<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1994
SECURITIES ACT FILE NO. 33-35987
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. / /
POST-EFFECTIVE AMENDMENT NO. 4 /X/
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 86 /X/
(Check appropriate box or boxes)
-------------------
MERRILL LYNCH MASSACHUSETTS 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 Office) (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
-------------------
COPIES TO:
Counsel for the Trust: Philip L. Kirstein, Esq.
BROWN & WOOD FUND ASSET MANAGEMENT
One World Trade Center P.O. Box 9011
New York, New York 10048-0557 Princeton, New Jersey
Attention: Thomas R. Smith, Jr., Esq. 08543-9011
-------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on October 21, 1994 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/ /_75 days after filing pursuant to paragraph (a)(ii)
/ /_on (date) pursuant to paragraph (a)(ii) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ /_ this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
-------------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF
BENEFICIAL INTEREST UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2
UNDER THE INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR
THE REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON SEPTEMBER 22, 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH MASSACHUSETTS 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
- ------------------------------------------------------------------------ ----------------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Cover Page...................................... Cover Page
Item 2. Synopsis........................................ Fee Table
Item 3. Condensed Financial Information................. Financial Highlights; Performance Data
Item 4. General Description of Registrant............... Investment Objective and Policies; 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 Securities.............. Cover Page; Additional Information
Item 7. Purchase of Securities Being Offered............ Cover Page; Fee Table; Merrill Lynch Select
Pricing-SM- System; Purchase of Shares;
Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption or Repurchase........................ Fee Table; Merrill Lynch Select Pricing-SM-
System; Purchase of Shares; Redemption of
Shares
Item 9. Pending Legal Proceedings....................... Not Applicable
PART B
Item 10. Cover Page...................................... Cover Page
Item 11. Table of Contents............................... Back Cover Page
Item 12. General Information and History................. Not Applicable
Item 13. Investment Objective and Policies............... Investment Objective and Policies
Item 14. Management of the Fund.......................... Management of the Trust
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Trust; Additional
Information
Item 16. Investment Advisory and Other Services.......... Management of the Trust; Purchase of Shares;
General Information
Item 17. Brokerage Allocation and Other Practices........ Portfolio Transactions
Item 18. Capital Stock and Other Securities.............. General Information-Description of Series and
Shares
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of Shares;
Determination of Net Asset Value;
Shareholder Services
Item 20. Tax Status...................................... Distributions and Taxes
Item 21. Underwriters.................................... Purchase of Shares
Item 22. Calculation of Performance Data................. Performance Data
Item 23. Financial Statements............................ Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
OCTOBER 21, 1994
MERRILL LYNCH MASSACHUSETTS 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 Massachusetts Municipal Bond Fund (the "Fund") is a mutual
fund seeking to provide shareholders with as high a level of income exempt from
Federal and Massachusetts income taxes as is consistent with prudent investment
management. The Fund invests primarily in a non-diversified portfolio of
long-term, investment grade obligations, the interest on which, in the opinion
of bond counsel to the issuer, is exempt from Federal and Massachusetts income
taxes ("Massachusetts Municipal Bonds"). Dividends paid by the Fund are exempt
from Federal and Massachusetts income taxes to the extent they are paid from
interest on Massachusetts 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.
-------------------
Pursuant to the Merrill Lynch Select Pricing-SM- System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing-SM- System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing-SM- System" on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 [(609)
282-2800], and other securities dealers which have entered into selected 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 October 21, 1994 (the "Statement of Additional Information"), has
been filed with the Securities and Exchange Commission and is available, without
charge, by calling or by writing Merrill Lynch Multi-State Municipal Series
Trust (the "Trust") at the above 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(C) CLASS D(C)
---------- --------------------- ---------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)....... 4.00%(d) None None 4.00%(d)
Sales Charge Imposed on Dividend
Reinvestments............................. None None None None(e)
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............. None(e) 4.0% during the first 1% for None
year, decreasing 1.0% one year
annually thereafter
to 0.0% after the
fourth year
Exchange Fee................................ None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)(F):
Management Fees(g).......................... 0.55% 0.55% 0.55% 0.55%
Rule 12b-1 Fees(h):
Account Maintenance 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 AND CEASE
BEING SUBJECT TO
DISTRIBUTION FEES AND
ARE SUBJECT TO LOWER
ACCOUNT MAINTENANCE
FEES)
Other Expenses:
Custodian Fees.......................... 0.02% 0.02% 0.02% 0.02%
Shareholder Servicing Costs(i).......... 0.04% 0.05% 0.05% 0.04%
Other................................... 0.24% 0.24% 0.24% 0.24%
----- --------------------- ---------- -----
Total Other Expenses............ 0.30% 0.31% 0.31% 0.30%
----- --------------------- ---------- -----
TOTAL FUND OPERATING EXPENSES+.................. 0.85% 1.36% 1.46% 0.95%
----- --------------------- ---------- -----
----- --------------------- ---------- -----
<FN>
- ------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain investment programs. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D Shares"
-- page 22.
(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 24.
(c) Prior to the date of this Prospectus, the Fund has not offered its Class C
or Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. 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 22.
(e) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more may not be
subject to an initial sales charge, but will instead be subject to a CDSC
of 1% of amounts redeemed within the first year of purchase.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
(f) Information for Class A and Class B shares is stated for the fiscal year
ended July 31, 1994. Information under "Other Expenses" for Class C and
Class D shares is estimated for the fiscal year ending July 31, 1995.
(g) See "Management of the Trust -- Management and Advisory Arrangements" --
page 19.
(h) See "Purchase of Shares -- Distribution Plans" -- page 26.
(i) See "Management of the Trust -- Transfer Agency Services" -- page 20.
+ As of July 31, 1994, the Manager has voluntarily waived a portion of the
management fees due from the Fund. The fee table has been restated to
assume the absence of any such waiver because the Manager may discontinue
or reduce such waiver of fees at any time without notice. During the fiscal
year ended July 31, 1994, the Manager waived management fees totaling 0.23%
for Class A shares and 0.24% for Class B shares after which the Fund's
total expense ratio was 0.62% for Class A shares and 1.12% for Class B
shares. Information is not provided with respect to either Class C or Class
D shares since no Class C or Class D shares were publicly issued during
this period.
</TABLE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
--------------------------------
3 10
1 YEAR YEARS 5 YEARS 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
above, (2) a 5% annual return throughout the periods and
(3) redemption at the end of the period:
Class A................................................. $ 48 $ 66 $ 85 $ 141
Class B................................................. $ 54 $ 63 $ 74 $ 164
Class C................................................. $ 25 $ 46 $ 80 $ 175
Class D................................................. $ 49 $ 69 $ 90 $ 152
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of the
period:
Class A................................................. $ 48 $ 66 $ 85 $ 141
Class B................................................. $ 14 $ 43 $ 74 $ 164
Class C................................................. $ 15 $ 46 $ 80 $ 175
Class D................................................. $ 49 $ 69 $ 90 $ 152
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission (the "Commission") regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL
RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C
shareholders who hold their shares for an extended period of time may pay more
in Rule 12b-1 distribution fees than the economic equivalent of the maximum
front-end sales charge permitted under the Rules of Fair Practice 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 PRICING-SM- SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing-SM- 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 Pricing System is used by more than 50
mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM") or Fund
Asset Management, L.P. ("FAM" or the "Manager"), an affiliate of MLAM. Funds
advised by MLAM or FAM are referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. 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 Pricing 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
4
<PAGE>
under the Merrill Lynch Select Pricing-SM- System that the investor believes is
most beneficial under his particular circumstances. More detailed information as
to each class of shares is set forth under "Purchase of Shares".
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<C> <S> <C> <C> <C>
A Maximum 4.00% initial sales charge(2)(3) No No No
B CDSC for a period of 4 years, at a rate 0.25% 0.25% B shares convert to D shares
of 4.0% during the first year, automatically after
decreasing 1.0% annually to 0.0% approximately ten years(4)
C 1.0% CDSC for one year 0.25% 0.35% No
D Maximum 4.00% initial sales charge(3) 0.10% No No
<FN>
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("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. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC if redeemed within one
year. See "Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares is 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 on to the holding period for the shares acquired.
</TABLE>
<TABLE>
<S> <C>
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 in a
shareholder account are entitled to purchase additional Class A shares in that
account. In addition, Class A shares will be offered to directors and employees of
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 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. 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
will be subject to a CDSC if the shares are redeemed within one year after
purchase. Sales charges also are reduced under a right of accumulation which takes
into account the investor's holdings of all classes of all MLAM-advised mutual
funds. See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares".
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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 the Class B shares,
and a CDSC if they are redeemed within four years 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 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 on to the holding period for the
shares acquired. Automatic conversion of Class B shares into Class D shares will
occur at least once each 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 if they are redeemed within one year of
purchase. Although Class C shares are subject to a 1.0% CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion feature
and, accordingly, an investor that purchases Class C shares will be subject to
distribution fees and higher account maintenance fees that will be imposed on
Class C shares for an indefinite period subject to annual approval by the Trust's
Board of Trustees and regulatory limitations.
CLASS D: Class D shares incur an initial sales charge when they are purchased and are
subject to an ongoing account maintenance fee of 0.10% of the Fund's average net
assets attributable to Class D shares. Class D shares are not subject to an
ongoing distribution fee or any CDSC when they are redeemed. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but if the
initial sales charge is waived such purchases will be subject to a CDSC of 1% if
the shares are redeemed within one year of purchase. The schedule of initial sales
charges and reductions for the Class D shares is the same as the schedule for
Class A shares. Class D shares also will be issued upon conversion of Class B
shares as described above under "Class B". See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares".
</TABLE>
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing-SM- System that the investor believes is most beneficial under his
particular circumstances.
6
<PAGE>
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 of the account maintenance fee imposed
on Class D shares. Investors qualifying for significantly reduced initial sales
charges may find the initial sales charge alternative particularly attractive
because similar sales charge reductions are not available with respect to the
deferred sales charges imposed in connection with purchases of Class B or Class
C shares. Investors not qualifying for reduced initial sales charges who expect
to maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales 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, 1994 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 financial statements.
Financial information is not presented for Class C or Class D shares, since no
shares of those classes are publicly issued as of the date of this Prospectus.
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 Fund 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
FOR THE YEAR FEBRUARY FOR THE YEAR FEBRUARY
ENDED JULY 31, 28, 1992+ ENDED JULY 31, 28, 1992+
------------------------ TO JULY 31 ------------------------- TO JULY 31
1994 1993 1992 1994 1993 1992
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period.............. $11.07 $ 10.68 $ 10.00 $ 11.07 $ 10.68 $ 10.00
---------- ----------- ----------- ----------- ----------- -----------
Investment income -- net........................ .58 .63 .25 .53 .57 .23
Realized and unrealized gain on investments --
net........................................... (.43) .42 .68 (.43) .42 .68
---------- ----------- ----------- ----------- ----------- -----------
Total from investment operations.................. .15 1.05 .93 .10 .99 .91
---------- ----------- ----------- ----------- ----------- -----------
Less dividends and distributions:
Investment income -- net........................ (.58) (.63) (.25) (.53) (.57) (.23)
Realized gain on investments -- net............. (.15) (.03) -- (.15) (.03) --
In excess of realized gain on investments --
net........................................... (.01) -- -- (.01) -- --
---------- ----------- ----------- ----------- ----------- -----------
Total dividends and distributions................. (.74) (.66) (.25) (.69) (.60) (.23)
---------- ----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Period.................... $10.48 $ 11.07 $ 10.68 $ 10.48 $ 11.07 $ 10.68
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
TOTAL INVESTMENT RETURN++:
Based on net asset value per share................ 1.26% 10.08% 9.44%** 0.75% 9.53% 9.22%**
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees and net of
reimbursement................................... .62% .42% .12%* .62% .43% .12%*
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
Expenses, net of reimbursement.................... .62% .42% .12%* 1.12% .93% .62%*
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
Expenses.......................................... .85% .95% 1.16%* 1.36% 1.45% 1.68%*
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
Investment income -- net.......................... 5.33% 5.75% 5.82%* 4.83% 5.24% 5.32%*
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands).......... $8,367 $ 7,093 $ 4,828 $76,436 $71,429 $38,947
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
Portfolio Turnover................................ 72.13% 39.37% 18.86% 72.13% 39.37% 18.86%
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
<FN>
- ------------
+ Commencement of Operations.
++ Total investment returns exclude the effects of sales loads.
* Annualized.
** Aggregate total investment return.
</TABLE>
8
<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 Massachusetts 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 Commonwealth of Massachusetts, 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
Massachusetts income taxes. Obligations exempt from Federal income taxes are
referred to herein as "Municipal Bonds" and obligations exempt from both Federal
and Massachusetts income taxes are referred to as "Massachusetts Municipal
Bonds". Unless otherwise indicated, reference to Municipal Bonds shall be deemed
to include Massachusetts Municipal Bonds. The Fund at all times, except during
temporary defensive periods, will maintain at least 65% of its total assets
invested in Massachusetts Municipal Bonds. The investment objective of the Fund
as set forth in the first sentence of this paragraph is a fundamental policy and
may not be changed without shareholder approval. At times, the Fund may seek to
hedge its portfolio through the use of futures transactions to reduce volatility
in the net asset value of Fund shares.
Municipal Bonds may include several types of 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,
as defined herein, 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". The Fund may also invest in variable rate
demand obligations. 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 Group ("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. 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 Massachusetts 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
9
<PAGE>
categories. The market prices of high-yielding, lower-rated securities may
fluctuate more than higher-rated securities and may decline significantly in
periods of general economic difficulty, which may follow periods of rising
interest rates. In purchasing such securities, the Fund will rely on the
Manager's judgment, analysis and experience in evaluating the creditworthiness
of the issuer of such securities. The Manager will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the quality of its
management and regulatory matters. See "Investment Objective and Policies" in
the Statement of Additional Information for a more detailed discussion of the
pertinent risk factors involved in investing in "high yield" or "junk" bonds and
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 variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial institution.
The VRDOs in which the Fund will invest are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an unconditional
right of demand on the part of the holder thereof to receive payment of the
unpaid principal balance plus accrued interest on a short notice period not to
exceed seven days. Participating VRDOs provide the Fund with a specified
undivided interest (up to 100%) of the underlying obligation and the right to
demand payment of the unpaid principal balance plus accrued interest on the
Participating VRDOs from the financial institution on a specified number of
days' notice, not to exceed seven days. There is, however, the possibility that
because of a default or insolvency, the demand feature of VRDOs or Participating
VRDOs may not be honored. The Fund has been advised by its counsel that the Fund
should be entitled to treat the income received on Participating VRDOs as
interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed illiquid securities. A VRDO with a demand notice period
exceeding seven days will therefore be subject to the Fund's restriction on
illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and be ultimately responsible for such
determinations.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal and Massachusetts income taxes. However, to the extent that
suitable Massachusetts 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 Massachusetts, taxation. The Fund
may also 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
10
<PAGE>
municipal bonds, to the extent such investments are permitted by the Investment
Company Act of 1940, as amended (the "1940 Act"). Other Tax-Exempt Non-Municipal
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term municipal securities.
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 Massachusetts 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 or SP-2 for notes and A-1 through A-3 for
VRDOs and commercial paper (as determined by Standard and Poor's), or F-1
through F-3 for notes, VRDOs and for 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 a Federal alternative minimum tax. The percentage of the Fund's
net assets invested in "private activity bonds" will vary during the year. See
"Distributions and Taxes". In addition, the Fund reserves the right 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
Massachusetts income taxes by investing in a professionally managed portfolio
consisting primarily of long-term Massachusetts 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 of investing in the Fund 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 MASSACHUSETTS MUNICIPAL BONDS
The Fund ordinarily will invest at least 65% of its total assets in
Massachusetts Municipal Bonds, and therefore it is more susceptible to factors
adversely affecting issuers of Massachusetts Municipal Bonds than is a municipal
bond mutual fund that is not concentrated in issuers of Massachusetts Municipal
Bonds to this degree. The Commonwealth of Massachusetts is experiencing a
moderate economic slowdown. Moreover, spending by the government of the
Commonwealth exceeded revenues in each of the five fiscal years commencing
fiscal 1987. The operating losses in fiscal 1989 and fiscal 1990 totalled $672
million and
11
<PAGE>
$1.251 billion, respectively, and were covered primarily through deficit
borrowings. The Commonwealth experienced an operating loss in fiscal 1991 of
$21.2 million, but because of a positive closing fund balance of $237.1 million
after applying proceeds of borrowing that financed the fiscal 1990 deficit, no
deficit borrowing was required to close out fiscal 1991. In fiscal 1992,
revenues exceeded spending and the Commonwealth ended fiscal 1992 with positive
fund balances of $549.4 million. Fiscal 1993 ended with positive fund balances
of $562.5 million. As of the date of this Prospectus, fiscal 1994 is expected to
end with an operating loss of $162.8 million, but with positive budgetary fund
balances totaling approximately $399.7 million, to be achieved through the use
of the prior year ending fund balances. Standard & Poor's, Fitch and Moody's
have upgraded their ratings of Massachusetts' general obligation bonds from BBB,
A and Baa, respectively, to A+, A+ and A, respectively. Ratings have been
lowered on short-term debt and some state agency obligations. From time to time,
the rating agencies may further change their ratings in response to budgetary
matters or other economic indicators. See Appendix I -- "Economic and Financial
Conditions in Massachusetts" 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 are issued by or on behalf of public authorities to
finance various privately operated facilities, including pollution control
facilities and certain local facilities for water supply, gas, electricity or
sewage or solid waste disposal. For purposes of this Prospectus, such
obligations are referred to as Municipal Bonds if the interest paid thereon is
exempt from Federal income tax, and, as Massachusetts Municipal Bonds if the
interest thereon is exempt from Federal income tax and exempt from Massachusetts
personal 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 industrial
development bonds or 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 state constitutions 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 economies viability of such
facility or such revenue source. The Fund may also invest in so-called "moral
12
<PAGE>
obligation" bonds, which are normally issued by special purpose authorities. If
an issuer of moral obligation bonds is unable to meet its obligations, repayment
of such bonds becomes a moral commitment, but not a legal obligation of the
issuer. The Fund will not invest more than 10% of its total assets (taken at
market value at the time of each investment) in industrial 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. 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 such investments will not adversely affect the Fund particularly
given the Fund's limitations on such investments.
The Fund may purchase industrial development bonds ("IDBs") or private
activity bonds. IDBs or private activity bonds are tax-exempt securities issued
by states, municipalities or public authorities to provide funds, usually
through a loan or lease arrangement, to a private entity for the purpose of
financing construction or improvement of a facility to be used by the entity.
Such bonds are secured primarily by revenues derived from loan repayments or
lease payments due from the entity which may or may not be guaranteed by a
parent company or otherwise secured. Neither IDBs nor private activity bonds are
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 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, governmental 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 or private activity bonds.
The Fund may invest in Municipal Bonds the return on which is based on a
particular index of value or interest rates. For example, the Fund may invest in
Municipal Bonds that pay interest based on an index of Municipal Bond interest
rates or based on the value of gold or some other commodity. The principal
amount payable upon maturity of certain Municipal Bonds also may be based on the
value of an index. To the extent the Fund invests in these types of Municipal
Bonds, the Fund's return on such Municipal Bonds will be subject to risk with
respect to the value of the particular 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. Such securities have the effect of
providing a degree of investment leverage, since they may increase or decrease
in value in response to changes, as an illustration, in market interest rates at
a rate which is a multiple (typically two) of the rate at which fixed-rate
long-term tax exempt securities increase or decrease in response to such
changes. As a result, the market values of such securities will generally be
more volatile than the market values of fixed-rate tax exempt securities. To
seek to limit the volatility of these securities, the Fund may purchase inverse
floating obligations with shorter term maturities or which contain limitations
on the extent to which the interest rate may vary. The Manager believes that
indexed and inverse floating obligations represent a flexible portfolio
management instrument for the Fund which allows the Manager to vary the degree
of investment leverage relatively efficiently under different market conditions.
Certain investments in such obligations may be illiquid. The Fund may not invest
in such illiquid obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's net assets.
13
<PAGE>
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called "lease
obligations") relating to such equipment, land or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
issuer's unlimited taxing power is pledged, a lease obligation is frequently
backed by the issuer's covenant to budget for, appropriate and make the payments
due under the lease obligation. However certain lease obligations contain
"non-appropriation" clauses which provide that the issuer has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the leased property disposition of the property
in the event of foreclosure might prove difficult. These securities represent a
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 other illiquid investments, would
exceed 10% of the Fund's net assets. The Fund may, however, invest without
regard to such limitation in lease obligations which the Manager, pursuant to
guidelines which have been adopted by the Board of Trustees and subject to the
supervision of the Board, determines to be liquid. The Manager will deem lease
obligations 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.
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 to holding
both the Call Right and the related Municipal Bond is identical to holding a
Municipal Bond as a non-callable security. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments, would
exceed 15% of the Fund's net assets.
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
14
<PAGE>
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 high
grade, liquid Municipal Bonds 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 will be in
accordance with the Fund's investment policies and limitations. A financial
futures contract obligates the seller of a contract to deliver and the purchaser
of a contract to take delivery of the type of financial instrument covered by
the contract, or in the case of index-based futures contracts to make and accept
a cash settlement, at a specific future time for a specified price. 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 deals in financial futures contracts traded on the Chicago Board of
Trade based on The Bond Buyer Municipal Bond Index, a price-weighted measure of
the market value of 40 large, recently issued tax-exempt bonds. There can be no
assurance, however, that a liquid secondary market will exist to terminate any
particular financial futures contract at any specific time. If it is not
possible to close a financial futures 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.
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
15
<PAGE>
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 ("CFTC"), 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) 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.) Margin
deposits may consist of cash or securities acceptable to the broker and the
relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or short-term, high-grade, fixed-income securities in a segregated
account with the Fund's custodian, so that the amount so segregated plus the
amount of initial and variation margin held in the account of its broker equals
the market value of the 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.
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
16
<PAGE>
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, would exceed 10% of the Fund's net
assets. In the event of a 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 has adopted a number of restrictions and policies relating to the
investment of the Fund's assets and its activities, which are fundamental
policies of the Fund and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities, as defined in the
1940 Act. Among the more significant restrictions, the Fund may not: (i)
purchase any securities other than securities referred to under "Investment
Objective and Policies" herein; (ii) purchase securities of other investment
companies, except in connection with certain specified transactions and with
respect to investments of up to 10% of the Fund's total assets in securities of
closed-end investment companies; (iii) 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
[The Fund will not purchase securities while borrowings are outstanding]; (iv)
mortgage, pledge, hypothecate or in any manner transfer as security for
indebtedness any securities owned or held by the Fund except in connection with
certain specified transactions; (v) invest in securities which cannot be readily
resold because of legal or contractual restrictions or which are not readily
marketable, including individually negotiated loans that constitute illiquid
investments and illiquid lease obligations, and in repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities taken together, more than 10% of its net assets (taken at market
value at the time of each investment) would be invested in such securities;
17
<PAGE>
(vi) invest more than 10% of its total assets (taken at market value at the time
of each investment) in industrial revenue bonds where the entity supplying the
revenues from which the issue is to be paid, and the guarantor of the
obligation, including predecessors, each have a record of less than three years'
continuous business operation; and (vii) invest more than 25% of its total
assets (taken at market value at the time of each investment) in securities of
issuers in any particular industry (other than United States Government
securities or Government agency securities, Municipal Bonds and Non-Municipal
Tax-Exempt Securities).
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 as a "regulated investment
company" for purposes of the Code. See "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.
The Board of Trustees of the Trust, at a meeting held on August 3, 1994,
approved certain changes to the fundamental and non-fundamental investment
restrictions of the Fund. These changes were proposed in connection with the
creation of a set of standard fundamental and non-fundamental investment
restrictions that would be adopted, subject to shareholder approval, by all of
the non-money market mutual funds advised by MLAM or the Manager. The proposed
uniform investment restrictions are designed to provide each of these funds,
including the Fund, with as much investment flexibility as possible under the
1940 Act and applicable state securities regulations, help promote operational
efficiencies and facilitate monitoring of compliance. The investment objectives
and policies of the Fund will be unaffected by the adoption of the proposed
investment restrictions.
The full text of the proposed investment restrictions is set forth under
"Investment Restrictions -- Proposed Uniform Investment Restrictions" in the
Statement of Additional Information. Shareholders of the Fund are currently
considering whether to approve the proposed revised investment restrictions. If
such shareholder approval is obtained, the Fund's current investment
restrictions will be replaced by the proposed restrictions, and the Fund's
Prospectus and Statement of Additional Information will be supplemented to
reflect such change.
Investors are referred to the Statement of Additional Information for a
complete description of the Fund's investment restrictions.
18
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the 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.
The Trustees are:
ARTHUR ZEIKEL* -- President and Chief Investment Officer of the Manager and
MLAM; President and Director of Princeton Services, Inc.; Executive Vice
President of ML & Co., and of Merrill Lynch; Director of the Distributor.
KENNETH S. AXELSON -- Former Executive Vice President and Director, J.C.
Penney Company, Inc.
HERBERT I. LONDON -- John M. Olin Professor of Humanities, New York
University.
ROBERT R. MARTIN -- Chairman, WTC Industries, Inc. and 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 1940 Act, of the Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, which 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 100 other registered investment companies. MLAM also offers portfolio
management and portfolio analysis services to individuals and institutions. As
of August 31, 1994, the Manager and MLAM had a total of approximately $165.7
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.
Vincent R. Giordano and Kenneth A. Jacob are the Portfolio Managers for the
Fund. Vincent R. Giordano has been a Portfolio Manager of the Manager and MLAM
since 1977 and a Senior Vice President of the Manager and MLAM since 1984.
Kenneth A. Jacob has been a Vice President of the Manager and MLAM since 1984.
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
19
<PAGE>
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 year ended July 31, 1994, the total fee
paid by the Fund to the Manager was $465,743 (based on average net assets of
approximately $84.9 million) of which $199,488 was voluntarily waived.
The Management Agreement obligates 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 year ended July 31, 1994, the Fund
reimbursed the Manager $36,930 for accounting services. For that period, the
annualized ratio of total expenses, excluding distribution fees and net of
reimbursement, to average net assets was 0.62% for Class A shares and 0.62% for
Class B shares.
