AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1998
SECURITIES ACT FILE NO. 33-44734
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. 7 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 172 [X]
(CHECK APPROPRIATE BOX OR BOXES)
---------------
MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
---------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS:
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
COUNSEL FOR THE TRUST: MICHAEL J. HENNEWINKEL, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
---------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
</TABLE>
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED: Shares of Beneficial Interest, par value
$.10 per share.
===============================================================================-
<PAGE>
PROSPECTUS
NOVEMBER 17, 1998
Merrill Lynch Minnesota Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust
P.O. Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
----------------
Merrill Lynch Minnesota Municipal Bond Fund (the "Fund") is a mutual fund
that seeks to provide shareholders with as high a level of income exempt from
Federal income tax and Minnesota personal income tax as is consistent with
prudent investment management. The Fund invests primarily in a non-diversified
portfolio of long-term, investment grade obligations of the State of Minnesota,
its political or governmental subdivisions, municipalities, governmental
agencies or instrumentalities, or of Indian tribal governments of tribes located
in Minnesota, the interest on which is exempt from Federal income tax and
Minnesota personal income tax ("Minnesota Municipal Bonds"). Dividends paid by
the Fund are exempt from Federal income tax and Minnesota personal income tax to
the extent they are paid from interest on Minnesota Municipal Bonds, provided
95% or more of the exempt-interest dividends paid by the Fund is derived from
interest on such Minnesota Municipal Bonds. The Fund may invest in certain
tax-exempt securities classified as "private activity bonds" that may subject
certain investors in the Fund to an alternative minimum tax. At times, the Fund
may seek to hedge its portfolio through the use of futures transactions and
options. There can be no assurance that the investment objective of the Fund
will be realized. For more information on the Fund's investment objective and
policies, please see "Investment Objective and Policies" on page 11.
----------------
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 (the
"Distributor"), a division of Princeton Funds Distributor, Inc. ("PFD"), P.O.
Box 9081, Princeton, New Jersey 08543-9081 [(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 except that for participants in certain fee-based
programs the minimum initial purchase is $250 and the minimum subsequent
purchase is $50. Merrill Lynch may charge its customers a processing fee
(presently $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through Financial Data Services, Inc. (the "Transfer
Agent") are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated November 17, 1998 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing
Merrill Lynch Multi-State Municipal Series Trust (the "Trust") at the above
telephone number or address. The Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding the Fund.
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 -- 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)
---------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price) ....................... 4.00%(c)
Sales Charge Imposed on Dividend Reinvestments ....... None
Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, whichever
is lower) ........................................... None(d)
Exchange Fee ......................................... None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS):
Management Fees(g) ................................... 0.55%
12b-1 Fees(h):
Account Maintenance Fees ............................ None
Distribution Fees ................................... None
Other Expenses:
Shareholder Servicing Costs(i) ...................... 0.05%
Other ............................................... 0.31%
----------
Total Other Expenses ............................... 0.36%
----------
Total Fund Operating Expenses ........................ 0.91%
==========
<CAPTION>
CLASS B(b) CLASS C CLASS D
------------------------------------- ---------------- ---------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price) ....................... None None 4.00%(c)
Sales Charge Imposed on Dividend Reinvestments ....... None None None
Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, whichever
is lower) ........................................... 4.0% during the first year, 1.0% for one None(d)
decreasing 1.0% annually year(f)
thereafter to 0.0% after the
fourth year(e)
Exchange Fee ......................................... None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS):
Management Fees(g) ................................... 0.55% 0.55% 0.55%
12b-1 Fees(h):
Account Maintenance Fees ............................ 0.25% 0.25% 0.10%
Distribution Fees ................................... 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 BECOME SUBJECT TO LOWER
ACCOUNT MAINTENANCE FEES)
Other Expenses:
Shareholder Servicing Costs(i) ...................... 0.06% 0.06% 0.05%
Other ............................................... 0.31% 0.31% 0.31%
---- ---- ----------
Total Other Expenses ............................... 0.37% 0.37% 0.36%
---- ---- ----------
Total Fund Operating Expenses ........................ 1.42% 1.52% 1.01%
==== ==== ==========
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and participants in certain fee-based programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 24 and "Shareholder Services -- Fee-Based
Programs" -- page 35.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 25.
(c) Reduced for purchases of $25,000 and over and waived for purchases of Class
A shares by participants in connection with certain fee-based programs.
Class A and Class D purchases of $1,000,000 or more may not be subject to
an initial sales charge. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 24.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
Such CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 35.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 35.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 35.
(g) See "Management of the Trust -- Management and Advisory Arrangements" --
page 20.
(h) See "Purchase of Shares -- Distribution Plans" -- page 28.
(i) See "Management of the Trust -- Transfer Agency Services" -- page 21.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
--------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $40 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total Fund
Operating Expenses for each class set forth on page 2, (2) a 5%
annual return throughout the periods and (3) redemption at the end
of the period (including any applicable CDSC for Class B and
Class C shares):
Class A ........................................................ $49 $68 $88 $147
Class B ........................................................ $54 $65 $78 $170
Class C ........................................................ $25 $48 $83 $181
Class D ........................................................ $50 $71 $94 $159
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A ........................................................ $49 $68 $88 $147
Class B ........................................................ $14 $45 $78 $170
Class C ........................................................ $15 $48 $83 $181
Class D ........................................................ $50 $71 $94 $159
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charge permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$5.35) for confirming purchases and repurchases. Purchases and redemptions made
directly through the 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(SM) System is used by more than
50 registered investment companies 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 that use the Merrill Lynch
Select Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on the Class D shares, are imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be used
to finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is most beneficial under his or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares."
4
<PAGE>
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FACTORS
===========================================================================================================
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(2)(3)
===========================================================================================================
B CDSC for a period of four years, 0.25% 0.25% B shares convert to
at a rate of 4.0% during D shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0%(4) ten years(5)
==========================================================================================================
C 1.0% CDSC for one year(6) 0.25% 0.35% No
==========================================================================================================
D Maximum 4.00% initial 0.10% No No
sales charge(3)
==========================================================================================================
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares -- Eligible Class
A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by participants in connection with certain fee-based programs.
Class A and Class D share purchases of $1,000,000 or more may not be
subject to an initial sales charge but instead may be subject to a 1.0%
CDSC if redeemed within one year. Such CDSC may be waived in connection
with certain fee-based programs. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
fee-based programs may differ. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares -- Conversion of Class B
Shares to Class D Shares." Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an eight
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
CLASS A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Other eligible investors include
participants in certain fee-based programs. In addition, Class A shares
will be offered at net asset value to Merrill Lynch & Co., Inc. ("ML &
Co.") and its subsidiaries (the term "subsidiaries," when used herein
with respect to ML & Co., includes MLAM, the Manager and certain other
entities directly or indirectly wholly owned and controlled by ML &
Co.), and their directors and employees, and to members of the Boards
of MLAM-advised mutual funds. The maximum initial sales charge of 4.00%
is reduced for purchases of $25,000 and over and waived for purchases
of Class A shares by participants in connection with certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge, but if the initial sales charge is waived such
purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection
with certain fee-based programs. Sales charges also are reduced under a
right of accumulation that takes into account the investor's holdings
of all classes of all MLAM-advised mutual funds. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares."
5
<PAGE>
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% and
an ongoing distribution fee of 0.25% of the Fund's average net assets
attributable to the Class B shares, as well as a CDSC if they are
redeemed within four years of purchase. Such CDSC may be modified in
connection with certain fee-based programs. Approximately ten years
after issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to a lower account maintenance
fee of 0.10% and no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into
Class D shares automatically after approximately eight years. If Class
B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the Class
B shares acquired in the exchange will apply, as will the Class D
account maintenance fee of the acquired fund upon the conversion, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired. Automatic conversion of Class B
shares into Class D shares will occur at least once a month on the
basis of the relative net asset values of the shares of the two classes
on the conversion date, without the imposition of any sales load, fee
or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax
purposes. Shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The
conversion period for dividend reinvestment shares is modified as
described under "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B
Shares to Class D Shares."
CLASS C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25% and
an ongoing distribution fee of 0.35% of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
CDSC of 1.0% if they are redeemed within one year after purchase. Such
CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B shares), Class C shares have no
conversion feature and, accordingly, an investor who purchases Class C
shares will be subject to account maintenance fees and higher
distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Trust's Board of
Trustees and regulatory limitations.
CLASS D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 4.00% 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 may be subject to a CDSC of 1.0% if the
shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with certain fee-based programs. The schedule of
initial sales charges and reductions for Class D shares is the same as
the schedule for Class A shares, except that there is no waiver for
purchases in connection with certain fee-based programs. Class D shares
also will be issued upon conversion of Class B shares as described
above under "Class B." See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
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 there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the CDSCs imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors who previously
purchased Class A shares may no longer be eligible to purchase Class A shares
of other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation that 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
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Financial statements for the
fiscal year ended July 31, 1998 and the independent auditors' report thereon
appear in the annual report of the Fund for the fiscal year ended July 31, 1998
(the "Annual Report") and are incorporated by reference in the Statement of
Additional Information. Further information about the performance of the Fund
is contained in the Annual Report 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.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------
FOR THE YEAR
ENDED JULY 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ...... $ 10.72 $ 10.28 $ 10.31 $ 10.33 $ 10.83 $ 10.58
------- ------- ------- ------- ------- -------
Investment income -- net .................. .54 .53 .54 .55 .55 .58
Realized and unrealized gain (loss) on
investments -- net ....................... .07 .44 (.03) (.02) (.35) .30
------- ------- -------- -------- -------- -------
Total from investment operations .......... .61 .97 .51 .53 .20 .88
------- ------- -------- -------- -------- -------
Less dividends and distributions:
Investment income -- net ................. (.54) (.53) (.54) (.55) (.55) (.58)
Realized gain on investments -- net ...... -- -- -- -- -- (.05)
In excess of realized gain on
investments -- net ..................... --++ -- -- -- (.15) --
------- -------- -------- -------- -------- -------
Total dividends and distributions ......... (.54) (.53) (.54) (.55) (.70) (.63)
------- -------- -------- -------- -------- -------
Net asset value, end of period ............ $ 10.79 $ 10.72 $ 10.28 $ 10.31 $ 10.33 $ 10.83
======= ======== ======== ======== ======== =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ........ 5.85% 9.71% 4.98% 5.44% 1.87% 8.71%
======= ======== ======== ======== ======== =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement ............ .91% .92% .84% .75% .69% .45%
======= ======== ======== ======== ======== =======
Expenses .................................. .91% .92% .95% .92% 1.03% 1.04%
======= ======== ======== ======== ======== =======
Investment income -- net .................. 4.98% 5.09% 5.16% 5.51% 5.18% 5.56%
======= ======== ======== ======== ======== =======
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) ........................... $ 6,993 $ 5,390 $ 5,884 $ 6,936 $ 8,810 $12,859
======= ======== ======== ======== ======== =======
Portfolio turnover ........................ 56.43% 28.42% 53.99% 22.36% 58.67% 23.83%
======= ======== ======== ======== ======== =======
<CAPTION>
CLASS A
----------------
FOR THE PERIOD
MARCH 27, 1992+
TO JULY 31,
1992
----------------
<S> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ...... $ 10.00
--------
Investment income -- net .................. .20
Realized and unrealized gain (loss) on
investments -- net ....................... .58
--------
Total from investment operations .......... .78
--------
Less dividends and distributions:
Investment income -- net ................. (.20)
Realized gain on investments -- net ...... --
In excess of realized gain on
investments -- net ..................... --
---------
Total dividends and distributions ......... (.20)
---------
Net asset value, end of period ............ $ 10.58
=========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ........ 7.88%#
=========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement ............ .12%*
=========
Expenses .................................. 1.18%*
=========
Investment income -- net .................. 5.73%*
=========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) ........................... $ 9,493
=========
Portfolio turnover ........................ 30.39%
=========
</TABLE>
- --------
+ Commencement of operations.
++ Amount is less than $.01 per share.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
8
<PAGE>
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------------------------
FOR THE
PERIOD
MARCH 27,
FOR THE YEAR
ENDED JULY 31, 1992+ TO
----------------------------------------------------------------------- JULY 31,
1998 1997 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ...... $ 10.72 $ 10.28 $ 10.31 $ 10.33 $ 10.83 $ 10.58 $ 10.00
------- ------- ------- ------- ------- ------- -------
Investment income -- net .................. .48 .48 .48 .50 .50 .53 .18
Realized and unrealized gain (loss) on
investments -- net ....................... .07 .44 (.03) (.02) (.35) .30 .58
------- ------- ------- ------- ------- ------- -------
Total from investment operations .......... .55 .92 .45 .48 .15 .83 .76
------- ------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income -- net ................. (.48) (.48) (.48) (.50) (.50) (.53) (.18)
Realized gain on investments -- net ...... -- -- -- -- -- (.05) --
In excess of realized gain on
investments -- net ..................... --++ -- -- -- (.15) -- --
------- ------- ------- ------- ------- ------- --------
Total dividends and distributions ......... (.48) (.48) (.48) (.50) (.65) (.58) (.18)
------- ------- ------- ------- ------- ------- --------
Net asset value, end of period ............ $ 10.79 $ 10.72 $ 10.28 $ 10.31 $ 10.33 $ 10.83 $ 10.58
======= ======= ======= ======= ======= ======= ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ........ 5.31% 9.15% 4.44% 4.91% 1.35% 8.16% 7.69%#
======= ======= ======= ======= ======= ======= ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement ............ 1.42% 1.43% 1.35% 1.27% 1.21% .96% .62%*
======= ======= ======= ======= ======= ======= ========
Expenses .................................. 1.42% 1.43% 1.46% 1.44% 1.54% 1.55% 1.70%*
======= ======= ======= ======= ======= ======= ========
Investment income -- net .................. 4.47% 4.58% 4.64% 5.00% 4.70% 5.03% 5.13%*
======= ======= ======= ======= ======= ======= ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) ........................... $38,585 $41,274 $48,696 $52,023 $56,960 $54,921 $ 32,686
======= ======= ======= ======= ======= ======= =========
Portfolio turnover ........................ 56.43% 28.42% 53.99% 22.36% 58.67% 23.83% 30.39%
======= ======= ======= ======= ======= ======= =========
</TABLE>
- --------
+ Commencement of operations.
++ Amount is less than $.01 per share.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
9
<PAGE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------
FOR THE
PERIOD
OCTOBER 21,
FOR THE YEAR
ENDED JULY 31, 1994+ TO
----------------------------------- JULY 31,
1998 1997 1996 1995
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period ................................. $ 10.72 $ 10.28 $ 10.31 $ 9.99
------- ------- ------- --------
Investment income -- net ................ .47 .47 .47 .37
Realized and unrealized gain (loss)
on investments -- net .................. .08 .44 (.03) .32
------- ------- -------- --------
Total from investment operations ........ .55 .91 .44 .69
------- ------- -------- --------
Less dividends and distributions:
Investment income -- net ............... (.47) (.47) (.47) (.37)
In excess of realized gain on
investments -- net ................... --++ -- -- --
------- -------- -------- ---------
Total dividends and distributions ....... (.47) (.47) (.47) (.37)
------- -------- -------- ---------
Net asset value, end of period .......... $ 10.80 $ 10.72 $ 10.28 $ 10.31
======= ======== ======== =========
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share .............................. 5.30% 9.04% 4.33% 7.13%#
======= ======== ======== =========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .......... 1.52% 1.53% 1.48% 1.46%*
======= ======== ======== =========
Expenses ................................ 1.52% 1.53% 1.57% 1.61%*
======= ======== ======== =========
Investment income -- net ................ 4.37% 4.48% 4.50% 4.70%*
======= ======== ======== =========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) ............................. $ 1,437 $ 1,201 $ 1,219 $ 375
======= ======== ======== =========
Portfolio turnover ...................... 56.43% 28.42% 53.99% 22.36%
======= ======== ======== =========
<CAPTION>
CLASS D
------------------------------------------------
FOR THE
PERIOD
OCTOBER 21,
FOR THE YEAR
ENDED JULY 31, 1994+ TO
----------------------------------- JULY 31,
1998 1997 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period ................................. $ 10.73 $ 10.28 $ 10.31 $ 9.99
------- ------- ------- --------
Investment income -- net ................ .53 .52 .53 .41
Realized and unrealized gain (loss)
on investments -- net .................. .07 .45 (.03) .32
------- ------- -------- --------
Total from investment operations ........ .60 .97 .50 .73
------- ------- -------- --------
Less dividends and distributions:
Investment income -- net ............... (.53) (.52) (.53) (.41)
In excess of realized gain on
investments -- net ................... --++ -- -- --
------- -------- -------- ---------
Total dividends and distributions ....... (.53) (.52) (.53) (.41)
------- -------- -------- ---------
Net asset value, end of period .......... $ 10.80 $ 10.73 $ 10.28 $ 10.31
======= ======== ======== =========
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share .............................. 5.74% 9.70% 4.88% 7.57%#
======= ======== ======== =========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .......... 1.01% 1.02% .94% .92%*
======= ======== ======== =========
Expenses ................................ 1.01% 1.02% 1.05% 1.07%*
======= ======== ======== =========
Investment income -- net ................ 4.88% 4.99% 5.05% 5.27%*
======= ======== ======== =========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) ............................. $ 1,141 $ 924 $ 684 $ 796
======= ======== ======== =========
Portfolio turnover ...................... 56.43% 28.42% 53.99% 22.36%
======= ======== ======== =========
</TABLE>
- --------
+ Commencement of operations.
++ Amount is less than $.01 per share.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
10
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal income tax and Minnesota personal
income tax as is consistent with prudent investment management. The Fund
seeks to achieve its objective by investing primarily in a non-diversified
portfolio of long-term obligations issued by or on behalf of the State of
Minnesota, its political or governmental subdivisions, municipalities,
governmental agencies or instrumentalities, or by Indian tribal governments of
tribes located in Minnesota, which pay interest exempt from Federal income tax
and Minnesota personal income tax ("Minnesota Municipal Bonds"). Obligations
exempt from Federal income taxes generally are referred to herein as "Municipal
Bonds." Unless otherwise indicated, references to Municipal Bonds shall be
deemed to include Minnesota Municipal Bonds. The Fund at all times, except
during temporary defensive periods, will maintain at least 65% of its total
assets invested in Minnesota 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 Fund also may
invest in variable rate demand obligations ("VRDOs") and participations
therein, described below, and short-term tax-exempt municipal obligations such
as tax anticipation notes. The interest on Municipal Bonds may be payable
either at a fixed rate or 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 ("Standard & Poor's") (currently AAA, AA, A and BBB) or
Fitch IBCA, Inc. ("Fitch") (currently AAA, AA, A and BBB). If Municipal Bonds
are unrated, such securities will possess creditworthiness comparable, in the
opinion of the Manager to obligations in which the Fund may invest. Municipal
Bonds rated in the fourth highest rating category, while considered "investment
grade," have certain speculative characteristics and are more likely to be
downgraded to non-investment grade than obligations rated in one of the top
three rating categories. See Appendix II -- "Ratings of Municipal Bonds" in the
Statement of Additional Information for more information regarding ratings of
debt securities. An issue of rated Municipal Bonds may cease to be rated or its
rating may be reduced below "investment grade" subsequent to its purchase by
the Fund. If an obligation is downgraded below investment grade, the Manager
will consider factors such as price, credit risk, market conditions, financial
condition of the issuer and interest rates to determine whether to continue to
hold the obligation in the Fund's portfolio.
