
<NET-CHANGE-IN-ASSETS> 2464978
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1392366)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (431025)
<GROSS-ADVISORY-FEES> 431325
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1033177
<AVERAGE-NET-ASSETS> 3266756
<PER-SHARE-NAV-BEGIN> 10.56
<PER-SHARE-NII> .53
<PER-SHARE-GAIN-APPREC> .14
<PER-SHARE-DIVIDEND> (.53)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.70
<EXPENSE-RATIO> .97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.10
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599
November 6, 1996
Merrill Lynch Ohio Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
This opinion is furnished in connection with the registration by Merrill
Lynch Multi-State Municipal Series Trust, a Massachusetts business trust (the
"Trust"), of shares of beneficial interest, par value $0.10 per share (the
"Shares") of the Merrill Lynch Ohio Municipal Bond Fund, a series of the Trust,
under the Securities Act of 1933, as amended, pursuant to a registration
statement on Form N-1A (File No. 33-44500), as amended (the "Registration
Statement"), in the amount set forth under "Amount Being Registered" on the
facing page of the Registration Statement.
As counsel for the Trust, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Declaration of Trust of the
Trust, as amended, the By-Laws of the Trust and such other documents as we have
deemed relevant to the matters referred to in this opinion.
<PAGE>
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of beneficial interest, except that shareholders
of the Trust may under certain circumstances be held personally liable for the
Trust's obligations.
In rendering this opinion, we have relied as to matters of Massachusetts
law upon an opinion of Bingham, Dana & Gould rendered to the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
2
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Ohio Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We consent to the use in Post-Effective Amendment No. 6 to Registration
Statement No. 33-44500 of our report dated September 10, 1996 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
November 6, 1996