TRANSFER AGENCY SERVICES
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 and Class D shareholder account and
$14.00 per Class B and 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 year ended July
31, 1994, the Fund paid the Transfer Agent a total fee of $41,161 pursuant to
the Transfer Agency Agreement for providing transfer agency services.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Manager and Merrill Lynch, acts as
the distributor of the shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). 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 offers 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
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 4:15 P.M., New York time, which includes orders received after
the determination of net asset value on the previous day, the applicable
offering price will be based on the net asset value as of 4:15 P.M., New York
time, on the day the orders are placed with the Distributor, provided the orders
are received by the Distributor prior to 4:30 P.M., New York time, on that day.
If the purchase orders are not received by the Distributor prior to 4:30 P.M.,
New York time, such orders shall be deemed received on the
20
<PAGE>
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. A discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing 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
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. 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.
21
<PAGE>
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
<C> <S> <C> <C> <C>
A Maximum 4.0% initial sales charge(2)(3) No No No
B CDSC for a period of 4 years, at a rate 0.25% 0.25% B shares convert to D shares
of 4.0% during the first year, automatically after
decreasing 1.0% annually to 0.0% approximately ten years(4)
C 1.0% CDSC for one year 0.25% 0.35% No
D Maximum 4.0% initial sales charge(3) 0.10% No No
<FN>
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be 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. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares is 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 on to the holding period for the shares acquired.
</TABLE>
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 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 SELECTED
AS PERCENTAGE AS PERCENTAGE* DEALERS AS
OF OFFERING OF THE NET 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
<FN>
- ----------
* Rounded to the nearest one-hundredth percent.
** Class A and Class D purchases of $1,000,000 or more made on or after October
21, 1994, will be subject to a CDSC of 1% if the shares are redeemed within
one year after purchase. Class A purchases made prior to October 21, 1994 may
be subject to a CDSC if the shares are redeemed within one year of purchase
at the following annual rates: 0.75% on purchases of $1,000,000 to
$2,500,000; 0.40% on purchases of $2,500,001 to $3,500,000; 0.25% on
purchases of $3,500,001 to $5,000,000; and 0.20% on purchases of more than
$5,000,000 in lieu of paying an initial sales charge. The charge will be
assessed on an amount equal to the lesser of the proceeds of the redemption
or the cost of the shares being redeemed.
</TABLE>
22
<PAGE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended. For the fiscal year ended July 31, 1994, the Fund sold 307,747 Class
A shares for aggregate net proceeds of $3,438,464. The gross sales charges for
the sale of Class A shares of the Fund for the period were $39,200, of which
$4,115 and $35,085 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal year ended July 31, 1994, 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.
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 in a
shareholder account are entitled to purchase additional Class A shares in that
account. Class A shares are available at net asset value to corporate warranty
insurance reserve fund programs provided that the program has $3 million or more
initially invested in MLAM-advised mutual funds. Also eligible to purchase Class
A shares at net asset value are participants in certain investment programs
including TMA-SM- Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services and certain purchases made in connection with the
Merrill Lynch Mutual Fund Adviser program. In addition, Class A shares will be
offered at net asset value to ML & Co., and its subsidiaries and their directors
and employees and to members of the Boards of MLAM-advised investment companies,
including the Fund. Certain persons who acquired shares of certain MLAM-advised
closed-end funds who wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in shares of the Fund also may purchase
Class A shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met. For example, 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. who wish to
reinvest the net proceeds from a sale of certain of their shares of common stock
of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of such 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".
Class D shares are offered at net asset value without 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.
23
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
INVESTORS CHOOSING THE DEFERRED SALES CHARGE ALTERNATIVES SHOULD CONSIDER
CLASS B SHARES IF THEY INTEND TO HOLD THEIR SHARES FOR AN EXTENDED PERIOD OF
TIME 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 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 a distribution fee 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 CDSCs and the distribution fees 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 on to 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. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. 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
24
<PAGE>
redemption or the cost of the shares being redeemed. Accordingly, no sales
charge will be imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CDSC AS A
PERCENTAGE OF
DOLLAR AMOUNT
SUBJECT TO
YEAR SINCE PURCHASE PAYMENT MADE CHANGE
- -------------------------------------------------------------------------- -------------
<S> <C>
0-1....................................................................... 4.0%
1-2....................................................................... 3.0%
2-3....................................................................... 2.0%
3-4....................................................................... 1.0%
4 and thereafter.......................................................... 0.0%
</TABLE>
For the fiscal year ended July 31, 1994, the Distributor received CDSCs of
$258,962 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 a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor makes
his first redemption of 50 shares (proceeds of $600), 10 shares will not be
subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rates in the third year after purchase).
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Internal Revenue Code of 1986, as amended) of a
shareholder. Additional information concerning the waiver of the Class B CDSC is
set forth in the Statement of Additional Information.
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.
25
<PAGE>
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 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 on to the holding
period for the shares acquired.
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.
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The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
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 fee 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.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing distribution
fee, accrued daily and paid monthly, at the annual rate of 0.50% of average
daily net assets of the Class B shares of the Fund under a distribution plan
previously adopted by the Fund (the "Prior Plan") to compensate the Distributor
and Merrill Lynch for providing account maintenance and distribution-related
activities and services to Class B shareholders. The fee rate payable and the
services provided under the Prior Plan are identical to the aggregate fee rate
payable and the services provided under the Class B Distribution Plan, the
difference being that the account maintenance and distribution services have
been unbundled.
For the fiscal year ended July 31, 1994, the Fund paid the Distributor
account maintenance fees of $191,024 and distribution fees of $191,024 under the
Class B Distribution Plan. The Fund did not begin to offer shares of Class C or
Class D publicly until the date of this Prospectus. Accordingly, no payments
have been made pursuant to the Class C or Class D Distribution Plans prior to
the date of this Prospectus.
Payments under the Distribution Plans are based on a percentage of average
daily net assets attributable to the shares regardless of the amount of expenses
incurred, and, accordingly, distribution-related revenues from the Distribution
Plans may be more or less than distribution-related expenses. Information with
respect to the distribution-related revenues and expenses is presented to the
Trustees for their consideration in connection with their deliberations as to
the continuance of the Class B and Class C Distribution Plans. This information
is presented annually as of December 31 of each year on a "fully allocated
accrual" basis and quarterly on a "direct expense and revenue/cash" basis. On
the fully allocated accrual basis, revenues consist of the account maintenance
fees, distribution fees, the CDSC 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 market expenses, corporate overhead and
interest expense. On the direct expense and revenue/cash basis, revenues consist
of the account maintenance fees, distribution fees and CDSC and the expenses
consist of financial consultant compensation. As of December 31, 1993, the fully
allocated accrual expenses incurred by the Distributor and
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Merrill Lynch exceeded fully allocated revenues by approximately $1,630,000
(2.1% of Class B net assets at that date). As of December 31, 1993, direct cash
expenses exceeded direct cash revenues by $374,161 (0.48% of Class B net assets
at that date). As of July 31, 1994, direct cash expenses for the period since
the commencement of operations exceeded direct cash revenues by $142,398 (0.19%
of Class B net assets at that date).
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 fees, the
distribution fees and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice 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.
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
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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, Financial Data Services,
Inc., Transfer Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville,
Florida 32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., Transfer Agency Mutual Fund
Operations, 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 term is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, 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 New York Stock Exchange on the day received and such request is received
by the Fund from such dealer not later than 4:30 P.M., New York time, on the
same day. Dealers have the responsibility of submitting such repurchase requests
to the Trust not later than 4:30 P.M., New York time, 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. Redemptions directly through the Fund's Transfer Agent are
not subject to the processing fee. The Trust reserves the right to reject any
order for
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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.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A and Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or Class D
shares of the Fund, as the case may be, at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement is a one-time privilege and may be
exercised by the Class A or Class D shareholder only the first time such
shareholder makes a redemption.
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 (an "Investment
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 reinvestments of ordinary income dividends and long-term capital gain
distributions. These 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 dividends and
long-term capital gains distributions. A shareholder may make additions to his
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,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A or Class D shares from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the Class A or
Class D shares are to be transferred will not take delivery of shares of the
Fund, a shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain an Investment Account
at the Transfer Agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder at the Transfer Agent.
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EXCHANGE PRIVILEGE. 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 account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares will be exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other fund.
Class A, Class B, Class C and Class D shares also will be 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.
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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 monthly.
Cash payments can also be directly deposited to the shareholder's bank account.
Cash payments can also be directly deposited to 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 Investment Account through
automatic payment by check or through automatic payment by direct deposit to his
bank account on either a monthly or quarterly basis. 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 Systematic Redemption Program, subject to certain conditions.
AUTOMATIC INVESTMENT PLANS. Regular additions of shares may be made to an
investor's Investment Account by prearranged charges of $50 or more to his
regular bank account. Alternatively, investors who maintain CMA-R- accounts may
arrange to have periodic investments made in the Fund in their CMA-R- account or
in certain related accounts in amounts of $100 or more through the CMA-R-
Automated Investment Program.
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
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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. Affiliated persons of the Trust may serve as its broker in
over-the-counter transactions conducted for the Fund on an agency basis only.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily
following the normal close of trading on the New York Stock Exchange (currently
4:00 P.M. New York time) prior to the determination of the net asset value 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
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. See "Additional Information -- Determination of
Net Asset Value".
See "Shareholder Services" for information as to how to elect either
dividend reinvestment or cash payments. Portions of dividends and distributions
which are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of the Fund or received in cash.
TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income (see below), 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 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 and railroad retirement benefits subject to Federal
income taxes. The portion of such exempt-interest dividends paid from interest
received by the Fund from Massachusetts Municipal Bonds also will be exempt from
Massachusetts personal income taxes. Corporate shareholders and shareholders
subject to income taxation by states other than Massachusetts will
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<PAGE>
realize a lower after-tax rate of return than Massachusetts 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
Massachusetts personal income taxes. Interest on indebtedness incurred or
continued to purchase or carry Fund shares is not deductible for Federal or
Massachusetts personal income tax purposes, to the extent attributable to
exempt-interest dividends. Persons who may be "substantial users" (or "related
persons" of substantial users) of facilities financed by industrial development
bonds or private activity bonds held by the Fund should consult their tax
advisers before purchasing Fund shares.
Exempt-interest and capital gain dividends paid to a corporate shareholder
will be subject to Massachusetts corporate excise tax, and the value of the
shares of the Fund will be taken into account in calculating the property
component 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 taxable ordinary income for Federal and Massachusetts income tax
purposes. Such distributions are not eligible for the dividends-received
deduction for corporations. Distributions, if any, of net long-term capital
gains from the sale of securities or from certain transactions in futures or
options ("capital gain dividends") are taxable as long-term capital gains for
Federal income tax purposes, regardless of the length of time the shareholder
has owned Fund shares and, for Massachusetts income tax purposes, are treated as
capital gains which are taxed at ordinary income tax rates, unless they are
attributable to the sale of certain Massachusetts Municipal Bonds issued
pursuant to legislation which specifically exempts capital gains on their sale
from Massachusetts personal income taxation. Under the Revenue Reconciliation
Act of 1993, 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 shares held for six months
or less will be treated as long-term capital loss to the extent of any capital
gain dividends received by the shareholder. In addition, such loss will be
disallowed to the extent of any exempt-interest 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. This alternative minimum tax applies
to interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference," which could subject 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.
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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 Revenue Reconciliation Act of 1993 has added new marginal tax brackets
of 36% and 39.6% for individuals and has created a graduated structure of 26%
and 28% for the alternative minimum tax applicable to individual taxpayers.
These rate increases may affect an individual investor's after-tax return from
an investment in the Fund as compared with such investor's return from taxable
investments.
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 the sales charge paid to the Fund
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 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 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.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and Massachusetts 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 Massachusetts personal income and corporate excise tax laws. The
Code and the Treasury regulations, as well as the Massachusetts tax laws, are
subject to change by legislative, judicial or administrative action either
prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes (other than those
imposed by Massachusetts) and with specific questions as to Federal, foreign,
state or local taxes.
35
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
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 and distribution charges and any incremental transfer
agency costs relating to each class of shares will be borne exclusively by that
class. The Fund will include performance data for all classes of shares of the
Fund in any advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over a longer period of time.
In advertisements distributed to investors whose purchases are subject to waiver
of the CDSC in the case of Class B and Class C shares or 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,
1994 was 5.37% for Class A shares and 5.09% for Class B shares and the
tax-equivalent yield for the same period (based on a Federal income tax rate of
28%) was 7.46% for Class A shares and 7.07% for Class B shares. The yield
36
<PAGE>
without voluntary reimbursement for the 30-day period would have been 5.18% for
Class A shares and 4.89% for Class B shares with a tax-equivalent yield of 7.19%
for Class A shares and 6.79% for Class B shares.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and 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 gain 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 representative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily as of 4:15 P.M., New York time, on each day during
which the New York Stock Exchange 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 the 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 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 D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher 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 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
37
<PAGE>
of income exempt from Federal, 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 Trust has received an order (the "Order") from the Commission
permitting the issuance and sale of multiple classes of shares. The Trustees of
the Trust may classify and reclassify the shares of the Fund into additional
classes at a future date. The Order permits the Trust to issue additional
classes of shares of any Series if the Board of Trustees deems such issuance to
be in the best interest of the Trust.
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
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:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, FL 32232-5289
38
<PAGE>
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 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; and no Trustee, shareholder, officer, employee or
agent of the Trust shall be held to any personal liability, nor shall resort be
had to such person's private property for the satisfaction of any obligation or
claim of the Trust, but the "Trust Property" only shall be liable.
39
<PAGE>
[This page intentionally left blank]
40
<PAGE>
MERRILL LYNCH MASSACHUSETTS 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 Massachusetts 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 Financial Data Services, Inc.,
as an initial investment (minimum $1,000). I understand that this purchase
will be executed at the applicable offering price next to be determined
after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds
that would qualify for the right of accumulation as outlined in the
Statement of Additional Information: (Please list all funds. Use a separate
sheet of paper if necessary.)
<TABLE>
<S> <C>
1. ......................................................... 4. .........................................................
2. ......................................................... 5. .........................................................
3. ......................................................... 6. .........................................................
</TABLE>
<TABLE>
<S> <C>
Name ...................................................................................................................
First Name Initial Last Name
Name of Co-Owner (if any) ..............................................................................................
First Name Initial Last Name
</TABLE>
Address ................... Date ................... , 19 ..................
...............................................................................
(Zip Code)
<TABLE>
<S> <C>
Occupation ................................................. Name and Address of Employer ...............................
............................................................
............................................................
........................................................... ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
ORDINARY INCOME DIVIDENDS LONG-TERM CAPITAL GAINS
Select / / Reinvest Select / / Reinvest
One: / / Cash One: / / Cash
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Massachusetts 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 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.
41
<PAGE>
MERRILL LYNCH MASSACHUSETTS 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
"Distributions and Taxes -- Taxes") either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am no
longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
........................................................... ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND CLASS D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
Dear Sir/Madam:
..................................... , 19 ....................................
Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Massachusetts 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 Massachusetts
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 Massachusetts Municipal Bond Fund held as security.
<TABLE>
<S> <C>
By.......................................................... ............................................................
Signature of Owner Signature of Co-Owner
(if registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name.................................................... (2) Name....................................................
Account Number.............................................. Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
<TABLE>
<S> <C>
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 made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the shareholder's signature.
This form, when completed, should be mailed to: ............................................................
Merrill Lynch Massachusetts Municipal Bond Fund Dealer Name and Address
c/o Financial Data Services, Inc. By: .......................................................
Transfer Agency Mutual Fund Operations Authorized Signature of Dealer
P.O. Box 45289 ------------ ----------------
Jacksonville, Florida 32232-5289 ------------ ----------------
............................................................
Branch Code F/C No. F/C Last Name
------------ --------------------
------------ --------------------
Dealer's Customer A/C No.
</TABLE>
42
<PAGE>
MERRILL LYNCH MASSACHUSETTS 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
<TABLE>
<S> <C>
Name of Owner .............................................. ----------------------------------------
Name of Co-Owner (if any) .................................. Social Security Number
Address .................................................... or Taxpayer Identification Number
........................................................... Account Number .............................................
(if existing account)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Massachusetts
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 ________________(month)________________
or as soon as possible thereafter.
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 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.
43
<PAGE>
MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND -
AUTHORIZATION FORM (PART 2) - (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that 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 Massachusetts 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.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Massachusetts Municipal Bond Fund as indicated
below:
Amount of each ACH debit $ .................................................
Account number ............................................................
Please date and invest ACH debits on the 20th of each month
beginning .................................. or as soon thereafter as possible.
(Month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a check or debit is not
honored upon presentation, Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................................... ..................................
Date Signature of Depositor
........................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To ........................................................................ Bank
(Investor's Bank)
Bank Address ...................................................................
City ................... State ................... Zip Code ..................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to 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.
................................... ..................................
Date Signature of Depositor
................................... ..................................
Bank Account Number 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.
44
<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 9011
Princeton, New Jersey 08543-9011
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood
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 Pricing-SM- System........ 4
Financial Highlights........................... 8
Investment Objective and Policies.............. 9
Potential Benefits........................... 11
Special and Risk Considerations Relating to
Massachusetts Municipal Bonds.............. 11
Description of Municipal Bonds............... 12
Call Rights.................................. 14
When-Issued Securities and Delayed Delivery
Transactions............................... 14
Financial Futures Transactions and Options... 15
Repurchase Agreements........................ 17
Investment Restrictions...................... 17
Management of the Trust........................ 19
Trustees..................................... 19
Management and Advisory Arrangements......... 19
Transfer Agency Services..................... 20
Purchase of Shares............................. 20
Initial Sales Charge Alternatives -- Class A
and Class D Shares......................... 22
Deferred Sales Charge Alternatives -- Class B
and Class C Shares......................... 24
Distribution Plans........................... 26
Limitations on the Payment of Deferred Sales
Charges.................................... 28
Redemption of Shares........................... 28
Redemption................................... 29
Repurchase................................... 29
Reinstatement Privilege -- Class A and Class
D Shares................................... 30
Shareholder Services........................... 30
Portfolio Transactions......................... 32
Distributions and Taxes........................ 33
Distributions................................ 33
Taxes........................................ 33
Performance Data............................... 36
Additional Information......................... 37
Determination of Net Asset Value............. 37
Organization of the Trust.................... 37
Shareholder Reports.......................... 38
Shareholder Inquiries........................ 39
Authorization Form............................. 41
Code # 16148 -- 1094
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[LOGO]
Merrill Lynch
Massachusetts
Municipal Bond
Fund
Merrill Lynch Multi-State
Municipal Series Trust
PROSPECTUS
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011--PHONE NO. (609) 282-2800
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Merrill Lynch Massachusetts 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 Massachusetts personal income taxes as is
consistent with prudent investment management. The Fund invests primarily in a
non-diversified portfolio of long-term investment grade obligations the interest
on which is exempt from Federal and Massachusetts income taxes in the opinion of
bond counsel to the issuer ("Massachusetts Municipal Bonds"). There can be no
assurance that the investment objective of the Fund will be realized.
Pursuant to the Merrill Lynch Select Pricing-SM- System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing-SM- System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
-------------------
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 October 21,
1994 (the "Prospectus"), which has been filed with the Securities and Exchange
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. Capitalized
terms used but not defined herein have the same meanings as in the Prospectus.
-------------------
FUND ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
--------------
The date of this Statement of Additional Information is October 21, 1994.
<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 Massachusetts 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 The Commonwealth of Massachusetts, 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 Massachusetts personal income taxes. Obligations exempt from Federal
income taxes are referred to herein as "Municipal Bonds" and obligations exempt
from both Federal and Massachusetts income taxes are referred to as
"Massachusetts Municipal Bonds". Unless otherwise indicated, references to
Municipal Bonds shall be deemed to include Massachusetts 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 Massachusetts
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 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 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"), to other obligations in which the Fund may invest.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal and Massachusetts income taxes. However, to the extent that
suitable Massachusetts 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 Massachusetts taxation (such
obligations being referred to herein as "Municipal Bonds"). 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 instruments evidencing interests in one or
more long-term municipal securities.
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 Massachusetts 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
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obligations being referred to herein as "Temporary Investments"), except that
taxable Temporary Investments shall not exceed 20% of the Fund's net assets. The
Fund 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 objective of the Fund set forth in this
paragraph 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 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 and 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 obligations 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 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 a particular 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. For example, 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. 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 as a rate which is a multiple (typically two) of the rate at which
fixed-rate long-term tax exempt securities increase or decrease in response to
such changes. As a result, the market values of such securities will generally
be more volatile than the market values of fixed-rate tax exempt securities. To
seek to limit the volatility of these securities, the Fund may purchase inverse
floating obligations with shorter term maturities or which contain limitations
on the extent to which the interest rate may vary. The Manager believes that
indexed and inverse floating obligations represent a flexible portfolio
management instrument for the Fund which allows the Manager to vary the degree
of investment leverage relatively efficiently under different market conditions.
Certain investments in such obligations may be illiquid. The Fund may not invest
in such illiquid obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's net assets.
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 to holding
both the Call Right and the related Municipal Bond is identical to holding a
Municipal Bond as a non-callable security. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments, would
exceed 15% of the Fund's net assets.
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.
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 or obligors of high yield securities may be more likely to
experience financial stress, especially if such issuers or obligors 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 such
periods, 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 the Municipal Bonds and Temporary
Investments in 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
to 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 industrial development bonds or private activity bonds are
issued by or on behalf of public authorities to finance various privately owned
or operated facilities, including pollution control 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 Massachusetts Municipal Bonds, exempt from
Massachusetts personal income taxes. Other types of industrial development bonds
or private activity bonds, the proceeds of which are used for the construction,
equipment or improvement of privately operated industrial or commercial
facilities, may constitute Municipal Bonds, although the current Federal tax
laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of faith, credit and taxing power for the
5
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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. Industrial
development bonds or 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 of 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 may invest in
Municipal Bonds that are so-called "moral obligation" bonds. Under a moral
obligation bond, if the issuer thereof 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 10% of
the Fund's net assets. The Fund may, however, invest without regard to such
limitation in lease obligations which the Manager, pursuant to the guidelines
which have been adopted by the Board of Trustees and subject to the supervision
of the Board of Trustees, determines to be liquid. The Manager will deem lease
obligations liquid if they are publicly offered and have received an investment
grade rating of Baa or better by Moody's, or BBB or better by Standard & Poor's
or Fitch. Unrated lease obligations, or those rated below investment grade, will
be considered liquid if the obligations come to the market through an
underwritten public offering and at least two dealers are willing to give
competitive bids. In reference to the latter, the Manager 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 is also dependent on the continuing ability of the issuers of the
bonds in which the Fund invests to meet their obligations for the payment of
interest and principal when due. There are variations in the risks involved in
holding Municipal Bonds, both within a particular classification and between
classifications, depending on numerous factors. Furthermore, the rights of
owners of Municipal Bonds and the obligations of the issuer of such Municipal
Bonds may be subject to applicable bankruptcy, insolvency and similar laws and
court decisions affecting the rights of creditors generally and to general
equitable principles, which may limit the enforcement of certain remedies.
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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 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 prime rate of a bank or some other
appropriate interest rate adjustment index. The Fund may invest in all types of
tax-exempt instruments currently outstanding or to be issued in the future which
satisfy the 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. 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
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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 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 at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period. In
the case of repurchase agreements, the prices at which the trades are conducted
do not reflect accrued interest on the underlying obligations. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In the case of a repurchase
agreement, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement; the Fund does not have the right to
seek additional collateral in the case of purchase and sale contracts. 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 all other illiquid investments, would exceed 10% of the Fund's net
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.
However, it is likely that income from such arrangements also 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 will
be in accordance with the Fund's investment policies and limitations. 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
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have a remaining maturity of 19 years or more. Twice a month new issues
satisfying the eligibility requirements are added to, and an equal number of old
issues are deleted from, the Municipal Bond Index. The value of the Municipal
Bond Index is computed daily according to a formula based on the price of each
bond in the Municipal Bond Index, as evaluated by six dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the exchange
membership which 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
("GNMA") Certificates and three-month U.S. Treasury bills. The Fund may purchase
and write call and put options on futures contracts on U.S. Government
securities 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 Securities and Exchange Commission
("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 short-term, high-grade, fixed income 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 have only recently been approved for
trading and therefore have little trading history. It is possible that trading
in such futures contracts will 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
CURRENT INVESTMENT RESTRICTIONS._In addition to the investment restrictions
set forth in the Prospectus, the Trust has adopted a number of restrictions and
policies relating to the investment of its assets and its activities, which are
fundamental policies and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities (which for this
purpose and under the 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) purchase any securities other than securities referred to
under "Investment Objective and Policies" herein and in the Prospectus; (2)
invest more than 25% of its total assets (taken at market value at the time of
each investment) in securities of issuers in any particular industry (other than
U.S. Government securities or Government agency securities, Municipal Bonds and
Non-Municipal Tax-Exempt Securities); (3) invest more than 10% of its total
assets (taken at market value at the time of each investment) in industrial
revenue bonds where the entity supplying the revenues from which the issuer is
to be paid, and the guarantor of the obligation, including predecessors, each
have a record of less than three years of continuous business operation; (4)
make investments for the purpose of exercising control or management; (5)
purchase securities of other investment companies, except in connection with a
merger, consolidation, acquisition or reorganization, and provided further that
the Fund may purchase securities of closed-end investment companies if
immediately thereafter not more than (i) 3% of the total outstanding voting
stock of such
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<PAGE>
company is owned by the Fund, (ii) 5% of the Fund's total assets, taken at
market value, would be invested in any one such company, or (iii) 10% of the
Fund's total assets, taken at market value, would be invested in such
securities; (6) purchase or sell real estate (provided that such restriction
shall not apply to securities secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein),
commodities or commodity contracts (except that the Fund may purchase and sell
financial futures contracts), interests in oil, gas or other mineral exploration
or development programs; (7) purchase any securities on margin, except for use
of short-term credit necessary for clearance of purchases and sales of portfolio
securities (the deposit or payment by the Fund of initial or variation margin in
connection with financial futures contracts is not considered the purchase of a
security on margin); (8) make short sales of securities or maintain a short
position or invest in put, call, straddle or spread options (this restriction
does not apply to options on financial futures contracts); (9) make loans to
other persons, provided that the Fund may purchase a portion of an issue of
tax-exempt securities (the acquisition of a portion of an issue of tax-exempt
securities or bonds, debentures or other debt securities which are not publicly
distributed is considered to be the making of a loan under the 1940 Act) and
provided further that investments in repurchase agreements and purchase and sale
contracts shall not be deemed to be the making of a loan; (10) 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 [Usually only "leveraged" investment companies may borrow in
excess of 5% of their assets; however, the Fund will not borrow to increase
income but only to meet redemption requests which might otherwise require
untimely disposition of portfolio securities. The Fund will not purchase
securities while borrowings are outstanding. Interest paid on such borrowings
will reduce net income]; (11) mortgage, pledge, hypothecate or in any manner
transfer as security for indebtedness any securities owned or held by the Fund
except as may be necessary in connection with borrowings mentioned in (10)
above, and then such mortgaging, pledging or hypothecating may not exceed 10% of
its total assets, taken at market value, or except as may be necessary in
connection with transactions in financial futures contracts; (12) invest in
securities with legal or contractual restrictions on resale or for which no
readily available market exists, or in individually negotiated loans that
constitute illiquid investments and illiquid lease obligations, or in repurchase
agreements or purchase and sale contracts maturing in more than seven days, if,
regarding all such securities, more than 10% of its net assets (taken at market
value), would be invested in such securities; and (13) act as an underwriter of
securities, except to the extent that the Fund may technically be deemed an
underwriter when engaged in the activities described in (12) above or insofar as
the Fund may be deemed an underwriter under the Securities Act of 1933, as
amended, in selling portfolio securities.