The Fund may invest up to 20% of its total assets in Municipal Bonds that
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or
which, in the Manager's judgment, possess similar credit characteristics. Such
securities, sometimes referred to as "high yield" or "junk" bonds, are
predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. The market prices of high yielding, lower-rated securities may
fluctuate more than higher-rated securities and may decline significantly in
periods of general economic difficulty, which may follow periods of rising
interest rates. In purchasing such securities, the Fund will rely on the
Manager's judgment, analysis and experience in evaluating the creditworthiness
of the issuer of such securities. The Manager will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and 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
11
<PAGE>
regarding ratings of debt securities. The Fund does not intend to purchase debt
securities that are in default or which the Manager believes will be in
default.
Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing the
quality of such bonds not only the creditworthiness of the issuer of such bonds
but also the creditworthiness of the financial institution.
The Fund's investments may also include VRDOs and VRDOs in the form of
participation interests ("Participating VRDOs") in variable rate tax-exempt
obligations held by a financial institution. The VRDOs in which the Fund will
invest are tax-exempt obligations that contain a floating or variable interest
rate adjustment formula and an unconditional right of demand on the part of the
holder thereof to receive payment of the unpaid principal balance plus accrued
interest on a short notice period not to exceed seven days. Participating VRDOs
provide the Fund with a specified undivided interest (up to 100%) of the
underlying obligation and the right to demand payment of the unpaid principal
balance plus accrued interest on the Participating VRDOs from the financial
institution on a specified number of days' notice, not to exceed seven days.
There is, however, the possibility that because of default or insolvency the
demand feature of VRDOs or Participating VRDOs may not be honored. The Fund has
been advised by its counsel that the Fund should be entitled to treat the
income received on Participating VRDOs as interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed illiquid securities. A VRDO with a demand notice
period exceeding seven days will therefore be subject to the Fund's restriction
on illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and be ultimately responsible for
such determinations.
The Fund ordinarily does not intend to realize investment income not
exempt from Federal income tax and Minnesota personal income tax. However, to
the extent that suitable Minnesota 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 income tax but not
Minnesota personal income taxation. In addition, the Fund may invest in
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the Virgin Islands and Guam, which are exempt both from Federal income
tax and Minnesota personal income taxation. The Fund also may invest in
securities not issued by or on behalf of a state or territory or by an agency
or instrumentality thereof, if the Fund nevertheless believes such securities
to be exempt from Federal income taxation ("Non-Municipal Tax-Exempt
Securities"). Non-Municipal Tax-Exempt Securities may include securities issued
by other investment companies that invest in municipal bonds, to the extent
such investments are permitted by the Investment Company Act of 1940, as
amended (the "1940 Act"). Other Non-Municipal Tax-Exempt Securities could
include trust certificates or other derivative instruments evidencing interests
in one or more Municipal Bonds.
Under normal circumstances, except when acceptable securities are
unavailable as determined by the Manager, the Fund will invest at least 65% of
its assets in Minnesota Municipal Bonds. However, since at least 95% of the
Fund's exempt-interest dividends must be derived from interest income on
obligations of the State of Minnesota, its political or governmental
subdivisions, municipalities, governmental agencies or instrumentalities, or of
Indian tribal governments of tribes located in Minnesota, in order for such
interest income to be excluded from the Minnesota taxable net income of
individuals, estates and trusts, it is anticipated that substantially all of
the Fund's assets will be invested in Minnesota Municipal Bonds. Dividends from
interest on other qualifying issues would
12
<PAGE>
not satisfy the 95% test. If for any reason there is not an adequate supply of
Minnesota Municipal Bonds, the Fund may have to hold cash uninvested in order
to preserve the Minnesota tax status of its dividends. Cash held uninvested
will not earn income. 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-3/VMIG-3 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 & Poor's), or F-1 through F-3 for notes, VRDOs
and commercial paper (as determined by Fitch) or, if unrated, of comparable
quality in the opinion of the Manager. The Fund at all times will have at least
80% of its net assets invested in securities the interest on which is exempt
from Federal taxation. However, interest received on certain otherwise
tax-exempt securities which are classified as "private activity bonds" (in
general, bonds that benefit non-governmental entities) may be subject to
Federal and Minnesota 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 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 income taxes and
Minnesota personal income tax by investing in a professionally managed
portfolio consisting primarily of long-term Minnesota 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 MUNICIPAL BONDS
The risks and special considerations involved in investments in Municipal
Bonds vary with the types of instruments being acquired. Investments in
Non-Municipal Tax-Exempt Securities may present similar risks, depending on the
particular investment. Certain instruments in which the Fund may invest may be
characterized as derivative securities. See "Description of Municipal Bonds"
and "Financial Futures Transactions and Options."
Moreover, the Fund ordinarily will invest at least 65% (and, it is
anticipated, substantially more) of its total assets in Minnesota Municipal
Bonds, and therefore it is more susceptible to factors adversely affecting
issuers of Minnesota Municipal Bonds than is a municipal bond mutual fund that
is not concentrated in issuers of Minnesota Municipal Bonds to this degree.
Following the 1998 legislative session, the Minnesota Department of Finance
projected that Minnesota will complete its current biennium June 30, 1999 with
an unrestricted balance of $35 million, plus a $350 million cash flow account
balance, plus a $613 million budget reserve. Total General Fund expenditures
and transfers for the biennium are projected to be $21.5 billion. State grants
and aids represent a large percentage of the total revenues of cities, towns,
counties and school districts in Minnesota. Possible reductions
13
<PAGE>
in federal aid to the State and its political subdivisions, economic or other
fiscal difficulties in the State, possible future changes in Federal and State
income tax laws, including rate reductions, and recent Minnesota tax
legislation (see "Distributions and Taxes -- Taxes") could adversely affect the
value and marketability of Minnesota Municipal Bonds that are held by the Fund.
The value of Municipal Bonds generally may be affected by uncertainties in
the municipal markets as a result of legislation or litigation changing the
taxation of Municipal Bonds or the rights of Municipal Bond holders in the
event of bankruptcy. Municipal bankruptcies are rare, and certain provisions of
the U.S. Bankruptcy Code governing such bankruptcies are unclear. Further, the
application of state law to Municipal Bond issuers could produce varying
results among the states or among Municipal Bond Issuers within a state. These
uncertainties could have a significant impact on the prices of the Minnesota
Municipal Bonds or Municipal Bonds in which the Fund invests.
The Manager does not believe that the current economic conditions in
Minnesota or other factors described above will have a significant adverse
effect on the Fund's ability to invest in high quality Minnesota Municipal
Bonds. Because the Fund's portfolio will be comprised primarily of investment
grade securities, the Fund is expected to be less subject to market and credit
risks than a fund that invests primarily in lower quality Minnesota Municipal
Bonds. See "Description of Municipal Bonds" in the Statement of Additional
Information and see also Appendix I -- "Economic Conditions in Minnesota" 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 (such as water, sewer, streets, roads, airports, gas,
electricity, solid waste, health care, transportation, education and housing
facilities), financing various governmental programs, including mortgage
financing for owner-occupied residences, refunding outstanding obligations and
obtaining funds for general operating expenses and loans to other public
institutions. In addition, certain types of bonds are issued by or on behalf of
public authorities to finance or refinance various privately owned or operated
facilities, including manufacturing facilities, hospitals, nursing homes,
multi-family residential rental projects and certain other specialized
facilities. For purposes of this Prospectus, such obligations are referred to
as Municipal Bonds if the interest paid thereon is excluded from gross income
for purposes of Federal income taxation and as Minnesota Municipal Bonds if the
obligations are issued by or on behalf of the State of Minnesota, its political
or governmental subdivisions, municipalities, governmental agencies or
instrumentalities, or by Indian tribal governments of tribes located in
Minnesota, and if the interest thereon is excluded from gross income for
Federal income tax purposes and from taxable net income of individuals, estates
and trusts for Minnesota income tax purposes, even though such bonds may be
"private activity bonds" as discussed below.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. Industrial development bonds ("IDBs") and, for
bonds issued after August 15, 1986, private activity bonds may be issued as
general obligation bonds, but they are issued most frequently as revenue bonds.
General obligation bonds are secured by the issuer's pledge of its full faith,
credit and general taxing power to the payment of principal and interest. The
taxing power of any governmental entity may be limited, however, by provisions
of its state constitution or laws. An issuer's creditworthiness and its
capacity to make timely payment of interest and principal on a general
obligation bond when due will depend on many factors, including potential
erosion of its property tax base due to population declines, economic
conditions which may depress property values, natural disasters, declines in
its industrial or commercial base or inability to attract new industries or
businesses, economic limits on the ability to tax without eroding the tax base,
legislation or voter initiatives to limit AD VALOREM real property taxes
14
<PAGE>
or the value or classification of property for property tax purposes, and the
extent to which the issuer relies on Federal or state aid, access to capital
markets or other factors beyond the issuer's control.
Revenue bonds are payable solely 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; accordingly, the timely payment
of interest and the repayment of principal in accordance with the terms of a
revenue bond is a function of the economic viability of such facility or such
revenue source.
The Fund may purchase IDBs and private activity bonds. IDBs and private
activity bonds are, in most cases, Municipal Bonds issued by states,
municipalities or public authorities to provide funds, usually through a loan
or lease arrangement, for the purpose of financing construction or improvement
of a facility to be used by a private 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 an affiliated company or otherwise
secured. IDBs and private activity bonds are generally not secured by a pledge
of the taxing power of the issuer of such bonds. Therefore, repayment of such
bonds generally depends on revenues attributable to a private entity. Continued
ability of an entity to generate sufficient revenues for the payment of
principal and interest on such bonds will be affected by many factors,
including the size of the entity, its capital structure, demand for its
products or services, competition, general economic conditions, government
regulation and the entity's dependence on revenues from the operation of the
particular facility being financed. The Fund also may invest in so-called
"moral obligation" bonds, which are normally issued by special purpose
authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, repayment of such bonds becomes a moral commitment, but not a
legal obligation, of the state or municipality with which the special purpose
authority is affiliated.
The Fund may invest in Municipal Bonds (and Non-Municipal Tax-Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an index.
To the extent the Fund invests in these types of Municipal Bonds, the Fund's
return on such Municipal Bonds will be subject to risk with respect to the
value of the particular index. Interest and principal payable on the Municipal
Bonds may also be based on relative changes among particular indices. Also, the
Fund may invest in so-called "inverse floating obligations" or "residual
interest bonds" on which the interest rates typically decline as market rates
increase and increase as market rates decline. The Fund's return on such types
of Municipal Bonds (and Non-Municipal Tax-Exempt Securities) will be subject to
risk with respect to the value of the particular index, which may include
reduced or eliminated interest payments and losses of invested principal. Such
securities have the effect of providing a degree of investment leverage, since
they may increase or decrease in value in response to changes, as an
illustration, in market interest rates at a rate which is a multiple (typically
two) of the rate at which fixed-rate long-term tax-exempt securities increase
or decrease in response to such changes. As a result, the market values of such
securities will generally be more volatile than the market values of fixed-rate
tax-exempt securities. To seek to limit the volatility of these securities, the
Fund may purchase inverse floating obligations with shorter-term maturities or
which contain limitations on the extent to which the interest rate may vary.
Certain investments in such obligations may be illiquid. The Fund may not
invest in such illiquid obligations if such investments, together with other
illiquid investments, would exceed 15% of the Fund's total assets. The Manager
believes, however, that indexed and inverse floating obligations represent
flexible portfolio management instruments for the Fund which allow the Fund to
seek potential investment rewards, hedge other portfolio positions or vary the
degree of investment leverage relatively efficiently under different market
conditions.
15
<PAGE>
Also included within the general category of Municipal Bonds are
participation certificates that represent participations in a lease, an
installment purchase contract or a conditional sales contract (collectively,
"lease obligations") entered into by a governmental entity or authority to
finance the acquisition or construction of land, buildings, equipment or other
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 repossession might
prove difficult. These securities represent a type of financing that has not
yet developed the depth of marketability associated with more conventional
securities. Certain investments in lease obligations may be illiquid. The Fund
may not invest in illiquid lease obligations if such investments, together with
all other illiquid investments, would exceed 15% of the Fund's total 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 obligations rated below investment grade, the Manager must, among
other things, also review the creditworthiness of the governmental entity that
is 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. The State of
Minnesota also has enacted legislation that could limit the types of bonds
eligible for a Minnesota income tax exemption. See "Distributions and Taxes --
Taxes." As a result, this legislation and legislation which may be enacted in
the future may affect the availability of Municipal Bonds for investment by the
Fund.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase or sell Municipal Bonds on a delayed delivery basis
or a when-issued basis at fixed purchase terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund enters
into the commitment, and the value of the obligation will thereafter be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery date may be more or less than its purchase price. A
separate account of the Fund will be established with its custodian consisting
of cash, cash equivalents or liquid securities having a market value at all
times at least equal to the amount of the forward commitment.
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
16
<PAGE>
effect of holding both the Call Right and the related Municipal Bond is
identical to that of holding a Municipal Bond as a non-callable security.
Certain investments in such obligations may be illiquid. The Fund may not
invest in such illiquid obligations if such investments, together with other
illiquid investments, would exceed 15% of the Fund's total assets.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
The Fund is authorized to purchase and sell certain exchange traded
financial futures contracts ("financial futures contracts") solely for the
purpose of hedging its investments in Municipal Bonds against declines in value
and to hedge against increases in the cost of securities it intends to
purchase. However, any transactions involving financial futures or options
(including puts and calls associated therewith) will be in accordance with the
Fund's investment policies 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 an index-based futures contract, to make and accept a cash
settlement, at a specific future time for a specified price. A sale of
financial futures contracts may provide a hedge against a decline in the value
of portfolio securities because such depreciation may be offset, in whole or in
part, by an increase in the value of the position in the financial futures
contracts. A purchase of financial futures contracts may provide a hedge
against an increase in the cost of securities intended to be purchased because
such appreciation may be offset, in whole or in part, by an increase in the
value of the position in the futures contracts. Distributions, if any, of net
long-term capital gains from certain transactions in futures or options are
taxable at long-term capital gains rates for Federal income tax purposes,
regardless of the length of time the shareholder has owned Fund shares. See
"Distributions and Taxes -- Taxes."
The Fund may deal in financial futures contracts traded on the Chicago
Board of Trade based on The Bond Buyer Municipal Bond Index, a price-weighted
measure of the market value of 40 large, recently issued tax-exempt bonds.
There can be no assurance, however, that a liquid secondary market will exist
to terminate any particular financial futures contract at any specific time. If
it is not possible to close a financial futures position entered into by the
Fund, the Fund would continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Fund has insufficient cash, it may have to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so. The inability to close financial futures positions
also could have an adverse impact on the Fund's ability to hedge effectively.
There is also the risk of loss by the Fund of margin deposits in the event of
bankruptcy of a broker with whom the Fund has an open position in a financial
futures contract.
The Fund may purchase and sell financial futures contracts on U.S.
Government securities and write and purchase put and call options on such
futures contracts as a hedge against adverse changes in interest rates as
described more fully in the Statement of Additional Information. With respect
to U.S. Government securities, currently there are financial futures contracts
based on long-term U.S. Treasury bonds, Treasury notes, Government National
Mortgage Association ("GNMA") Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Trustees, the Fund also may engage in
other financial futures contracts transactions and options thereon, such as
financial futures contracts or options on other municipal bond indexes which
may become available if the Manager of the Fund and the Trustees of the Trust
should determine that there is normally a sufficient correlation between the
prices of such futures contracts and the Municipal Bonds in which the Fund
invests to make such hedging appropriate.
Utilization of futures transactions and options thereon involves the risk
of imperfect correlation in movements in the price of futures contracts and
movements in the price of the security which is the subject of the hedge. If
17
<PAGE>
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 liquid securities in a segregated account with the Fund's custodian
so that the amount so segregated plus the amount of initial and variation
margin held in the account of its broker equals the market value of the futures
contracts, thereby ensuring that the use of such futures contract is
unleveraged. It is not anticipated that transactions in futures contracts will
have the effect of increasing portfolio turnover.
Although certain risks are involved in options and futures transactions,
the Manager believes that, because the Fund will engage in futures transactions
only for hedging purposes, the futures portfolio strategies of the Fund will
not subject the Fund to certain risks frequently associated with speculation in
futures transactions.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past moved beyond the
daily limit on a number of consecutive trading days.
The successful use of transactions in futures also depends on the ability
of the Manager to forecast correctly the direction and extent of interest rate
movements within a given time frame. To the extent these rates remain stable
during the period in which a futures contract is held by the Fund or 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.
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.
18
<PAGE>
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 15% of the
Fund's total assets. In the event of default by the seller under a repurchase
agreement, the Fund may suffer time delays and incur costs or possible losses
in connection with the disposition of the underlying securities.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act, which means the lesser of (i)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares. Among its fundamental policies, the Fund may not invest more than 25%
of its assets, taken at market value at the time of each investment, in the
securities of issuers in any particular industry (excluding the U.S. Government
and its agencies and instrumentalities). (For purposes of this restriction,
states, municipalities and their political subdivisions are not considered to
be part of any industry.) Investment restrictions and policies that are
non-fundamental policies may be changed by the Board of Trustees without
shareholder approval. As a non-fundamental policy, the Fund may not borrow
amounts in excess of 20% of its total assets taken at market value (including
the amount borrowed), and then only from banks as a temporary measure for
extraordinary or emergency purposes. In addition, the Fund will not purchase
securities while borrowings are outstanding.
As a non-fundamental policy, the Fund will not invest in securities which
cannot be readily resold because of legal or contractual restrictions or which
cannot otherwise be marketed, redeemed or put to the issuer or a third party,
if at the time of acquisition more than 15% of its total assets would be
invested in such securities. This restriction shall not apply to securities
which mature within seven days or securities which the Board of Trustees of the
Trust has otherwise determined to be liquid pursuant to applicable law.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the proportion
of its assets that it may invest in obligations of a single issuer. However,
the Fund's investments will be limited so as to qualify as a "regulated
investment company" for purposes of the Code. See "Distributions and Taxes --
Taxes." To qualify, among other requirements, the Trust will limit the Fund's
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of the Fund's total assets will be invested
in the securities of a single issuer, and (ii) with respect to 50% of the
market value of its total assets, not more than 5% of the market value of its
total assets will be invested in the securities of a single issuer and the Fund
will not own more than 10% of the outstanding voting securities of a single
issuer. For purposes of this restriction, the Fund will regard each state and
each political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public authority
which issues securities on behalf of a private entity as a separate issuer,
except that if the security is backed only by the assets and revenues of a
non-government entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the Trustees of the Trust to the
extent necessary to comply with changes to the
19
<PAGE>
Federal tax requirements. A fund which elects to be classified as "diversified"
under the 1940 Act must satisfy the foregoing 5% and 10% requirements with
respect to 75% of its total assets. To the extent that the Fund assumes large
positions in the obligations of a small number of issuers, the Fund's total
return may fluctuate to a greater extent than that of a diversified company as
a result of changes in the financial condition or in the market's assessment of
the issuers.
Investors are referred to the Statement of Additional Information for a
complete description of the Fund's investment restrictions.
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
The Trustees of the Trust are:
ARTHUR ZEIKEL* -- Chairman of the Manager and its affiliate, MLAM;
Chairman and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.
JAMES H. BODURTHA -- Director and Executive Vice President, The China
Business Group, Inc.
HERBERT I. LONDON -- John M. Olin Professor of Humanities, New York
University.
ROBERT R. MARTIN -- Former Chairman, Kinnard Investments, Inc.
JOSEPH L. MAY -- Attorney in private practice.
ANDRE F. PEROLD -- Professor, Harvard Business School.
- --------
* Interested person, as defined in the 1940 Act, of the Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, which is an affiliate of MLAM and is owned and controlled by
ML & Co., a financial services holding company, acts as the manager for the
Fund and provides the Fund with management services. The Merrill Lynch Asset
Management Group (which includes the Manager) acts as the investment adviser
for more than 100 registered investment companies and offers portfolio
management services to individuals and institutions. As of October 1998, the
Asset Management Group had a total of approximately $483 billion in investment
company and other portfolio assets under management. This amount includes
assets managed for 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.
Hugh T. Hurley, III is the Portfolio Manager for the Fund and has been
responsible for the day-to-day management of the Fund's investment portfolio
since April 1998. He has been a Vice President of MLAM since 1996 and was an
Assistant Vice President of MLAM from 1993 to 1996.
20
<PAGE>
Pursuant to the management agreement between the Manager and the Trust on
behalf of the Fund (the "Management Agreement"), the Manager is entitled to
receive from the Fund a monthly fee based upon the average daily net assets of
the Fund at the following annual rates: 0.55% of the average daily net assets
not exceeding $500 million; 0.525% of the average daily net assets exceeding
$500 million but not exceeding $1.0 billion; and 0.50% of the average daily net
assets exceeding $1.0 billion. For the fiscal year ended July 31, 1998, the
total fee payable by the Fund to the Manager was $263,497 (based upon average
daily net assets of approximately $47.6 million).
The Management Agreement obligates the Trust on behalf of the Fund to pay
certain expenses incurred in the Fund's operations, including, among other
things, the management fee, legal and audit fees, unaffiliated Trustees' fees
and expenses, registration fees, custodian and transfer agency fees, accounting
and pricing costs, and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information. Accounting
services are provided to the Fund by the Manager, and the Fund reimburses the
Manager for its costs in connection with such services. For the fiscal year
ended July 31, 1998, the Fund reimbursed the Manager $34,032 for accounting
services. For the fiscal year ended July 31, 1998, the ratio of total expenses
to average net assets was .91% for Class A shares, 1.42% for Class B shares,
1.52% for Class C shares and 1.01% for Class D shares.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act that incorporates the Code of Ethics of the Manager
(together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
TRANSFER AGENCY SERVICES
The Transfer Agent, which is a subsidiary of ML & Co., acts as the Trust's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement,
the Transfer Agent receives an annual fee of $11.00 per Class A or Class D
account and $14.00 per Class B or Class C account, and is entitled to
reimbursement for certain transaction charges and out-of-pocket expenses
incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of the
calendar year, no further fees will be due. For purposes of the Transfer Agency
Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the
beneficial
21
<PAGE>
interest of a person in the relevant share class on a recordkeeping system,
provided the recordkeeping system is maintained by a subsidiary of ML & Co. For
the fiscal year ended July 31, 1998, the total fee paid by the Fund to the
Transfer Agent was $29,369 pursuant to the Transfer Agency Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of each of the Manager, MLAM and Merrill
Lynch, acts as the distributor of the shares of the Fund. Shares of the Fund
are offered continuously for sale by the Distributor and other eligible
securities dealers (including Merrill Lynch). Shares of the Fund may be
purchased from securities dealers or by mailing a purchase order directly to
the Transfer Agent. The minimum initial purchase is $1,000 and the minimum
subsequent purchase is $50, except that for shareholders who are participants
in certain fee-based programs, the minimum initial purchase is $250 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(SM) System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (the "NYSE") (generally, the NYSE closes at 4:00 p.m., Eastern
time), which includes orders received after the close of business on the
previous day, the applicable offering price will be based on the net asset
value determined as of 15 minutes after the close of business on the NYSE on
that day, provided the Distributor in turn receives the order from the
securities dealer prior to 30 minutes after the close of business on the NYSE
on that day. If the purchase orders are not received by the Distributor prior
to 30 minutes after the close of business on the NYSE, such orders shall be
deemed received on the next business day. The Trust or the Distributor may
suspend the continuous offering of the Fund's shares of any class at any time
in response to conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. Any order may be rejected by
the Distributor or the Trust. Neither the Distributor nor the dealers are
permitted to withhold placing orders to benefit themselves by a price change.
Merrill Lynch may charge its customers a processing fee (presently $5.35) to
confirm a sale of shares to such customers. Purchases made directly through the
Transfer Agent are not subject to the processing fee.
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, ongoing distribution fees and higher
account maintenance fees. A discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill Lynch
Select Pricing(SM) System is set forth under "Merrill Lynch Select Pricing(SM)
System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C
22
<PAGE>
shares, as well as the account maintenance fees that are imposed on Class D
shares, are imposed directly against those classes and not against all assets
of the Fund and, accordingly, such charges do not affect the net asset value of
any other class or have any impact on investors choosing another sales charge
option. Dividends paid by the Fund for each class of shares are calculated in
the same manner at the same time and will differ only to the extent that
account maintenance and distribution fees and any incremental transfer agency
costs relating to a particular class are borne exclusively by that class. Class
B, Class C and Class D shares each have exclusive voting rights with respect to
the Rule 12b-1 distribution plan adopted with respect to such class pursuant to
which account maintenance and/or distribution fees are paid (except that Class
B shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). See "Distribution Plans" below. Each class has
different exchange privileges. See "Shareholder Services -- Exchange
Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
============================================================================================================================
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(2)(3)
===========================================================================================================================
B CDSC for a period of four years, at a 0.25% 0.25% B shares convert to D
rate of 4.0% during the first year, shares automatically after
decreasing 1.0% annually to 0.0%(4) approximately ten years(5)
===========================================================================================================================
C 1.0% CDSC for one year(6) 0.25% 0.35% No
===========================================================================================================================
D Maximum 4.00% initial sales charge(3) 0.10% No No
===========================================================================================================================
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge Alternatives
-- Class A and Class D Shares -- Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by participants in connection with certain fee-based programs.
Certain Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead may be subject to a 1.0%
CDSC if redeemed within one year. Such CDSC may be waived in connection
with certain fee-based programs.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
fee-based programs may differ. See "Deferred Sales Charge Alternatives --
Class B and Class C Shares -- Conversion of Class B Shares to Class D
Shares." Also, Class B shares of certain other MLAM-advised mutual funds
into which exchanges may be made have an eight year conversion period. If
Class B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the Class B
shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
23
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
INVESTORS CHOOSING THE INITIAL SALES CHARGE ALTERNATIVES WHO ARE ELIGIBLE
TO PURCHASE CLASS A SHARES SHOULD PURCHASE CLASS A SHARES RATHER THAN CLASS D
SHARES BECAUSE THERE IS AN ACCOUNT MAINTENANCE FEE IMPOSED ON CLASS D SHARES.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (I.E., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DISCOUNT TO
AS PERCENTAGE AS PERCENTAGE* SELECTED DEALERS
OF OFFERING OF THE NET AS PERCENTAGE OF THE
AMOUNT OF PURCHASE PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------------------------ --------------- ----------------- ---------------------
<S> <C> <C> <C>
Less than $25,000......................... 4.00% 4.17% 3.75%
$25,000 but less than $50,000............. 3.75 3.90 3.50
$50,000 but less than $100,000............ 3.25 3.36 3.00
$100,000 but less than $250,000........... 2.50 2.56 2.25
$250,000 but less than $1,000,000......... 1.50 1.52 1.25
$1,000,000 and over**..................... 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on certain Class A and Class D
purchases of $1,000,000 or more and on Class A purchases by participants in
connection with certain fee-based programs. If the sales charge is waived
in connection with a purchase of $1,000,000 or more, such purchases may be
subject to a 1.0% CDSC if the shares are redeemed within one year after
purchase. Such CDSC may be waived in connection with certain fee-based
programs. The charge will be assessed on an amount equal to the lesser of
the proceeds of redemption or the cost of the shares being redeemed.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended. The proceeds from the account maintenance fees are used to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) for
providing continuing account maintenance activities. For the fiscal year ended
July 31, 1998, the Fund sold 214,660 Class A shares for aggregate net proceeds
to the Fund of $2,301,470. The gross sales charges for the sale of Class A
shares of the Fund for the year were $1,760, of which $154 and $1,606 were
received by the Distributor and Merrill Lynch, respectively. For the fiscal
year ended July 31, 1998 the Distributor received no CDSCs with respect to
redemption within one year after purchase of Class A shares purchased subject
to a front-end sales charge waiver. For the fiscal year ended July 31, 1998,
the Fund sold 36,837 Class D shares for aggregate net proceeds to the Fund of
$399,229. The gross sales charges for the sale of Class D shares of the Fund
for the year were $5,404, of which $987 and $4,417 were received by the
Distributor and Merrill Lynch, respectively. For the fiscal year ended July 31,
1998, the Distributor received no CDSCs with respect to redemption within one
year after purchase of Class D shares purchased subject to a front-end sales
charge waiver.
ELIGIBLE CLASS A INVESTORS. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs and U.S. branches of foreign
banking institutions provided that the program or branch has $3 million or more
initially invested in MLAM-advised mutual funds. Also eligible to purchase Class
A shares at net asset value are participants in certain investment programs
including TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
24
<PAGE>
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and purchases made in connection with
certain fee-based programs. In addition, Class A shares are offered at net
asset value to ML & Co. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM-advised investment companies, including
the Trust. Certain persons who acquired shares of certain MLAM-advised
closed-end funds in their initial offerings who wish to reinvest the net
proceeds from a sale of their closed-end fund shares of common stock in shares
of the Fund also may purchase Class A shares of the Fund if certain conditions
set forth in the Statement of Additional Information are met. In addition,
Class A shares of the Fund and certain other MLAM-advised mutual funds are
offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. and, if certain conditions set forth in the Statement of
Additional Information are met, to shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who
wish to reinvest the net proceeds from a sale of certain of their shares of
common stock pursuant to a tender offer conducted by such funds in shares of
the Fund and certain other MLAM-advised mutual funds.
REDUCED INITIAL SALES CHARGES. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors." See
"Shareholder Services -- Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or
Class D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Class A shares are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and,
subject to certain conditions, Class A and Class D shares are offered at net
asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest in
shares of the Fund the net proceeds from a sale of certain of their shares of
common stock, pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
INVESTORS CHOOSING THE DEFERRED SALES CHARGE ALTERNATIVES SHOULD CONSIDER
CLASS B SHARES IF THEY INTEND TO HOLD THEIR SHARES FOR AN EXTENDED PERIOD OF
TIME AND CLASS C SHARES IF THEY ARE UNCERTAIN AS TO THE LENGTH OF TIME THEY
INTEND TO HOLD THEIR ASSETS IN MLAM-ADVISED MUTUAL FUNDS.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC
which declines each year, 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
25
<PAGE>
Class C shares are subject to an account maintenance fee of 0.25% of net assets
and Class B and Class C shares are subject to distribution fees of 0.25% and
0.35%, respectively, of net assets as discussed below under "Distribution
Plans." The proceeds from the account maintenance fees are used to compensate
the Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so
that the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) that are paid from the dealers'
own funds. These expenses relate 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 such shares.
The combination of the CDSC and the ongoing distribution fee facilitates the
ability of the Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. Approximately ten years after
issuance, Class B shares will convert automatically into Class D shares of the
Fund, which are subject to a lower account maintenance fee and no distribution
fee; Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made convert into Class D shares automatically after
approximately eight years. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and the
holding period for the shares exchanged will be tacked onto the holding period
for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations
on the Payment of Deferred Sales Charges" below. Class B shareholders of the
Fund exercising the exchange privilege described under "Shareholder Services --
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. Class B shares that
are redeemed within four years of purchase may be subject to a CDSC at the
rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption value 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
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ------------------------------------- ------------------
<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, 1998, the Distributor received CDSCs of
$16,916 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch. Additional CDSCs payable to the Distributor may
26
<PAGE>
have been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
applicable rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the four-year period. The charge will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Code) of a shareholder. The Class B CDSC also is
waived for any Class B shares that are purchased within qualifying Employee
Access(SM) Accounts. Additional information concerning the waiver of the Class B
CDSC is set forth in the Statement of Additional Information. The terms of the
CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs."
CONTINGENT DEFERRED SALES CHARGES -- CLASS C SHARES. Class C shares that
are redeemed within one year 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. The CDSC may be waived in connection
with certain fee-based programs. See "Shareholder Services -- Fee-Based
Programs." For the fiscal year ended July 31, 1998, the Distributor received
CDSCs of $36 with respect to redemptions of Class C shares, all of which were
paid to Merrill Lynch. The Class C CDSC may be waived in connection with
certain fee-based programs. See "Shareholder Services -- Fee-Based Programs."
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the 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
27
<PAGE>
classes on the Conversion Date, without the imposition of any sales load, fee
or other charge. Conversion of Class B shares to Class D shares will not be
deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will
convert approximately eight years after initial purchase, and Class B shares of
taxable and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
The Conversion Period also may be modified for investors who participate
in certain fee-based programs. See "Shareholder Services -- Fee-Based
Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the 1940 Act (each a "Distribution
Plan") with respect to the account maintenance and/or distribution fees paid by
the Fund to the Distributor with respect to such classes. The Class B and Class
C Distribution Plans provide for the payment of account maintenance fees and
distribution fees, and the Class D Distribution Plan provides for the payment
of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each
provide that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid 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
28
<PAGE>
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.
For the fiscal year ended July 31, 1998, the Fund paid the Distributor
$196,872 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $39.2
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended July 31, 1998, the Fund paid the
Distributor $7,989 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately
$1.3 million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended July 31, 1998, the Fund paid the
Distributor $868 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan of approximately
$0.8 million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
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 CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs,
and the expenses consist of financial consultant compensation.
As of December 31, 1997, the fully allocated accrual expenses incurred by
the Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated accrual revenues by
approximately $752,000 (1.94% of Class B net assets at that date). As of July
31, 1998, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $759,493 (1.97%
of Class B net assets at that date). As of December 31, 1997, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for
the period since the commencement of operations of Class C shares exceeded
fully allocated accrual revenues for such period by approximately $7,000 (.56%
of Class C net assets at that date). As of July 31, 1998, direct cash revenues
for the period since the commencement of operations of Class C shares exceeded
direct cash expenses by $11,284 (.78% of Class C net assets at that date).
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee
and the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges) plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
29
<PAGE>
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances
payments in excess of the amount payable under the NASD formula will not be
made.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Trustees of the Trust will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Trustees will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance 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."
REDEMPTION OF SHARES
The Trust is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper
notice of redemption. Except for any CDSC that may be applicable, there will be
no charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so, without charge, by
tendering the shares directly to the Transfer Agent, Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper
notice of redemption in the case of shares deposited with the Transfer Agent
may be accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. Redemption requests should not be sent to the Trust.
The redemption request in either event requires the signature(s) of all persons
in whose name(s) the shares are registered, signed exactly as such name(s)
appear(s) on the Transfer Agent's register. The signature(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, as
amended, the existence and validity of which may be verified by the Transfer
Agent through 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,
30
<PAGE>
death certificates, appointments as executor or administrator, or certificates
of corporate authority. For shareholders redeeming directly with the Transfer
Agent, payments will be mailed within seven days of receipt of a proper notice
of redemption.
At various times the Trust may be requested to redeem Fund shares for
which it has not yet received good payment (E.G., cash, Federal funds or
certified check drawn on a United States bank). The Trust may delay or cause to
be delayed the mailing of a redemption check until such time as it has assured
itself that good payment has been collected for the purchase of such Fund
shares, which will not exceed 10 days.
REPURCHASE
The Trust also will repurchase Fund shares through a shareholder's listed
securities dealer. The Trust normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after receipt of the order by the dealer, provided that the
request for repurchase is received by the dealer prior to the close of business
on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) on the day
received, and such request is received by the Trust from such dealer not later
than 30 minutes after the close of business on the NYSE on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Trust not later than 30 minutes after the close of business on the NYSE in
order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than any
applicable CDSC). Securities firms that do not have selected dealer agreements
with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Trust. Merrill
Lynch may charge its customers a processing fee (presently $5.35) to confirm a
repurchase of shares to such customers. Repurchases made directly through the
Transfer Agent are not subject to the processing fee. The Trust reserves the
right to reject any order for repurchase, which right of rejection might
adversely affect shareholders seeking redemption through the repurchase
procedure. However, a shareholder whose order for repurchase is rejected by the
Trust may redeem Fund shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares
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. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will
be made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
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<PAGE>
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. Included in such services are the following:
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and capital gains distributions. The statements also will show any
other activity in the account since the preceding statement. Shareholders also
will receive separate transaction confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gains distributions. A
shareholder may make additions to his or her Investment Account at any time by
mailing a check directly to the Transfer Agent. Shareholders also may maintain
their accounts through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened automatically 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. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he or she be issued certificates for such shares and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds and Summit Cash Reserves
Fund ("Summit"), a Merrill Lynch-sponsored money market fund specifically
designated as available for exchange by holders of Class A, Class B, Class C
and Class D shares of 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
the account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual
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fund at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund that are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC
that might otherwise be due upon redemption of the shares of the Fund. For
purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period for the newly acquired
shares of the other fund.
Class A and Class D shares are exchangeable for Class A shares of, and
Class B and Class C shares are exchangeable for Class B shares of, Summit. Class
A shares of Summit have an exchange privilege back into Class A or Class D
shares of MLAM-advised mutual funds; Class B shares of Summit have an exchange
privilege back into Class B or Class C shares of MLAM-advised mutual funds and,
in the event of such an exchange, the period of time that Class B shares of
Summit are held will count toward satisfaction of the holding period requirement
for purposes of reducing any CDSC and, with respect to Class B shares, toward
satisfaction of any Conversion Period. Class B shares of Summit will be subject
to a distribution fee at an annual rate of 0.75% of average daily net assets of
such Class B shares. This exchange privilege does not apply with respect to
certain Merrill Lynch fee-based programs, for which alternative exchange
arrangements may exist. Please see your Merrill Lynch Financial Consultant for
further information.