In addition, to comply with tax requirements for qualifications 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-governmental entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer.] These
tax-related limitations may be changed by the Trustees of the Trust to the
extent necessary to comply with changes to the Federal tax requirements.
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<PAGE>
PROPOSED UNIFORM INVESTMENT RESTRICTIONS._As discussed in the Prospectus
under "Investment Objective and Policies -- Investment Restrictions", the Board
of Trustees of the Fund has approved the replacement of the Trust's existing
investment restrictions with the fundamental and non-fundamental investment
restrictions set forth below. These uniform investment restrictions have been
proposed for adoption by all of the non-money market mutual funds advised by the
Manager or its affiliate, Merrill Lynch Asset Management, L.P. ("MLAM"). The
investment objective and policies of the Fund will be unaffected by the adoption
of the proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve the
proposed revised investment restrictions. If such shareholder approval is
obtained, the current investment restrictions applicable to the Fund will be
replaced by the proposed restrictions, and the Fund's Prospectus and Statement
of Additional Information will be supplemented to reflect such change.
Under the proposed fundamental investment restrictions, the Fund may not:
1.__Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities). For purposes of this
restriction, states, municipalities and their political subdivisions are not
considered part of any industry.
2.__Make investments for the purpose of exercising control or
management.
3.__Purchase or sell real estate, except that to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
4.__Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
5.__Issue senior securities to the extent such issuance would violate
applicable law.
6.__Borrow money, except that (i) the Fund may borrow from banks (as
defined in the 1940 Act) in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) the Fund may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) the Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (iv) the Fund may purchase
securities on margin to the extent permitted by applicable law. The Fund may
not pledge its assets other than to secure such borrowings or, to the extent
permitted by the Fund's investment policies as set forth in its Prospectus
and Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.
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<PAGE>
7.__Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (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 such purchases are permitted by applicable law.
b.__Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c.__Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Trustees of the Trust has otherwise determined
to be liquid pursuant to applicable law. Notwithstanding the 15% limitation
herein, to the extent the laws of any state in which the Fund's shares are
registered or qualified for sale require a lower limitation, the Fund will
observe such limitation. As of the date hereof, therefore, the Fund will not
invest more than 10% of its total assets in securities which are subject to
this investment restriction (c).
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 total assets; included within such limitation, but not to exceed
2% of the Fund's total assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by a 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 securities. This
restriction shall 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
Trustees, officers and directors of the Trust, the officers and general
partner of the Manager, the directors of such general partner or the
officers and directors of any subsidiary thereof each owning beneficially
more than one-half of one percent of the securities of such issuer own in
the aggregate more than 5% of the securities of 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.
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<PAGE>
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, the Fund will
not purchase securities while borrowings are outstanding.
-------------------
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Trust, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the 1940 Act involving only usual and
customary commissions or transactions pursuant to an exemptive order under the
1940 Act. Included among such restricted transactions will be purchases from or
sales to Merrill Lynch of securities in transactions in which it acts as
principal. See "Portfolio Transactions". An exemptive order has been obtained
which permits the Trust to effect principal transactions with Merrill Lynch in
high quality, short-term, tax-exempt securities subject to conditions set forth
in such order.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust and their principal
occupations for at least the last five years are 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 -- PRESIDENT AND TRUSTEE(1)(2) -- President and Chief
Investment Officer of the Manager (which term as used herein includes the
Manager's corporate predecessors) since 1977; President of Merrill Lynch Asset
Management, L.P. ("MLAM", which term as used herein includes MLAM's corporate
predecessors) since 1977 and Chief Investment Officer thereof 1976; President
and Director of Princeton Services, Inc. since 1993, Executive Vice President of
Merrill Lynch & Co., Inc. since 1990; Executive Vice President of Merrill Lynch
since 1990 and a Senior Vice President thereof from 1985 to 1990; Director of
Merrill Lynch Funds Distributor, Inc. ("MLFD" or the "Distributor").
KENNETH S. AXELSON -- TRUSTEE(2) -- 75 Jameson Point Road, Rockland, Maine
04841. Executive Vice President and Director, J.C. Penney Company, Inc. until
1982; Director, UNUM Corporation, Protection Mutual Insurance Company and until
1994, Grumman Corporation, and Zurn Industries, Inc., and, until 1992 Central
Maine Power Company and Key Trust Company of Maine; Trustee, The Chicago Dock
and Canal Trust.
HERBERT I. LONDON -- TRUSTEE(2) -- New York University -- Gallatin Division,
113-115 University Place, New York, New York 10003. John M. Olin Professor of
Humanities, New York University since 1993 and Professor thereof since 1973;
Dean, Gallatin Division of New York University from 1978 to 1993 and Director
from 1975 to 1976; Distinguished Fellow, Herman Kahn Chair, Hudson Institute
from 1984 to 1985; Trustee, Hudson Naval Institute since 1980; Director, Damon
Corporation since 1991; Overseer, Center for Naval Analyses from 1983 to 1993.
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<PAGE>
ROBERT R. MARTIN -- TRUSTEE(2) -- 513 Grand Hill, St. Paul, Minnesota 55102.
Chairman of the Board, WTC Industries, Inc. since 1994; 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; Trustee, Northland College since 1992.
JOSEPH L. MAY -- 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 -- TRUSTEE(2) -- Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School and Associate Professor
from 1983 to 1989; Trustee, The Common Fund, since 1989; Director, Quantec
Limited since 1991 and Teknekron Software Systems since 1994.
TERRY K. GLENN -- EXECUTIVE VICE PRESIDENT(1)(2) -- Executive Vice President
of the Manager and MLAM since 1983 and Director thereof since 1991; President of
MLFD since 1986 and Director thereof since 1991.
VINCENT R. GIORDANO -- VICE PRESIDENT AND PORTFOLIO MANAGER(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.
KENNETH A. JACOB -- VICE PRESIDENT AND PORTFOLIO MANAGER(1)(2) -- Vice
President of the Manager and MLAM since 1984.
DONALD C. BURKE -- VICE PRESIDENT(1)(2) -- Vice President and Director of
Taxation of MLAM since 1990; employee of Deloitte & Touche LLP from 1982 to
1990.
GERALD M. RICHARD -- TREASURER(1)(2) -- Senior Vice President and Treasurer
of the Manager and MLAM since 1984; Treasurer of the Distributor since 1984 and
Vice President since 1981.
JERRY WEISS -- 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 September 30, 1994, 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 Merrill Lynch & Co., Inc. and owned an aggregate of less than 1% of the
outstanding shares of the Fund.
The Trust pays each Trustee not affiliated with the Manager 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
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meetings. The Trust also compensates members of its Audit Committee, which
consists of all the non-affiliated Trustees a fee of $2,000 per year plus $500
per meeting attended. For the fiscal year ended July 31, 1994, fees and
out-of-pocket expenses paid to unaffiliated Trustees aggregated $3,699.
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 affiliates purchase or sell
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 year ended July 31,
1994, the total advisory fees paid by the Fund to the Manager aggregated
$465,743 (based on average net assets of approximately $84.9 million) of which
$199,488 was voluntarily waived.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Trust connected with investment and economic
research, trading and investment management of the Trust, as well as the fees of
all Trustees of the Trust who are affiliated persons of the Manager or any of
its subsidiaries. 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
19
<PAGE>
are provided to the Fund by the Manager and the Fund reimburses the Manager for
its costs in connection with such services. For the year ended July 31, 1994,
the Fund reimbursed the Manager $36,930 for such services. As required by the
Fund's distribution agreements, the Distributor will pay the promotional
expenses of the Fund incurred in connection with the offering of shares of the
Fund. Certain expenses in connection with the account maintenance and the
distribution of Class B and Class C shares will be financed by the Fund pursuant
to the Distribution Plans in compliance with Rule 12b-1 under the 1940 Act. See
"Purchase of Shares -- Distribution Plans".
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.
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
Pricing 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 Pricing System is used by more than 50 mutual funds
advised by MLAM or its affiliate, the Manager. Funds advised by MLAM or the
Manager 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 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.
20
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The Fund commenced the public offering of its Class A shares on February 28,
1992. The gross sales charges for the sale of Class A shares for the period
February 28, 1992, the Fund's commencement of operations, to July 31, 1992, the
Fund's fiscal year end, were $117,671 of which the Distributor received $5,734
and Merrill Lynch received $111,937. The gross sales charges for the sale of
Class A shares for the year ended July 31, 1993 were $53,543, of which the
Distributor received $5,384 and Merrill Lynch received $48,159. The gross sales
charges for the sale of Class A shares for the year ended July 31, 1994 were
$39,200 of which the Distributor received $4,115 and Merrill Lynch received
$35,085.
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.
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
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
21
<PAGE>
value of Class A or 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 of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to that further
reduced percentage sales charge, but there will be no retroactive reduction of
the sales charges on any previous purchase. The value of any shares redeemed or
otherwise disposed of by the purchaser prior to termination or completion of the
Letter of Intention will be deducted from the total purchases made under such
Letter. An exchange from a MLAM advised money market fund into the Fund that
creates a sales charge will count toward completing a new or existing Letter of
Intention from the Fund.
TMA-SM- MANAGED TRUSTS._Class A shares are offered to TMA-SM- Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.
PURCHASE PRIVILEGE OF CERTAIN PERSONS. Trustees of the Trust, members of the
Boards of other MLAM-advised investment companies, directors and employees of
Merrill Lynch & Co., Inc. and its subsidiaries (the term "subsidiaries", when
used herein with respect to Merrill Lynch & Co., Inc., includes MLAM, the
Manager and certain other entities directly or indirectly wholly-owned and
controlled by Merrill Lynch & Co.), 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 will be 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. 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
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.
22
<PAGE>
Class D shares of the Fund will be offered at net asset value, without sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund 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.
CLOSED-END FUND INVESTMENT OPTION. Class A shares of the Fund and certain
other MLAM-advised mutual funds advised ("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. Class A
shares of the Fund are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc. ("Senior Floating Rate Fund") who wish to
reinvest the net proceeds from a sale of certain of their shares of common stock
of Senior Floating Rate Fund in shares of the Fund. In order to exercise this
investment option, Senior Floating Rate Fund shareholders must sell their Senior
Floating Rate Fund shares to the Senior Floating Rate Fund in connection with a
tender offer conducted by the Senior Floating Rate Fund and reinvest the
proceeds immediately in the Fund. This investment option is available only with
respect to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing
to exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund at such day.
ACQUISITION OF CERTAIN INVESTMENT COMPANIES. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund 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
23
<PAGE>
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 applicable limits on acquisition of such
securities set forth under "Investment Objective and Policies" herein).
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 the account maintenance 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
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 such Distribution Plan will
benefit the Fund and its related class of shareholders. Each Distribution Plan
can be terminated at any time, without penalty, by the vote of a majority of the
Independent Trustees or by the vote of the holders of a majority of the
outstanding related class of voting securities of the Fund. A Distribution Plan
cannot be amended to increase materially the amount to be spent by the Fund
without the approval of the related class of shareholders and all material
amendments are required to be approved by the vote of 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 such
Distribution Plan and any report made pursuant to such plan for a period of not
less than six years from the date of such Distribution Plan or such report, the
first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B 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
24
<PAGE>
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, 1994
with respect to the Class B shares of the Fund indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule and the
Distributor's voluntary maximum for the period February 28, 1992 (commencement
of the public issuance of Class B shares) to July 31, 1994. Since Class C shares
of the Fund had not been publicly issued prior to the date of this Statement of
Additional Information, information concerning Class C shares is not yet
provided below.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1994
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
<CAPTION>
ALLOWABLE AMOUNTS
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE
GROSS SALES UNPAID AMOUNT PAID TO UNPAID
SALES(1) CHARGES BALANCE PAYABLE DISTRIBUTOR(3) BALANCE
----------- ----------- ------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Under NASD Rule As Adopted............. $ 82,350 $ 5,147 $ 609 $ 5,756 $ 749 $ 5,007
Under Distributor's Voluntary Waiver... $ 82,350 $ 5,147 $ 412 $ 5,559 $ 749 $ 4,810
<CAPTION>
<S> <C>
ANNUAL
DISTRIBUTION
FEE AT CURRENT
NET ASSET
LEVEL(4)
---------------
<S> <C>
Under NASD Rule As Adopted............. $ 191
Under Distributor's Voluntary Waiver... $ 191
<FN>
- ------------
(1) Purchase price of all eligible Class B shares sold since February 28, 1992
(commencement of operations) 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%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to July 6, 1993 under a prior plan at
the 0.50% rate, 0.25% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule. See "Purchase of Shares -- Distribution Plans".
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any contingent deferred sales
charge 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.
</TABLE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the New
York Stock Exchange is restricted as determined by the Commission or such
Exchange is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of shareholders
of the Fund.
25
<PAGE>
DEFERRED SALES CHARGE--CLASS B 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
period February 28, 1992 (commencement of operations) through July 31, 1992, the
Distributor received CDSCs of $3,131, all of which was paid to Merrill Lynch.
For the fiscal years ended July 31, 1993 and 1994, the Distributor received
CDSCs of $128,971 and $258,962, respectively, all of which was paid to Merrill
Lynch.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies" and "Portfolio
Transactions" 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 period February 28, 1992 (commencement of
operations) through July 31, 1992, the Fund engaged in no transactions pursuant
to such order. For the year ended July 31, 1993, the Fund engaged in three
transactions pursuant to such order for an aggregate market value of $1,200,000.
For the year ended July 31, 1994, the Fund engaged in ten transactions pursuant
to such order for an aggregate market value of $9,309,470. Affiliated persons of
the Trust may serve as broker for the Fund in over-the-counter transactions
conducted on an agency basis. Certain court decisions have raised questions as
to the extent to which investment companies should seek exemptions under the
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
Trustee will reconsider this matter from time to time.
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.
26
<PAGE>
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.
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 its Manager. While it is not possible to predict turnover rates
with any certainty, at present it is anticipated that the Fund's annual
portfolio turnover rate, under normal circumstances after the Fund's portfolio
is invested in accordance with its investment objective, will be less than 100%.
(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 for the period February 28, 1992 (commencement of
operations) through July 31, 1992, was 18.86%. The portfolio turnover for the
years ended July 31, 1993 and 1994 was 39.37% and 72.13%, respectively.
Section 11(a) of the Securities and 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 Securities and Exchange Commission has prescribed with respect to the
requirements of clauses (i) and (ii). To the extent Section 11(a) would apply to
Merrill Lynch acting as a broker for the Fund in any of its portfolio
transactions executed on any such securities exchange of which it is a member,
appropriate consents have been obtained from the Fund and annual statements as
to aggregate compensation will be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Manager once daily,
Monday through Friday, as of 4:15 P.M., New York City time, on each day during
which the New York Stock Exchange is open for trading. The New York Stock
Exchange 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 Distributor, are accrued
daily. The net asset value per share of each class of shares is expected to be
equivalent. 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 higher daily expense accruals of the account maintenance,
distribution fees, 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 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 assset value of Class D shares
27
<PAGE>
reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with respect to Class C and Class D shares of
the Fund. Even under those circumstances, the per share net asset value of the
four classes will tend to converge immediately after the payment of dividends,
which will differ by approximately the amount of the expense accrual
differential 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. 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 confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains distributions. These statements will also show any
other activity in the account since the previous statement. 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. A
shareholder may make additions to his Investment Account at any time by mailing
a check directly to the Transfer Agent.
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<PAGE>
Share certificates are issued only for full shares and only upon the
specific request of the shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
AUTOMATIC INVESTMENT PLAN
A shareholder may make additions to an Investment Account at any time by
purchasing Class A (if an eligible Class A investor as described in the
Prospectus), 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 Fund's
Automatic Investment Plan whereby the Fund is authorized through pre-authorized
checks or automatic 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- accounts may arrange to have periodic investments
made in the Fund in their CMA-R- account or in certain related accounts in
amounts of $100 or more through the CMA-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
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of business
on the 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 on or
about the payment date.
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 and 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 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 at the normal
close of business on the New York Stock Exchange (currently 4:00 P.M., New York
City time) on the 24th day of each month or the 24th day of the last month of
each quarter, whichever is applicable. If the Exchange is not open for business
on such date, the Class A or Class D shares will be redeemed at the close of
business on the following business day. The check for the withdrawal payment
will be mailed, or the direct deposit 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
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<PAGE>
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.
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 Systematic Redemption Program.
The minimum fixed dollar amount redeemable is $25. The proceeds of systematic
redemptions will be posted to the shareholder's account five 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
redemption 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 Company shares are being purchased within the account pursuant to
the Automatic Investment Program. For more information on the 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 listed below. Under the Merrill
Lynch Select Pricing 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 will be
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 of the newly acquired
shares of the other fund as more fully described below. Class A, Class B, Class
C and Class D shares also will be exchangeable for shares of certain
MLAM-advised money market funds specifically designated below as available for
exchange by holders of Class A, Class B, Class C or Class D shares. Shares with
a net asset value
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<PAGE>
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 or Class D shares acquired through dividend reinvestment shall be deemed
to have been sold with a sales charge equal to the sales charge previously paid
on the Class A or Class D shares on which the dividend was paid. Based on this
formula, Class A or Class D shares of the Fund generally may be exchanged into
the Class A or Class D shares of the other funds or into shares of the Class A
or Class D money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B or Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B shares or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than the
CDSC schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through use
of the exchange privilege will be subject to the Fund's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B shares of the
fund from which the exchange has been made. For purposes of computing the 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 or Class C shares of the Fund for
those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after
having held the Fund's Class B shares for two and a half years. The 2% sales
charge 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 the 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 from the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a Class B or Class C money market
fund will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC. However, shares of a money market fund which were
acquired as a result of an exchange for Class B or Class C shares of a fund may,
in turn, be exchanged back into Class B or Class C
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<PAGE>
shares of any fund offering such shares, in which event the holding period for
Class B or Class C shares of the Fund will be aggregated with previous holding
periods for purposes of reducing the CDSC. Thus, for example, an investor may
exchange Class B shares of the Fund for shares of Merrill Lynch Institutional
Fund ("Institutional Fund") after having held the Fund Class B shares for two
and a half years and three years later decide to redeem the shares of the
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 the 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 will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
<TABLE>
<S> <C>
FUNDS ISSUING CLASS A, CLASS B, CLASS C AND CLASS D SHARES
MERRILL LYNCH ADJUSTABLE RATE SECURITIES
FUND, INC.................................. High current income consistent with a policy
of limiting the degree of fluctuation in net
asset value of fund shares resulting from
movements in interest rates, through
investment primarily in a portfolio of
adjustable rate securities, consisting
principally of adjustable rate securities.
MERRILL LYNCH AMERICAS INCOME FUND, INC...... A high level of current income, consistent
with prudent investment risk, by investing
primarily in debt securities denominated in
a currency of a country located in the
Western Hemisphere (I.E., North and South
America and the surrounding waters).
MERRILL LYNCH ARIZONA LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Arizona income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-term
investment grade Arizona Municipal Bonds.
MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND.... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arizona
income taxes as is consistent with prudent
investment management.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arkansas
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH ASSET GROWTH FUND, INC......... High total investment return, consistent with
prudent risk, from investment in United
States and foreign equity, debt and money
market securities the combination of which
will be varied both with respect to types
of securities and markets in response to
changing market and economic trends.
MERRILL LYNCH ASSET INCOME FUND, INC......... A high level of current income through
investment primarily in United States fixed
income securities.
MERRILL LYNCH BALANCED FUND FOR INVESTMENT
AND RETIREMENT............................. As high a level of total investment return as
is consistent with a relatively low level of
risk through investment in common stocks
and other types of securities, including
fixed income securities and convertible
securities.
MERRILL LYNCH BASIC VALUE FUND, INC.......... Capital appreciation, and secondarily, income
by investing in securities, primarily
equities, that are undervalued and
therefore represent basic investment value.
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL
BOND FUND.................................. A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management through investment in
a portfolio primarily of insured California
Municipal Bonds.
MERRILL LYNCH CALIFORNIA LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and California income taxes as is
consistent with prudent investment
management through investment in a port-
folio primarily of intermediate-term
investment grade California Municipal
Bonds.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH CALIFORNIA MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH CAPITAL FUND, INC.............. The highest total investment return
consistent with prudent risk through a fully
managed investment policy utilizing equity,
debt and convertible securities.
MERRILL LYNCH COLORADO MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Colorado
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH CONNECTICUT MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Limited Municipal Series Trust, a series
fund, whose objective is to provide as high
as level of income exempt from Federal and
Connecticut income taxes as is consistent
with prudent investment management.
MERRILL LYNCH CORPORATE BOND FUND, INC....... Current income from three separate
diversified portfolios of fixed income
securities.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS
FUND, INC.................................. Long-term appreciation through investment in
securities, principally equities, of issuers
in countries having smaller capital
markets.
MERRILL LYNCH DRAGON FUND, INC............... Current appreciation primarily through
investment in equity and debt securities of
issuers domiciled in developing
Asia-Pacific countries which include all
countries in Asia and the Pacific Basin.
MERRILL LYNCH EUROFUND....................... Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
MERRILL LYNCH FEDERAL SECURITIES TRUST....... High current return through investments in
U.S. Government and Government agency
securities, including GNMA mortgage-backed
certificates and other mortgage-backed
Government securities.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH FLORIDA LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal income taxes as is consistent with
prudent investment management while serving
to offer shareholders the opportunity to
own securities exempt from Florida intangi-
ble personal property taxes through
investment in a portfolio primarily of
intermediate-term investment grade Florida
Municipal Bonds.
MERRILL LYNCH FLORIDA MUNICIPAL BOND FUND.... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management while seeking to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes.
MERRILL LYNCH FUND FOR TOMORROW, INC......... Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic and
cultural changes as they affect consumer
markets.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND,
INC........................................ Long-term growth through investment in a
diversified portfolio of equity securities
placing particular emphasis on companies
that have exhibited above-average growth
rate in earnings.
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.... High total investment return, consistent with
prudent risk, through a fully managed
investment policy utilizing United States
and foreign equity, debt and money market
securities, the combination of which will
be varied from time to time both with
respect to the types of securities and
markets in response to changing market and
economic trends.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT
AND RETIREMENT............................. High total investment return from investment
in government and corporate bonds denominated
in various currencies and multinational
currency units.
MERRILL LYNCH GLOBAL CONVERTIBLE FUND,
INC........................................ High total return from investment primarily
in an international diversified portfolio of
convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of
debt securities or preferred stock and
warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS, INC.
(residents of Arizona must meet investor
suitability standards)..................... The highest total investment return
consistent with prudent risk through world
wide investment in an internationally
diversified portfolio of securities.
MERRILL LYNCH GLOBAL RESOURCES TRUST......... Long-term growth and protection of capital
from investment in securities of domestic and
foreign companies that possess substantial
natural resources assets.
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC...... Long-term growth of capital by investing
primarily in equity securities of companies
with relatively small market
capitalizations located in various foreign
countries and in the United States.
MERRILL LYNCH GLOBAL UTILITY FUND, INC....... Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt securities
issued by domestic and foreign companies
which are primarily engaged in the
ownership or operation of facilities used
to generate, transmit or distribute
electricity, telecommunications, gas or
water.
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT.................. Growth of capital and, secondarily, income
from investment in a diversified portfolio of
equity securities placing principal
emphasis on those securities which
management of the fund believes to be un-
dervalued.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH HEALTHCARE FUND, INC.
(residents of Wisconsin must meet investor
suitability standards)..................... Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare (re-
sidents of Wisconsin must meet investor
suitability standards).
MERRILL LYNCH INTERNATIONAL EQUITY FUND...... Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
MERRILL LYNCH LATIN AMERICA FUND, INC........ Capital appreciation by investing primarily
in Latin American equity and debt securities.
MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Maryland
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MASSACHUSETTS LIMITED
MATURITY MUNICIPAL BOND FUND............... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Massachusetts income taxes as
is consistent with prudent investment
management through investment in a port-
folio primarily of intermediate-term
investment grade Massachusetts Municipal
Bonds.
MERRILL LYNCH MICHIGAN LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Michigan income taxes as is
consistent with prudent investment
management through investment in a port-
folio primarily of intermediate-term
investment grade Michigan Municipal Bonds.
</TABLE>
37
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal or Michigan
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MINNESOTA MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Minnesota
personal income taxes as is consistent with
prudent investment management.
MERRILL LYNCH MUNICIPAL BOND FUND, INC....... Tax-exempt income from three separate
diversified portfolios of municipal bonds.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM
FUND....................................... Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income as possible exempt from Federal
income taxes by investing in investment
grade obligations with a dollar weighted
average maturity of five to twelve years.