Prior to October 12, 1998, exchanges from the Fund and other MLAM-advised
mutual funds into a money market fund were directed to certain Merrill
Lynch-sponsored money market funds other than Summit. Shareholders who
exchanged shares of a MLAM-advised mutual fund for shares of such other money
market funds and subsequently wish to exchange those money market fund shares
for shares of the Fund will be subject to the CDSC schedule applicable to such
Fund shares, if any. The holding period for those money market fund shaares
will not count toward satisfaction of the holding period requirement for
reduction of the CDSC imposed on such shares, if any, and, with respect to
Class B shares, toward satisfaction of the Conversion Period. However, the
holding period for Class B or Class C shares received in exchange for such
money market fund shares will be aggregated with the holding period for the
original shares for purposes of reducing the CDSC or satisfying the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal and Minnesota personal
income and corporate franchise tax purposes. For further information, see
"Shareholder Services -- Exchange Privilege" in the Statement of Additional
Information.
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The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares by non-retirement plan investors under the Merrill
Lynch Mutual Fund Advisor (Merrill Lynch MFA(SM)) program (the "MFA program").
First, the initial allocation of assets is made under the MFA program. Then,
any subsequent exchange under the MFA program of Class A or Class D shares of a
MLAM-advised mutual fund for Class A or Class D shares of the Fund will be made
solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual
fund and the sales charge payable on the shares of the Fund being acquired in
the exchange under the MFA program.
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 to Merrill Lynch if the shareholder's account is maintained with
Merrill Lynch, or by written notification or telephone (1-800-MER-FUND) to the
Transfer Agent if the shareholder's account is maintained with the Transfer
Agent, elect to have subsequent dividends or both dividends and capital gains
distributions paid in cash, rather than reinvested, in which event payment will
be mailed on or about the payment date (provided that, in the event that a
payment on an account maintained at the Transfer Agent would amount to $10.00
or less, a shareholder will not receive such payment in cash and such payment
will automatically be reinvested in additional shares). Cash payments can also
be directly deposited to the shareholder's bank account. No CDSC will be
imposed upon redemption of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed distribution or
redemption checks.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to receive systematic withdrawal payments from his
or her Investment Account through automatic payment by check or through
automatic payment by direct deposit to his or her bank account on either a
monthly or quarterly basis. Alternatively, a shareholder whose shares are held
within a CMA(R) or CBA(R) account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(R) or
CBA(R) Systematic Redemption Program, subject to certain conditions. With
respect to redemptions of Class B or Class C shares pursuant to a systematic
withdrawal plan, the maximum number of Class B or Class C shares that can be
redeemed from an account annually shall not exceed 10% of the value of shares
of such class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Contingent
Deferred Sales Charges -- Class B Shares" and " -- Contingent Deferred Sales
Charges -- Class C Shares." Where the systematic withdrawal plan is applied to
Class B shares, upon conversion of the last Class B shares in an account to
Class D shares, the systematic withdrawal plan will be applied thereafter to
Class D shares if the shareholder so elects. See "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Conversion
of Class B Shares to Class D Shares."
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AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C and Class D shares may be
made to an investor's Investment Account by prearranged charges of $50 or more
to his or her regular bank account. Alternatively, an investor whose shares of
the Fund are held within a CMA(R) or CBA(R) account may arrange to have
periodic investments made in the Fund in amounts of $100 or more through the
CMA(R) or CBA(R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program")
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(800) MER-FUND or (800) 637-3863.
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities of the Fund. Municipal
Bonds and other securities in which the Fund invests are traded primarily in
the over-the-counter market. Where possible, the Trust deals directly with the
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Trust to obtain the best net results in conducting portfolio
transactions for the Fund, taking into account such factors as price (including
the applicable dealer spread), the size, type and difficulty of the
transactions involved, the firm's general execution and operations facilities,
and the firm's risk in positioning the securities involved and the provision of
supplemental investment research by the firm. While reasonably competitive
spreads or commissions are sought, the Fund will not necessarily be paying the
lowest spread or commission available. The sale of shares of the Fund may be
taken into consideration as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Fund. The portfolio securities of the
Fund generally are traded on a net basis and normally do not involve either
brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Fund primarily consists of dealer or underwriter spreads.
Under the 1940 Act, persons affiliated with the Trust, including Merrill Lynch,
are prohibited from dealing with the Trust as a principal in the purchase and
sale of securities unless such trading is permitted by an exemptive order
issued by the Commission. The Trust has obtained an exemptive order permitting
it to engage in certain principal transactions with Merrill Lynch involving
high quality short-term municipal bonds subject to certain conditions. In
addition, the Fund may not purchase securities, including Municipal Bonds,
during the existence of any underwriting syndicate of which Merrill Lynch is a
member or in a private placement in which Merrill Lynch serves as placement
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agent except pursuant to procedures approved by the Trustees of the Trust which
either comply with rules adopted by the Commission or with interpretations of
the Commission staff. 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,
prior to the determination of the net asset value which is calculated 15
minutes after the close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern time) on that day. The net investment income of the Fund for
dividend purposes consists 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 capital gains, if any, are declared and distributed to
the Fund's shareholders 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 with respect 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 Code. As
long as it so qualifies, the Fund (but not its shareholders) will not be
subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Trust intends to cause
the Fund to distribute substantially all of such income.
To the extent that the dividends distributed to the Fund's Class A, Class
B, Class C and Class D shareholders (together, the "shareholders") are derived
from interest income exempt from Federal tax under Code Section 103(a) and are
properly designated as "exempt-interest dividends" by the Trust, they will be
excludable from a shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends are included, however, in determining the portion, if
any, of a person's social security and railroad retirement benefits subject to
Federal income and Minnesota personal income taxes. The portion of such
exempt-interest dividends that is derived from interest income on Minnesota
Municipal Bonds is excluded from the Minnesota taxable net income of
individuals, estates and trusts, provided that the portion of the
exempt-interest dividends from such Minnesota Municipal Bonds paid to all
shareholders represents 95% or more of the exempt-interest dividends paid by
the Fund. Also excluded from the Minnesota taxable net income of individuals,
estates and trusts are dividends that are directly attributable to interest on
obligations of the Government of Puerto Rico, the Territory of Guam and
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certain other territories and possessions of the United States. Shareholders
subject to income taxation by states other than Minnesota will realize a lower
after-tax rate of return than Minnesota 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
Minnesota personal income taxes. Interest on indebtedness incurred or continued
to purchase or carry Fund shares is not deductible for Federal income or
Minnesota personal income tax purposes. 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 dividends are not excluded from the Minnesota taxable
income of corporations and financial institutions.
The 1995 Minnesota Legislature enacted a statement of intent that interest
on obligations of Minnesota governmental units and Indian tribes be included in
net income of individuals, estates and trusts for Minnesota income tax purposes
if a court determines that Minnesota's exemption of such interest unlawfully
discriminates against interstate commerce because interest on obligations of
governmental issuers located in other states is so included. This provision
applies to taxable years that begin during or after the calendar year in which
any such court decision becomes final, irrespective of the date on which the
obligations were issued. The Fund is not aware of any judicial decision holding
that a state's exemption of interest on its own bonds or those of its political
subdivisions or Indian tribes, but not of interest on the bonds of other states
or their political subdivisions or Indian tribes, unlawfully discriminates
against interstate commerce or otherwise contravenes the United States
Constitution. Nevertheless, the Fund cannot predict the likelihood that
interest on the Minnesota Bonds held by the Fund would become taxable under
this Minnesota statutory provision.
Distributions from investment income and capital gains of the Fund,
including exempt-interest dividends, may also be subject to state taxes in
states other than Minnesota and may be subject to local taxes in cities other
than those in Minnesota. Accordingly, investors in the Fund should consult
their tax advisors with respect to the application of such taxes to the receipt
of Fund dividends and to the holding of shares in the Fund.
To the extent that the Fund's distributions are derived from interest on
its taxable investments (including, in the case of Minnesota tax law, interest
on Municipal Bonds of other states) or from an excess of net short-term capital
gains over net long-term capital losses ("ordinary income dividends"), such
distributions are considered ordinary income for Federal and Minnesota income
tax purposes, except, in the case of Minnesota personal income tax, for
dividends that are directly attributable to interest on obligations of the
United States Government. Distributions, if any, from an excess of net
long-term capital gains over net short-term capital losses derived from the
sale of securities or from certain transactions in futures or options ("capital
gain dividends") are taxable as long-term capital gains for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares. Such capital gain dividends are also subject to Minnesota personal
income and corporate franchise taxes. Minnesota law does not have preferential
tax rates for capital gains, but it does place limitations on the deductibility
of capital losses. Certain categories of capital gains are taxable at different
rates for Federal income tax purposes. Generally not later than 60 days after
the close of the Fund's taxable year, the Trust will provide shareholders with
a written notice designating the amounts of any exempt-interest dividends,
ordinary income dividends or capital gain dividends, as well as any amount of
capital gain dividends in the different categories of capital gain referred to
above. Distributions by the Fund, whether from exempt-interest income, ordinary
income or capital gains, will not be eligible for the dividends received
deduction allowed to corporations under the Code.
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All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed for both Federal income and Minnesota
personal income and corporate franchise tax purposes to the extent of any
exempt-interest dividends received by the shareholder, even, in the case of
Minnesota taxes, where all or a portion of such dividends is not excluded from
Minnesota taxable income. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such
months, then such dividend will be treated for tax purposes as being paid by
the Fund and received by its shareholders on December 31 of the year in which
such dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This alternative minimum tax applies
to interest received on certain "private activity bonds" issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (E.G., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference," which could subject certain investors in such bonds,
including shareholders of the Fund, to an alternative minimum tax. The Fund
will purchase such "private activity bonds," and the Trust will report to
shareholders within 60 days after the calendar 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. Exempt-interest dividends
attributable to interest on certain private activity bonds issued after August
7, 1986, also will be included in Minnesota alternative minimum taxable income
of individuals, estates and trusts for purposes of computing Minnesota's
alternative minimum tax.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis
in the Class D shares acquired will be the same as such shareholder's basis in
the Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
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Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and Minnesota 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 Minnesota tax laws. The Code and the Treasury regulations, as
well as the Minnesota tax laws, are subject to change by legislative, judicial
or administrative action either prospectively or retroactively.
Shareholders are urged to consult their tax advisors regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return,
yield and tax-equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return, yield and tax-equivalent yield are computed
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such
as in the case of Class B and Class C shares and the maximum sales charge in
the case of Class A and Class D shares. Dividends paid by the Fund with respect
to all shares, to the extent any dividends are paid, will be calculated in the
same manner at the same time on the same day and will be in the same amount,
except that account maintenance fees and distribution charges 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
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will be higher than average annual total return data since the aggregate rates
of return reflect compounding over a longer period of time. In advertisements
distributed to investors whose purchases are subject to waiver of the CDSC in
the case of Class B and Class C shares, or to reduced sales charges in the case
of Class A or 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, 1998 was 3.95% for Class A shares, 3.60% for Class B shares, 3.50% for
Class C shares and 3.85% for Class D shares and the tax-equivalent yield for
the same period (based on a Federal income tax rate of 28%) was 5.49% for Class
A shares, 5.00% for Class B shares, 4.86% for Class C shares and 5.35% for
Class D shares.
Total return, yield and tax-equivalent yield figures are based on the
Fund's historical performance and are not intended to indicate future
performance. The Fund's total return, yield and tax-equivalent yield will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Lehman Brothers
Municipal Bond Index or to performance data published by Lipper Analytical
Services, Inc., Morningstar Publications, Inc. ("Morningstar"), CDA Investment
Technology, Inc., MONEY MAGAZINE, U.S. NEWS & WORLD REPORT, BUSINESS WEEK,
FORBES MAGAZINE, FORTUNE MAGAZINE or other industry publications. When
comparing its performance to a market index, the Fund may refer to various
statistical measures derived from the historic performance of the Fund and the
index, such as standard deviation and beta. In addition, from time to time, the
Fund may include the Fund's risk-adjusted performance ratings assigned by
Morningstar in advertising or supplemental sales literature. As with other
performance data, performance comparisons should not be considered indicative
of the Fund's relative performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily 15 minutes after the close of business on the NYSE
(generally, the NYSE closes at 4:00 p.m., Eastern time), on each day during
which the NYSE is open for trading. The net asset value per share is computed
by dividing the sum of the value of the securities held by the Fund plus any
cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the fees payable to the Manager and the Distributor, are
accrued daily.
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The per share net asset value of Class A shares generally will 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
fees, higher account maintenance fees and higher transfer agency fees
applicable with respect to Class B and Class C shares. It is expected, however,
that the per share net asset value of the classes will tend to converge
(although not necessarily meet) immediately after the payment of dividends or
distributions which will differ by approximately the amount of the expense
accrual differentials between the classes.
ORGANIZATION OF THE TRUST
The Trust is a business trust organized on August 2, 1985 under the laws
of Massachusetts. On October 1, 1987, the Trust changed its name from "Merrill
Lynch Multi-State Tax-Exempt Series Trust" to "Merrill Lynch Multi-State
Municipal Bond Series Trust," and on December 22, 1987, the Trust again changed
its name to "Merrill Lynch Multi-State Municipal Series Trust." The Trust is an
open-end management investment company comprised of separate series ("Series"),
each of which is a separate portfolio offering shares to selected groups of
purchasers. Each of the Series is managed independently in order to provide to
shareholders who are residents of the state to which such Series relates as
high a level of income exempt from Federal and, in certain cases, state and
local income taxes as is consistent with prudent investment management. The
Trustees are authorized to create an unlimited number of Series and, with
respect to each Series, to issue an unlimited number of full and fractional
shares of beneficial interest, $.10 par value per share, of different classes.
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 relating to the account maintenance
associated with such shares, and Class B and Class C shares bear certain
expenses relating to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to distribution and/or account
maintenance expenditures, as applicable. See "Purchase of Shares." The Trustees
of the Trust may classify and reclassify the shares of any Series into
additional or other classes at a future date.
Shareholders are entitled to one vote for each full share 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. Upon
liquidation or dissolution of a Series, each issued and outstanding share of
that Series is entitled to participate equally in dividends and distributions
declared by the respective Series and in net assets of such Series remaining
after satisfaction of outstanding liabilities except 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
41
<PAGE>
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.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
matter, please call your Merrill Lynch Financial Consultant or 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.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Fund could be adversely
affected if the computer systems used by the Manager or other Fund service
providers do not properly address this problem prior to January 1, 2000. The
Manager has established a dedicated group to analyze these issues and to
implement any systems modifications necessary to prepare for the Year 2000.
Currently, the Manager does not anticipate that the transition to the Year 2000
will have any material impact on its ability to continue to service the Fund at
current levels. In addition, the Manager has sought assurances from the Fund's
other service providers that they are taking all necessary steps to ensure that
their computer systems will accurately reflect the Year 2000, and the Manager
will continue to monitor the situation. At this time, however, no assurance can
be given that the Fund's other service providers have anticipated every step
necessary to avoid any adverse effect on the Fund attributable to the Year 2000
Problem.
----------------
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.
42
<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,
a division of Princeton Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
----------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fee Table ............................................. 2
Merrill Lynch Select Pricing(SM) System ............... 4
Financial Highlights .................................. 8
Investment Objective and Policies ..................... 11
Potential Benefits .................................. 13
Special and Risk Considerations Relating to
Municipal Bonds .................................. 13
Description of Municipal Bonds ...................... 14
When-Issued Securities and Delayed Delivery
Transactions ..................................... 16
Call Rights ......................................... 16
Financial Futures Transactions and Options .......... 17
Repurchase Agreements ............................... 19
Investment Restrictions ............................. 19
Management of the Trust ............................... 20
Trustees ............................................ 20
Management and Advisory Arrangements ................ 20
Code of Ethics ...................................... 21
Transfer Agency Services ............................ 21
Purchase of Shares .................................... 22
Initial Sales Charge Alternatives -- Class A and
Class D Shares ................................... 24
Deferred Sales Charge Alternatives -- Class B and
Class C Shares ................................... 25
Distribution Plans .................................. 28
Limitations on the Payment of Deferred Sales
Charges .......................................... 29
Redemption of Shares .................................. 30
Redemption .......................................... 30
Repurchase .......................................... 31
Reinstatement Privilege -- Class A and
Class D Shares ................................... 31
Shareholder Services .................................. 31
Investment Account .................................. 32
Exchange Privilege .................................. 32
Automatic Reinvestment of Dividends and Capital
Gains Distributions .............................. 34
Systematic Withdrawal Plans ......................... 34
Automatic Investment Plans .......................... 35
Fee-Based Programs .................................. 35
Portfolio Transactions ................................ 35
Distributions and Taxes ............................... 36
Distributions ....................................... 36
Taxes ............................................... 36
Performance Data ...................................... 39
Additional Information ................................ 40
Determination of Net Asset Value .................... 40
Organization of the Trust ........................... 41
Shareholder Reports ................................. 42
Shareholder Inquiries ............................... 42
Year 2000 Issues .................................... 42
</TABLE>
Code #16185-1198
(MERRILL LYNCH logo)
MERRILL LYNCH
MINNESOTA MUNICIPAL
BOND FUND
of Merrill Lynch Multi-State
Municipal Series Trust
(compass graphic appears here)
PROSPECTUS
November 17, 1998
Distributor:
Merrill Lynch
Funds Distributor
This Prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
---------------
Merrill Lynch Minnesota 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 income tax and Minnesota personal income
tax as is consistent with prudent investment management. The Fund invests
primarily in a non-diversified portfolio of long-term investment grade
obligations of the State of Minnesota, its political or governmental
subdivisions, municipalities, governmental agencies or instrumentalities, or of
Indian tribal governments of tribes located in Minnesota, the interest on which
is exempt, in the opinion of bond counsel to the issuer, from Federal and
Minnesota personal income taxes. 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
November 17, 1998 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission (the "Commission") and can be obtained, without charge,
by calling or by writing the Fund at the above telephone number or address.
This Statement of Additional Information has been incorporated by reference
into the Prospectus.
---------------
FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
---------------
The date of this Statement of Additional Information is November 17, 1998
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal income tax and Minnesota personal
income tax 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 State of Minnesota, its
political or governmental subdivisions, municipalities, governmental agencies
or instrumentalities, or by Indian tribal governments of tribes located in
Minnesota, which pay interest exempt from Federal income tax and Minnesota
personal income tax ("Minnesota Municipal Bonds"). Obligations exempt from
Federal income taxes generally are referred to herein as "Municipal Bonds."
Unless otherwise indicated, references to Municipal Bonds shall be deemed to
include Minnesota 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 Minnesota 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 ("Standard & Poor's")
(currently AAA, AA, A and BBB) or Fitch IBCA, Inc. ("Fitch") (currently AAA,
AA, A and BBB). If unrated, such securities will possess creditworthiness
comparable, in the opinion of the manager 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 income tax and Minnesota personal income tax. However, to
the extent that suitable Minnesota 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 to the issuer, from Federal income tax
but not Minnesota personal income taxation. In addition, the Fund may invest in
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the Virgin Islands and Guam which are exempt both from Federal and
Minnesota taxation. The Fund also may invest in securities not issued by or on
behalf of a state or territory or by an agency or instrumentality thereof if
the Fund nevertheless believes such securities to be exempt from Federal income
taxation ("Non-Municipal Tax-Exempt Securities"). Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more Municipal Bonds. Non-Municipal Tax-Exempt Securities
also may include securities issued by other investment companies that invest in
municipal bonds, to the extent permitted by applicable law.
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 Minnesota Municipal Bonds. However, since at least 95% of the
Fund's exempt-interest dividends must be derived from interest income on
obligations of the State of Minnesota, its political or governmental
subdivisions, municipalities, governmental agencies or instrumentalities, or of
Indian tribal governments of tribes located in Minnesota, in order for such
interest income to be excluded from the Minnesota taxable net income of
individuals, estates and trusts, it is anticipated that substantially all of
the Fund's assets will be invested in Minnesota Municipal Bonds. Dividends from
interest on other qualifying issues would not satisfy the 95% test. If for any
reason there is not an adequate supply of Minnesota Municipal Bonds, the Fund
may have to hold cash uninvested in order to preserve the Minnesota tax status
of its dividends. For temporary periods or to provide liquidity, the Fund has
the authority to invest as much as 35% of its assets in tax-exempt or taxable
money market obligations with a maturity of one year or less (such short-term
obligations being referred to herein as "Temporary Investments"), except that
taxable Temporary Investments 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.
2
<PAGE>
Municipal Bonds may at times be purchased or sold on a delayed delivery
basis or a when-issued basis. These transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligation and
the interest rate are each fixed at the time the buyer enters into the
commitment. The Fund will make only commitments to purchase such securities
with the intention of actually acquiring the securities, but the Fund may sell
these securities prior to the settlement date if it is deemed advisable.
Purchasing Municipal Bonds on a when-issued basis involves the risk that the
yields available in the market when the delivery takes place may actually be
higher than those obtained in the transaction itself; if yields so increase,
the value of the when-issued 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 (and Non-Municipal Tax-Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an index.
Also, the Fund may invest in so-called "inverse floating obligations" or
"residual interest bonds" on which the interest rates typically decline as
short-term market rates increase and increase as short-term market rates
decline. To the extent the Fund invests in these types of Municipal Bonds, the
Fund's return on such Municipal Bonds will be subject to risk with respect to
the value of the particular index, which may include reduced or eliminated
interest payments and losses of invested principal. Such securities have the
effect of providing a degree of investment leverage, since they may increase or
decrease in value in response to changes, as an illustration, in market
interest rates at a rate which is a multiple (typically two) of the rate at
which fixed-rate long-term tax-exempt securities increase or decrease in
response to such changes. As a result, the market values of such securities
will generally be more volatile than the market values of fixed-rate tax-exempt
securities. To seek to limit the volatility of these securities, the Fund may
purchase inverse floating obligations with shorter term maturities or which
contain limitations on the extent to which the interest rate may vary. Certain
investments in such obligations may be illiquid. The Fund may not invest in
such illiquid obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's total assets. The Manager believes,
however, that indexed and inverse floating obligations represent flexible
portfolio management instruments for the Fund which allow the Fund to seek
potential investment rewards, hedge other portfolio positions or vary the
degree of investment leverage relatively efficiently under different market
conditions.
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's total assets.
The Fund may invest up to 20% of its total assets in Municipal Bonds which
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or
which, in the Manager's judgment, possess similar credit characteristics ("high
yield securities"). See Appendix II -- "Ratings of Municipal Bonds" for
additional information regarding ratings of debt securities. The Manager
considers the ratings assigned by Standard & Poor's, Moody's or Fitch as one of
several factors in its independent credit analysis of issuers.
High yield securities are considered by Standard & Poor's, Moody's and
Fitch to have varying degrees of speculative characteristics. Consequently,
although high yield securities can be expected to provide higher yields, such
securities may be subject to greater market price fluctuations and risk of loss
of principal than lower yielding, higher rated debt securities. Investments in
high yield securities will be made only when, in the judgment of the Manager,
such securities provide attractive total return potential relative to the risk
of such securities, as compared to higher quality debt securities. The Fund
generally will not invest in debt securities in the lowest rating categories
(those rated CC or lower by Standard & Poor's or Fitch or Ca or lower by
Moody's) unless the Manager believes that the financial condition of the issuer
or the protection afforded the particular securities is stronger than would
otherwise be indicated by such low ratings. The Fund does not intend to
purchase debt securities that are in default or which the Manager believes will
be in default.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers or obligors generally
are greater than is the case with higher rated securities. For example, during
an economic downturn or a sustained period of rising interest rates, issuers of
high yield securities may be more likely to experience financial stress,
especially if such issuers or
3
<PAGE>
obligors are highly leveraged. During periods of economic recession, such
issuers may not have sufficient revenues to meet their interest payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific issuer developments or the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. The risk of loss due to default by the issuer is significantly
greater for the holders of high yield securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer.
High yield securities frequently have call or redemption features that
would permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
would likely have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
secondary market for many of these securities, and the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for high
yield securities does exist, it generally is not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally 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, financing governmental programs, refunding outstanding obligations
and obtaining funds for general operating expenses and loans to other public
institutions. In addition, certain types of bonds are issued by or on behalf of
public authorities to finance or refinance various privately owned or operated
facilities. Such obligations are included within the term Municipal Bonds if
the interest paid thereon is excluded from gross income for Federal income tax
purposes. Other types of industrial development bonds or private activity
bonds, the proceeds of which are used for the construction, equipment or
improvement of privately owned or operated facilities, may constitute Municipal
Bonds, although current Federal tax laws place substantial limitations on the
size and permitted purposes 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 its full faith, credit and taxing power for the payment
of principal and interest. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special or limited tax or other specific revenue source
such as payments from the user of the facility being financed. Industrial
development bonds ("IDBs") and, for bonds issued after August 15, 1986, private
activity bonds are in most cases revenue bonds and generally do not constitute
the pledge of the credit or taxing power of
4
<PAGE>
the issuer of such bonds. Generally, the payment of the principal of and
interest on such IDBs or private activity 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 letter of credit, bond insurance or
other security is furnished. The Fund may invest in "moral obligation" bonds,
which are normally issued by special purpose public authorities. If an issuer
of moral obligation bonds is unable to meet its obligations, the repayment of
such bonds becomes a moral commitment, but not a legal obligation, of the state
or municipality in question.
Also included within the general category of Municipal Bonds are
participation certificates that represent participations in a lease, an
installment purchase contract or a conditional sales contract (collectively,
"lease obligations") entered into by a governmental entity or authority to
finance the acquisition or construction of land, buildings, equipment or other
facilities. Although lease obligations ordinarily do not constitute general
obligations of the issuer for which the lessee'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 non-appropriation
and repossession might prove difficult. These securities represent a relatively
new type of financing that has not yet developed the depth of marketability
associated with more conventional securities. Certain investments in lease
obligations may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with all other illiquid investments,
would exceed 15% of the Fund's total assets. The Fund may, however, invest
without regard to such limitation in lease obligations which the Manager,
pursuant to guidelines which have been adopted by the Board of Trustees and
subject to the supervision of the Board 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 governmental entity
that is 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 or the
entity responsible for payment, the maturity of the obligation and the rating
of the issue or the absence of a rating. The ability of the Fund to achieve its
investment objective is also dependent on the continuing ability of the issuers
or the entities responsible for payment 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,
depending on numerous factors. Furthermore, the rights of owners of Municipal
Bonds and the obligations of the issuer or the entity responsible for payment
of such Municipal Bonds may be subject to applicable bankruptcy, insolvency and
similar laws and court decisions affecting the rights of creditors and to
general equitable principles, which may limit the enforcement of certain
remedies.
DESCRIPTION OF TEMPORARY INVESTMENTS
The Fund may invest in short-term tax-free and taxable securities subject
to the limitations set forth under "Investment Objective and Policies." The
tax-exempt money market securities may include municipal notes, municipal
commercial paper, municipal bonds with a remaining maturity of less than one
year, variable rate demand notes and participations therein. Municipal notes
include tax anticipation notes, bond anticipation notes and grant anticipation
notes. Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales, government grants or revenue receipts. Municipal
commercial paper refers to short-term unsecured promissory notes generally
issued to finance short-term credit needs. The taxable money market securities
in which the Fund may invest as Temporary Investments consist of U.S.
Government securities, U.S. Government agency securities, domestic bank or
savings institution certificates of deposit and bankers' acceptances,
short-term corporate debt securities such as commercial paper, and repurchase
agreements. These Temporary Investments must have a stated maturity not in
excess of one year from the date of purchase.
Variable rate demand obligations ("VRDOs") are tax-exempt obligations
which contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility that
because of default or insolvency the demand feature of VRDOs and Participating
VRDOs, described below,
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may not be honored. The interest rates are adjustable at intervals (ranging
from daily to up to one year) to a market rate for similar investments, such
adjustment calculated to maintain the market value of the VRDO at the par value
of the VRDOs on the adjustment date. The adjustments typically are set at a
rate determined by the remarketing agent or based upon the Public Securities
Association Index or some other appropriate interest rate adjustment index. The
Fund may invest in all types of tax-exempt instruments currently outstanding or
to be issued in the future which satisfy the short-term maturity and quality
standards of the Fund.
The Fund also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank. Participating VRDOs provide
the Fund with a specified undivided interest (up to 100%) of the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the Participating VRDOs from the financial institution upon
a specified number of days' notice, not to exceed seven days. In addition, a
Participating VRDO is backed by an irrevocable letter of credit or guaranty of
the financial institution. The Fund would have an undivided interest in the
underlying obligation and thus participate on the same basis as the financial
institution in such obligation except that the financial institution typically
retains fees out of the interest paid on the obligation for servicing the
obligation, providing the letter of credit and issuing the repurchase
commitment. The Fund has been advised by its counsel that the Fund should be
entitled to treat the income received on Participating VRDOs as interest from
tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed to be illiquid securities. 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 the liquidity of such VRDOs.
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-3/VMIG-3 by Moody's or F-1 through F-3 by Fitch. Temporary Investments, if
not rated, must be of comparable quality to securities rated in the above
rating categories in the opinion of the Manager. The Fund may not invest in any
security issued by a commercial bank or a savings institution unless the bank
or institution is organized and operating in the United States, has total
assets of at least one billion dollars and is a member of the Federal Deposit
Insurance Corporation ("FDIC"), except that up to 10% of total assets may be
invested in certificates of deposit of small institutions if such certificates
are fully insured by the FDIC.
REPURCHASE AGREEMENTS
The Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or a primary dealer in U.S. Government securities or an
affiliate thereof. Under such agreements, the seller agrees, upon entering into
the contract, to repurchase the security at a mutually agreed upon time and
price, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during
such period. In repurchase agreements, the prices at which the trades are
conducted do not reflect accrued interest on the underlying obligations. Such
agreements usually cover short periods, such as under one week. Repurchase
agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. In a repurchase
agreement, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund
may suffer time delays and incur costs or possible losses in connection with
the disposition of the collateral. In the event of a default under such a
repurchase agreement, instead of the contractual fixed rate of return, the rate
of return to the Fund 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 more than 10% of its net assets
in repurchase agreements maturing in more than seven days if such investments,
together with all other illiquid investments, would exceed 15% of the Fund's
total assets.
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In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
Reference is made to the discussion concerning futures transactions under
"Investment Objective and Policies" in the Prospectus. Set forth below is
additional information concerning these transactions.
As described in the Prospectus, the Fund may purchase and sell exchange
traded financial futures contracts ("financial futures contracts") to hedge its
portfolio of Municipal Bonds against declines in the value of such securities
and to hedge against increases in the cost of securities the Fund intends to
purchase. However, any transactions involving financial futures or options (and
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. See "Investment Objective and Policies --
Investment Restrictions" in the Prospectus. To hedge its portfolio, the Fund
may take an investment position in a futures contract which will move in the
opposite direction from the portfolio position being hedged. While the Fund's
use of hedging strategies is intended to moderate capital changes in portfolio
holdings and thereby reduce the volatility of the net asset value of Fund
shares, the Fund anticipates that its net asset value will fluctuate. Set forth
below is information concerning futures transactions.
DESCRIPTION OF FUTURES CONTRACTS. A futures contract is an agreement
between two parties to buy and sell a security or, in the case of an
index-based futures contract, to make and accept a cash settlement for a set
price on a future date. A majority of transactions in futures contracts,
however, do not result in the actual delivery of the underlying instrument or
cash settlement, but are settled through liquidation, I.E., by entering into an
offsetting transaction. Futures contracts have been designed by boards of trade
which have been designated "contracts markets" by the Commodity Futures Trading
Commission ("CFTC").
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the
purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin," are required to be made on a daily
basis as the price of the futures contract fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"marking to market." At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or
gain. In addition, a nominal commission is paid on each completed sale
transaction.
The Fund may deal in financial futures contracts based on a long-term
municipal bond index developed by the Chicago Board of Trade ("CBT") and The
Bond Buyer (the "Municipal Bond Index"). The Municipal Bond Index is comprised
of 40 tax-exempt municipal revenue and general obligations bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
Standard & Poor's and must have a remaining maturity of 19 years or more. Twice
a month new issues satisfying the eligibility requirements are added to, and an
equal number of old issues are deleted from, the Municipal Bond Index. The
value of the Municipal Bond Index is computed daily according to a formula
based on the price of each bond in the Municipal Bond Index, as evaluated by
six dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the
exchange membership which is also responsible for handling daily accounting of
deposits or withdrawals of margin.
As described in the Prospectus, the Fund may purchase and sell financial
futures contracts on U.S. Government securities as a hedge against adverse
changes in interest rates as described below. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-term
U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage
Association ("GNMA") Certificates and three-month U.S. Treasury bills. The Fund
may purchase and write call and put options on 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 that 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.
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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 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 write
exchange traded call and put options on financial futures contracts on U.S.
Government securities. The purchase of a call option on a futures contract is
analogous to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the futures contract on which
it is based or on the price of the underlying debt securities, it may or may
not be less risky than ownership of the futures contract or underlying debt
securities. Like the purchase of a futures contract, the Fund will purchase a
call option on a futures contract to hedge against a market advance when the
Fund is not fully invested.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is below
the exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any decline that may have occurred in
the Fund's portfolio holdings.
PUT OPTIONS ON FUTURES CONTRACTS. The purchase of options on a futures
contract is analogous to the purchase of protective put options on portfolio
securities. The Fund will purchase put options on futures contracts to hedge
the Fund's portfolio against the risk of rising interest rates.
The writing of a put option on a futures contract constitutes a partial
hedge against increasing prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is higher
than the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
Municipal Bonds which the Fund intends to purchase.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option will be included in initial margin. The writing of an option on a
futures contract involves risks similar to those relating to futures contracts.
The Trust has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "1940 Act"), in connection with its strategy of investing
in futures contracts. Section 17(f) relates to the custody of securities and
other assets of an investment company and may be deemed to prohibit certain
arrangements between the Trust and commodities brokers with respect to initial
and variation margin. Section 18(f) of the 1940 Act prohibits an open-end
investment company such as the Trust from issuing a "senior security" other
than a borrowing from a bank. The staff of the Commission has in the past
indicated that a futures contract may be a "senior security" under the 1940
Act.
RESTRICTIONS ON USE OF FUTURES TRANSACTIONS. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and sell
futures contracts
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and options thereon (i) for bona fide hedging purposes, and (ii) for
non-hedging purposes, if the aggregate initial margin and premiums required to
establish positions in such contracts and options does not exceed 5% of the
liquidation value of the Fund's portfolio assets after taking into account
unrealized profits and unrealized losses on any such contracts and options.
(However, the Fund intends to engage in options and futures transactions only
for hedging purposes.) Margin deposits may consist of cash or securities
acceptable to the broker and the relevant contract market.
When the Fund purchases futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or liquid securities will be deposited in a segregated account with
the Fund's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the futures contract, thereby ensuring that the use of such
futures is unleveraged.
RISK FACTORS IN FUTURES TRANSACTIONS AND OPTIONS. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged security,
the Fund will experience either a loss or gain on the futures contract which is
not completely offset by movements in the price of the hedged securities. To
compensate for imperfect correlations, the Fund may purchase or sell futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
futures contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts.
The particular municipal bonds comprising the index underlying the
Municipal Bond Index financial futures contract may vary from the Municipal
Bonds held by the Fund. As a result, the Fund's ability to hedge effectively
all or a portion of the value of its Municipal Bonds through the use of such
financial futures contracts will depend in part on the degree to which price
movements in the index underlying the financial futures contract correlate with
the price movements of the Municipal Bonds held by the Fund. The correlation
may be affected by disparities in the average maturity, ratings, geographical
mix or structure of the Fund's investments as compared to those comprising the
Municipal Bond Index and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may
be subject to change over time as additions to and deletions from the Municipal
Bond Index alter its structure. The correlation between futures contracts on
U.S. Government securities and the Municipal Bonds held by the Fund may be
adversely affected by similar factors, and the risk of imperfect correlation
between movements in the prices of such futures contracts and the prices of the
Municipal Bonds held by the Fund may be greater.
The Fund expects to liquidate a majority of the futures contracts it
enters into through offsetting transactions on the applicable contract market.
There can be no assurance, however, that a liquid secondary market will exist
for any particular futures contract at any specific time. Thus, it may not be
possible to close out a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments
of variation margin. In such situations, if the Fund has insufficient cash, it
may be required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability
to close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments in Municipal Bonds. The Fund will
enter into a futures position only if, in the judgment of the Manager, there
appears to be an actively traded secondary market for such futures contracts.
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
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futures contract also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased.
Municipal Bond Index futures contracts were approved for trading in 1986.
Trading in such futures contracts may tend to be less liquid than that in other
futures contracts. The trading of futures contracts also is subject to certain
market risks, such as inadequate trading activity, which could at times make it
difficult or impossible to liquidate existing positions.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the 1940 Act means the lesser of
(i) 67% of the Fund's shares present at a meeting at which more than 50% of the
outstanding shares of the Fund are represented or (ii) more than 50% of the
Fund's outstanding shares). The Fund may not:
1. Invest more than 25% of its assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities). For
purposes of this restriction, states, municipalities and their political
subdivisions are not considered 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
acceptable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the 1940 Act) in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) the Fund may, to the extent permitted
by applicable law, borrow up to an additional 5% of its total assets for
temporary purposes, (iii) the Fund may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio
securities and (iv) the Fund may purchase securities on margin to the
extent permitted by applicable law. The Fund may not pledge its assets
other than to secure such borrowings or, to the extent permitted by the
Fund's investment policies as set forth in its Prospectus and Statement of
Additional Information, as they may be amended from time to time, in
connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.
7. Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act 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 non-fundamental investment restrictions, which may be changed
by the Board of Trustees without shareholder approval, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of
the 1940 Act at any time the Fund's shares are owned by another investment
company that is part of the same group of investment companies as the Fund.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box."
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c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Trustees of the Trust has otherwise
determined to be liquid pursuant to applicable law.
d. Notwithstanding fundamental investment restriction (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.