MERRILL LYNCH NEW JERSEY LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and New Jersey income taxes as is
consistent with prudent investment
management through investment in a port-
folio primarily of intermediate-term
investment grade New Jersey Municipal
Bonds.
MERRILL LYNCH NEW JERSEY MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Jersey
income taxes as is consistent with prudent
investment management.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Mexico
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH NEW YORK LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal, New York State and New York City
income taxes as is consistent with prudent
investment management through investment in
a portfolio primarily of intermediate-term
investment grade New York Municipal Bonds.
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal, New York State
and New York City income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and North
Carolina income taxes as is consistent with
prudent investment management.
MERRILL LYNCH OHIO MUNICIPAL BOND FUND....... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Ohio income
taxes as is consistent with prudent
investment management.
MERRILL LYNCH OREGON MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Oregon
income taxes as is consistent with prudent
investment management.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH PACIFIC FUND, INC.............. Capital appreciation by investing in equity
securities of corporations domiciled in Far
Eastern and Western Pacific countries,
including Japan, Australia, Hong Kong and
Singapore.
MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of personal income exempt
from Federal and Pennsylvania income taxes
as is consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-term
investment grade Pennsylvania Municipal
Bonds.
MERRILL LYNCH PENNSYLVANIA MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Pennsylvania
personal income taxes as is consistent with
prudent investment management.
MERRILL LYNCH PHOENIX FUND, INC.............. Long-term growth of capital by investing in
equity and fixed income securities, including
tax-exempt securities, of issuers in weak
financial condition or experiencing poor
operating results believed to be
undervalued relative to the current or
prospective condition of such issuer.
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND,
INC........................................ As high a level of current income as is
consistent with prudent investment management
from a global portfolio of high quality
debt securities denominated in various
currencies and multinational currency units
and having remaining maturities not
exceeding three years.
MERRILL LYNCH SPECIAL VALUE FUND, INC........ Long-term growth of capital from investments
in securities, primarily common stocks, of
relatively small companies believed to have
special investment value and emerging
growth companies regardless of size.
MERRILL LYNCH STRATEGIC DIVIDEND FUND........ Long-term total return from investment in
dividend paying common stocks which yield
more than Standard & Poor's 500 Composite
Stock Price Index.
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH TECHNOLOGY FUND, INC........... Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in technology.
MERRILL LYNCH TEXAS MUNICIPAL BOND FUND...... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management by investing primarily in a
portfolio of long-term, investment grade
municipal obligations issued by the State
of Texas, its political subdivisions,
agencies and instrumentalities.
MERRILL LYNCH UTILITY INCOME FUND, INC....... High current income through investment in
equity and debt securities issued by
companies which are primarily engaged in
the ownership or operation of facilities
used to generate, transmit or distribute
electricity, telecommunications, gas or
water.
MERRILL LYNCH WORLD INCOME FUND, INC......... High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies,
including multinational currency units.
CLASS A SHARE MONEY MARKET FUNDS
MERRILL LYNCH READY ASSETS TRUST............. Preservation of capital, liquidity and the
highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in which
the Fund invests.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
(available only if the exchange occurs
within certain retirement plans)........... Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund, whose
objectives are current income, preservation
of capital and liquidity available from
investing in a diversified portfolio of
short-term money market securities.
MERRILL LYNCH U.S.A. GOVERNMENT RESERVES..... Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
</TABLE>
41
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH U.S. TREASURY MONEY FUND....... Preservation of capital, liquidity and
current income through investment exclusively
in a diversified portfolio of short-term
marketable securities which are direct
obligations of the U.S. Treasury.
CLASS B, CLASS C AND CLASS D SHARE MONEY MARKET FUNDS
MERRILL LYNCH GOVERNMENT FUND................ A portfolio of Merrill Lynch Funds For
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct short-
term obligations of the U.S. Treasury and
repurchase agreements secured by such
obligations.
MERRILL LYNCH INSTITUTIONAL FUND............. A portfolio of Merrill Lynch Funds For
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high-quality portfolio of
money market securities.
MERRILL LYNCH INSTITUTIONAL TAX-EXEMPT
FUND....................................... A portfolio of Merrill Lynch Funds For
Institutions Series, a series fund, whose
objective is to provide current income
exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
MERRILL LYNCH TREASURY FUND.................. A portfolio of Merrill Lynch Funds For
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct obliga-
tions of the U.S. Treasury and up to 10% of
its total assets in repurchase agreements
secured by such obligations.
</TABLE>
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made.
To exercise the exchange privilege, shareholders should contact 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 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 at any time and thereafter may 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.
42
<PAGE>
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, in any taxable
year in which it distributes at least 90% of its taxable net income and 90% of
its tax-exempt net income (see below), 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 will be
determined at the Series level rather than at the Trust level.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The required distributions, however, are based only
on the taxable income of a RIC. The excise tax, therefore, generally will not
apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Trust intends to qualify the Fund to pay "exempt-interest dividends" as
defined in Section 852(b)(5) of the Code. Under such section if, at the close of
each quarter of the Fund's taxable year, at least 50% of the value of the Fund's
total assets consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be qualified
to pay exempt-interest dividends to its Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). Exempt-interest dividends are
dividends or any part thereof paid by the Fund 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's exemptive order permitting the
issuance and sale of multiple classes of shares) that is based on the gross
income allocable to Class A, Class B, Class C and Class D shareholders during
the taxable year or such other method as the Internal Revenue Service may
prescribe. To the extent that the dividends distributed to the Fund's
shareholders are derived from interest income exempt from Federal income tax
under Code Section 103(a), and are properly designated as exempt-interest
dividends, they will be excludable from a shareholder's gross income for Federal
income tax purposes. Exempt-interest dividends are included, however, in
determining the portion, if any, of a person's social security and railroad
retirement benefits subject to Federal income taxes. Interest on indebtedness
incurred or continued to purchase or carry shares of a RIC paying
exempt-interest dividends, such as the Fund, will not be deductible by the
investor for Federal or Massachusetts personal income tax purposes to the extent
attributable to exempt-interest dividends. Shareholders are advised to consult
their tax advisers with respect to whether exempt-interest
43
<PAGE>
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 Massachusetts Municipal Bonds also will be exempt from
Massachusetts personal income taxes. Corporate shareholders and shareholders
subject to income taxation by states other than Massachusetts will realize a
lower after tax rate of return than Massachusetts 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
Massachusetts personal income taxes. The Trust will allocate exempt-interest
dividends among Class A, Class B, Class C and Class D shareholders for
Massachusetts income tax purposes based on a method similar to that described
above for Federal income tax purposes.
An investment in or distributions from investment income and capital gains
of the Fund, including exempt-interest dividends, will be subject to
Massachusetts corporation excise tax and may also be subject to state taxes in
states other than Massachusetts and local taxes in cities other than those in
Massachusetts. Accordingly, investors in the Fund, including, in particular,
corporate investors which may be subject to the Massachusetts corporate excise
tax, should consult their tax advisers with respect to the application of such
taxes to an investment in the Fund and to the receipt of Fund dividends and with
respect to their Massachusetts 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 taxable ordinary income for Federal and Massachusetts income tax
purposes. Such distributions are not eligible for the dividends-received
deduction for corporations. Distributions, if any, of net long-term capital
gains from the sale of securities or from certain transactions in futures or
options ("capital gain dividends") are taxable as long-term capital gains for
Federal income tax purposes, regardless of the length of time the shareholder
has owned Fund shares, and for Massachusetts income tax purposes are treated as
capital gains which are taxed at ordinary income tax rates, unless they are
attributable to the sale of certain Massachusetts Municipal Bonds issued
pursuant to legislation which specifically exempts capital gains on their sale
from Massachusetts personal income taxation. Under the Revenue Reconciliation
Act of 1993, 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. Any loss upon the sale or
exchange of Fund shares held for six months or less will be treated as long-term
capital loss to the extent of any capital gain dividend received by the
shareholder. In addition, such loss will be disallowed to the extent of any
exempt-interest dividends received by the shareholder. 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). If the Fund pays a dividend in January which was declared in the
previous October, November or December to shareholders of record on a specific
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.
44
<PAGE>
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies to
interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference," which could subject investors in such bonds, including
shareholders of the Fund, to an increased 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 Revenue Reconciliation Act of 1993 has added new marginal tax brackets
of 36% and 39.6% for individuals and has created a graduated structure of 26%
and 28% for the alternative minimum tax applicable to individual taxpayers.
These rate increases may affect an individual investor's after-tax return from
an investment in the Fund as compared with such investor's return from taxable
investments.
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 the sales charge paid to the Fund
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 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 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.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S. withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
45
<PAGE>
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 imposes 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 is imposed
for taxable years beginning after December 31, 1986, and before January 1, 1996.
The Environmental Tax is imposed even if the corporation is not required to pay
an alternative minimum tax because the corporation's regular income tax
liability exceeds its minimum tax liability. The Code provides, however, that a
RIC, such as the Fund, is not subject to the Environmental Tax. However,
exempt-interest dividends paid by the Fund that create alternative minimum
taxable income for corporate shareholders under the Code (as described above)
may 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 financial futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, i.e., each such
option or financial futures contract will be treated as sold for its fair market
value on the last day of the taxable year, and any gain or loss attributable to
Section 1256 contracts will be 60% long-term and 40% short-term capital gain or
loss. Application of these rules to Section 1256 contracts held by the Fund may
alter the timing and character of distributions to shareholders.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's 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 closing transactions in financial
futures contracts or the related options.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option or financial futures contract.
-------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and Massachusetts 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 Massachusetts personal income and corporate excise
tax laws. The Code and the Treasury regulations, as well as the Massachusetts
tax laws, are subject to change by legislative or administrative action either
prospectively or retroactively.
Shareholders are urged to consult their own tax advisers regarding the
availability of any exemptions from state or local taxes (other than those
imposed by Massachusetts) and with specific questions as to Federal, foreign,
state or local taxes.
46
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective shareholders.
Total return and 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 and yield are determined separately for Class A,
Class B, Class C and Class D shares in accordance with formulas specified by the
Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of 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.
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.
Set forth below is the total return, yield and tax equivalent yield
information for Class A and Class B shares of the Fund for the period indicated.
Since Class C and Class D shares have not been issued prior to the date of this
Statement of Additional Information, performance information concerning Class C
and Class D shares is not provided.
47
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF THE ON A HYPOTHETICAL AT THE END OF THE
$1,000 INVESTMENT PERIOD $1,000 INVESTMENT PERIOD
----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN (INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1994.......... (2.79)% $ 972.10 (3.03)% $ 969.70
February 28, 1992 (Inception) to July
31, 1994............................ 6.74% $1,171.10 7.27% $1,185.20
ANNUAL TOTAL RETURN (EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1994.............. 1.26% $1,012.60 0.75% $1,007.50
Year ended July 31, 1993.............. 10.08% $1,100.80 9.53% $1,095.30
February 28, 1992 (Inception) to July
31, 1992............................ 9.44% $1,094.40 9.22% $1,092.20
AGGREGATE TOTAL RETURN (INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
February 28, 1992 (Inception) to July
31, 1994............................ 17.11% $1,171.10 18.52% $1,185.20
YIELD
30 days ended on July 31, 1994........ 5.37% 5.09%
TAX EQUIVALENT YIELD*
30 days ended on July 31, 1994........ 7.46% 7.07%
*Based on a Federal income tax rate of 28%.
</TABLE>
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 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 Ohio
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 Trust has received
an order (the "Order") from the Commission permitting the issuance and sale of
multiple classes of shares. The Order permits the Trust to issue additional
classes of shares of any Series if the Board of Trustees deems such issuance to
be in the best interests of the Trust.
48
<PAGE>
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 will be borne solely by such class. There normally will be no meeting 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 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
(estimated at approximately $83,100) were paid by the Fund and 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.
49
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A and
Class B shares of the Fund based on the Fund's net assets on July 31, 1994, and
its shares outstanding on that date is as set forth below. Information is not
provided for Class C or Class D shares since no Class C or Class D shares were
publicly offered prior to the date of this Statement of Additional Information.
The offering price for Class B and Class C shares of the Fund is the net asset
value of Class B shares and Class C shares, respectively.
TABLE
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ -------------
<S> <C> <C>
Net Assets........................................................................... $ 8,367,548 $ 76,435,740
------------ -------------
------------ -------------
Number of Shares Outstanding......................................................... 798,416 7,293,392
------------ -------------
------------ -------------
Net Asset Value Per Share (net assets divided by number of shares outstanding)....... $ 10.48 $ 10.48
Sales Charge (for Class A shares: 4.00% of offering price (4.17% of net asset value
per share))*........................................................................ .44 **
------------ -------------
Offering Price....................................................................... $ 10.92 $ 10.48
------------ -------------
------------ -------------
<FN>
- ---------
* 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 contingent deferred sales charge on redemption of
shares.
</TABLE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The employment of
such auditors may be terminated without any penalty by vote of a majority of the
outstanding shares of the Trust at a meeting called for the purpose of
terminating such employment. 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
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6434, 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, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
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<PAGE>
REPORTS 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 semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act of 1940, 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 any
such person's 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 September 30, 1994.
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<PAGE>
APPENDIX I
ECONOMIC AND FINANCIAL CONDITIONS IN MASSACHUSETTS
THE INFORMATION SET FORTH BELOW IS DERIVED FROM THE OFFICIAL STATEMENTS
PREPARED IN CONNECTION WITH THE ISSUANCE OF MASSACHUSETTS MUNICIPAL BONDS AND
OTHER SOURCES THAT ARE GENERALLY AVAILABLE TO INVESTORS. SUCH INFORMATION
CONSTITUTES ONLY A BRIEF SUMMARY AND DOES NOT PURPORT TO BE COMPLETE. THE TRUST
HAS NOT INDEPENDENTLY VERIFIED THIS INFORMATION.
Throughout much of the 1980's, the Commonwealth of Massachusetts (sometimes
referred to as the "Commonwealth") had a strong economy which was evidenced by
low unemployment and high personal income growth as compared to national trends.
Economic growth in the Commonwealth has slowed since 1988, however, particularly
in the construction, real estate, financial and manufacturing sectors, including
certain high technology areas, with especially adverse results in 1990 and the
first half of 1991. The unemployment rate in Massachusetts peaked in 1991 at
9.0% and dropped to 6.9% in 1993. As of May, 1994, the Commonwealth's
unemployment rate was 5.8% as compared to a national average of 6.0%. Increasing
unemployment claims have also reduced the balances in the unemployment
compensation trust fund. In addition, per capita personal income in the
Commonwealth is currently growing at a rate lower than the national average.
Between the second quarter of 1992 and the second quarter of 1993, aggregate
personal income in the Commonwealth increased 4.0%, as compared to 5.5% for the
nation as a whole.
Moreover, Commonwealth spending exceeded revenues in each of the five fiscal
years commencing fiscal 1987. In particular, from 1987 to 1990, spending in five
major expenditure categories -- Medicaid, debt service, public assistance, group
health insurance and transit subsidies -- grew at rates in excess of the rate of
inflation for the comparable period. In addition, the Commonwealth's tax
revenues during this period repeatedly failed to meet official forecasts. For
the budgeted funds, operating losses in fiscal 1988 of $370 million were covered
by surplus carried forward from the prior year. The operating losses in fiscal
1989 and 1990, which totalled $672 million and $1.251 billion, respectively,
were covered primarily through deficit borrowings. During the period, fund
balances in the budgeted operating funds declined from an opening balance of
$1.072 billion in fiscal 1987 to an ending balance of negative $1.104 billion in
fiscal 1990. For fiscal 1991, these funds attained positive ending balances of
$237.1 million. Fiscal 1992 ended with positive fund balances of $549.4 million
after carrying forward the fund balances from fiscal 1991.
In fiscal 1993, which ended June 30, 1993, the total revenues of the
budgeted operating funds of the Commonwealth during such fiscal year increased
by approximately 6.9% over the prior fiscal year, to $14.710 billion.
Expenditures increased by 9.6% over the prior year, to $14.696 billion. As a
result, the Commonwealth ended fiscal 1993 with a positive closing fund balance
of $562.5 million, after carrying forward the fund balances from fiscal 1992.
Standard & Poor's Corporation and Moody's Investors Service, Inc. have
upgraded their ratings of the Commonwealth's general obligation bonds from BBB
and Baa, respectively, to A+ and A, respectively. Fitch Investors Service, Inc.
has rated the Commonwealth's bonds A and has recently upgraded the bonds to A+.
Ratings have been lowered on short-term debt and some state agency obligations.
From time to time, the rating agencies may further change their ratings.
The Commonwealth is in the process of closing its 1994 financial records.
Budgeted revenues and other sources for fiscal 1994 are expected to total
approximately $15.529 billion, including tax revenues of
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<PAGE>
$10.694 billion. Commonwealth expenditures and other uses in fiscal 1994
currently are expected to be approximately $15.692 billion. The Executive Office
for Administration and Finance currently estimates the ending fund balances of
the budgeted operating funds of the Commonwealth for fiscal 1994 to aggregate
approximately $399.7 million. The foregoing estimates for fiscal 1994 do not
take into account the Department of Revenue's preliminary figures for fiscal
1994 which indicate an $88 million reduction in tax revenue collections from the
Department's previous estimates for fiscal 1994.
Growth of tax revenues in the Commonwealth is limited by law. Tax revenues
in fiscal years 1988 through 1993 were lower than the limits set by law, and the
Executive Office for Administration and Finance estimates that state tax
revenues in fiscal 1994 and fiscal 1995 will not reach the limits imposed by
law. In addition, effective July 1, 1990, limitations were placed on the amount
of direct bonds the Commonwealth may have outstanding in a fiscal year, and the
amount of the total appropriation in any fiscal year that may be expended for
payment of principal of and interest on general obligation debt of the
Commonwealth was limited to 10% of such appropriation. Bonds in the aggregate
principal amount of $1.399 billion issued in October and December, 1990, under
Chapter 151 of the Acts of 1990 to meet the fiscal 1990 deficit are excluded
from the computation of these limitations, and principal of and interest on such
bonds are to be paid from up to 15% of the Commonwealth's income tax receipts in
each year that such principal or interest is payable.
Furthermore, certain of the Commonwealth's cities and towns have at times
experienced serious financial difficulties which have adversely affected their
credit standing. The recurrence of such financial difficulties, or financial
difficulties of the Commonwealth, could adversely affect the market values and
marketability of, or result in defaults in payment on, outstanding obligations
issued by the Commonwealth or its public authorities or municipalities. In
addition, the Massachusetts statutes which limit the taxing authority of the
Commonwealth of certain Massachusetts governmental entities may impair the
ability of issuers of some Massachusetts obligations to pay debt service on
their obligations.
In Massachusetts, the tax on personal property and real estate is virtually
the only source of tax revenues available to cities and towns to meet local
costs. "Proposition 2 1/2," an initiative petition adopted by the voters of the
Commonwealth of Massachusetts on November 4, 1980, limits the power of
Massachusetts cities and towns and certain tax-supported districts and public
agencies to raise revenue from property taxes to support their operations,
including the payment of certain debt service. Proposition 2 1/2 required many
cities and towns to reduce their property tax levels to a stated percentage of
the full and fair cash value of their taxable real estate and personal property
and limited the amount by which the total property taxes assessed by a city or
town might increase from year to year. Although the limitations of Proposition
2 1/2 on tax increases may be overridden and amounts for debt service and
capital expenditures excluded from such limitation by the voters of the relevant
municipality, Proposition 2 1/2 will continue to restrain significantly the
ability of cities and towns to pay for local services, especially in light of
cost increases due to an inflation rate generally exceeding 2.5% and the
decrease and delay in local aid from the Commonwealth, discussed below.
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<PAGE>
To offset shortfalls experienced by local governments as a result of the
implementation of Proposition 2 1/2, the government of the Commonwealth
increased direct local aid from the 1981 level of $1.632 billion to the fiscal
1989 level of $2.961 billion. Direct local aid decreased from the fiscal 1989
level to $2.328 billion in fiscal 1992 and increased to $2.547 billion in fiscal
1993. It is estimated that fiscal 1994 expenditures for direct local aid will be
$2.737 billion.
The Commonwealth's fiscal circumstances have led to delays in the
distribution of local aid. Of the $2.961 billion direct local aid payments for
fiscal 1989, $305 million in Chapter 70 school aid due on June 30, 1989, was
delayed and not disbursed until July, 1989, because of the fiscal 1989 deficit.
The Commonwealth issued fiscal 1990 revenue anticipation notes in July in order
to make this local aid payment. Similarly, because of the Commonwealth's fiscal
1990 deficit, the Commonwealth deferred $1.26 billion of local aid due June 30,
1990 into fiscal 1991.
The aggregate unfunded actuarial liabilities of the pension systems of the
Commonwealth and the unfunded liability of the Commonwealth related to local
retirement systems are significant -- estimated to be approximately $9.651
billion as of January 1, 1993 on the basis of certain actuarial assumptions
regarding, among other things, future investment earnings, annual inflation
rates, wage increases and cost of living increases. No assurance can be given
that these assumptions will be realized. The legislature adopted a comprehensive
pension bill addressing the issue in January, 1988, which requires the
Commonwealth, beginning in fiscal year 1989, to fund future pension liabilities
currently and amortize the Commonwealth's unfunded liabilities over 40 years in
accordance with funding schedules prepared by the Secretary of Administration
and Finance and approved by the legislature. The amounts required for funding of
current pension liabilities in fiscal years 1992, 1993 and 1994 are estimated to
be $724 million, $778 million and $844 million, respectively. As of December 31,
1993, the Commonwealth's state pension reserve was approximately $4.124 billion.
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<PAGE>
APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATING
<TABLE>
<S> <C>
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 payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real investment
standing.
<FN>
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.
</TABLE>
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<PAGE>
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.
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 earning coverage of fixed financial
charges and high internal cash generation; and well established access to a
range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or 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.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("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
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<PAGE>
connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default -- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligations;
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay principal and
differs from the higher-rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal although
it is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher rated categories.
BB Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on balance, as
B predominately speculative with respect to capacity to pay interest and repay
CCC principal in accordance with the terms of the obligations. "BB" indicates the
CC lowest degree of speculation and "CC" the highest degree of speculation. While
C such debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
CI The rating "CI" is reserved for income bonds on which no interest is being paid.
D Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized. Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the major
rating categories.
</TABLE>
DESCRIPTION OF STANDARD & POOR'S CORPORATE BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity
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<PAGE>
to pay interest and to repay principal and differs from the highest rated issues
only in small degree. Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt of a higher rated
category. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
The ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Ratings are applicable to
both taxable and tax-exempt commercial paper. Issues assigned the highest rating
are regarded as having the greatest capacity for timely payment. Issues in this
category are further refined with the designation 1, 2 and 3 to indicate the
relative degree of safety. The three designations in the "A" category are as
follows:
<TABLE>
<C> <S>
A-1 This designation indicates that the degree of safety regarding timely payment is
either overwhelming or very 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 strong. However,
the relative degree of safety is not as overwhelming as for issues designated
"A-1".
A-3 Issues carrying this designation have a satisfactory 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.
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 S&P 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 and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 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).
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<PAGE>
--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>
<S> <C>
A very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a "+"
SP-1 designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
</TABLE>
Standard & Poor's may continue to rate note issues with a maturity greater
than three years in accordance with the same rating scale currently employed for
municipal bond ratings.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuers belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date information to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
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<PAGE>
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 any other reasons.
<TABLE>
<S> <C>
AAA Bonds considered to be investment grade and of the highest credit quality. The
obligor has an exceptionally strong ability to pay interest and repay principal,
which is unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although not
quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and "AA"
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+".
A Bonds considered to be investment grade and of high credit quality. The obligor's
ability to pay interest and repay principal is considered to be strong, but may be
more vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
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>
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:
<TABLE>
<S> <C>
Improving Up-arrow
Stable Left-and Right-arrows
Declining Down-arrow
Uncertain Up-and Down-arrows
</TABLE>
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<PAGE>
Credit trend indicators are not predictions that any rating change will
occur, and have a longer-term time frame than issues placed on FitchAlert. NR
indicates that Fitch does not rate the specific issue.
<TABLE>
<S> <C>
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.
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>
<S> <C>
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>
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<PAGE>
<TABLE>
<S> <C>
DDD, DD and D Bonds are in default on interest and/or principal payments. Such bonds are
extremely speculative and should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D"
represents the lowest potential for recovery.
</TABLE>
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD", "DD", or "D" categories.
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>
<S> <C>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+".
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not
as great as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
however, near-term adverse changes could cause these securities to be
rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or imminent payment
default.
LOC The symbol "LOC" indicates that the rating is based on a letter of
credit issued by a commercial bank.
INS The symbol "INS" indicates that the rating is based on an insurance
policy or financial guaranty issued by an insurance company.
</TABLE>
62
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
MERRILL LYNCH MASSACHUSETTS 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 Massachusetts Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust as of July 31, 1994, 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 two-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,
1994 by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Massachusetts Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series
Trust as of July 31, 1994, 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
August 29, 1994
63
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Massachusetts--94.6%
<C> <C> <C> <S> <C>
AAA Aaa $ 1,650 Beverly, Massachusetts, GO, 6.60% due 3/15/2009 (f) $ 1,753
BBB Baa1 865 Boston, Massachusetts, Industrial Development Financing Authority, Sewer
Facility Revenue Bonds (Harbor Electric Energy Company Project), AMT, 7.375%
due 5/15/2015 906
NR Aaa 600 Boston, Massachusetts, Revenue Bonds (Boston City Hospital), Series A, 7.625%
due 8/15/2000 (c)(g) 690
A NR 300 Boston, Massachusetts, Water and Sewer Community Revenue Bonds, Series A, 7.10%
due 11/01/1999 (g) 335
NR Baa 1,000 Greater New Bedford, Massachusetts, Regional Refuse Management District Revenue
Bonds (Massachusetts Landfill), AMT, 5.875% due 5/01/2013 948
NR Aaa 1,650 Lowell, Massachusetts, GO, 7.625% due 2/15/2001 (g) 1,912
Massachusetts Bay Transportation Authority Revenue Bonds (Massachusetts General
Transportation Systems):
A+ A 2,000 Refunding, Series A, 7% due 3/01/2011 2,206
A+ A 1,250 Refunding, Series B, 6.20% due 3/01/2016 1,263
A+ Aaa 3,305 Series A, 7% due 3/01/2001 (g) 3,700
A+ A 1,500 Series A, 7% due 3/01/2021 1,705
A+ A 1,285 Massachusetts State GO, Consolidated Loan, Series A, 6.50% due 6/01/2008 1,342
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listing of Merrill Lynch Massachusetts 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 at right.
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
HFA Housing Finance Authority
INFLOS Inverse Floating Rate Municipal Bonds
LEVRRS Leveraged Reverse Rate Securities
PCR Pollution Control Revenue Bonds
UPDATES Unit Priced Daily Adjustable Tax-Exempt Securities
UT Unlimited Tax
VRDN Variable Rate Demand Notes
YCN Yield Curve Notes
64
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Massachusetts (continued)
<C> <C> <C> <S> <C>
Massachusetts State Health and Educational Facilities Authority Revenue Bonds:
NR Baa $2,000 (Anna Jaques Hospital), Series B, 6.875% due 10/01/2012 $ 2,018
AAA Aaa 2,000 (Beth Israel), INFLOS, 8.776% due 7/01/2025 (b)(j) 1,915
AAA Aaa 2,385 (Boston College), Series J, 6.625% due 7/01/2021 (h) 2,465
A Aa 1,000 (Brigham and Women's Hospital), Series C, 7% due 6/01/2018 1,045
Al+ VMIG1 700 (Capital Asset Program), VRDN, Series B, 2.80% due 7/01/2005 (a)(e) 700
Al+ VMIG1 1,000 (Capital Asset Program), VRDN, Series C, 2.80% due 7/01/2005 (a)(e) 1,000
AAA Aaa 1,000 (Massachusetts General Hospital), Series F, 6.25% due 7/01/2020 (b) 1,010
AAA Aaa 1,000 (New England Medical Center), Series F, 6.50% due 7/01/2012 (h) 1,040
AAA Aaa 2,900 (New England Medical Center Hospitals), YCN, 7.08% due 7/01/2018 (e)(j) 2,244
AAA Aaa 2,200 (Newton Wellesley Hospital), Series D, 7% due 7/01/2015 (e) 2,378
AAA Aaa 1,000 (Northeastern University), Series E, 6.55% due 10/01/2022 (e) 1,031
A+ A1 2,000 Refunding (Boston College), Series K, 5.25% due 6/01/2023 1,748
NR Baa1 500 Refunding (Holyoke Hospital), Series B, 6.50% due 7/01/2015 480
NR Baa 1,000 Refunding (New England Memorial Hospital), Series B, 6.125% due 7/01/2013 940
AAA Aaa 1,000 Refunding (Stonehill College), Series E, 6.60% due 7/01/2020 (e) 1,044
BBB Baa1 2,000 (Sisters of Providence Health Systems), Series A, 6.625% due 11/15/2022 1,915
AA- Aa 4,490 (Smith College), Series D, 5.75% due 7/01/2024 4,234
AAA NR 1,000 (Suffolk University), Series B, 6.35% due 7/01/2022 (i) 1,008
Al+ NR 1,000 (Williams College), VRDN, Series E, 2.80% due 8/01/2014 (a) 1,000
A+ Aa 3,250 Massachusetts State, HFA, Revenue Bonds, AMT, Series A, 6.75% due 6/01/2026 3,276
Massachusetts State, HFA, Revenue Bonds (Residential Development) (d):
AAA Aaa 1,000 Series C, 6.90% due 11/15/2021 1,035
AAA Aaa 1,000 Series F, 6.30% due 11/15/2024 984
NR MIG1+ 100 Massachusetts State Industrial Finance Agency, Health Care Facility Revenue
Bonds(Beverly Enterprises), VRDN, 2.90% due 4/01/2009 (a) 100
Massachusetts State Industrial Finance Agency, PCR, Refunding:
BBB Baa2 1,000 (Boston Edison Company Project), Series A, 5.75% due 2/01/2014 906
BBB Baa2 2,750 (Eastern Edison Company Project), 5.875% due 8/01/2008 2,628
BBB Baa1 3,000 Massachusetts State Industrial Finance Agency Resource Recovery Revenue
Refunding Bonds (Refusetech Inc. Project), Series A, 6.30% due 7/01/2005 3,035
Massachusetts State Industrial Finance Agency Revenue Bonds:
AAA Aaa 1,000 (Babson College), Series A, 6.50% due 10/01/2022 (e) 1,038
A+ A1 1,460 Refunding (Holly Cross College-II), 6.375% due 11/01/2015 1,495
BBB+ A 2,000 Massachusetts State Municipal Wholesale Electric Company, Power Supply System,
Revenue Refunding Bonds, Series A, 6.75% due 7/01/2011 2,091
A+ A 2,000 Massachusetts State, Refunding, GO, Series B, 6.50% due 8/01/2008 2,133
A+ A1 1,000 Massachusetts State Turnpike Authority, Turnpike Revenue Refunding Bonds,
Series A, 5% due 1/01/2020 845
Massachusetts State, UPDATES, VRDN (a):
A1 VMIG1 1,000 2.80% due 12/01/1997 1,000
A1+ VMIG1 1,700 2.80% due 6/01/1995 1,700
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Massachusetts (concluded)
<C> <C> <C> <S> <C>
Massachusetts State Water Resource Authority Revenue Bonds, Series A:
A A $ 6,000 6.50% due 7/15/2019 $ 6,242
A A 1,100 5.50% due 7/15/2022 982
NR A l,000 New England Educational Loan Marketing Corporation, Massachusetts, Student
Loan Revenue Bonds, Sub-Issue H, AMT, 6.90% due 11/01/2009 l,030
AAA Aaa l,000 Southern Berkshire, Massachusetts, Regional School District Revenue Bonds, UT,
7% due 4/15/2011 (e) 1,087
NR Baa 1,500 Springfield, Massachusetts, School Project, Loan Revenue Bonds, Series B,
7.10% due 9/01/2011 1,548
A+ A 1,000 Woods Hole--Martha's Vineyard and Nantucket, Massachusetts, Revenue Refunding
Bonds, 6.60% due 3/01/2003 1,084
Puerto Rico--5.0%
BB Baa 2,000 Puerto Rico Commonwealth, Aqueduct and Sewer Authority Revenue Bonds, Series A,
7.875% due 7/01/2017 2,174
AAA Aaa 1,000 Puerto Rico Electric Power Authority, Power Revenue Bonds, LEVRRS, 8.778%
due 7/01/2023 (f)(j) 966
A- Baa1 1,000 Puerto Rico Electric Power Authority, Power Revenue Refunding Bonds, Series
N, 7% due 7/01/2007 1,091
Total Investments (Cost--$84,103)--99.6% 84,445
Other Assets Less Liabilities--0.4% 358
-------
Net Assets--100.0% $84,803
=======
<FN>
(a)The interest rate is subject to change periodically based upon
the prevailing market rate. The interest rate shown is the rate in
effect at July 31, 1994.
(b)AMBAC Insured.
(c)FHA Insured.
(d)FNMA Collateralized.
(e)MBIA Insured.
(f)FSA Insured.
(g)Prerefunded.
(h)FGIC Insured.
(i)Connie Lee Insured.
(j)The interest rate is subject to change periodically and inversely
based upon the prevailing market rate. The interest rate shown is
the rate in effect at July 31, 1994.
+Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.
</TABLE>
See Notes to Financial Statements.
66
<PAGE>
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of July 31, 1994
<C> <S> <C> <C>
Assets: Investments, at value (identified cost--$84,103,398) (Note 1a) $84,445,011
Cash 10,091
Receivables:
Securities sold $ 2,928,378
Interest 1,087,787
Beneficial interest sold 102,162 4,118,327
-----------
Deferred organization expenses (Note 1e) 26,707
Prepaid registration fees and other assets (Note 1e) 19,834
-----------
Total assets 88,619,970
-----------
Liabilities: Payables:
Securities purchased 3,510,736
Beneficial interest redeemed 125,728
Dividends to shareholders (Note 1f) 68,728
Distributor (Note 2) 31,865
Investment adviser (Note 2) 24,782 3,761,839
-----------
Accrued expenses and other liabilities 54,843
-----------
Total liabilities 3,816,682
-----------
Net Assets: Net assets $84,803,288
===========
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $ 79,842
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 729,339
Paid-in capital in excess of par 83,725,271
Accumulated distribution in excess of realized capital gains--net (72,777)
Unrealized appreciation on investments--net 341,613
-----------
Net assets $84,803,288
===========
Net Asset Class A--Based on net assets of $8,367,548 and 798,416 shares of
Value: beneficial interest outstanding $ 10.48
===========
Class B--Based on net assets of $76,435,740 and 7,293,392 shares of
beneficial interest outstanding $ 10.48
===========
</TABLE>
See Notes to Financial Statements.
67
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended
July 31, 1994
<C> <S> <C>
Investment Interest and amortization of premium and discount earned $ 5,037,381
Income
(Note 1d):
Expenses: Investment advisory fees (Note 2) 465,743
Distribution fees--Class B (Note 2) 382,048
Printing and shareholder reports 79,831
Professional fees 53,898
Transfer agent fees--Class B (Note 2) 37,639
Accounting services (Note 2) 36,930
Custodian fees 13,374
Registration fees (Note 1e) 12,735
Amortization of organization expenses (Note 1e) 10,370
Pricing fees 6,922
Trustees' fees and expenses 3,699
Transfer agent fees--Class A (Note 2) 3,522
Other 2,154
-----------
Total expenses before reimbursement 1,108,865
Reimbursement of expenses (Note 2) (199,488)
-----------
Total expenses after reimbursement 909,377
-----------
Investment income--net 4,128,004
-----------
Realized & Realized gain on investments--net 21,770
Unrealized Change in unrealized appreciation on investments--net (3,726,694)
Gain -----------
(Loss) on Net Increase in Net Assets Resulting from Operations $ 423,080
Investments ===========
- --Net
(Notes
1d & 3):
</TABLE>
See Notes to Financial Statements.
68
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended July 31,
Increase (Decrease) in Net Assets: 1994 1993
<C> <S> <C> <C>
Operations: Investment income--net $ 4,128,004 $ 3,173,589
Realized gain on investments--net 21,770 1,192,844
Change in unrealized appreciation on investments--net (3,726,694) 1,786,432
----------- -----------
Net increase in net assets resulting from operations 423,080 6,152,865
----------- -----------
Dividends & Investment income--net:
Distributions Class A (441,160) (300,336)
to Share- Class B (3,686,844) (2,873,253)
holders Realized gain on investments--net:
(Note 1f): Class A (119,994) (10,398)
Class B (1,037,479) (128,953)
In excess of realized gain on investments--net:
Class A (7,544) --
Class B (65,233) --
----------- -----------
Net decrease in net assets resulting from dividends and distributions
to shareholders (5,358,254) (3,312,940)
----------- -----------
Beneficial Net increase in net assets derived from beneficial interest transactions 11,216,720 31,906,779
Interest ----------- -----------
Transactions
(Note 4):
Net Assets: Total increase in net assets 6,281,546 34,746,704
Beginning of year 78,521,742 43,775,038
----------- -----------
End of year $84,803,288 $78,521,742
=========== ===========
</TABLE>
See Notes to Financial Statements.
69
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights
Class A Class B
For the For the
Period Period
The following per share data and ratios have been derived Feb 28, Feb 28,
from information provided in the financial statements. For the Year 1992+ to For the Year 1992+ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1994 1993 1992
<C> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.07 $ 10.68 $ 10.00 $ 11.07 $ 10.68 $ 10.00
Operating -------- -------- -------- -------- -------- --------
Performance: Investment income--net .58 .63 .25 .53 .57 .23
Realized and unrealized gain (loss)
on investments--net (.43) .42 .68 (.43) .42 .68
-------- -------- -------- -------- -------- --------
Total from investment operations .15 1.05 .93 .10 .99 .91
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.58) (.63) (.25) (.53) (.57) (.23)
Realized gain on investments--net (.15) (.03) -- (.15) (.03) --
In excess of realized gain on
investments--net (.01) -- -- (.01) -- --
-------- -------- -------- -------- -------- --------
Total dividends and distributions (.74) (.66) (.25) (.69) (.60) (.23)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 10.48 $ 11.07 $ 10.68 $ 10.48 $ 11.07 $ 10.68
======== ======== ======== ======== ======== ========
Total Based on net asset value per share 1.26% 10.08% 9.44%++ 0.75% 9.53% 9.22%++
Investment ======== ======== ======== ======== ======== ========
Return:**
Ratios to Expenses, excluding distribution
Average fees and net of reimbursement -- -- -- 62% .43% .12%*
Net Assets: ======== ======== ======== ======== ======== ========
Expenses, net of reimbursement .62% .42% .12%* 1.12% .93% .62%*
======== ======== ======== ======== ======== ========
Expenses .85% .95% 1.16%* 1.36% 1.45% 1.68%*
======== ======== ======== ======== ======== ========
Investment income--net 5.33% 5.75% 5.82%* 4.83% 5.24% 5.32%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 8,367 $ 7,093 $ 4,828 $76,436 $71,429 $38,947
======== ======== ======== ======== ======== ========
Portfolio turnover 72.13% 39.37% 18.86% 72.13% 39.37% 18.86%
======== ======== ======== ======== ======== ========
<FN>
+Commencement of Operations.
++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales loads.
</TABLE>
See Notes to Financial Statements.
70
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Massachusetts 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 both Class A and Class B Shares.
Class A Shares are sold with a front-end sales charge. Class B Shares must be
subject to a contingent deferred sales charge. Both classes of shares have
identical voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class B Shares bear certain expenses related to the
distribution of such shares and have exclusive voting rights with respect to
matters relating to such 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 a remaining maturity of sixty days or less are valued on an
amortized cost basis, which approximates market value. Options, which are traded
on exchanges, are valued at their last sale price as of the close of such
exchanges or, lacking any sales, at the last available bid price. 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) 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 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 realized capital gains are due
primarily to differing tax treatments for futures transactions and post October
losses.
71
<PAGE>
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). Effective January 1, 1994, the investment advisory
business of FAM was reorganized from a corporation to a limited partnership.
Both prior to and after the reorganization, ultimate control of FAM was vested
with Merrill Lynch & Co., Inc. ("ML & Co."). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of ML &
Co. The limited partners are ML & Co. and Fund Asset Management, Inc. ("FAMI"),
which is also an indirect wholly-owned subsidiary of ML & Co. The Fund has also
entered into Distribution Agreements and a Distribution Plan with Merrill Lynch
Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of
Merrill Lynch Investment Management, Inc. ("MLIM"), an indirect wholly-owned
subsidiary of ML & Co.
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 exceeding $500 million but not
exceeding $1 billion; and 0.50% of the average daily net assets exceeding $1.0
billion. For the year ended July 31, 1994, FAM earned fees of $465,743, of which
$199,488 was voluntarily waived.
The Fund has adopted a Plan of Distribution (the "Plan") in accordance with
Rule 12b-1 under the Investment Company Act of 1940 pursuant to which the Fund
pays the Distributor ongoing account maintenance and distribution fees relating
to Class B Shares, which are accrued daily and paid monthly at the annual rates
of 0.25% and 0.25%, respectively, of the average daily net assets of the Class B
Shares of the Fund. Pursuant to a sub-agreement with the Distributor, Merrill
Lynch, Pierce, Fenner & Smith, Inc. ("MLPF&S"), an affilliate 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
distribution and account maintenance services to Class B shareholders. As
authorized by the Plan, the Distributor has entered into an agreement with
MLPF&S, an affiliate of ML & Co., which provides for the compensation of MLPF&S
for providing distribution-related services to the Fund. For the year ended
July 31, 1994, MLFD earned underwriting discounts of $4,115, and MLPF&S earned
dealer concessions of $35,085 on sales of the Fund's Class A Shares.
MLPF&S also received contingent deferred sales charges of $258,962 for the sale
of Class B Shares during the period.
Financial Data Services, Inc. ("FDS"), 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, FAMI, PSI, MLIM, MLFD, FDS, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 1994 were $63,776,218 and $57,233,376, respectively.
Net realized and unrealized gains (losses) as of July 31, 1994 were as follows:
<TABLE>
<CAPTION>
Realized
Gains Unrealized
Total (Losses) Gains
<S> <C> <C>
Long-term investments $ (500,555) $ 341,613
Financial futures contracts 522,325 --
----------- -----------
Total $ 21,770 $ 341,613
=========== ===========
</TABLE>
As of July 31, 1994, net unrealized depreciation for Federal income tax purposes
aggregated $341,613, of which $1,838,644 related to appreciated securities and
$1,497,031 related to depreciated securities. The aggregate cost of investments
at July 31, 1994 for Federal income tax purposes was $84,103,398.
72
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest transactions was
$11,216,720 and $31,906,779 for the years ended July 31, 1994, and July 31,
1993, respectively.
Transactions in shares of beneficial interest for Class A and Class B Shares
were as follows:
<TABLE>
<CAPTION>
Class A Shares for the Dollar
Year Ended July 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 307,747 $ 3,438,464
Shares issued to shareholders
in reinvestment of dividends
and distributions 19,821 217,018
----------- -----------
Total issued 327,568 3,655,482
Shares redeemed (169,861) (1,887,059)
----------- -----------
Net increase 157,707 $ 1,768,423
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Class A Shares for the Dollar
Year Ended July 31, 1993 Shares Amount
<S> <C> <C>
Shares sold 354,701 $ 3,828,180
Shares issued to shareholders
in reinvestment of dividends
and distributions 13,015 138,508
----------- -----------
Total issued 367,716 3,966,688
Shares redeemed (179,030) (1,881,614)
----------- -----------
Net increase 188,686 $ 2,085,074
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Class B Shares for the Dollar
Year Ended July 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 1,809,726 $19,990,791
Shares issued to shareholders
in reinvestment of dividends
and distributions 254,694 2,796,404
----------- -----------
Total issued 2,064,420 22,787,195
Shares redeemed (1,222,971) (13,338,898)
----------- -----------
Net increase 841,449 $ 9,448,297
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Class B Shares for the Dollar
Year Ended July 31, 1993 Shares Amount
<S> <C> <C>
Shares sold 3,127,040 $33,253,505
Shares issued to shareholders
in reinvestment of dividends
and distributions 159,939 1,704,515
----------- -----------
Total issued 3,286,979 34,958,020
Shares redeemed (481,243) (5,136,315)
----------- -----------
Net increase 2,805,736 $29,821,705
=========== ===========
</TABLE>
73
<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........................ 17
Trustees and Officers........................ 17
Management and Advisory Arrangements......... 19
Purchase of Shares............................. 20
Initial Sales Charge Alternatives -- Class A
and Class D Shares......................... 21
Reduced Initial Sales Charges................ 21
Distribution Plans........................... 24
Limitations on the Payment of Deferred Sales
Charges.................................... 24
Redemption of Shares........................... 25
Deferred Sales Charge -- Class B Shares...... 26
Portfolio Transactions......................... 26
Determination of Net Asset Value............... 27
Shareholder Services........................... 28
Investment Account........................... 28
Automatic Investment Plan.................... 29
Automatic Reinvestment of Dividends and
Capital Gains Distributions................ 29
Systematic Withdrawal Plans -- Class A and
Class D Shares............................. 29
Exchange Privilege........................... 30
Distributions and Taxes........................ 43
Environmental Tax............................ 46
Tax Treatment of Option and Futures
Transactions............................... 46
Performance Data............................... 47
General Information............................ 48
Description of Shares........................ 48
Computation of Offering Price Per Share...... 50
Independent Auditors......................... 50
Custodian.................................... 50
Transfer Agent............................... 50
Legal Counsel................................ 50
Reports to Shareholders...................... 51
Additional Information....................... 51
Appendix I -- Economic and Financial Conditions
in Massachusetts............................. 52
Appendix II -- Ratings of Municipal Bonds...... 55
Independent Auditors' Report................... 63
Financial Statements........................... 64
Code # 16149-1074
</TABLE>
[LOGO]
Merrill Lynch
Massachusetts
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
STATEMENT OF
ADDITIONAL INFORMATION
October 21, 1994
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 two-year
period ended July 31, 1994 and for the period February 28, 1992
(commencement of operations) through July 31, 1992
Contained in Part B:
Schedule of Investments as of July 31, 1994.
Statement of Assets and Liabilities as of July 31, 1994.
Statement of Operations for the year ended July 31, 1994.
Statements of Changes in Net Assets for each of the years in the
two-year period ended July 31, 1994.
Financial Highlights for each of the years in the two-year
period ended July 31, 1994 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 October 3, 1988.(b)
(c) -- Instrument establishing Merrill Lynch Massachusetts Municipal Bond
Fund (the "Fund") as a series of Registrant.(e)
(d) -- Instrument establishing Class A and Class B shares of beneficial
interest of the Fund.(e)
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.(c)
5(a) -- Form of Management Agreement between Registrant and Fund Asset
Management, L.P.(d)
(b) -- Supplement to Management Agreement between Registrant and Fund Asset
Management, L.P.
6(a)(1) -- Form of Class A Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(d)
(a)(2) -- Form of Revised Class A Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distribution, Inc (including Form of
Selected Dealers Agreement).
(b) -- Form of Class B Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(d)
(c) -- Form of Class C Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement)
(d) -- Form of Class D Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<C> <S>
(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.(f)
7 -- None.
8 -- Form of Custody Agreement between Registrant and State Street Bank &
Trust Company.(g)
9 -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc.(d)
10 -- None.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 -- None.
13 -- Certificate of Fund Asset Management, Inc.(d)
14 -- None.
15(a) -- Form of Class B Shares Distribution Plan of the Registrant and Class B
Shares Distribution Plan Sub-Agreement.(d)
(b) -- Class C Shares Distribution Plan and Class C Shares Distribution Plan
Sub-Agreement of Registrant.
(c) -- Class D Shares Distribution Plan and Class D Shares Distribution Plan
Sub-Agreement of Registrant.
16(a) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class A
shares.(e)
(b) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class B
Shares.(e)
17(a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
<FN>
- ---------
(a) Filed on August 6, 1985 as an Exhibit to the Registration Statement on Form
N-1A (File No. 2-99473) under the Securities Act of 1933 of Merrill Lynch
New York Municipal Bond Fund, a series of the Registrant.
(b) Filed on October 11, 1988 as an Exhibit to Post-Effective Amendment No. 4
to the Registration Statement on Form N-1A (File No. 2-99473) under the
Securities Act of 1933 of Merrill Lynch New York Municipal Bond Fund, a
series of the Registrant.
(c) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's Declaration of Trust, previously filed as
Exhibit 1(a) to the Registration Statement referred to in paragraph (a)
above; 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, which will be filed as Exhibits
1(c) and 1(d), respectively, to the Registration Statement; and to Articles
I,V and VI of the Registrant's By-Laws, previously filed as Exhibit 2 to
the Registration Statement referred to in paragraph (a) above.
(d) Filed on November 5, 1991 as an Exhibit to Pre-Effective Amendment No. 1 to
the Registration Statement under the Securities Act of 1933 of Merrill
Lynch Massachusetts Municipal Bond Fund.
(e) Filed on July 9, 1992, as an Exhibit to Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933.
(f) Filed on November 9, 1993 as an Exhibit to Post-Effective Amendment No. 3
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933.
</TABLE>
C-2
<PAGE>
<TABLE>
<S> <C>
(g) Filed on October 14, 1994 as an Exhibit to Post-Effective Amendment No. 3
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended, relating to shares of Merrill Lynch Minnesota
Municipal Bond Fund series of the Registrant (File No. 33-44734).
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT
SEPTEMBER 30,
TITLE OF CLASS 1994
- ---------------------------------------------------------------------------------------------------- ----------------
<S> <C>
Class A shares of beneficial interest par value $0.10 per share..................................... 6
Class B shares of beneficial interest par value $0.10 per share..................................... 84
Class C shares of beneficial interest par value $0.10 per share..................................... 0
Class D shares of beneficial interest par value $0.10 per share..................................... 0
</TABLE>
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 to which it is ultimately determined that he is
entitled to receive from the Registrant by reason of indemnification; and (iii)
(a) such promise must be secured by a surety bond, other suitable insurance or
an equivalent form of security which assures that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient of the advance, or (b) a
majority of a quorum of the Registrant's disinterested, non-party Trustees, or
an independent legal counsel in a written opinion, shall determine, based upon a
review of readily available facts that the recipient of the advance ultimately
will be found entitled to indemnification.
C-3
<PAGE>
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 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
Director, 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") acts as the investment adviser
for the following registered investment companies: Apex Municipal Fund, Inc.,
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., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Emerging Tigers Fund, Inc., Financial Institutions Series
Trust, Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal
Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
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., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal
Fund Accumulation Program, 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 Arizona Fund
II, 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., Senior High Income Portfolio, II,
Inc., Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNew York Holdings, Inc. and Worldwide DollarVest Fund, Inc. Merrill
Lynch Asset Management, L.P. ("MLAM"), of the Manager, acts as the investment
adviser for the following companies: Convertible Holdings, Inc., Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc.,
Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc.,
Merrill Lynch Balanced Fund for Investment and Retirement, 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 Bond
Fund for Investment and Retirement, Merrill Lynch Global Allocation Fund, Inc.,
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 Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
High Income Municipal Bond Fund, Inc., Merrill Lynch Institutional
C-4
<PAGE>
Intermediate Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin
America Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific
Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series
Trust, Merrill Lynch Senior Floating Rate Fund, Inc., Merrill Lynch Series Fund,
Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury
Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility
Income Fund, Inc. and Merrill Lynch Variable Series Funds, Inc. 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, Merrill Lynch Funds Distributor, Inc. ("MLFD"), 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,
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 Financial Data Services, Inc. is 4800
Deerlake 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 has been engaged since December 1,
1991 for his own account or in the capacity of director, officer, partner or
trustee. In addition, Mr. Zeikel is President, Mr. Richard is Treasurer and Mr.
Glenn is Executive Vice President of substantially all of the investment
companies described in the preceding paragraph and also hold the same positions
with all or substantially all of the investment companies advised by MLAM as
they do with those advised by the Manager, and Messrs. Durnin, Giordano, Harvey,
Hewitt, Kirstein, Monagle and Ms. Griffin are directors or officers of one or
more of such companies.