In addition, to comply with Federal income tax requirements for
qualification as a "regulated investment company," the Fund's investments will
be limited in a manner such that, at the close of each quarter of each fiscal
year, (a) no more than 25% of the Fund's total assets are invested in the
securities of a single issuer, and (b) with regard to at least 50% of the
Fund's total assets, no more than 5% of its total assets are invested in the
securities of a single issuer. For purposes of this restriction, the Fund will
regard each state and each political subdivision, agency or instrumentality of
such state and each multi-state agency of which such state is a member and each
public authority which issues securities on behalf of a private entity as a
separate issuer, except that if the security is backed only by the assets and
revenues of a non-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 income
tax requirements.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Manager, the Fund is prohibited from
engaging in certain transactions involving Merrill Lynch or its affiliates
except pursuant to an exemptive order or otherwise in compliance with the
provisions of the 1940 Act and the rules and regulations thereunder. Included
among such restricted transactions are purchases from or sales to Merrill Lynch
of securities in transactions in which it acts as principal and purchases of
securities from underwriting syndicates of which Merrill Lynch is a member. 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
Information about the Trustees and executive officers of the Trust and the
portfolio manager of the Fund, including their ages and principal occupations
for at least the last five years, is set forth below. Unless otherwise noted,
the address of each Trustee, executive officer and the portfolio manager is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66) -- PRESIDENT AND TRUSTEE(1)(2) -- Chairman of the
Manager and of Merrill Lynch Asset Management, L.P. ("MLAM") (which terms as
used herein include their corporate predecessors) since 1997; President of the
Manager and MLAM from 1977 to 1997; Chairman of Princeton Services, Inc.
("Princeton Services") since 1997, and Director thereof since 1993; President
of Princeton Services from 1993 to 1997; Executive Vice President of Merrill
Lynch & Co., Inc. ("ML & Co.") since 1990.
JAMES H. BODURTHA (54) -- TRUSTEE(2) -- 36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (59) -- TRUSTEE(2) -- 113-115 University Place, New
York, New York 10003. John M. Olin Professor of Humanities, New York University
since 1993 and Professor thereof since 1980; President, Hudson Institute since
1997 and Trustee since 1980; Dean, Gallatin Division of New York University
from 1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute
from 1984 to 1985; Director, Damon Corporation from 1991 to 1995; Overseer,
Center for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech LP in
1996.
ROBERT R. MARTIN (71) -- TRUSTEE(2) -- 513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from
1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989;
Director, Carnegie Capital Management from 1977 to 1985 and Chairman thereof in
1979; Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC
Industries, Inc. in 1994; Trustee, Northland College since 1992.
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JOSEPH L. MAY (69) -- 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.
ANDR- F. PEROLD (46) -- TRUSTEE(2) -- Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund since 1989;
Director, Quantec Limited since 1991 and TIBCO from 1994 to 1996.
TERRY K. GLENN (58) -- EXECUTIVE VICE PRESIDENT(1)(2) -- Executive Vice
President of the Manager and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Princeton Funds
Distributor, Inc. ("PFD") since 1986 and Director thereof since 1991; President
of Princeton Administrators, L.P. since 1988.
VINCENT R. GIORDANO (54) -- SENIOR VICE PRESIDENT(1)(2) -- Senior Vice
President of the Manager and MLAM since 1984; Vice President of MLAM from 1980
to 1984; Senior Vice President of Princeton Services since 1993.
KENNETH A. JACOB (47) -- VICE PRESIDENT(1)(2) -- First Vice President of
MLAM since 1997; Vice President of MLAM from 1984 to 1997; Vice President of
the Manager since 1984.
HUGH T. HURLEY, III (34) -- PORTFOLIO MANAGER AND VICE PRESIDENT OF THE
FUND(1)(2) -- Vice President of MLAM since 1996; Assistant Vice President of
MLAM from 1993 to 1996.
DONALD C. BURKE (38) -- VICE PRESIDENT(1)(2) -- First Vice President of
MLAM since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation
of MLAM since 1990.
GERALD M. RICHARD (49) -- TREASURER(1)(2) -- Senior Vice President and
Treasurer of the Manager and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Treasurer of PFD since 1984 and
Vice President thereof since 1981.
ROBERT E. PUTNEY, III (38) -- SECRETARY(1)(2) -- Director (Legal Advisory)
of MLAM and Princeton Administrators, L.P. since 1997; Vice President of MLAM
from 1994 to 1997; Vice President of Princeton Administrators, L.P. from 1996
to 1997; Attorney with MLAM from 1991 to 1994.
- -------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At November 2, 1998, the Trustees, the officers of the Trust and the
officers of the Fund as a group (13 persons) owned an aggregate of less than 1%
of the outstanding shares of the Fund. At such date, Mr. Zeikel, a Trustee and
officer of the Trust, the other officers of the Trust and the officers of the
Fund owned less than 1% of the outstanding shares of common stock of ML & Co.
COMPENSATION OF TRUSTEES
The Trust pays each Trustee not affiliated with the Manager (each a
"non-affiliated Trustee") a fee of $10,000 per year plus $1,000 per meeting
attended, together with such Trustee's actual out-of-pocket expenses relating
to attendance at meetings. The Trust also compensates members of its Audit and
Nominating Committee (the "Committee"), which consists of all the
non-affiliated Trustees, an annual fee of $2,000 plus $500 per committee
meeting attended. The Trust reimburses each non-affiliated Trustee for his
out-of-pocket expenses relating to attendance at Board and Committee meetings.
The fees and expenses of the Trustees are allocated to the respective series of
the Trust on the basis of asset size. For the fiscal year ended July 31, 1998,
fees and expenses paid to non-affiliated Trustees that were allocated to the
Fund aggregated $2,707.
12
<PAGE>
The following table sets forth the compensation paid by the Fund to the
non-affiliated Trustees for the fiscal year ended July 31, 1998, and the
aggregate compensation paid by all registered investment companies (including
the Trust) advised by the Manager and its affiliate, MLAM ("FAM/MLAM Advised
Funds") to the non-affiliated Trustees for the calendar year ended December 31,
1997:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM TRUST AND OTHER
PENSION OR RETIREMENT FAM/MLAM ADVISED
COMPENSATION BENEFITS ACCRUED AS FUNDS PAID TO
NAME OF TRUSTEE FROM FUND PART OF TRUST'S EXPENSES TRUSTEE(1)
- --------------------------- -------------- -------------------------- ---------------------
<S> <C> <C> <C>
James H. Bodurtha ......... $535 None $148,500
Herbert I. London ......... $535 None $148,500
Robert R. Martin .......... $535 None $148,500
Joseph L. May ............. $535 None $148,500
Andre F. Perold ........... $535 None $148,500
</TABLE>
- -------
(1) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (25 registered investment companies consisting of 43 portfolios);
Mr. London (25 registered investment companies consisting of 43
portfolios); Mr. Martin (25 registered investment companies consisting of
43 portfolios); Mr. May (25 registered investment companies consisting of
43 portfolios); and Mr. Perold (25 registered investment companies
consisting of 43 portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the 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 and purchases arise for consideration at
or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of
the Manager or its affiliates during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there
may be an adverse effect on price.
Pursuant to a management agreement between the Trust on behalf of the Fund
and the Manager (the "Management Agreement"), the Manager receives for its
services to the Fund monthly compensation based upon the average daily net
assets of the Fund at the following annual rates: 0.55% of the average daily
net assets not exceeding $500 million; 0.525% of the average daily net assets
exceeding $500 million but not exceeding $1.0 billion; and 0.50% of the average
daily net assets exceeding $1.0 billion. For the fiscal years ended July 31,
1996, 1997 and 1998, the total advisory fees payable by the Fund to the Manager
were $328,665, $285,229 and $263,497, respectively. For the fiscal year ended
July 31, 1996, the Manager voluntarily waived $65,668 of such fees. No advisory
fees were waived for the fiscal years ended July 31, 1997 and 1998.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Trust connected with investment and economic
research, trading and investment management of the Trust, as well as the fees
of all Trustees of the Trust who are affiliated persons of ML & Co. or any of
its affiliates. The Fund pays all other expenses incurred in its operation and
a portion of the Trust's general administrative expenses allocated on the basis
of the asset size of the respective series of the Trust ("Series"). Expenses
that will be borne directly by the Series include, 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 Merrill Lynch Funds Distributor, a division of PFD
(the "Distributor") as described below, fees for legal and auditing services,
Commission fees, interest, certain taxes and other expenses attributable to a
particular Series. Expenses that will be allocated on the basis of asset size
of the respective Series include fees and expenses of 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
13
<PAGE>
lawsuit relates or allocated on the basis of the asset size of the respective
Series. The Trustees have determined that this is an appropriate method of
allocation of expenses. Accounting services are provided to the Fund by the
Manager and the Fund reimburses the Manager for its costs in connection with
such services. For the fiscal years ended July 31, 1996, 1997 and 1998, the
Fund reimbursed the Manager $52,951, $43,046 and $34,032, respectively, for
accounting services. As required by the Fund's distribution agreements, the
Distributor will pay the promotional expenses of the Fund incurred in
connection with the offering of shares of the Fund. Certain expenses in
connection with the account maintenance and distribution of Class B 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."
The Manager is a limited partnership, the partners of which are ML & Co.
and Princeton Services. ML & Co. and Princeton Services are "controlling
persons" of the Manager as defined under the 1940 Act because of their
ownership of its voting securities or their power to exercise a controlling
influence over its management or policies.
DURATION AND TERMINATION. Unless earlier terminated as described below,
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(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C 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 (except
that Class B shareholders may vote upon any material changes to expenses
charged under the Class D Distribution Plan). Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLAM or its affiliate, the Manager.
Funds advised by MLAM or the Manager that utilize the Merrill Lynch Select
Pricing(SM) System are referred to herein as "Select Pricing 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.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal year
ended July 31, 1996 were $54,038, of which the Distributor received $318 and
Merrill Lynch received $53,720. The gross sales charges for the sale of Class A
shares for the fiscal year ended July 31, 1997 were $2,099, of which the
Distributor received $174 and Merrill Lynch received $1,925. The gross sales
charges for the sale of Class A shares for the fiscal year ended July 31, 1998
were $1,760, of which the Distributor received $154 and Merrill Lynch received
$1,606. For the fiscal years ended July 31, 1996, 1997 and 1998, the
Distributor received no contingent deferred sales charges ("CDSCs") with
respect to redemptions within one year after purchase of Class A shares
purchased subject to a front-end sales charge waiver. The gross sales charges
for the sale of Class D shares for the fiscal year ended July 31, 1996 were
$6,395, of which the Distributor received $116 and Merrill Lynch received
$6,279. The gross sales charges for the sale of Class D shares for the fiscal
year ended July 31, 1997 were $205, of which the Distributor received $13 and
Merrill Lynch received $192. The gross sales charges for the sale of Class D
14
<PAGE>
shares for the fiscal year ended July 31, 1998 were $5,404, of which the
Distributor received $987 and Merrill Lynch received $4,417. For the fiscal
years ended July 31, 1996, 1997 and 1998, the Distributor received no CDSCs
with respect to redemption within one year after purchase of Class D shares
purchased subject to a front-end sales charge waiver.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account
and to single purchases by a trustee or other fiduciary purchasing shares for a
single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company," as that term is defined in the 1940 Act, but does not include
purchases by any such company that has not been in existence for at least six
months or which has no purpose other than the purchase of shares of the Fund or
shares of other registered investment companies at a discount; provided,
however, that it shall not include purchases by any group of individuals whose
sole organizational nexus is that the participants therein are credit
cardholders of a company, policyholders of an insurance company, customers of
either a bank or broker-dealer or clients of an investment adviser.
CLOSED-END FUND INVESTMENT OPTION. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or
MLAM who purchased such closed-end fund shares prior to October 21, 1994, the
date the Merrill Lynch Select Pricing(SM) System commenced operations, and wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to purchase Class A shares) or Class D shares of the Fund and other Select
Pricing Funds ("Eligible Class D Shares"), if the following conditions are met.
First, the sale of closed-end fund shares must be made through Merrill Lynch,
and the net proceeds therefrom must be immediately reinvested in Eligible Class
A or Class D Shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends
from shares of common stock acquired in such offering. Third, the closed-end
fund shares must have been continuously maintained in a Merrill Lynch
securities account. Fourth, there must be a minimum purchase of $250 to be
eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A shares and the
other requirements pertaining to the reinvestment privilege are met. In order
to exercise this investment option, a shareholder of one of the
above-referenced continuously offered closed-end funds (an "eligible fund")
must sell his or her shares of common stock of the eligible fund (the "eligible
shares") back to the eligible fund in connection with a tender offer conducted
by the eligible fund and reinvest the proceeds immediately in the designated
class of shares of the Fund. This investment option is available only with
respect to eligible shares as to which no Early Withdrawal Charge or CDSC (each
as defined in the eligible fund's prospectus) is applicable. Purchase orders
from eligible fund shareholders wishing to exercise this investment option will
be accepted only on the day that the related tender offer terminates and will
be effected at the net asset value of the designated class of the Fund on such
day.
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 Select Pricing Funds. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
15
<PAGE>
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
Select Pricing Fund 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 recordkeeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares;
however, its execution will result in the purchaser paying a lower sales charge
at the appropriate quantity purchase level. A purchase not originally made
pursuant to a Letter of Intention may be included under a subsequent Letter of
Intention executed within 90 days of such purchase if the Distributor is
informed in writing of this intent within such 90-day period. The value of
Class A or Class D shares of the Fund and of other Select Pricing Funds
presently held, at cost or maximum offering price (whichever is higher), on the
date of the first purchase under the Letter of 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 5.0% 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 5.0% 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 that would be
applicable to a single purchase equal to the total dollar value of the shares
then being purchased under such Letter, 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 the Summit Cash Reserves
Fund into the Fund that creates a sales charge will count toward completing a
new or existing Letter of Intention from the Fund.
EMPLOYEE ACCESS(SM) ACCOUNTS. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. The initial
minimum investment for such accounts is $500, except that the initial minimum
investment for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
TMA(SM) MANAGED TRUSTS. Class A shares are offered at net asset value to
TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
PURCHASE PRIVILEGE OF CERTAIN PERSONS. Trustees of the Trust, members of
the Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes MLAM, the Manager and certain other entities directly or
indirectly wholly owned and controlled by ML & Co.) and their directors and
employees, and any trust, pension, profit-sharing or other benefit plan for
such persons, may purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the Financial Consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish that such redemption had
been made within 60 days prior to the investment in the Fund and the proceeds
from the redemption had been maintained in the interim in cash or a money
market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares
of such other fund were subject to a sales charge either at the time of
purchase or on a deferred basis; and second, such purchase of Class D shares
must be made within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has
16
<PAGE>
not served as a selected dealer if the following conditions are satisfied:
first, the investor must advise Merrill Lynch that it will purchase Class D
shares of the Fund with proceeds from the redemption of shares of such other
mutual fund and that such shares have been outstanding for a period of no less
than six months; and second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must
be maintained in the interim in cash or a money market fund.
ACQUISITION OF CERTAIN INVESTMENT COMPANIES. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund that might result from an acquisition of assets having net unrealized
appreciation that is disproportionately higher at the time of acquisition than
the realized or unrealized appreciation of the Fund. The issuance of Class D
shares for consideration other than cash is limited to bona fide
reorganizations, statutory mergers or other acquisitions of portfolio
securities that (i) meet the investment objectives and policies of the Fund;
(ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, that are not restricted as to transfer
either by law or liquidity of market (except that the Fund may acquire through
such transactions restricted or illiquid securities to the extent the Fund does
not exceed the applicable limits on acquisition of such securities set forth
under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
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
fees and/or distribution fees paid to the Distributor. In their consideration
of each Distribution Plan, the Trustees must consider all factors they deem
relevant, including information as to the benefits of the Distribution Plan to
the Fund and its related class of shareholders. Each Distribution Plan further
provides that, so long as the Distribution Plan remains in effect, the
selection and nomination of Trustees who are not "interested persons" of the
Trust, as defined in the 1940 Act (the "Independent Trustees"), shall be
committed to the discretion of the Independent Trustees then in office. In
approving each Distribution Plan in accordance with Rule 12b-1, the Independent
Trustees concluded that there is reasonable likelihood that 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 Conduct Rules of the National
Association of Securities Dealers, Inc. (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
17
<PAGE>
sales. Consequently, the maximum amount payable to the Distributor (referred to
as the "voluntary maximum") in connection with the Class B shares is 6.75% of
eligible gross sales. The Distributor retains the right to stop waiving the
interest charges at any time. To the extent payments would exceed the voluntary
maximum, the Fund will not make further payments of the distribution fee with
respect to Class B shares, and any CDSCs will be paid to the Fund rather than
to the Distributor; however, the Fund will continue to make payments of the
account maintenance fee. In certain circumstances the amount payable pursuant
to the voluntary maximum may exceed the amount payable under the NASD formula.
In such circumstances payment in excess of the amount payable under the NASD
formula will not be made.
The following table sets forth comparative information as of July 31,
1998, with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to the Class B shares, the Distributor's voluntary
maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1998
---------------------------------------------
ALLOWABLE ALLOWABLE
ELIGIBLE AGGREGATE INTEREST MAXIMUM
GROSS SALES ON UNPAID AMOUNT
SALES(1) CHARGES BALANCE(2) PAYABLE
---------- ----------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD
MARCH 27, 1992 (COMMENCEMENT OF
OPERATIONS) TO JULY 31, 1998:
Under NASD Rule as Adopted ............ $70,718 $4,420 $2,138 $6,558
Under Distributor's Voluntary Waiver .. $70,718 $4,420 $ 354 $4,774
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994 (COMMENCEMENT
OF OPERATIONS) TO JULY 31, 1998:
Under NASD Rule as Adopted ............ $ 1,861 $ 116 $ 25 $ 141
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1998
------------------------------------------------
AMOUNTS ANNUAL
PREVIOUSLY AGGREGATE DISTRIBUTION
PAID TO UNPAID FEE AT CURRENT
DISTRIBUTOR(3) BALANCE NET ASSET LEVEL(4)
---------------- ----------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD
MARCH 27, 1992 (COMMENCEMENT OF
OPERATIONS) TO JULY 31, 1998:
Under NASD Rule as Adopted ............ $1,220 $5,338 $96
Under Distributor's Voluntary Waiver .. $1,220 $3,554 $96
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994 (COMMENCEMENT
OF OPERATIONS) TO JULY 31, 1998:
Under NASD Rule as Adopted ............ $ 12 $ 129 $ 5
</TABLE>
- -------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in THE WALL STREET JOURNAL, plus 1.0%, as permitted under the
NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares -- Distribution Plans" in the Prospectus. This figure
may include CDSCs that were deferred when a shareholder redeemed shares
prior to the expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFA(SM)) Program (the "MFA program"). The
CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA program.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum (with respect to Class
B and Class C shares) or the voluntary maximum (with respect to Class B
shares).
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the NYSE is restricted as determined by the Commission or the
NYSE is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
The value of shares at the time of the redemption may be more or less than
the shareholder's cost, depending on the market value of the securities held by
the Fund at any such time.