Officers and Partners of FAM are set forth as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- --------------------------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ML & Co. Limited Partner Financial Services Holding Company
Fund Asset Management, Inc. Limited Partner Investment Advisory Services
Princeton Services General Partner General Partner of MLAM
Arthur Zeikel President President and Director of MLAM; President and Director of Princeton
Services; Director of MLFD; Executive Vice President of ML & Co.;
Executive Vice President of Merrill Lynch
Terry K. Glenn Executive Vice President Executive Vice President of MLAM; Executive Vice President and
Director of Princeton Services; President and Director of MLFD;
President of Princeton Administrators, L.P.
Bernard J. Durnin Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton
Services
Vincent R. Giordano Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton
Services
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
N. John Hewitt Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton
Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- --------------------------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Philip L. Kirstein Senior Vice President, Senior Vice-President, General Counsel and Secretary of MLAM; Senior
General Counsel and Vice President, General Counsel and Director of Princeton Services;
Secretary Director of MLFD
Ronald M. Kloss Senior Vice President Senior Vice President and Controller of MLAM; Senior Vice President
and Controller and Controller of Princeton Services
Joseph T. Monagle Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton
Services
Gerald M. Richard Senior Vice President Senior Vice President and Treasurer of MLAM; Senior Vice President and
and Treasurer Treasurer of Princeton Services; Vice President and Treasurer of
MLFD
Richard L. Rufener Senior Vice President Senior Vice President of MLAM; Vice President of MLFD; Senior Vice
President of Princeton Services
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 paragraph of Item
28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Emerging Tigers Fund, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond
Income Fund, Inc., The Municipal Fund Accumulation Program, 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 Fund, MuniYield Arizona Fund, Inc., MuniYield
Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, 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., Senior High Income Portfolio II, Inc., Senior Strategic
Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York
Holdings, Inc. and Worldwide DollarVest Fund, Inc.
C-6
<PAGE>
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9011, Princeton,
New Jersey 08543-9011, except that the address of Messrs. Crook, Aldrich, Breen,
Graczyk, Fatseas and Wasel is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(1) (2) (3)
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
Sharon Creveling Vice President and Assistant None
Treasurer
Mark A. DeSario Vice President None
James T. Fatseas Vice President None
Stanley Graczyk Vice President None
Debra W. Landsman-Yaros Vice President None
Michelle T. Lau Vice President None
Gerald M. Richard Vice President and Treasurer Treasurer
Richard L. Rufener Vice President None
Salvatore Venezia Vice President None
William Wasel Vice President None
Robert Harris Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder are maintained at the offices of the Registrant and Financial Data
Services, Inc.
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)_Registration 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 Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Plainsboro, and State
of New Jersey, on the 11th day of October, 1994.
MERRILL LYNCH MULTI-STATE MUNICIPAL
SERIES TRUST
(Registrant)
By: /s/_ARTHUR ZEIKEL
--------------------------------------
(ARTHUR ZEIKEL, PRESIDENT)
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
- ------------------------------------------------------ ------------------------------------ -------------------
<C> <S> <C>
/s/ARTHUR ZEIKEL
------------------------------------------- President (Principal Executive October 11, 1994
(Arthur Zeikel) Officer) and Trustee
/s/GERALD M. RICHARD
------------------------------------------- Treasurer (Principal Financial and October 11, 1994
(Gerald M. Richard) Accounting Officer)
KENNETH S. AXELSON*
------------------------------------------- Trustee
(Kenneth S. Axelson)
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)
*By /s/ARTHUR ZEIKEL
------------------------------------- October 11, 1994
(Arthur Zeikel, Attorney-in-fact)
</TABLE>
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- ---------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
-- Supplement to Management Agreement between Registrant and Fund Asset Management, L.P.
5(b)
-- Form of Revised Class A Shares Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (including Form of Selected Dealers Agreement).
6(a)(2)
-- Form of Class C Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers Agreement).
(c)
-- Form of Class D Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers Agreement).
(d)
-- Consent of Deloitte & Touche LLP, independent auditors for Registrant.
11
-- Form of Class C Shares Distribution Plan and Class C Distribution Plan Sub-Agreement.
15(b)
-- Form of Class D Shares Distribution Plan and Class D Distribution Plan Sub-Agreement.
(c)
-- Financial Data Schedule for Class A Shares.
17(a)
-- Financial Data Schedule for Class B Shares.
17(b)
</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
<PAGE>
SUPPLEMENT TO INVESTMENT ADVISORY AGREEMENT
WITH
FUND ASSET MANAGEMENT
As of January 1, 1994 Fund Asset Management was reorganized as a limited
partnership, formally known as Fund Asset Management, L.P. ("FAM"). The general
partner of FAM is Princeton Services, Inc. and the limited partners are Fund
Asset Management, Inc. and Merrill Lynch & Co, Inc. Pursuant to Rule 202(a)(1)-
1 under the Investment Advisors Act of 1940 and Rule 2a-6 under the Investment
Company Act of 1940 such reorganization did not constitute an assignment of this
investment advisory agreement since it did not involve a change of control or
management of the investment adviser. Pursuant to the requirements of Section
205 of the Investment Advisers Act of 1940, however, Fund Asset Management
hereby supplements this investment advisory agreement by undertaking to advise
you of any change in the membership of the partnership within a reasonable time
after any such change occurs.
By /s/ Arthur Zeikel
------------------
Dated: January 3, 1994
<PAGE>
CLASS A SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____ day of October, 1994, between MERRILL LYNCH
MULTI-STATE MUNICIPAL SERIES TRUST, a Massachusetts business trust (the
"Trust"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").
W I T N E S S E T H :
WHEREAS, the Trust is registered under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), as an open-end investment company,
and it is affirmatively in the interest of the Trust to offer its shares for
sale continuously;
and
WHEREAS, the Trustees of the Trust (the "Trustees") are authorized to
establish separate series (the "Series") relating to separate portfolios of
securities, each of which will offer separate classes of shares of beneficial
interest, par value $0.10 per share (collectively referred to as "shares") to
selected groups of purchasers; and
WHEREAS, the Trustees have established and designated the Merrill Lynch
[State] Municipal Bond Fund (the "Fund") as a series of the Trust; and
WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or through
other securities dealers; and
<PAGE>
WHEREAS, the Trust and the Distributor wish to enter into an agreement with
each other with respect to the continuous offering of the Class A shares of
beneficial interest in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR. The Trust hereby appoints the
Distributor as the principal underwriter and distributor of the Trust to sell
Class A shares of beneficial interest in the Fund (sometimes herein referred to
as "Class A shares") to eligible investors (as defined below) and hereby agrees
during the term of this Agreement to sell Class A shares of the Fund to the
Distributor upon the terms and conditions herein set forth.
Section 2. EXCLUSIVE NATURE OF DUTIES. The Distributor shall be the
exclusive representative of the Trust to act as principal underwriter and
distributor, except that:
(a) The Trust may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class A shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class A shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
2
<PAGE>
(b) The exclusive right granted to the Distributor to purchase Class A
shares from the Trust shall not apply to Class A shares issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Trust or the acquisition by purchase or otherwise of
all (or substantially all) the assets or the outstanding Class A shares of any
such company by the Trust.
(c) Such exclusive right also shall not apply to Class A shares issued
pursuant to reinvestment of dividends or capital gains distributions.
(d) Such exclusive right also shall not apply to Class A shares issued
pursuant to any conversion, exchange or reinstatement privilege afforded
redeeming shareholders or to any other Class A shares as shall be agreed between
the Trust and the Distributor from time to time.
Section 3. PURCHASE OF CLASS A SHARES FROM THE TRUST.
(a) The Distributor shall have the right to buy from the Trust the Class A
shares needed, but not more than the Class A shares needed (except for clerical
errors in transmission) to fill unconditional orders for Class A shares of the
Fund placed with the Distributor by eligible investors or securities dealers.
Investors eligible to purchase Class A shares shall be those persons so
identified in the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of additional
information", respectively) under the Securities Act of 1933, as amended (the
"Securities Act"),
3
<PAGE>
relating to such Class A shares ("eligible investors"). The price which the
Distributor shall pay for the Class A shares so purchased from the Trust shall
be the net asset value, determined as set forth in Section 3(d) hereof, used in
determining the public offering price on which such orders were based.
(b) The Class A shares are to be resold by the Distributor to eligible
investors at the public offering price, as set forth in Section 3(c) hereof, or
to securities dealers having agreements with the Distributor upon the terms and
conditions set forth in Section 7 hereof.
(c) The public offering price(s) of the Class A shares, I.E., the price
per share at which the Distributor or selected dealers may sell Class A shares
to eligible investors, shall be the public offering price as set forth in the
prospectus and statement of additional information relating to such Class A
shares, but not to exceed the net asset value at which the Distributor is to
purchase the Class A shares, plus a sales charge not to exceed 4.00% of the
public offering price (4.17% of the net amount invested), subject to reductions
for volume purchases. Class A shares may be sold to certain Trustees, officers
and employees of the Trust, directors and employees of Merrill Lynch & Co., Inc.
and its subsidiaries, and to certain other persons described in the prospectus
and statement of additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the prospectus and
statement of additional information. If the
4
<PAGE>
public offering price does not equal an even cent, the public offering price may
be adjusted to the nearest cent. All payments to the Trust hereunder shall be
made in the manner set forth in Section 3(f).
(d) The net asset value of Class A shares shall be determined by the Trust
or any agent of the Trust in accordance with the method set forth in the
prospectus and statement of additional information of the Fund and guidelines
established by the Trustees.
(e) The Trust shall have the right to suspend the sale of its Class A
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Trust shall also have the right to suspend
the sale of its Class A shares if trading on the New York Stock Exchange shall
have been suspended, if a banking moratorium shall have been declared by Federal
or New York authorities, or if there shall have been some other event, which, in
the judgment of the Trust, makes it impracticable or inadvisable to sell the
Class A shares.
(f) The Trust, or any agent of the Trust designated in writing by the
Trust, shall be promptly advised of all purchase orders for Class A shares
received by the Distributor. Any order may be rejected by the Trust; provided,
however, that the Trust will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class A shares from eligible
investors. The Trust (or its agent) will confirm orders upon their receipt,
will make appropriate book entries and, upon
5
<PAGE>
receipt by the Trust (or its agent) of payment therefor, will deliver deposit
receipts or certificates for such Class A shares pursuant to the instructions of
the Distributor. Payment shall be made to the Trust in New York Clearing House
funds. The Distributor agrees to cause such payment and such instructions to be
delivered promptly to the Trust (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF CLASS A SHARES BY THE TRUST.
(a) Any of the outstanding Class A shares may be tendered for redemption
at any time, and the Trust agrees to repurchase or redeem the Class A shares so
tendered in accordance with its obligations as set forth in Article VIII of its
Declaration of Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement of additional
information. The price to be paid to redeem or repurchase the Class A shares
shall be equal to the net asset value calculated in accordance with the
provisions of Section 3(d) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in the prospectus
and statement of additional information of the Fund. All payments by the Trust
hereunder shall be made in the manner set forth below. The redemption or
repurchase by the Trust of any of the Class A shares purchased by or through the
Distributor will not affect the sales charge secured by the Distributor or any
selected dealer in the course of the original sale, except that if any Class A
shares are tendered for redemption or repur-
6
<PAGE>
chase within seven business days after the date of the confirmation of the
original purchase, the right to the sales charge shall be forfeited by the
Distributor and the selected dealer which sold such Class A shares.
The Trust shall pay the total amount of the redemption price as defined in
the above paragraph pursuant to the instructions of the Distributor in New York
Clearing House funds on or before the seventh business day subsequent to its
having received the notice of redemption in proper form. The proceeds of any
redemption of shares shall be paid by the Trust as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall be paid to or
for the account of the shareholder, in each case in accordance with the
applicable provisions of the prospectus and statement of additional information.
(b) Redemption of Class A shares or payment may be suspended at times when
the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Trust fairly
to determine the value of the net assets of the Fund, or during any other period
when the Securities and Exchange Commission, by order, so permits.
Section 5. DUTIES OF THE TRUST.
(a) The Trust shall furnish to the Distributor copies of all information,
financial statements and other papers which the
7
<PAGE>
Distributor may reasonably request for use in connection with the distribution
of Class A shares of the Fund, and this shall include, upon request by the
Distributor, one certified copy of all financial statements prepared for the
Trust by independent public accountants. The Trust shall make available to the
Distributor such number of copies of the prospectus and statement of additional
information relating to the Fund as the Distributor shall reasonably request.
(b) The Trust shall take, from time to time, but subject to any necessary
approval of the Class A shareholders, all necessary action to fix the number of
authorized Class A shares and such steps as may be necessary to register the
same under the Securities Act, to the end that there will be available for sale
such number of Class A shares as the Distributor may reasonably be expected to
sell.
(c) The Trust shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class A shares for sale under the
securities laws of such states as the Distributor and the Trust may approve.
Any such qualification may be withheld, terminated or withdrawn by the Trust at
any time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Trust.
The Distributor shall furnish such information and other material relating to
its affairs and activities as may be required by the Trust in connection with
such qualification.
8
<PAGE>
(d) The Trust will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports of the Fund.
Section 6. DUTIES OF THE DISTRIBUTOR.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class A shares of the Fund but shall not be obligated to sell any
specific number of Class A shares. The services of the Distributor to the Trust
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class A shares of the Fund, the Distributor shall use
its best efforts in all respects duly to conform with the requirements of all
Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Trust to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of additional information and any sales
literature specifically approved by the Trust.
(c) The Distributor shall adopt and follow procedures, as approved by the
officers of the Trust, for the confirmation of sales to eligible investors and
selected dealers, the collection of amounts payable by eligible investors and
selected dealers on
9
<PAGE>
such sales, and the cancellation of unsettled transactions, as may be necessary
to comply with the requirements of the National Association of Securities
Dealers, Inc. (the "NASD"), as such requirements may from time to time exist.
Section 7. SELECTED DEALERS AGREEMENTS.
(a) The Distributor shall have the right to enter into selected dealers
agreements with securities dealers of its choice ("selected dealers") for the
sale of Class A shares and fix therein the portion of the sales charge which may
be allocated to the selected dealers; provided that the Trust shall approve the
forms of agreements with dealers and the dealer compensation set forth therein.
Class A shares sold to selected dealers shall be for resale by such dealers only
at the public offering price(s) set forth in the prospectus and statement of
additional information. The form of agreement with selected dealers to be used
during the continuous offering of the Class A shares is attached hereto as
Exhibit A.
(b) Within the United States, the Distributor shall offer and sell Class A
shares only to such selected dealers as are members in good standing of the
NASD.
Section 8. PAYMENT OF EXPENSES.
(a) The Trust shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company
10
<PAGE>
Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class A
shareholders (including but not limited to the expense of setting in type any
such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments made to selected
dealers as reimbursement for their expenses associated with payments of sales
commissions to financial consultants. In addition, after the prospectuses,
statements of additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs and expenses of
printing and distributing any copies thereof which are to be used in connection
with the offering of Class A shares to selected dealers or eligible investors
pursuant to this Agreement. The Distributor shall bear the costs and expenses
of preparing, printing and distributing any other literature used by the
Distributor or furnished by it for use by selected dealers in connection with
the offering of the Class A shares for sale to eligible investors and any
expenses of advertising incurred by the Distributor in connection with such
offering.
(c) The Trust shall bear the cost and expenses of qualification of the
Class A shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Trust as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the
11
<PAGE>
Trust and the Distributor pursuant to Section 5(c) hereof and the cost and
expenses payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5(c)
hereof.
Section 9. INDEMNIFICATION.
(a) The Trust shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor against any loss, liability, claim,
damage or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by reason of any
person acquiring any Class A shares, which may be based upon the Securities Act,
or on any other statute or at common law, on the ground that the registration
statement or related prospectus and statement of additional information relating
to the Fund, as from time to time amended and supplemented, or an annual or
interim report to shareholders of the Fund, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary in order to make the statements therein not misleading, unless such
statement or omission was made in reliance upon, and in conformity with,
information furnished to the Trust in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the indemnity of the
Trust in favor of the Distributor and any such controlling persons to be deemed
to protect such Distributor or any such controlling persons thereof against any
12
<PAGE>
liability to the Trust or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of the reckless disregard of their obligations and duties under this
Agreement; or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the Distributor or such
controlling persons, as the case may be, shall have notified the Trust in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor or such
controlling persons shall have received notice of such service on any designated
agent), but failure to notify the Trust of any such claim shall not relieve it
from any liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. The Trust will be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Trust elects to assume the defense, such
defense shall be conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or defendants in
the suit. In the event the Trust elects to assume the defense of any such suit
and retain
13
<PAGE>
such counsel, the Distributor or such controlling person or persons, defendant
or defendants in the suit shall bear the fees and expenses of any additional
counsel retained by them, but in case the Trust does not elect to assume the
defense of any such suit, it will reimburse the Distributor or such controlling
person or persons, defendant or defendants in the suit, for the reasonable fees
and expenses of any counsel retained by them. The Trust shall promptly notify
the Distributor of the commencement of any litigation or proceedings against it
or any of its officers or Trustees in connection with the issuance or sale of
any of the Class A shares.
(b) The Distributor shall indemnify and hold harmless the Trust and each
of its Trustees and officers and each person, if any, who controls the Trust
against any loss, liability, claim, damage or expense described in the foregoing
indemnity contained in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity with,
information furnished to the Trust in writing by or on behalf of the Distributor
for use in connection with the registration statement or related prospectus and
statement of additional information, as from time to time amended, or the annual
or interim reports to Class A shareholders. In case any action shall be brought
against the Trust or any person so indemnified, in respect of which indemnity
may be sought against the Distributor, the Distributor shall have the rights and
duties given to the Trust, and the Trust and each person so indemnified
14
<PAGE>
shall have the rights and duties given to the Distributor by the provisions of
subsection (a) of this Section 9.
Section 10. MERRILL LYNCH MUTUAL FUND ADVISER PROGRAM. In connection with
the Merrill Lynch Mutual Fund Adviser Program, the Distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized to
offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the duties of the Distributor, the payment of expenses and indemnification
obligations of the Fund and the Distributor.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT. This Agreement
shall become effective as of the date first above written and shall remain in
force until October __, 1996 and thereafter, but only for so long as such
continuance is specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding Class A voting securities of the Fund
and (ii) by the vote of a majority of those Trustees who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees or by vote of a majority of the outstanding Class A
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other
15
<PAGE>
party. This Agreement shall automatically terminate in the event of its
assignment.
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS OF THIS AGREEMENT. This Agreement may be amended
by the parties only if such amendment is specifically approved by (i) the
Trustees or by the vote of a majority of outstanding Class A voting securities
of the Fund and (ii) by the vote of a majority of those Trustees of the Trust
who are not parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on such approval.
Section 13. GOVERNING LAW. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment Company
Act. To the extent that the applicable law of the State of New York, or any of
the provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
Section 14. This Agreement supersedes the prior Distribution Agreement
entered into by the parties hereto with respect to the Class A shares of the
Fund.
Section 15. PERSONAL LIABILITY. The Declaration of Trust establishing
Merrill Lynch Multi-State Municipal Series Trust,
16
<PAGE>
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 said 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 or otherwise in connection with the
affairs of said Trust, but the "Trust Property" only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MERRILL LYNCH MULTI-STATE
MUNICIPAL SERIES TRUST
By
-------------------------------------------
Title:
MERRILL LYNCH TRUSTS DISTRIBUTOR, INC.
By
-------------------------------------------
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
CLASS A SHARES OF BENEFICIAL INTEREST
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST, a Massachusetts business
trust (the "Trust"), pursuant to which it acts as the distributor for the sale
of Class A shares of beneficial interest, par value $0.10 per share (herein
referred to as "Class A shares"), of the Trust relating to Merrill Lynch [State]
Municipal Bond Fund (the "Fund"), and as such has the right to distribute Class
A shares of the Fund for resale. The Trust is an open-end investment company
registered under the Investment Company Act of 1940, as amended, and the Fund's
Class A shares are registered under the Securities Act of 1933, as amended. You
have received a copy of the Class A shares Distribution Agreement (the
"Distribution Agreement") between ourself and the Trust and reference is made
herein to certain provisions of such Distribution Agreement. The terms
"Prospectus" and "Statement of Additional Information" used herein refer to the
prospectus and statement of additional information, respectively, on file with
the Securities and Exchange Commission which is part of the most recent
effective registration statement pursuant to the Securities Act of 1933, as
amended. We offer to sell to you, as a member of the Selected Dealers Group,
Class A shares of the Fund for resale to investors identified in the Prospectus
and Statement of Additional Information as eligible to purchase Class A shares
("eligible investors") upon the following terms and conditions:
1. In all sales of these Class A shares to eligible investors, you shall
act as dealer for your own account and in no transaction shall you have any
authority to act as agent for the Trust, for us or for any other member of the
Selected Dealers Group, except in connection with the Merrill Lynch Mutual Fund
Adviser program and such other special programs as we from time to time agree,
in which case you shall have authority to offer and sell shares, as agent for
the Trust, to participants in such program.
<PAGE>
2. Orders received from you will be accepted through us only at the
public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional Information of the Fund. The procedure
relating to the handling of orders shall be subject to Section 5 hereof and
instructions which we or the Trust shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor or the Trust in
the sole discretion of either. The minimum initial and subsequent purchase
requirements are as set forth in the current Prospectus and Statement of
Additional Information of the Fund.
3. The sales charges for sales to eligible investors, computed as
percentages of the public offering price and the amount invested, and the
related discount to Selected Dealers are as follows:
<TABLE>
<CAPTION>
Discount to
Sales Charge Selected
Sales Charge as Percentage* Dealers as
as Percentage of the Net Percentage
of the Amount of the
Amount of Purchase Offering Price 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%
<FN>
___________________
* Rounded to the nearest one-hundredth percent.
** Initial sales charges may be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information of the
Fund. Such purchase may be subject to a contingent deferred sales
</FN>
A-2
<PAGE>
<FN>
charge as set forth in the current Prospectus and Statement of Additional
Information.
</TABLE>
The term "purchase" 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 Class A shares for his or their own account
and to single purchases by a trustee or other fiduciary purchasing Class A
shares for a single trust estate or single fiduciary account although more
than one beneficiary is involved. The term "purchase" also includes
purchases by any "company" as that term is defined in the Investment
Company Act of 1940, as amended, 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 Class A shares of the Fund or
Class A 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.
The reduced sales charges are applicable through a right of
accumulation under which certain eligible investors are permitted to
purchase Class A shares of the Fund 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 Class A, Class
B, Class C and Class D shares of the Fund and of any other investment
company with an initial sales charge for which the Distributor acts as the
distributor. For any such right of accumulation to be made available, the
Distributor must be provided at the time of purchase, by the purchaser or
you, with sufficient information to permit confirmation of qualification,
and acceptance of the purchase order is subject to such confirmation.
The reduced sales charges are applicable to purchases aggregating
$25,000 or more of Class A shares or of Class D shares of any other
investment company with an initial sales charge for which the Distributor
acts as the distributor made through you within a thirteen-month period
starting with the first purchase pursuant to a Letter of Intention in the
form provided in the Prospectus. A purchase not originally made pursuant
to a Letter of Intention may be included under a subsequent letter executed
within 90 days of such purchase if the Distributor is informed in writing
of this intent within such 90-day period. If the
A-3
<PAGE>
intended amount of shares is not purchased within the thirteen-month
period, an appropriate price adjustment will be made pursuant to the terms
of the Letter of Intention.
You agree to advise us promptly at our request as to amounts of any
sales made by you to eligible investors qualifying for reduced sales
charges. Further information as to the reduced sales charges pursuant to
the right of accumulation or a Letter of Intention is set forth in the
Prospectus and Statement of Additional Information.
4. You shall not place orders for any of the Class A shares unless
you have already received purchase orders for such Class A shares at the
applicable public offering prices and subject to the terms hereof and of
the Distribution Agreement. You agree that you will not offer or sell any
of the Class A shares except under circumstances that will result in
compliance with the applicable Federal and state securities laws and that
in connection with sales and offers to sell Class A shares you will furnish
to each person to whom any such sale or offer is made a copy of the
Prospectus and, if requested, the Statement of Additional Information (as
then amended or supplemented) and will not furnish to any person any
information relating to the Class A shares of the Fund which is
inconsistent in any respect with the information contained in the
Prospectus and Statement of Additional Information (as then amended or
supplemented) or cause any advertisement to be published in any newspaper
or posted in any public place without our consent and the consent of the
Trust.
5. As a selected dealer, you are hereby authorized (i) to place
orders directly with the Trust for Class A shares of the Fund to be resold
by us to you subject to the applicable terms and conditions governing the
placement of orders by us set forth in Section 3 of the Distribution
Agreement and subject to the compensation provisions of Section 3 hereof
and (ii) to tender Class A shares directly to the Trust or its agent for
redemption subject to the applicable terms and conditions set forth in
Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such withholding: E.G.,
by a change in the "net asset value" from that used in determining the
offering price to your customers.
7. If any Class A shares sold to you under the terms of this
Agreement are repurchased by the Trust or by us for the account of the
Trust or are tendered for redemption within seven
A-4
<PAGE>
business days after the date of the confirmation of the original purchase
by you, it is agreed that you shall forfeit your right to, and refund to
us, any discount received by you on such Class A shares.
8. No person is authorized to make any representations concerning
Class A shares of the Fund except those contained in the current Prospectus
and Statement of Additional Information of the Fund and in such printed
information subsequently issued by us or the Trust as information
supplemental to such Prospectus and Statement of Additional Information.
In purchasing Class A shares through us you shall rely solely on the
representations contained in the Prospectus and Statement of Additional
Information and supplemental information above mentioned. Any printed
information which we furnish you other than the Fund's Prospectus,
Statement of Additional Information, periodic reports and proxy
solicitation material is our sole responsibility and not the responsibility
of the Trust, and you agree that the Trust shall have no liability or
responsibility to you in these respects unless expressly assumed in
connection therewith.
9. You agree to deliver to each of the purchasers making purchases
from you a copy of the then current Prospectus and, if requested, the
Statement of Additional Information at or prior to the time of offering or
sale and you agree thereafter to deliver to such purchasers copies of the
annual and interim reports and proxy solicitation materials of the Fund.
You further agree to endeavor to obtain proxies from such purchasers.
Additional copies of the Prospectus and Statement of Additional
Information, annual or interim reports and proxy solicitation materials of
the Fund will be supplied to you in reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to
suspend sales or withdraw the offering of Class A shares entirely or to
certain persons or entities in a class or classes specified by us. Each
party hereto has the right to cancel this agreement upon notice to the
other party.
11. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering.
We shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this
paragraph is intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of compliance
with any provision of the Securities Act of 1933, as
A-5
<PAGE>
amended, or of the rules and regulations of the Securities and Exchange
Commission issued thereunder.
12. You represent that you are a member of the National Association
of Securities Dealers, Inc. and, with respect to any sales in the United
States, we both hereby agree to abide by the Rules of Fair Practice of such
Association.
13. Upon application to us, we will inform you as to the states in
which we believe the Class A shares have been qualified for sale under, or
are exempt from the requirements of, the respective securities laws of such
states, but we assume no responsibility or obligation as to your right to
sell Class A shares in any jurisdiction. We will file with the Department
of State in New York a Further State Notice with respect to the Class A
shares, if necessary.
14. All communications to us should be sent to the address below.
Any notice to you shall be duly given if mailed or telegraphed to you at
the address specified by you below.
15. Your first order placed pursuant to this Agreement for the
purchase of Class A shares of the Fund will represent your acceptance of
this Agreement.
MERRILL LYNCH TRUSTS DISTRIBUTOR, INC.
By
--------------------------------------
(Authorized Signature)
A-6
<PAGE>
Please return one signed copy
of this agreement to:
MERRILL LYNCH TRUSTS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
--------------------------------------------------
By:
---------------------------------------------------------
Address: 800 Scudders Mill Road
----------------------------------------------------
Plainsboro, New Jersey 08536
------------------------------------------------------------
Date: , 1994
-------------------------------------------------------
A-7
<PAGE>
CLASS C SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ______ day of October, 1994, between MERRILL LYNCH
MULTI-STATE MUNICIPAL SERIES TRUST, a Massachusetts business trust (the
"Trust"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").
W I T N E S S E T H :
WHEREAS, the Trust is registered under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), as an open-end investment company,
and it is affirmatively in the interest of the Trust to offer its shares for
sale continuously; and
WHEREAS, the Trustees of the Trust (the "Trustees") are authorized to
establish separate series (the "Series") relating to separate portfolios of
securities, each of which will offer separate classes of shares of beneficial
interest, par value $0.10 per share (collectively referred to as "shares") to
selected groups of purchasers; and
WHEREAS, the Trustees have established and designated the Merrill Lynch
[State] Municipal Bond Fund (the "Fund") as a series of the Trust; and
<PAGE>
WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or through
other securities dealers; and
WHEREAS, the Trust and the Distributor wish to enter into an agreement with
each other with respect to the continuous offering of the Fund's Class C shares
in order to promote the growth of the Fund and facilitate the distribution of
its Class C shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR. The Trust hereby appoints the
Distributor as the principal underwriter and distributor of the Trust to sell
Class C shares of beneficial interest in the Fund (sometimes herein referred to
as "Class C shares") to the public and hereby agrees during the term of this
Agreement to sell shares of the Fund to the Distributor upon the terms and
conditions herein set forth.
Section 2. EXCLUSIVE NATURE OF DUTIES. The Distributor shall be the
exclusive representative of the Trust to act as principal underwriter and
distributor of the Class C shares of the Fund, except that:
(a) The Trust may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class C shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this
2
<PAGE>
Agreement to sell Class C shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive right granted to the Distributor to purchase Class C
shares from the Trust shall not apply to Class C shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Trust or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding Class C
shares of any such company by the Trust.
(c) Such exclusive right also shall not apply to Class C shares issued
pursuant to reinvestment of dividends or capital gains distributions.
(d) Such exclusive right also shall not apply to Class C shares issued
pursuant to any conversion, exchange or reinstatement privilege afforded
redeeming shareholders or to any other Class C shares as shall be agreed between
the Trust and the Distributor from time to time.
Section 3. PURCHASE OF CLASS C SHARES FROM THE TRUST.
(a) The Distributor shall have the right to buy from the Trust the Class C
shares needed, but not more than the Class C shares needed (except for clerical
errors in transmission) to fill unconditional orders for Class C shares of the
Fund placed with the Distributor by eligible investors or securities dealers.
3
<PAGE>
Investors eligible to purchase Class C shares shall be those persons so
identified in the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of additional
information", respectively) under the Securities Act of 1933, as amended (the
"Securities Act"), relating to such Class C shares. The price which the Distri-
butor shall pay for the Class C shares so purchased from the Trust shall be the
net asset value, determined as set forth in Section 3(c) hereof.
(b) The Class C shares are to be resold by the Distributor to investors at
net asset value, as set forth in Section 3(c) hereof, or to securities dealers
having agreements with the Distributor upon the terms and conditions set forth
in Section 7 hereof.
(c) The net asset value of Class C shares of the Fund shall be determined
by the Trust or any agent of the Trust in accordance with the method set forth
in the prospectus and statement of additional information and guidelines
established by the Board of Trustees.
(d) The Trust shall have the right to suspend the sale of its Class C
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Trust shall also have the right to suspend
the sale of its Class C shares if trading on the New York Stock Exchange shall
have been suspended, if a banking moratorium shall have been declared by
4
<PAGE>
Federal or New York authorities, or if there shall have been some other event,
which, in the judgment of the Trust, makes it impracticable or inadvisable to
sell the Class C shares.
(e) The Trust, or any agent of the Trust designated in writing by the
Trust, shall be promptly advised of all purchase orders for Class C shares
received by the Distributor. Any order may be rejected by the Trust; provided,
however, that the Trust will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class C shares. The Trust (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and, upon receipt by the Trust (or its agent) of payment therefor, will
deliver deposit receipts or certificates for such Class C shares pursuant to the
instructions of the Distributor. Payment shall be made to the Trust in New York
Clearing House funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Trust (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF CLASS C SHARES BY THE TRUST.
(a) Any of the outstanding Class C shares may be tendered for redemption
at any time, and the Trust agrees to repurchase or redeem the Class C shares so
tendered in accordance with its obligations as set forth in Article VIII of its
Declaration of Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement
5
<PAGE>
of additional information of the Fund. The price to be paid to redeem or
repurchase the Class C shares shall be equal to the net asset value calculated
in accordance with the provisions of Section 3(c) hereof, less any contingent
deferred sales charge ("CDSC"), redemption fee or other charge(s), if any, set
forth in the prospectus and statement of additional information of the Fund.
All payments by the Trust hereunder shall be made in the manner set forth below.
The Trust shall pay the total amount of the redemption price as defined in
the above paragraph pursuant to the instructions of the Distributor on or before
the seventh business day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of shares shall be
paid by the Trust as follows: (i) any applicable CDSC shall be paid to the
Distributor, and (ii) the balance shall be paid to or for the account of the
shareholder, in each case in accordance with the applicable provisions of the
prospectus and statement of additional information.
(b) Redemption of Class C shares or payment may be suspended at times when
the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Trust fairly
to determine the value of the net assets of the
6
<PAGE>
Fund, or during any other period when the Securities and Exchange Commission, by
order, so permits.
Section 5. DUTIES OF THE TRUST.
(a) The Trust shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class C shares of the
Fund, and this shall include, upon request by the Distributor, one certified
copy of all financial statements prepared for the Trust by independent public
accountants. The Trust shall make available to the Distributor such number of
copies of the prospectus and statement of additional information relating to the
Fund as the Distributor shall reasonably request.
(b) The Trust shall take, from time to time, but subject to any necessary
approval of the shareholders, all necessary action to fix the number of
authorized shares and such steps as may be necessary to register the same under
the Securities Act to the end that there will be available for sale such number
of Class C shares as the Distributor reasonably may be expected to sell.
(c) The Trust shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class C shares for sale under the
securities laws of such states as the Distributor and the Trust may approve.
Any such qualification may be withheld, terminated or withdrawn by the Trust at
any time in its discretion. As provided in Section 8(c) hereof, the
7
<PAGE>
expense of qualification and maintenance of qualification shall be borne by the
Trust. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Trust in
connection with such qualification.
(d) The Trust will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports of the Fund.
Section 6. DUTIES OF THE DISTRIBUTOR.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class C shares of the Fund but shall not be obligated to sell any
specific number of shares. The services of the Distributor to the Trust
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other in-
vestment companies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class C shares of the Fund, the Distributor shall use
its best efforts in all respects duly to conform with the requirements of all
Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Trust to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of
8
<PAGE>
additional information and any sales literature specifically approved by the
Trust.
(c) The Distributor shall adopt and follow procedures, as approved by the
officers of the Trust, for the confirmation of sales to investors and selected
dealers, the collection of amounts payable by investors and selected dealers on
such sales, and the cancellation of unsettled transactions, as may be necessary
to comply with the requirements of the National Association of Securities
Dealers, Inc. (the "NASD"), as such requirements may from time to time exist.
Section 7. SELECTED DEALER AGREEMENTS.
(a) The Distributor shall have the right to enter into selected dealer
agreements with securities dealers of its choice ("selected dealers") for the
sale of Class C shares; provided, that the Trust shall approve the forms of
agreements with dealers. Class C shares sold to selected dealers shall be for
resale by such dealers only at net asset value determined as set forth in
Section 3(c) hereof. The form of agreement with selected dealers to be used
during the continuous offering of the shares is attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer and sell Class C
shares only to such selected dealers that are members in good standing of the
NASD.
Section 8. PAYMENT OF EXPENSES.
9
<PAGE>
(a) The Trust shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class C
shareholders (including but not limited to the expense of setting in type any
such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments made to selected
dealers as reimbursement for their expenses associated with payments of sales
commissions to financial consultants. In addition, after the prospectuses,
statements of additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs and expenses of
printing and distributing any copies thereof which are to be used in connection
with the offering of Class C shares to selected dealers or investors pursuant to
this Agreement. The Distributor shall bear the costs and expenses of preparing,
printing and distributing any other literature used by the Distributor or
furnished by it for use by selected dealers in connection with the offering of
the Class C shares for sale to the public and any expenses of advertising
incurred by the Dis-
10
<PAGE>
tributor in connection with such offering. It is understood and agreed that so
long as the Fund's Class C Shares Distribution Plan pursuant to Rule 12b-1 under
the Investment Company Act remains in effect, any expenses incurred by the
Distributor hereunder may be paid from amounts recovered by it from the Fund
under such Plan.
(c) The Trust shall bear the cost and expenses of qualification of the
Class C shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Trust as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Trust and the Distributor pursuant to Section 5(c) hereof and the cost
and expenses payable to each such state for continuing qualification therein
until the Trust decides to discontinue such qualification pursuant to Section
5(c) hereof.
Section 9. INDEMNIFICATION.
(a) The Trust shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor against any loss, liability, claim,
damage or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by reason of any
person acquiring any Class C shares, which may be based upon the Securities Act,
or on any other statute or at common law, on the ground that the registration
statement or
11
<PAGE>
related prospectus and statement of additional information relating to the Fund,
as from time to time amended and supplemented, or an annual or interim report to
Class C shareholders of the Fund, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading, unless such
statement or omission was made in reliance upon, and in conformity with, in-
formation furnished to the Trust in connection therewith by or on behalf of the
Distributor; provided, however, that in no case (i) is the indemnity of the
Trust in favor of the Distributor and any such controlling persons to be deemed
to protect such Distributor or any such controlling persons thereof against any
liability to the Trust or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of the reckless disregard of their obligations and duties under this
Agreement; or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against the Distri-
butor or any such controlling persons, unless the Distributor or such
controlling persons, as the case may be, shall have notified the Trust in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon the
12
<PAGE>
Distributor or such controlling persons (or after the Distributor or such
controlling persons shall have received notice of such service on any designated
agent), but failure to notify the Trust of any such claim shall not relieve it
from any liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. The Trust will be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Trust elects to assume the defense, such
defense shall be conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or defendants in
the suit. In the event the Trust elects to assume the defense of any such suit
and retain such counsel, the Distributor or such controlling person or persons,
defendant or defendants in the suit shall bear the fees and expenses, as
incurred, of any additional counsel retained by them, but in case the Trust does
not elect to assume the defense of any such suit, it will reimburse the Dis-
tributor or such controlling person or persons, defendant or defendants in the
suit, for the reasonable fees and expenses, as incurred, of any counsel retained
by them. The Trust shall promptly notify the Distributor of the commencement of
any litigation or proceedings against it or any of its officers or Trustees in
connection with the issuance or sale of any of the Class C shares.
13
<PAGE>
(b) The Distributor shall indemnify and hold harmless the Trust and each
of its Trustees and officers and each person, if any, who controls the Trust
against any loss, liability, claim, damage or expense, as incurred, described in
the foregoing indemnity contained in subsection (a) of this Section, but only
with respect to statements or omissions made in reliance upon, and in conformity
with, information furnished to the Trust in writing by or on behalf of the
Distributor for use in connection with the registration statement or related
prospectus and statement of additional information, as from time to time
amended, or the annual or interim reports to shareholders. In case any action
shall be brought against the Trust or any person so indemnified, in respect of
which indemnity may be sought against the Distributor, the Distributor shall
have the rights and duties given to the Trust, and the Trust and each person so
indemnified shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
Section 10. MERRILL LYNCH MUTUAL FUND ADVISER PROGRAM. In connection with
the Merrill Lynch Mutual Fund Adviser Program, the Distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized to
offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the duties of the Distributor, the payment of
14
<PAGE>
expenses and indemnification obligations of the Fund and the Distributor.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT. This Agreement
shall become effective as of the date first above written and shall remain in
force until October __, 1996 and thereafter, but only for so long as such
continuance is specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding Class C voting securities of the Fund
and (ii) by the vote of a majority of those Trustees who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees or by vote of a majority of the outstanding Class C
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other party. This Agreement shall automatically terminate in the
event of its assignment.
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS OF THIS AGREEMENT. This Agreement may be amended
by the parties only if such amendment is specifically approved by (i) the
Trustees or by the vote of a majority
15
<PAGE>
of outstanding Class C voting securities of the Fund and (ii) by the vote of a
majority of those Trustees of the Trust who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting called for the
purpose of voting on such approval.
Section 13. GOVERNING LAW. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment Company
Act. To the extent that the applicable law of the State of New York, or any of
the provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
Section 14. PERSONAL LIABILITY. The Declaration of Trust establishing
Merrill Lynch Multi-State Municipal Series 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 said
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 or otherwise in
connection with the affairs of said Trust, but the "Trust Property" only shall
be liable.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MERRILL LYNCH MULTI-STATE MUNICIPAL
SERIES TRUST
By
------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
------------------------------------
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
CLASS C SHARES OF BENEFICIAL INTEREST
SELECTED DEALER AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with Merrill Lynch Multi-State Municipal Series Trust, a Massachusetts business
trust (the "Trust"), pursuant to which it acts as the distributor for the sale
of Class C shares of beneficial interest, par value $0.10 per share (herein
referred to as the "Class C shares"), of the Trust relating to Merrill Lynch
[State] Municipal Bond Fund (the "Fund") and as such has the right to distribute
Class C shares of the Fund for resale. The Trust is an open-end investment
company registered under the Investment Company Act of 1940, as amended, and the
Fund's Class C shares being offered to the public are registered under the
Securities Act of 1933, as amended. You have received a copy of the Class C
Shares Distribution Agreement (the "Distribution Agreement") between ourself and
the Trust and reference is made herein to certain provisions of such
Distribution Agreement. The terms "Prospectus" and "Statement of Additional
Information" as used herein refer to the prospectus and statement of additional
information, respectively, on file with the Securities and Exchange Commission
which is part of the most recent effective registration statement pursuant to
the Securities Act of 1933, as amended. We offer to sell to you, as a member of
the Selected Dealers Group, Class C shares of the Fund upon the following terms
and conditions:
1. In all sales of these Class C shares to the public, you shall act as
dealer for your own account and in no transaction shall you have any authority
to act as agent for the Trust, for us or for any other member of the Selected
Dealers Group, except in connection with the Merrill Lynch Mutual Fund Adviser
program and such other special programs as we from time to time agree, in which
case you shall have authority to offer and sell shares, as agent for the Trust,
to participants in such program.
2. Orders received from you will be accepted through us only at the public
offering price applicable to each order, as set forth in the current Prospectus
and Statement of Additional Information of the Fund. The procedure relating to
the handling of orders shall be subject to Section 4 hereof and instructions
<PAGE>
which we or the Trust shall forward from time to time to you. All orders are
subject to acceptance or rejection by the Distributor or the Trust in the sole
discretion of either. The minimum initial and subsequent purchase requirements
are as set forth in the current Prospectus and Statement of Additional
Information of the Fund.
3. You shall not place orders for any of the Class C shares unless you
have already received purchase orders for such Class C shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class C shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class C shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of Addi-
tional Information (as then amended or supplemented) and will not furnish to any
person any information relating to the Class C shares of the Fund which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Trust.
4. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Trust for Class C shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of orders
by us set forth in Section 3 of the Distribution Agreement and (ii) to tender
Class C shares directly to the Trust or its agent for redemption subject to the
applicable terms and conditions set forth in Section 4 of the Distribution
Agreement.
5. You shall not withhold placing orders received from your customers so
as to profit yourself as a result of such withholding: E.G., by a change in the
"net asset value" from that used in determining the offering price to your
customers.
6. No person is authorized to make any representations concerning Class C
shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Trust as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class C
shares through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, Statement of Additional Information, periodic reports and
A-2
<PAGE>
proxy solicitation material is our sole responsibility and not the
responsibility of the Trust, and you agree that the Trust shall have no
liability or responsibility to you in these respects unless expressly assumed in
connection therewith.
7. You agree to deliver to each of the purchasers making purchases from you
a copy of the then current Prospectus and, if requested, the Statement of
Additional Information at or prior to the time of offering or sale and you agree
thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
8. We reserve the right in our discretion, without notice, to suspend sales
or withdraw the offering of Class C shares entirely or to certain persons or
entities in a class or classes specified by us. Each party hereto has the right
to cancel this Agreement upon notice to the other party.
9. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not in any
way whatsoever constitute, a waiver by you of compliance with any provision of
the Securities Act of 1933, as amended, or of the rules and regulations of the
Securities and Exchange Commission issued thereunder.
10. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.
11. Upon application to us, we will inform you as to the states in which we
believe the Class C shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but we
assume no responsibility or obligation as to your right to sell Class C shares
in any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the Class C shares, if necessary.
A-3
<PAGE>
12. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
13. Your first order placed pursuant to this Agreement for the purchase of
Class C shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
----------------------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
--------------------------------------------
By:
---------------------------------------------------
Address: 800 Scudders Mill Road
----------------------------------------------
Plainsboro, New Jersey 08536
-------------------------------------------------------
Date: , 1994
-------------------------------------------------
A-4
<PAGE>
CLASS D SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____ day of October, 1994, between MERRILL LYNCH
MULTI-STATE MUNICIPAL SERIES TRUST, a Massachusetts business trust (the
"Trust"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").
W I T N E S S E T H :
WHEREAS, the Trust is registered under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), as an open-end investment company,
and it is affirmatively in the interest of the Trust to offer its shares for
sale continuously;
and
WHEREAS, the Trustees of the Trust (the "Trustees") are authorized to
establish separate series (the "Series") relating to separate portfolios of
securities, each of which will offer separate classes of shares of beneficial
interest, par value $0.10 per share (collectively referred to as "shares") to
selected groups of purchasers; and
WHEREAS, the Trustees have established and designated the Merrill Lynch
[State] Municipal Bond Fund (the "Fund") as a series of the Trust; and
WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or through
other securities dealers; and
<PAGE>
WHEREAS, the Trust and the Distributor wish to enter into an agreement with
each other with respect to the continuous offering of the Class D shares of
beneficial interest in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR. The Trust hereby appoints the
Distributor as the principal underwriter and distributor of the Trust to sell
Class D shares of beneficial interest in the Fund (sometimes herein referred to
as "Class D shares") to the public and hereby agrees during the term of this
Agreement to sell Class D shares of the Fund to the Distributor upon the terms
and conditions herein set forth.
Section 2. EXCLUSIVE NATURE OF DUTIES. The Distributor shall be the
exclusive representative of the Trust to act as principal underwriter and
distributor of the Class D shares of the Fund, except that:
(a) The Trust may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class D shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class D shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
2
<PAGE>
(b) The exclusive right granted to the Distributor to purchase Class D
shares from the Trust shall not apply to Class D shares issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Trust or the acquisition by purchase or otherwise of
all (or substantially all) the assets or the outstanding Class D shares of any
such company by the Trust.
(c) Such exclusive right also shall not apply to Class D shares issued
pursuant to reinvestment of dividends or capital gains distributions.
(d) Such exclusive right also shall not apply to Class D shares issued
pursuant to any conversion, exchange or reinstatement privilege afforded
redeeming shareholders or to any other Class D shares as shall be agreed between
the Trust and the Distributor from time to time.
Section 3. PURCHASE OF CLASS D SHARES FROM THE TRUST.
(a) The Distributor shall have the right to buy from the Trust the Class D
shares needed, but not more than the Class D shares needed (except for clerical
errors in transmission) to fill unconditional orders for Class D shares of the
Fund placed with the Distributor by eligible investors or securities dealers.
Investors eligible to purchase Class D shares shall be those persons so
identified in the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of additional
information", respectively) under the Securities Act of 1933, as amended (the
"Securities Act"),
3
<PAGE>
relating to such Class D shares. The price which the Distributor shall pay for
the Class D shares so purchased from the Trust shall be the net asset value,
determined as set forth in Section 3(d) hereof, used in determining the public
offering price on which such orders were based.
(b) The Class D shares are to be resold by the Distributor to investors at
the public offering price, as set forth in Section 3(c) hereof, or to securities
dealers having agreements with the Distributor upon the terms and conditions
set forth in Section 7 hereof.
(c) The public offering price(s) of the Class D shares, I.E., the price
per share at which the Distributor or selected dealers may sell Class D shares
to the public, shall be the public offering price as set forth in the prospectus
and statement of additional information relating to such Class D shares, but not
to exceed the net asset value at which the Distributor is to purchase the Class
D shares, plus a sales charge not to exceed 4.00% of the public offering price
(4.17% of the net amount invested), subject to reductions for volume purchases.
Class D shares may be sold to certain Trustees, officers and employees of the
Trust, directors and employees of Merrill Lynch & Co., Inc. and its
subsidiaries, and to certain other persons described in the prospectus and
statement of additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the prospectus and
statement of additional information. If the
4
<PAGE>
public offering price does not equal an even cent, the public offering price may
be adjusted to the nearest cent. All payments to the Trust hereunder shall be
made in the manner set forth in Section 3(f).
(d) The net asset value of Class D shares shall be determined by the Trust
or any agent of the Trust in accordance with the method set forth in the
prospectus and statement of additional information of the Fund and guidelines
established by the Trustees.
(e) The Trust shall have the right to suspend the sale of its Class D
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Trust shall also have the right to suspend
the sale of its Class D shares if trading on the New York Stock Exchange shall
have been suspended, if a banking moratorium shall have been declared by Federal
or New York authorities, or if there shall have been some other event, which, in
the judgment of the Trust, makes it impracticable or inadvisable to sell the
Class D shares.
(f) The Trust, or any agent of the Trust designated in writing by the
Trust, shall be promptly advised of all purchase orders for Class D shares
received by the Distributor. Any order may be rejected by the Trust; provided,
however, that the Trust will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class D shares. The Trust (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and, upon receipt by the Trust (or its
5
<PAGE>
agent) of payment therefor, will deliver deposit receipts or certificates for
such Class D shares pursuant to the instructions of the Distributor. Payment
shall be made to the Trust in New York Clearing House funds. The Distributor
agrees to cause such payment and such instructions to be delivered promptly to
the Trust (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF CLASS D SHARES BY THE TRUST.
(a) Any of the outstanding Class D shares may be tendered for redemption
at any time, and the Trust agrees to repurchase or redeem the Class D shares so
tendered in accordance with its obligations as set forth in Article VIII of its
Declaration of Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement of additional
information. The price to be paid to redeem or repurchase the Class D shares
shall be equal to the net asset value calculated in accordance with the
provisions of Section 3(d) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in the prospectus
and statement of additional information of the Fund. All payments by the Trust
hereunder shall be made in the manner set forth below. The redemption or
repurchase by the Trust of any of the Class D shares purchased by or through the
Distributor will not affect the sales charge secured by the Distributor or any
selected dealer in the course of the original sale, except that if any Class D
shares are tendered for redemption or repur-
6
<PAGE>
chase within seven business days after the date of the confirmation of the
original purchase, the right to the sales charge shall be forfeited by the
Distributor and the selected dealer which sold such Class D shares.
The Trust shall pay the total amount of the redemption price as defined in
the above paragraph pursuant to the instructions of the Distributor in New York
Clearing House funds on or before the seventh business day subsequent to its
having received the notice of redemption in proper form. The proceeds of any
redemption of shares shall be paid by the Trust as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall be paid to or
for the account of the shareholder, in each case in accordance with the
applicable provisions of the prospectus and statement of additional information.
(b) Redemption of Class D shares or payment may be suspended at times when
the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Trust fairly
to determine the value of the net assets of the Fund, or during any other period
when the Securities and Exchange Commission, by order, so permits.
Section 5. DUTIES OF THE TRUST.
(a) The Trust shall furnish to the Distributor copies of all information,
financial statements and other papers which the
7
<PAGE>
Distributor may reasonably request for use in connection with the distribution
of Class D shares of the Fund, and this shall include, upon request by the
Distributor, one certified copy of all financial statements prepared for the
Trust by independent public accountants. The Trust shall make available to the
Distributor such number of copies of the prospectus and statement of additional
information relating to the Fund as the Distributor shall reasonably request.
(b) The Trust shall take, from time to time, but subject to any necessary
approval of the Class D shareholders, all necessary action to fix the number of
authorized Class D shares and such steps as may be necessary to register the
same under the Securities Act, to the end that there will be available for sale
such number of Class D shares as the Distributor may reasonably be expected to
sell.