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in certain
circumstances including 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
18
<PAGE>
within one year of the death or initial determination of disability. For the
fiscal years ended July 31, 1996, 1997 and 1998, the Distributor received CDSCs
of $58,961, $58,681 and $16,916, respectively, with respect to redemptions of
Class B shares, all of which were paid to Merrill Lynch. Additional CDSCs
payable to the Distributor during the fiscal years ended July 31, 1997 and 1998
may have been waived or converted to a contingent obligation in connection with
a shareholder's participation in certain fee-based programs. For the fiscal
years ended July 31, 1996, 1997 and 1998, the Distributor received CDSCs of
$26, $124 and $36, respectively, with respect to redemptions of Class C shares,
all of which were paid to Merrill Lynch.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies" 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 ("OTC") transactions are usually principal
transactions, affiliated persons of the Trust, including Merrill Lynch, may not
serve as dealer in connection with transactions with the Fund. The Trust has
obtained an exemptive order permitting it to engage in certain principal
transactions with Merrill Lynch involving high quality short-term municipal
bonds subject to certain conditions. For the fiscal years ended July 31, 1996,
1997 and 1998, [the Fund engaged in no transactions] pursuant to such order.
Affiliated persons of the Trust may serve as broker for the Fund in OTC
transactions conducted on an agency basis. Certain court decisions have raised
questions as to the extent to which investment companies should seek exemptions
under the 1940 Act in order to seek to recapture underwriting and dealer
spreads from affiliated entities. The Trustees have considered all factors
deemed relevant and have made a determination not to seek such recapture at
this time. The Trustees will reconsider this matter from time to time.
The Fund may not purchase securities, including Municipal Bonds, during
the existence of any underwriting syndicate of which Merrill Lynch is a member
or in a private placement in which Merrill Lynch serves as placement agent
except pursuant to procedures approved by the Trustees of the Trust which
either comply with rules adopted by the Commission or with interpretations of
the Commission staff. Rule 10f-3 under the 1940 Act sets forth conditions under
which the Fund may purchase municipal bonds from an underwriting syndicate of
which Merrill Lynch is a member. The rule sets forth requirements relating to,
among other things, the terms of an issue of municipal bonds purchased by the
Fund, the amount of municipal bonds which may be purchased in any one issue and
the assets of the Fund which may be invested in a particular issue.
The Fund does not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who
provide supplemental investment research (such as information concerning
tax-exempt securities, economic data and market forecasts) to the Manager may
receive orders for transactions by the Fund. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Manager under its Management Agreement, and the expenses of the Manager will
not necessarily be reduced as a result of the receipt of such supplemental
information.
The Trust has no obligation to deal with any broker in the execution of
transactions for the Fund's portfolio securities. In addition, consistent with
the Conduct Rules of the NASD and policies established by the Trustees of the
Trust, the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
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. As a result of the investment policies described in
the Prospectus, the Fund's annual portfolio turnover rate may be higher than
that of other investment companies. The portfolio turnover rate is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
particular fiscal year by the monthly average of the value of the portfolio
securities owned by the Fund during the particular fiscal year. For purposes of
determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded. The portfolio turnover rates for
the fiscal years ended July 31, 1997 and 1998 were 28.42% and 56.43%,
respectively.
Section 11(a) of the Securities Exchange Act of 1934, as amended,
generally prohibits members of the U.S. national securities exchanges from
executing exchange transactions for their affiliates and institutional accounts
that they manage unless the member (i) has obtained prior express authorization
from the account to effect such transactions, (ii) at least annually furnishes
the account with a statement setting forth the aggregate compensation received
by the member in effecting such transactions, and (iii) complies with any rules
the Commission has prescribed with respect to the requirements of clauses
19
<PAGE>
(i) and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting
as a broker for the Fund in any of its portfolio transactions executed on any
such securities exchange of which it is a member, appropriate consents have
been obtained from the Fund and annual statements as to aggregate compensation
will be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information -- Determination of Net Asset
Value" in the Prospectus for information concerning the determination of net
asset value.
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily, Monday through Friday, as of 15 minutes after the
close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern
time) on each day during which the NYSE is open for trading. The NYSE is not
open on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Net asset value per share is computed by dividing the sum of the
value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
fees payable to the Manager and any account maintenance and/or distribution
fees, are accrued daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares and the daily expense accruals of the account maintenance fees
applicable with respect to Class D shares; moreover, the per share net asset
value of the Class B and Class C shares generally will be lower than the per
share net asset value of Class D shares, reflecting the daily expense accruals
of the distribution fees, higher account maintenance fees and higher transfer
agency fees applicable with respect to Class B and Class C shares of the Fund.
It is expected, however, that the per share net asset value of the four classes
will tend to converge (although not necessarily meet) immediately after the
payment of dividends, which will differ by approximately the amount of the
expense accrual differentials between the classes.
The Municipal Bonds and other portfolio securities in which the Fund
invests are traded primarily in OTC municipal bond and money markets and are
valued at the last available bid price in the OTC market or on the basis of
yield equivalents as obtained from one or more dealers that make markets in the
securities. One bond is the "yield equivalent" of another bond when, taking
into account market price, maturity, coupon rate, credit rating and ultimate
return of principal, both bonds will theoretically produce an equivalent return
to the bondholder. Financial futures contracts and options thereon, which are
traded on exchanges, are valued at their settlement prices as of the close of
such exchanges. Short-term investments with a remaining maturity of 60 days or
less are valued on an amortized cost basis, which approximates market value.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Trustees of the Trust, including valuations furnished by a pricing service
retained by the Trust, which may utilize a matrix system for valuations. The
procedures of the pricing service and its valuations are reviewed by the
officers of the Trust under the general supervision of the Trustees.
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 and
instructions as to how to participate in the various services or plans, or how
to change options with respect thereto, can be obtained from the 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. The statements will also
show any other activity in the account since the preceding statement.
Shareholders also will receive separate transaction confirmations for each
purchase or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gains
distributions. A shareholder may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent.
20
<PAGE>
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or continue
to maintain an Investment Account at the Transfer Agent for those Class A or
Class D shares. Shareholders interested in transferring their Class B or Class
C shares from Merrill Lynch 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. If
the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he or she be issued certificates for
his or her shares, and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Transfer Agent, acting as agent for such
securities dealers. Voluntary accumulation also can be made through a service
known as the Fund's Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks or automated clearing house debits of $50 or more
to charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder.
Alternatively, an investor whose shares of the Fund are held within a CMA(R) or
CBA(R) account may arrange to have periodic investments made in the Fund in
amounts of $100 or more through the CMA(R) or CBA(R) Automated Investment
Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
automatically reinvested in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of
business on the monthly payment date for such dividends and distributions.
Shareholders may elect in writing to receive either their income dividends or
capital gains distributions, or both, in cash, in which event payment will be
mailed on or about the payment date (provided that, in the event that a payment
on an account maintained at the Transfer Agent would amount to $10.00 or less,
a shareholder will not receive such payment in cash and such payment will
automatically be reinvested in additional shares). The Fund is not responsible
for any failure of delivery to the shareholder's address of record and no
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
Shareholders may, at any time, notify Merrill Lynch in writing if their
account is maintained with Merrill Lynch, or notify the Transfer Agent in
writing or by telephone (1-800-MER-FUND) if their account is maintained with
the Transfer Agent, 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
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired shares of the Fund having a value, based on cost
or the current offering price, of $5,000 or more, and monthly withdrawals are
available for shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed
from those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and the class of shares to be redeemed. Redemptions will be made at net
asset value as determined as of 15 minutes after the close of business on the
NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) on the 24th day of
each month or the 24th day of the last month of each quarter, whichever is
applicable. If the NYSE is not open for business on such date, the shares will
be redeemed at the close of business on the following business day. The check
for the withdrawal payment will be mailed, or the direct deposit for the
withdrawal payment will be made, on the next business day following
21
<PAGE>
redemption. When a shareholder is making systematic withdrawals, dividends and
distributions on all shares in the Investment Account are reinvested
automatically in Fund shares. 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.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Contingent
Deferred Sales Charges -- Class B Shares" and " -- Contingent Deferred Sales
Charges -- Class C Shares" in the Prospectus. Where the systematic withdrawal
plan is applied to Class B shares, upon conversion of the last Class B shares in
an account to Class D shares, the systematic withdrawal plan will be applied
thereafter to Class D shares if the shareholder so elects. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares --
Conversion of Class B Shares to Class D Shares" in the Prospectus. If an
investor wishes to change the amount being withdrawn in a systematic withdrawal
plan the investor should contact his or her Merrill Lynch Financial Consultant.
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 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 shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R) or
CBA(R) Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
three business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the
case of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market mutual fund specifically designated as available
for exchange by holders of Class A, Class B, Class C and Class D shares of
Select Pricing Funds. Shares with a net asset value of at least $100 are
required to qualify for the exchange privilege and any shares utilized in an
exchange must have been held by the shareholder for at least 15 days. Before
effecting an exchange, shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made. Exercise of the
exchange privilege is treated as a sale of the exchanged shares and a purchase
of the acquired shares for Federal income tax purposes.
EXCHANGES OF CLASS A AND CLASS D SHARES. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund
if the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second Select
Pricing Fund, but does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second Select Pricing Fund at any time as
long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which
22
<PAGE>
the exchange is made or is otherwise eligible to purchase Class A shares of the
second fund. Class D shares are exchangeable with shares of the same class of
other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A
or Class D shares") for Class A or Class D shares of other Select Pricing Funds
or Class A shares of Summit ("new Class A or Class D shares") are transacted on
the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class D shares and the
sales charge payable at the time of the exchange on the new Class A or Class D
shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares generally
may be exchanged into the Class A or Class D shares, respectively, of the other
funds with a reduced sales charge or without a sales charge.
EXCHANGES OF CLASS B AND CLASS C SHARES. Each Select Pricing Fund with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offers to exchange its Class B or Class C shares for Class B or Class C shares,
respectively, of another Select Pricing Fund or for Class B shares of Summit
("new Class B or Class C shares") on the basis of relative net asset value per
Class B or Class C share, without the payment of any CDSC that might otherwise
be due on redemption of the outstanding shares. Class B shareholders of the
Fund exercising the exchange privilege will continue to be subject to the
Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating
to the new Class B shares acquired through use of the exchange privilege. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the CDSC that may
be payable on a disposition of the new Class B or Class C shares, the holding
period for the outstanding Class B or Class C shares is "tacked" to the holding
period of the new Class B or Class C shares. For example, an investor may
exchange Class B or Class C shares of the Fund for those of Merrill Lynch
Special Value Fund, Inc. ("Special Value Fund") after having held the Fund's
Class B shares for two and a half years. The 2% CDSC that generally would apply
to a redemption would not apply to the exchange. Three years later the investor
may decide to redeem the Class B shares of Special Value Fund and receive cash.
There will be no CDSC due on this redemption, since by "tacking" the two and a
half year holding period of Fund Class B shares to the three-year holding
period for the Special Value Fund Class B shares, the investor will be deemed
to have held the Special Value Fund Class B shares for more than five years.
EXCHANGES FOR SHARES OF A MONEY MARKET FUND. Class A and Class D shares
are exchangeable for Class A shares of Summit and Class B and Class C shares
are exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class
C shares of Select Pricing Funds and, in the event of such an exchange, the
period of time that Class B shares of Summit are held will count toward
satisfaction of the holding period requirement for purposes of reducing any
CDSC and toward satisfaction of any conversion period with respect to Class B
shares. Class B shares of Summit will be subject to a distribution fee at an
annual rate of 0.75% of average daily net assets of such Class B shares. This
exchange privilege does not apply with respect to certain Merrill Lynch
fee-based programs for which alternative exchange arrangements may exist.
Please see your Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-sponsored
money market funds other than Summit. Shareholders who have exchanged Select
Pricing Fund shares for shares of such other money market funds and subsequently
wish to exchange those money market fund shares for shares of the Fund will be
subject to the CDSC schedule applicable to such Fund shares, if any. The holding
period for those money market fund shares will not count toward satisfaction of
the holding period requirement for reduction of the CDSC imposed on such shares,
if any, and, with respect to Class B shares, toward satisfaction of the
conversion period. However, the holding period for Class B or Class C shares
received in exchange for such money market fund shares will be aggregated with
the holding period for the original shares for purposes of reducing the CDSC or
satisfying the conversion period.
EXCHANGES BY PARTICIPANTS IN THE MFA PROGRAM. The Fund's exchange
privilege is modified with respect to purchases of Class A and Class D shares
by non-retirement plan investors under the MFA program. First, the initial
allocation of assets is made under the MFA program. Then, any subsequent
exchange under the MFA program of Class A or Class D shares of a Select Pricing
Fund for Class A or Class D shares of the Fund will be made solely on the basis
of the relative net asset
23
<PAGE>
values of the shares being exchanged. Therefore, there will not be a charge for
any difference between the sales charge previously paid on the shares of the
other Select Pricing Fund and the sales charge payable on the shares of the
Fund being acquired in the exchange under the MFA program.
EXERCISE OF THE EXCHANGE PRIVILEGE. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and
shareholders of the other Select Pricing Funds with shares for which
certificates have not been issued, may exercise the exchange privilege by wire
through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be
modified or terminated in accordance with the rules of the Commission. The Fund
reserves the right to limit the number of times an investor may exercise the
exchange privilege. Certain funds may suspend the continuous offering of their
shares to the general public at any time and may thereafter resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor.
DISTRIBUTIONS AND TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Code. As
long as it so qualifies, the Fund (but not its shareholders) will not be
subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Trust intends to cause
the Fund to distribute substantially all of such income.
As discussed in the Fund's Prospectus, the Trust has established other
series in addition to the Fund (together with the Fund, the "Series"). Each
Series of the Trust is treated as a separate corporation for Federal income tax
purposes. Each Series, therefore, is considered to be a separate entity in
determining its treatment under the rules for RICs described in the Prospectus.
Losses in one Series do not offset gains in another Series, and the
requirements (other than certain organizational requirements) for qualifying
for RIC status are determined at the Series level rather than at the Trust
level.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Trust intends to qualify the Fund to pay "exempt-interest dividends" as
defined in Section 852(b)(5) of the Code. Under such section if, at the close of
each quarter of the Fund's taxable year, at least 50% of the value of the Fund's
total assets consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be qualified
to pay exempt-interest dividends to its Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). Exempt-interest dividends are
dividends or any part thereof paid by the Fund that are attributable to interest
on tax-exempt obligations and designated by the Trust as exempt-interest
dividends in a written notice mailed to the Fund's shareholders within 60 days
after the close of the Fund's taxable year. For this purpose, the Fund will
allocate interest from tax-exempt obligations (as well as ordinary income,
capital gains and tax preference items, discussed below) among the Class A,
Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission rule permitting the issuance and sale
of multiple classes of shares) that is based on the gross income 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 and Minnesota personal income taxes. Shareholders are advised to consult
their tax advisors with respect to whether exempt-interest dividends retain the
exclusion under Code Section 103(a) if such 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.
Subject to the preceding paragraph, the portion of the Fund's
exempt-interest dividends that is derived from interest income on Minnesota
Municipal Bonds is excluded from the Minnesota taxable net income of
individuals, estates and trusts, provided that the portion of the
exempt-interest dividends from such Minnesota sources paid to all shareholders
represents
24
<PAGE>
95% or more of the exempt-interest dividends paid by the Fund. Also excluded
from the Minnesota taxable net income of individuals, estates and trusts are
dividends that are directly attributable to interest on obligations of the
Government of Puerto Rico, the Territory of Guam and certain other territories
and possessions of the United States. Shareholders subject to income taxation
by states other than Minnesota will realize a lower after tax rate of return
than Minnesota 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 Minnesota personal income taxes. The Fund
will allocate exempt-interest dividends among Class A, Class B, Class C and
Class D shareholders for Minnesota income tax purposes based on a method
similar to that described above for Federal income tax purposes. Interest on
indebtedness incurred or continued to purchase or carry shares of a RIC paying
exempt-interest dividends, such as the Fund, will not be deductible by the
investor for Federal income and Minnesota personal income tax purposes.
Exempt-interest dividends are not excluded from the Minnesota taxable
income of corporations and financial institutions. Distributions from
investment income and capital gains of the Fund, including exempt-interest
dividends, will be subject to Minnesota corporate franchise tax, state taxes in
states other than Minnesota and local taxes in cities other than those in
Minnesota. Accordingly, investors in the Fund, including, in particular,
corporate investors which may be subject to the Minnesota corporate franchise
tax, should consult their tax advisors with respect to the application of such
taxes to an investment in the Fund and to the receipt of Fund dividends and as
to their Minnesota tax situation in general.
The 1995 Minnesota Legislature enacted a statement of intent that interest
on obligations of Minnesota governmental units and Indian tribes be included in
net income of individuals, estates and trusts for Minnesota income tax purposes
if a court determines that Minnesota's exemption of such interest unlawfully
discriminates against interstate commerce because interest on obligations of
governmental issuers located in other states is so included. This provision
applies to taxable years that begin during or after the calendar year in which
any such court decision becomes final, irrespective of the date on which the
obligations were issued. The Fund is not aware of any judicial decision holding
that a state's exemption of interest on its own bonds or those of its political
subdivisions or Indian tribes, but not of interest on the bonds of other states
or their political subdivisions or Indian tribes, unlawfully discriminates
against interstate commerce or otherwise contravenes the United States
Constitution. Nevertheless, the Fund cannot predict the likelihood that
interest on the Minnesota Bonds held by the Fund would become taxable under
this Minnesota statutory provision.
To the extent that the Fund's distributions are derived from interest on
its taxable investments (including, in the case of Minnesota tax law, interest
on Municipal Bonds of other states) or from an excess of net short-term capital
gains over net long-term capital losses ("ordinary income dividends"), such
distributions are considered ordinary income for Federal and Minnesota income
tax purposes, except, in the case of Minnesota personal income tax, for
dividends that are directly attributable to interest on obligations of the
United States Government. Distributions, if any, from an excess of net
long-term capital gains over net short-term capital losses derived from the
sale of securities or from certain transactions in futures or options ("capital
gain dividends") are taxable as long-term capital gains for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares. Such capital gain dividends also are subject to the Minnesota personal
income and corporate franchise taxes. Minnesota law does not have preferential
tax rates for capital gains, but it does place limitations on the deductibility
of capital losses. Certain categories of capital gains are taxable at different
rates for Federal income tax purposes. Generally not later than 60 days after
the close of the Fund's taxable year, the Trust will provide shareholders with
a written notice designating the amounts of any exempt-interest dividends,
ordinary income dividends or capital gain dividends, as well as any amount of
capital gain dividends in different categories of capital gain referred to
above. Distributions by the Fund, whether from exempt-interest income, ordinary
income or capital gains, will not be eligible for the dividends received
deduction allowed to corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed for both Federal income and Minnesota
personal income and corporate franchise tax purposes to the extent of any
exempt-interest dividends received by the shareholder, even, in the case of
Minnesota taxes, where all or a portion of such dividends is not excluded from
Minnesota taxable income. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. If the Fund
pays a dividend in January which was declared in the previous October, November
or December
25
<PAGE>
to shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on certain "private activity bonds" issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (E.G., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference," which could subject certain investors in such bonds,
including shareholders of the Fund, to an alternative minimum tax. The Fund
will purchase such "private activity bonds," and the Trust will report to
shareholders within 60 days after the calendar 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. Exempt-interest dividends
attributable to interest on certain private activity bonds issued after August
7, 1986, also will be included in Minnesota alternative minimum taxable income
of individuals, estates and trusts for purposes of computing Minnesota's
alternative minimum tax.