(c) The Trust shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class D shares for sale under the
securities laws of such states as the Distributor and the Trust may approve.
Any such qualification may be withheld, terminated or withdrawn by the Trust at
any time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Trust.
The Distributor shall furnish such information and other material relating to
its affairs and activities as may be required by the Trust in connection with
such qualification.
8
<PAGE>
(d) The Trust will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports of the Fund.
Section 6. DUTIES OF THE DISTRIBUTOR.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class D shares of the Fund but shall not be obligated to sell any
specific number of Class D shares. The services of the Distributor to the Trust
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other in-
vestment companies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class D shares of the Fund, the Distributor shall use
its best efforts in all respects duly to conform with the requirements of all
Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Trust to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of additional information and any sales
literature specifically approved by the Trust.
(c) The Distributor shall adopt and follow procedures, as approved by the
officers of the Trust, for the confirmation of sales to investors and selected
dealers, the collection of amounts payable by investors and selected dealers on
such sales,
9
<PAGE>
and the cancellation of unsettled transactions, as may be necessary to comply
with the requirements of the National Association of Securities Dealers, Inc.
(the "NASD"), as such requirements may from time to time exist.
Section 7. SELECTED DEALERS AGREEMENTS.
(a) The Distributor shall have the right to enter into selected dealers
agreements with securities dealers of its choice ("selected dealers") for the
sale of Class D shares and fix therein the portion of the sales charge which may
be allocated to the selected dealers; provided that the Trust shall approve the
forms of agreements with dealers and the dealer compensation set forth therein.
Class D shares sold to selected dealers shall be for resale by such dealers only
at the public offering price(s) set forth in the prospectus and statement of
additional information. The form of agreement with selected dealers to be used
during the continuous offering of the Class D shares is attached hereto as
Exhibit A.
(b) Within the United States, the Distributor shall offer and sell Class D
shares only to such selected dealers as are members in good standing of the
NASD.
Section 8. PAYMENT OF EXPENSES.
(a) The Trust shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company
10
<PAGE>
Act, the Securities Act, and all amendments and supplements thereto, and pre-
paring and mailing annual and interim reports and proxy materials to Class D
shareholders (including but not limited to the expense of setting in type any
such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments made to selected
dealers as reimbursement for their expenses associated with payments of sales
commissions to financial consultants. In addition, after the prospectuses,
statements of additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs and expenses of
printing and distributing any copies thereof which are to be used in connection
with the offering of Class D shares to selected dealers or investors pursuant to
this Agreement. The Distributor shall bear the costs and expenses of preparing,
printing and distributing any other literature used by the Distributor or
furnished by it for use by selected dealers in connection with the offering of
the Class D shares for sale to the public and any expenses of advertising
incurred by the Distributor in connection with such offering. It is understood
and agreed that so long as the Fund's Class D Shares Distribution Plan pursuant
to Rule 12b-1 under the Investment Company Act remains in effect, any expenses
incurred by the Distributor hereunder in connection with account maintenance
activities may
11
<PAGE>
be paid from amounts recovered by it from the Fund under such plan.
(c) The Trust shall bear the cost and expenses of qualification of the
Class D shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Trust as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Trust and the Distributor pursuant to Section 5(c) hereof and the cost
and expenses payable to each such state for continuing qualification therein
until the Trust decides to discontinue such qualification pursuant to Section
5(c) hereof.
Section 9. INDEMNIFICATION.
(a) The Trust shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor against any loss, liability, claim,
damage or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by reason of any
person acquiring any Class D shares, which may be based upon the Securities Act,
or on any other statute or at common law, on the ground that the registration
statement or related prospectus and statement of additional information relating
to the Fund, as from time to time amended and supplemented, or an annual or
interim report to shareholders of the Fund, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make
12
<PAGE>
the statements therein not misleading, unless such statement or omission was
made in reliance upon, and in conformity with, information furnished to the
Trust in connection therewith by or on behalf of the Distributor; provided,
however, that in no case (i) is the indemnity of the Trust in favor of the
Distributor and any such controlling persons to be deemed to protect such
Distributor or any such controlling persons thereof against any liability to the
Trust or its security holders to which the Distributor or any such controlling
persons would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of their duties or by reason of the
reckless disregard of their obligations and duties under this Agreement; or (ii)
is the Trust to be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against the Distributor or any such
controlling persons, unless the Distributor or such controlling persons, as the
case may be, shall have notified the Trust in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon the Distributor or such controlling
persons (or after the Distributor or such controlling persons shall have
received notice of such service on any designated agent), but failure to notify
the Trust of any such claim shall not relieve it from any liability which it may
have to the person against whom such action is brought otherwise than on account
of its indemnity agreement contained in this paragraph. The Trust will be
13
<PAGE>
entitled to participate at its own expense in the defense or, if it so elects,
to assume the defense of any suit brought to enforce any such liability, but if
the Trust elects to assume the defense, such defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or such controlling
person or persons, defendant or defendants in the suit. In the event the Trust
elects to assume the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them, but in case the Trust does not elect to assume the defense of any such
suit, it will reimburse the Distributor or such controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of any
counsel retained by them. The Trust shall promptly notify the Distributor of
the commencement of any litigation or proceedings against it or any of its
officers or Trustees in connection with the issuance or sale of any of the Class
D shares.
(b) The Distributor shall indemnify and hold harmless the Trust and each
of its Trustees and officers and each person, if any, who controls the Trust
against any loss, liability, claim, damage or expense described in the foregoing
indemnity contained in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity with,
information furnished to the Trust in writing by or on behalf of the Distributor
for use in connection with the
14
<PAGE>
registration statement or related prospectus and statement of additional infor-
mation, as from time to time amended, or the annual or interim reports to Class
D shareholders. In case any action shall be brought against the Trust or any
person so indemnified, in respect of which indemnity may be sought against the
Distributor, the Distributor shall have the rights and duties given to the
Trust, and the Trust and each person so indemnified shall have the rights and
duties given to the Distributor by the provisions of subsection (a) of this
Section 9.
Section 10. MERRILL LYNCH MUTUAL FUND ADVISER PROGRAM. In connection with
the Merrill Lynch Mutual Fund Adviser Program, the Distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized to
offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the duties of the Distributor, the payment of expenses and indemnification
obligations of the Fund and the Distributor.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT. This Agreement
shall become effective as of the date first above written and shall remain in
force until October __, 1996 and thereafter, but only for so long as such
continuance is specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding Class D voting securities of the Fund
and (ii) by the vote of a majority of
15
<PAGE>
those Trustees who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees or by vote of a majority of the outstanding Class D
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other party. This Agreement shall automatically terminate in the
event of its assignment.
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS OF THIS AGREEMENT. This Agreement may be amended
by the parties only if such amendment is specifically approved by (i) the
Trustees or by the vote of a majority of outstanding Class C voting securities
of the Fund and (ii) by the vote of a majority of those Trustees of the Trust
who are not parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on such approval.
Section 13. GOVERNING LAW. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment Company
Act. To the extent that the applicable law of the State of New York, or any
16
<PAGE>
of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
Section 14. PERSONAL LIABILITY. The Declaration of Trust establishing
Merrill Lynch Multi-State Municipal Series 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 said
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 or otherwise in
connection with the affairs of said Trust, but the "Trust Property" only shall
be liable.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
By
-------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
CLASS D SHARES OF BENEFICIAL INTEREST
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST, a Massachusetts business
trust (the "Trust"), pursuant to which it acts as the distributor for the sale
of Class D shares of beneficial interest, par value $0.10 per share (herein
referred to as "Class D shares"), of the Trust relating to Merrill Lynch [State]
Municipal Bond Fund (the "Fund"), and as such has the right to distribute Class
D shares of the Fund for resale. The Trust is an open-end investment company
registered under the Investment Company Act of 1940, as amended, and the Fund's
Class D shares being offered to the public are registered under the Securities
Act of 1933, as amended. You have received a copy of the Class D Shares
Distribution Agreement (the "Distribution Agreement") between ourself and the
Trust and reference is made herein to certain provisions of such Distribution
Agreement. The terms "Prospectus" and "Statement of Additional Information"
used herein refer to the prospectus and statement of additional information,
respectively, on file with the Securities and Exchange Commission which is part
of the most recent effective registration statement pursuant to the Securities
Act of 1933, as amended. We offer to sell to you, as a member of the Selected
Dealers Group, Class D shares of the Fund upon the following terms and
conditions:
1. In all sales of these Class D shares to the public, you shall act as
dealer for your own account and in no transaction shall you have any authority
to act as agent for the Trust, for us or for any other member of the Selected
Dealers Group, except in connection with the Merrill Lynch Mutual Fund Adviser
program and such other special programs as we from time to time agree, in which
case you shall have authority to offer and sell shares, as agent for the Trust,
to participants in such program.
2. Orders received from you will be accepted through us only at the
public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional Information of the Fund. The procedure
relating to the handling
A-1
<PAGE>
of orders shall be subject to Section 5 hereof and instructions which we or the
Trust shall forward from time to time to you. All orders are subject to
acceptance or rejection by the Distributor or the Trust in the sole discretion
of either. The minimum initial and subsequent purchase requirements are as set
forth in the current Prospectus and Statement of Additional Information of the
Fund.
3. The sales charges for sales to the public, computed as percentages of
the public offering price and the amount invested, and the related discount to
Selected Dealers are as follows:
<TABLE>
<CAPTION>
Discount to
Sales Charge Selected
Sales Charge as Percentage* Dealers as
as Percentage of the Net Percentage
of the Amount of the
Amount of Purchase Offering Price 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%
<FN>
___________________
* Rounded to the nearest one-hundredth percent.
** Initial sales charges will be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information of the
Fund. Such purchase may be subject to a contingent deferred sales charge as set
forth in the current Prospectus and Statement of Additional Information.
</TABLE>
The term "purchase" 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
A-2
<PAGE>
spouse and their children under the age of 21 years purchasing Class D shares
for his or their own account and to single purchases by a trustee or other
fiduciary purchasing Class D shares for a single trust estate or single
fiduciary account although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company" as that term is defined in
the Investment Company Act of 1940, as amended, 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 Class D shares of the Fund or
Class D 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.
The reduced sales charges are applicable through a right of accumulation
under which eligible investors are permitted to purchase Class D shares of the
Fund at the offering price applicable to the total of (a) the dollar amount 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 Class A,
Class B, Class C and Class D shares of the Fund and of any other investment
company with an initial sales charge for which the Distributor acts as the
distributor. For any such right of accumulation to be made available, the
Distributor must be provided at the time of purchase, by the purchaser or you,
with sufficient information to permit confirmation of qualification, and
acceptance of the purchase order is subject to such confirmation.
The reduced sales charges are applicable to purchases aggregating $25,000
or more of Class A shares or of Class D shares of any other investment company
with an initial sales charge for which the Distributor acts as the distributor
made through you within a thirteen-month period starting with the first purchase
pursuant to a Letter of Intention in the form provided in the Prospectus. A
purchase not originally made pursuant to a Letter of Intention may be included
under a subsequent letter executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period. If
the intended amount of shares is not purchased within the thirteen-month period,
an appropriate price adjustment will be made pursuant to the terms of the Letter
of Intention.
You agree to advise us promptly at our request as to amounts of any sales
made by you to the public qualifying for reduced sales charges. Further
information as to the reduced sales charges pursuant to the right of
accumulation or a Letter of
A-3
<PAGE>
Intention is set forth in the Prospectus and Statement of Additional
Information.
4. You shall not place orders for any of the Class D shares unless you
have already received purchase orders for such Class D shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class D shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class D shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class D shares of the Fund which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Trust.
5. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Trust for Class D shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of orders
by us set forth in Section 3 of the Distribution Agreement and subject to the
compensation provisions of Section 3 hereof and (ii) to tender Class D shares
directly to the Trust or its agent for redemption subject to the applicable
terms and conditions set forth in Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from your customers so
as to profit yourself as a result of such withholding: E.G., by a change in the
"net asset value" from that used in determining the offering price to your
customers.
7. If any Class D shares sold to you under the terms of this Agreement
are repurchased by the Trust or by us for the account of the Trust or are
tendered for redemption within seven business days after the date of the
confirmation of the original purchase by you, it is agreed that you shall
forfeit your right to, and refund to us, any discount received by you on such
Class D shares.
8. No person is authorized to make any representations concerning Class D
shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Trust as information supplemental to such
Prospectus and
A-4
<PAGE>
Statement of Additional Information. In purchasing Class D shares through us
you shall rely solely on the representations contained in the Prospectus and
Statement of Additional Information and supplemental information above
mentioned. Any printed information which we furnish you other than the Fund's
Prospectus, Statement of Additional Information, periodic reports and proxy
solicitation material is our sole responsibility and not the responsibility of
the Trust, and you agree that the Trust shall have no liability or
responsibility to you in these respects unless expressly assumed in connection
therewith.
9. You agree to deliver to each of the purchasers making purchases from
you a copy of the then current Prospectus and, if requested, the Statement of
Additional Information at or prior to the time of offering or sale and you agree
thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class D shares entirely or to certain persons
or entities in a class or classes specified by us. Each party hereto has the
right to cancel this agreement upon notice to the other party.
11. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not in any
way whatsoever constitute, a waiver by you of compliance with any provision of
the Securities Act of 1933, as amended, or of the rules and regulations of the
Securities and Exchange Commission issued thereunder.
12. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.
13. Upon application to us, we will inform you as to the states in which
we believe the Class D shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but we
assume no responsibility or obligation as to your right to sell Class D
A-5
<PAGE>
shares in any jurisdiction. We will file with the Department of State in New
York a Further State Notice with respect to the Class D shares, if necessary.
14. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
15. Your first order placed pursuant to this Agreement for the purchase of
Class D shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
----------------------------------
(Authorized Signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
--------------------------------------------
By:
--------------------------------------------
Address: 800 Scudders Mill Road
-------------------------------------
Plainsboro, New Jersey 08536
---------------------------------------------
Date: , 1994
----------------------------------------------
A-6
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Massachusetts Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We consent to the use in Post-Effective Amendment No. 4 to Registration
Statement No. 33-35987 of our report dated August 29, 1994 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
October 10, 1994
<PAGE>
CLASS C DISTRIBUTION PLAN
OF
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the day of October, 1994, by and between
Merrill Lynch Multi-State Municipal Series Trust, a Massachusetts business trust
(the "Trust"), and Merrill Lynch Funds Distributor, Inc., a Delaware corporation
("MLFD").
W I T N E S S E T H:
WHEREAS, the Trust is engaged in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"); and
WHEREAS, the Trust is authorized to establish separate ("Series") each of
which will offer separate classes of shares of beneficial interest par value
$0.10 per share (the "Shares") to selected groups of purchasers; and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Trust proposes to enter into a Class C Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Trust in the offer and sale of Class C
shares of beneficial interest, par value $0.10 per share (the "Class C shares"),
of the Merrill Lynch [State] Municipal Bond Fund (the "Fund") series of the
Trust to the public; and
WHEREAS, the Trust desires to adopt this Class C Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Trust will pay an account maintenance fee and a distribution fee to
MLFD with respect to the Fund's Class C shares; and
WHEREAS, the Trustees of the Trust have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.
NOW, THEREFORE, the Trust hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1
<PAGE>
under the Investment Company Act on the following terms and conditions:
1. The Trust shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class C shares to compensate MLFD and securities firms with
which MLFD enters into related agreements pursuant to Paragraph 3 hereof ("Sub-
Agreements") for providing account maintenance activities with respect to Class
C shareholders of the Fund. Expenditures under the Plan may consist of payments
to financial consultants for maintaining accounts in connection with Class C
shares of the Fund and payment of expenses incurred in connection with such
account maintenance activities including the costs of making services available
to shareholders including assistance in connection with inquiries related to
shareholder accounts.
2. The Trust shall pay MLFD a distribution fee under the Plan at the end
of each month at the annual rate of 0.35% of average daily net assets of the
Fund relating to Class C shares to compensate MLFD and securities firms with
which MLFD enters into related Sub-Agreements for providing sales and
promotional activities and services. Such activities and services will relate
to the sale, promotion and marketing of the Class C shares of the Fund. Such
expenditures may consist of sales commissions to financial consultants for
selling Class C shares of the Fund, compensation, sales incentives and payments
to sales and marketing personnel, and the payment of expenses incurred in its
sales and promotional activities, including advertising expenditures related to
the Fund and the costs of preparing and distributing promotional materials. The
distribution fee may also be used to pay the financing costs of carrying the
unreimbursed expenditures described in this Paragraph 2. Payment of the
distribution fee described in this Paragraph 2 shall be subject to any
limitations set forth in any applicable regulation of the National Association
of Securities Dealers, Inc.
3. The Trust hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs 1 and 2
hereof. MLFD may reallocate all or a portion of its account maintenance fee or
distribution fee to such Securities Firms as compensation for the
above-mentioned activities and services. Such Sub-Agreement shall provide that
the Securities Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting requirements set forth in
Paragraph 4 hereof.
2
<PAGE>
4. MLFD shall provide the Trust for review by the Board of Trustees, and
the Trustees shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period.
5. This Plan shall not take effect until it has been approved by a vote of
at least a majority, as defined in the Investment Company Act, of the
outstanding Class C voting securities of the Fund.
6. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Trustees of
the Trust and (b) those Trustees of the Trust who are not "interested persons"
of the Trust, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Trustees cast in person at a meeting or meetings
called for the purpose of voting on the Plan and such related agreements.
7. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding Class C voting
securities of the Fund.
9. The Plan may not be amended to increase materially the rate of payments
provided for herein unless such amendment is approved by at least a majority, as
defined in the Investment Company Act, of the outstanding Class C voting
securities of the Fund, and by the Trustees of the Trust in the manner provided
for in Paragraph 6 hereof, and no material amendment to the Plan shall be made
unless approved in the manner provided for approval and annual renewal in
Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomination of Trustees
who are not interested persons, as defined in the Investment Company Act, of the
Trust shall be committed to the discretion of the Trustees who are not
interested persons.
11. The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Paragraph 4 hereof, for a period of not less
than six years from the date of the Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.
3
<PAGE>
12. 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 or
otherwise in connection with the affairs of the Trust, but the "Trust Property"
only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this Distribution Plan
as of the date first above written.
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
By
-----------------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-----------------------------------------------
Title:
4
<PAGE>
CLASS C SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the day of October, 1994, by and between Merrill
Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD"), and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation ("Securities
Firm").
W I T N E S S E T H :
WHEREAS, MLFD has entered into an agreement with Merrill Lynch Multi-State
Municipal Series Trust, a Massachusetts business trust (the "Trust"), pursuant
to which it acts as the exclusive distributor for the sale of Class C shares of
beneficial interest, par value $0.10 per share (the "Class C shares"), of the
Merrill Lynch [State] Municipal Bond Fund (the "Fund") series of the Trust; and
WHEREAS, MLFD and the Trust have entered into a Class C Shares Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "Act"), pursuant to which MLFD receives an account
maintenance fee from the Fund at the annual rate of 0.25% of average daily net
assets of the Fund relating to Class C shares for account maintenance activities
related to Class C shares of the Fund and a distribution fee from the Fund at
the annual rate of 0.35% of average daily net assets of the Fund relating to
Class C shares for providing sales and promotional activities and services
related to the distribution of Class C shares of the Fund; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and sales and promotional activities and services for the
Fund's Class C shareholders and the Securities Firm is willing to perform such
activities and services;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities and
services with respect to the Class C shares of the Fund and incur expenditures
in connection with such activities and services of the types referred to in
Paragraph 1 of the Plan.
2. The Securities Firm shall provide sales and promotional activities and
services with respect to the sale of the Class C shares of the Fund, and incur
distribution expenditures, of the types referred to in Paragraph 2 of the Plan.
<PAGE>
3. As compensation for its activities and services performed under this
Agreement, MLFD shall pay the Securities Firm an account maintenance fee and a
distribution fee at the end of each calendar month in an amount agreed upon by
the parties hereto.
4. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Trustees of the Trust and (b) those Trustees
of the Trust who are not "interested persons" of the Trust, as defined in the
Act, and have no direct or indirect financial interest in the operation of the
Plan, this Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Trustees"), cast in person at a meeting or meetings called for
the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as such continuance
is specifically approved at least annually in the manner provided for approval
of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
--------------------------------------
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
---------------------------------------
Title:
2
<PAGE>
CLASS D DISTRIBUTION PLAN
OF
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the day of October, 1994, by and between
Merrill Lynch Multi-State Municipal Series Trust, a Massachusetts business trust
(the "Trust"), and Merrill Lynch Funds Distributor, Inc., a Delaware corporation
("MLFD").
W I T N E S S E T H :
WHEREAS, the Trust is engaged in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"); and
WHEREAS, the Trust is authorized to establish separate ("Series") each of
which will offer separate classes of shares of beneficial interest par value
$0.10 per share (the "Shares") to selected groups of purchasers; and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Trust proposes to enter into a Class D Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Trust in the offer and sale of Class D
shares of beneficial interest, par value $0.10 per share (the "Class D shares"),
of the Merrill Lynch [State] Municipal Bond Fund (the "Fund") series of the
Trust to the public; and
WHEREAS, the Trust desires to adopt this Class D Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Trust will pay an account maintenance fee to MLFD with respect to the
Fund's Class D shares; and
WHEREAS, the Trustees of the Trust have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.
NOW, THEREFORE, the Trust hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1
<PAGE>
under the Investment Company Act on the following terms and conditions:
1. The Trust shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.10% of average daily net assets of
the Fund relating to Class D shares to compensate MLFD and securities firms with
which MLFD enters into related agreements ("Sub-Agreements") pursuant to
Paragraph 2 hereof for providing account maintenance activities with respect to
Class D shareholders of the Fund. Expenditures under the Plan may consist of
payments to financial consultants for maintaining accounts in connection with
Class D shares of the Fund and payment of expenses incurred in connection with
such account maintenance activities including the costs of making services
available to shareholders including assistance in connection with inquiries
related to shareholder accounts.
2. The Trust hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities of the type referred to in Paragraph 1. MLFD may reallocate all
or a portion of its account maintenance fee to such Securities Firms as
compensation for the above-mentioned activities. Such Sub-Agreement shall
provide that the Securities Firms shall provide MLFD with such information as is
reasonably necessary to permit MLFD to comply with the reporting requirements
set forth in Paragraph 3 hereof.
3. MLFD shall provide the Trust for review by the Board of Trustees, and
the Trustees shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee during such period.
4. This Plan shall not take effect until it has been approved by a vote of
at least a majority, as defined in the Investment Company Act, of the
outstanding Class D voting securities of the Fund.
5. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Trustees of
the Trust and (b) those Trustees of the Trust who are not "interested persons"
of the Trust, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Trustees"), cast in person at a meeting or
meetings called for the purpose of voting on the Plan and such related
agreements.
2
<PAGE>
6. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 5.
7. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding Class D voting
securities of the Fund.
8. The Plan may not be amended to increase materially the rate of payments
provided for in Paragraph 1 hereof unless such amendment is approved by at least
a majority, as defined in the Investment Company Act, of the outstanding Class D
voting securities of the Fund, and by the Trustees of the Trust in the manner
provided for in Paragraph 5 hereof, and no material amendment to the Plan shall
be made unless approved in the manner provided for approval and annual renewal
in Paragraph 5 hereof.
9. While the Plan is in effect, the selection and nomination of Trustees
who are not interested persons, as defined in the Investment Company Act, of the
Trust shall be committed to the discretion of the Trustees who are not
interested persons.
10. The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Paragraph 3 hereof, for a period of not less
than six years from the date of the Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.
11. 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 or
otherwise in connection with the affairs of the Trust, but the "Trust Property"
only shall be liable.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Distribution Plan
as of the date first above written.
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
By
-----------------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-----------------------------------------------
Title:
4
<PAGE>
CLASS D SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the day of October, 1994, by and between Merrill
Lynch Funds Distributor, Inc. a Delaware corporation ("MLFD"), and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation ("Securities
Firm").
W I T N E S S E T H :
WHEREAS, MLFD has entered into an agreement with Merrill Lynch Multi-State
Municipal Series Trust, a Massachusetts business trust (the "Trust"), pursuant
to which it acts as the exclusive distributor for the sale of Class D shares of
beneficial interest, par value $0.10 per share (the "Class D shares"), of the
Merrill Lynch [State] Municipal Bond Fund (the "Fund") series of the Trust; and
WHEREAS, MLFD and the Trust have entered into a Class D Shares Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "Act"), pursuant to which MLFD receives an account
maintenance fee from the Fund at the annual rate of 0.10% of average daily net
assets of the Fund relating to Class D shares for providing account maintenance
activities and services with respect to Class D shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and services, including assistance in connection with
inquiries related to shareholder accounts, for the Fund's Class D shareholders
and the Securities Firm is willing to perform such services;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities and
services with respect to the Class D shares of the Fund and incur expenditures
in connection with such activities and services, of the types referred to in
Paragraph 1 of the Plan.
2. As compensation for its services performed under this Agreement, MLFD
shall pay the Securities Firm a fee at the end of each calendar month in an
amount agreed upon by the parties hereto.
3. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule
<PAGE>
12b-1 regarding the disbursement of the fee during such period referred to in
Paragraph 3 of the Plan.
4. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Trustees of the Trust and (b) those Trustees
of the Trust who are not "interested persons" of the Trust, as defined in the
Act, and have no direct or indirect financial interest in the operation of the
Plan, this Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Trustees"), cast in person at a meeting or meetings called for
the purpose of voting on this Agreement.
5. This Agreement shall continue in effect for as long as such continuance
is specifically approved at least annually in the manner provided for approval
of the Plan in Paragraph 5.
6. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
--------------------------------------
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
--------------------------------------
Title:
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-01-1994
<PERIOD-END> JUL-01-1994
<INVESTMENTS-AT-COST> 84103398
<INVESTMENTS-AT-VALUE> 84445011
<RECEIVABLES> 4118327
<ASSETS-OTHER> 56632
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 88619970
<PAYABLE-FOR-SECURITIES> 3510736
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 305946
<TOTAL-LIABILITIES> 3816682
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84534452
<SHARES-COMMON-STOCK> 798416
<SHARES-COMMON-PRIOR> 640709
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<NAME> MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND
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