The Fund may invest in high yield securities, as described in the
Prospectus. Furthermore, the Fund may also invest in instruments the return on
which includes nontraditional features such as indexed principal or interest
payments ("nontraditional instruments"). These instruments may be subject to
special tax rules under which the Fund may be required to accrue and distribute
income before amounts due under the obligations are paid. In addition, it is
possible that all or a portion of the interest payments on such high yield
securities and/or nontraditional instruments could be recharacterized as
taxable ordinary income.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis
in the Class D shares acquired will be the same as such shareholder's basis in
the Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge such
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax
under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisors concerning the applicability of the United
States withholding tax.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
TAX TREATMENT OF 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
26
<PAGE>
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, I.E., each such
option or financial futures contract will be treated as sold for its fair
market value on the last day of the taxable year, and any gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. Application of these rules to Section 1256 contracts held
by the Fund may alter the timing and character of distributions to
shareholders. The mark-to-market rules outlined above, however, will not apply
to certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in financial futures
contracts or the related options.
---------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and Minnesota 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 Minnesota tax laws. The Code and the Treasury regulations, as
well as the Minnesota tax laws, are subject to change by legislative, judicial
or administrative action either prospectively or retroactively.
Shareholders are urged to consult their own tax advisors regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective shareholders.
From time to time, the Fund may include the Fund's Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales literature. Total
return 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, yield and tax-equivalent yield are determined
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
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.
27
<PAGE>
Set forth below is the total return, yield and tax equivalent yield
information for Class A, Class B, Class C and Class D shares of the Fund for
the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------- ------------------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A PERCENTAGE VALUE OF A AS A PERCENTAGE VALUE OF A
BASED ON A HYPOTHETICAL BASED ON A HYPOTHETICAL
HYPOTHETICAL $1,000 INVESTMENT HYPOTHETICAL $1,000 INVESTMENT
$1,000 AT THE END $1,000 AT THE END
INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD
----------------- ------------------- ----------------- ------------------
PERIOD AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------------- (INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
One year ended July 31, 1998 .................... 1.62% $ 1,016.28 1.31% $ 1,013.10
Five years ended July 31, 1998 .................. 4.68% $ 1,257.10 5.00% $ 1,276.50
Inception (March 27, 1992) to July 31, 1998 ..... 6.31% $ 1,474.20 6.45% $ 1,486.90
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year Ended July 31,
1998 ............................................ 5.85% $ 1,058.50 5.31% $ 1,053.10
1997 ............................................ 9.71% $ 1,097.10 9.15% $ 1,091.50
1996 ............................................ 4.98% $ 1,049.80 4.44% $ 1,044.40
1995 ............................................ 5.44% $ 1,054.40 4.91% $ 1,049.10
1994 ............................................ 1.87% $ 1,018.70 1.35% $ 1,013.50
1993 ............................................ 8.71% $ 1,087.10 8.16% $ 1,081.60
Inception (March 27, 1992) to July 31, 1992 ..... 7.88% $ 1,078.80 7.69% $ 1,076.90
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (March 27, 1992) to July 31, 1998 ..... 47.42% $ 1,474.20 48.69% $ 1,486.90
YIELD
30 days ended July 31, 1998 ..................... 3.95% -- 3.60% --
TAX-EQUIVALENT YIELD*
30 days ended July 31, 1998 ..................... 5.49% -- 5.00% --
</TABLE>
- -------
* Based on a Federal income tax rate of 28%.
28
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------------- ------------------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A PERCENTAGE VALUE OF A AS A PERCENTAGE VALUE OF A
BASED ON A HYPOTHETICAL BASED ON A HYPOTHETICAL
HYPOTHETICAL $1,000 INVESTMENT HYPOTHETICAL $1,000 INVESTMENT
$1,000 AT THE END $1,000 AT THE END
INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD
----------------- ------------------- ----------------- ------------------
PERIOD AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------- (INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
One year ended July 31, 1998 ...................... 4.30% $ 1,043.00 1.51% $ 1,015.10
Inception (October 21, 1994) to July 31, 1998 ..... 6.83% $ 1,283.40 6.23% $ 1,256.30
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year Ended July 31,
1998 .............................................. 5.30% $ 1,053.00 5.74% $ 1,057.40
1997 .............................................. 9.04% $ 1,090.40 9.70% $ 1,097.00
1996 .............................................. 4.33% $ 1,043.30 4.88% $ 1,048.80
Inception (October 21, 1994) to July 31, 1995 ..... 7.13% $ 1,071.30 7.57% $ 1,075.70
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (October 21, 1994) to July 31, 1998 ..... 28.34% $ 1,283.40 25.63% $ 1,256.30
YIELD
30 days ended July 31, 1998 ....................... 3.50% -- 3.85% --
TAX-EQUIVALENT YIELD*
30 days ended July 31, 1998 ....................... 4.86% -- 5.35% --
</TABLE>
- -------
* Based on a Federal income tax rate of 28%.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
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 not take into account the
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or the waiver of the CDSC, a lower amount of expenses may be
deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust provides that the Trust shall be comprised of
separate Series, each of which will consist of a separate portfolio which will
issue separate shares. The Trust is presently comprised of the Fund, Merrill
Lynch Arizona Municipal Bond Fund, Merrill Lynch Arkansas Municipal Bond Fund,
Merrill Lynch Colorado Municipal Bond Fund, Merrill Lynch Connecticut Municipal
Bond Fund, Merrill Lynch Florida Municipal Bond Fund, Merrill Lynch Maryland
Municipal Bond Fund, Merrill Lynch Massachusetts Municipal Bond Fund, Merrill
Lynch Michigan Municipal Bond Fund, Merrill Lynch 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 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 and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such account maintenance and/or distribution expenditures
(except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). The Board of Trustees
may classify and reclassify the shares of any Series into additional or other
classes at a future date.
29
<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 have exclusive
voting rights with respect to matters relating to the account maintenance
and/or distribution expenses, as appropriate, being borne solely by such class.
Each issued and outstanding share of a Series is entitled to one vote and to
participate equally in dividends and distributions declared with respect to
that Series and, upon liquidation or dissolution of that Series, in the net
assets of such Series remaining after satisfaction of outstanding liabilities,
except that, as noted above, expenses relating to distribution and/or account
maintenance of the Class B, Class C and Class D shares are borne solely by the
respective class. There normally will be no meetings of shareholders for the
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 will be freely transferable. Holders of shares of any Series are
entitled to redeem their shares as set forth elsewhere herein and in the
Prospectus. Shares do not have cumulative voting rights, and the holders of
more than 50% of the shares of the Trust voting for the election of Trustees
can elect all of the Trustees if they choose to do so, and in such event the
holders of the remaining shares would not be able to elect any Trustees. No
amendments may be made to the Declaration of Trust other than amendments
necessary to conform the Declaration to certain laws or regulations, to change
the name of the Trust, or to make certain non-material changes, without the
affirmative vote of a majority of the outstanding shares of the Trust or of the
affected Series or class, as applicable.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of the Fund for $100,000. Such shares were acquired for investment and
can only be disposed of by redemption. If additional Series are added to the
Trust, the organizational expenses will be allocated among the Series in a
manner deemed equitable by the Trustees.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the initial offering price for Class
A, Class B, Class C and Class D shares of the Fund based on the value of the
Fund's net assets and number of shares outstanding on July 31, 1998, is
calculated as set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Assets .................................................... $ 6,992,916 $ 38,584,824 $ 1,437,526 $ 1,140,997
=========== ============ =========== ===========
Number of Shares Outstanding .................................. 647,914 3,574,517 133,156 105,633
=========== ============ =========== ===========
Net Asset Value Per Share (net assets divided by number of
shares outstanding) .......................................... $ 10.79 $ 10.79 $ 10.80 $ 10.80
Sales Charge (for Class A and Class D shares: 4.00% of offering
price (4.17% of net asset value per share))* ................. .45 ** ** .45
----------- ------------- ------------ -----------
Offering Price ................................................ $ 11.24 $ 10.79 $ 10.80 $ 11.25
=========== ============ =========== ===========
</TABLE>
- -------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Class B and Class C Shares" in the Prospectus
and "Redemption of Shares -- Deferred Sales Charges -- Class B and Class C
Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Trust. The selection of
independent auditors is subject to approval by the independent Trustees of the
Trust. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
30
<PAGE>
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 32246-6484, acts as the Trust's transfer agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "Management of
the Trust -- Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557,
is counsel for the Trust.
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 and the 1940 Act, to
which reference is hereby made.
The Declaration of Trust establishing the Trust dated August 2, 1985, a
copy of which, together with all amendments thereto (the "Declaration") is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch Multi-State Municipal Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Trust shall be held to any personal liability; nor shall resort be
had to 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 November 2, 1998.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated by reference in
this Statement of Additional Information to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling 1-800-456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
31
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32
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APPENDIX I
ECONOMIC CONDITIONS IN MINNESOTA
THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY AND THE FISCAL SITUATION OF THE STATE OF MINNESOTA (THE "STATE") AND
DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF SUCH FACTORS. THE SUMMARY IS
BASED PRIMARILY UPON ONE OR MORE PUBLICLY AVAILABLE OFFERING STATEMENTS
RELATING TO DEBT OFFERINGS OF THE STATE OF MINNESOTA AND RELEASES ISSUED BY THE
MINNESOTA DEPARTMENT OF FINANCE; THE INFORMATION HAS NOT BEEN UPDATED, HOWEVER,
AND IT WILL NOT BE UPDATED DURING THE YEAR. THE TRUST HAS NOT INDEPENDENTLY
VERIFIED THE INFORMATION.
Diversity and a significant natural resource base are two important
characteristics of the Minnesota economy. Generally, the structure of the
State's economy parallels the structure of the United States economy as a
whole. There are, however, employment concentrations in the manufacturing
categories of industrial machinery, instruments and miscellaneous, food, paper
and related industries, and printing and publishing. During the period from
1980 to 1990, overall employment growth in Minnesota lagged behind national
employment growth, in large part due to declining agricultural employment. The
rate of non-farm employment growth in Minnesota exceeded the rate of national
growth, however, in the period 1990 to 1997. The State's unemployment rate
continues to be substantially less than the national unemployment rate. Since
1980, Minnesota per capita income generally has remained above the national
average.
The State relies heavily on a progressive individual income tax and a
retail sales tax for revenue, which results in a fiscal system that is
sensitive to economic conditions. On a number of occasions in previous years,
legislation has been required to eliminate projected budget deficits by raising
additional revenue, reducing expenditures, including aids to political
subdivisions and higher education, reducing the State's budget reserve,
imposing a sales tax on purchases by local governmental units, and making other
budgetary adjustments. The Minnesota Department of Finance February 1998
Forecast projected, under then current laws, that the State would complete its
current biennium June 30, 1999 with more than a $1 billion surplus, plus a $350
million cash flow account balance, plus a $522 million budget reserve. The 1998
Legislature, however, adopted various tax cuts, spending increases, and other
budgetary changes. As a result, the Department of Finance issued revised
projections that the State will complete the June 30, 1999 biennium with an
unrestricted balance of $35 million, plus a $350 million cash flow account
balance, plus a $613 million budget reserve. Total General Fund expenditures
and transfers for the biennium were projected to be $21.5 billion. The State is
party to a variety of civil actions that could adversely affect the State's
General Fund. In addition, substantial portions of State and local revenues are
derived from federal expenditures, and reductions in federal aid to the State
and its political subdivisions and other federal spending cuts may have
substantial adverse effects on the economic and fiscal condition of the State
and its local governmental units. Risks are inherent in making revenue and
expenditure forecasts. Economic or fiscal conditions less favorable than those
reflected in State budget forecasts may create additional budgetary pressures.
State grants and aids represent a large percentage of the total revenues
of cities, towns, counties and school districts in Minnesota, but generally the
State has no obligation to make payments on local obligations in the event of a
default. Even with respect to revenue obligations, no assurance can be given
that economic or other fiscal difficulties and the resultant impact on State
and local government finances will not adversely affect the ability of the
respective obligors to make timely payment of the principal and interest on
Minnesota Municipal Bonds that are held by the Fund or the value or
marketability of such obligations.
Recent Minnesota tax legislation and possible future changes in federal
and State income tax laws, including rate reductions, could adversely affect
the value and marketability of Minnesota Municipal Bonds that are held by the
Fund. See "Distributions and Taxes."
Currently, the State's general obligation bonds are rated Aaa by Moody's
Investors Service, Inc., AAA by Standard & Poor's and AAA by Fitch IBCA, Inc.
33
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34
<PAGE>
APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") LONG-TERM DEBT
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well- assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
SHORT-TERM NOTES: The three ratings of Moody's for short-term notes are
MIG1/VMIG1, MIG2/VMIG2 and MIG3/VMIG3; MIG1/VMIG1 denotes "best quality . . .
strong protection by established cash flows"; MIG2/VMIG2 denotes "high quality"
with ample margins of protection; MIG3/VMIG3 notes are of "favorable quality .
. . but . . . lacking the undeniable strength of the preceding grades."
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Issuers rated PRIME-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. PRIME-1 repayment ability
will often be evidenced by many of the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
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Issuers rated PRIME-2 (or supporting institutions) have a strong ability
for repayment of senior short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or supporting institutions) have an acceptable
ability for repayment of short-term debt obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S ("STANDARD & POOR'S") ISSUE CREDIT RATING
DEFINITIONS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers or
other forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is dominated.
The issue credit rating is not a recommendation to purchase, sell or hold
a financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. Credit
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of payment -- capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the
terms of the obligation;
II. Nature of and provisions of the obligations; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
LONG-TERM ISSUE CREDIT RATINGS
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capcity to meet its financial
commitment on the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
BB, B, An obligation rated "BB," "B," "CCC," "CC" and "C" is regarded as
CCC, having significant speculative characteristics. CCC, "BB" indicates the
CC, least degree of speculation and "C" the highest degree of speculation.
C While such bonds CC, C will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
D An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The "D" rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
36
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Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
SHORT-TERM ISSUE CREDIT RATINGS
A-1 A short-term obligation rated "A-1" is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated "A-2" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is
satisfactory.
A-3 A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
C A short-term obligation rated "C" is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
DESCRIPTION OF FITCH IBCA, INC.'S ("FITCH") RATINGS
Fitch credit ratings are an opinion on the ability of an entity or of a
securities issue to meet financial commitments, such as interest, preferred
dividends, or repayment of principal, on a timely basis.
Credit ratings are used by investors as indications of the likelihood of
getting their money back in accordance with the terms on which they invested.
Thus, the use of credit ratings defines their function: "investment-grade"
ratings (international long-term "AAA" -- "BBB" categories: short-term "F1" --
"F3") indicate a relatively low probability of default, while those in the
"speculative" or "non-investment grade" categories (international long-term
"BB" -- "D") either signal a higher probability of default or that a default
has already occured. Ratings imply no specific prediction of default
probability.
Entities or issues carrying the same rating are of similar but not
necessarily identical credit quality since the rating categories do not fully
reflect small differences in the degrees of credit risk.
Fitch credit and other ratings are not recommendations to buy, sell, or
hold any security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of any payments of any security. The ratings are based on
information obtained from issuers, other obligors, underwriters, their experts,
and other sources Fitch, believes to be reliable. Fitch, does not audit or
verify the truth or accuracy of such information. Ratings may be changed or
withdrawn as a result of changes in, or the unavailability of, information or
for other reasons.
INTERNATIONAL CREDIT RATINGS
Fitch's international credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other corporate
entities and the securities they issue, as well as municipal and other public
finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these long- and
short-term ratings assess its general creditworthiness on a senior basis. When
applied to specific issues and programs, these ratings take into account the
relative preferential position of the holder of the security and reflect the
terms, conditions, and covenants attaching to that security.
37
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ANALYTICAL CONSIDERATIONS
When assigning ratings, Fitch considers the historical and prospective
financial condition, quality of management, and operating performance of the
issuer and of any guarantor, any special features of a specific issue or
guarantee, the issue's relationship to other obligations of the issuer, as well
as developments in the economic and political environment that might affect the
issuer's financial strength and credit quality.
Investment-grade ratings reflect expectations of timeliness of payment.
However, ratings of different classes of obligations of the same issuer may
vary based on expectations of recoveries in the event of a default or
liquidation. Recovery expectations, which are the amounts expected to be
received by investors after a security defaults, are a relatively minor
consideration in investment-grade ratings, but Fitch does use "notching" of
particular issues to reflect their degree of preference in a winding up,
liquidation, or reorganization as well as other factors. Recoveries do,
however, gain in importance at lower rating levels, because of the greater
likelihood of default, and become the major consideration at the "DDD"
category. Factors that affect recovery expectations include collateral and
seniority relative to other obligations in the capital structure.
Variable rate demand obligations and other securities which contain a
demand feature will have a dual rating, such as "AAA/F1+." The first rating
denotes long-term ability to make principal and interest payments. The second
rating denotes ability to meet a demand feature in full and on time.
INTERNATIONAL LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
AAA HIGHEST CREDIT QUALITY. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA VERY HIGH CREDIT QUALITY. "AA" ratings denote a very low expectation of
credit risk. They indicate strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A HIGH CREDIT QUALITY. "A" ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB GOOD CREDIT QUALITY. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
SPECULATIVE GRADE
BB SPECULATIVE. "BB" ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B HIGHLY SPECULATIVE. "B" ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
CCC, HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
CC, financial commitments is solely reliant CC, upon sustained, favorable
C business or economic developments. A "CC" rating indicated that default
of some C kind appears probable. "C" ratings signal imminent default.
DDD, DEFAULT. Securities are not meeting current obligations and are
DD, extremely speculative. "DDD" designates the DD, highest potential for
D recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, D "DD" indicates expected recovery of 50%-90%
of such outstandings, and "D", the lowest potential, I.E., below 50%.
38
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INTERNATIONAL SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 HIGHEST CREDIT QUALITY. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 GOOD CREDIT QUALITY. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3 FAIR CREDIT QUALITY. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B SPECULATIVE. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D DEFAULT. Denotes actual or imminent payment default.
- -------
Notes:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the "AAA" long-term rating
category, to categories below "CCC" or to short-term ratings other than "F1".
"NR" indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn": A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that there
is a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive," indicating a potential upgrade,
"Negative," for a potential downgrade, or "Evolving," if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively
short period.
39
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies .................. 2
Description of Municipal Bonds and Temporary
Investments ..................................... 4
Description of Municipal Bonds .................. 4
Description of Temporary Investments ............ 5
Repurchase Agreements ........................... 6
Financial Futures Transactions and Options ...... 7
Investment Restrictions ......................... 10
Management of the Trust ............................ 11
Trustees and Officers ........................... 11
Compensation of Trustees ........................ 12
Management and Advisory Arrangements ............ 13
Purchase of Shares ................................. 14
Initial Sales Charge Alternatives -- Class A and
Class D Shares ............................... 14
Reduced Initial Sales Charges ................... 15
Distribution Plans .............................. 17
Limitations on the Payment of Deferred Sales
Charges ...................................... 17
Redemption of Shares ............................... 18
Deferred Sales Charges -- Class B and Class C
Shares ....................................... 18
Portfolio Transactions ............................. 19
Determination of Net Asset Value ................... 20
Shareholder Services ............................... 20
Investment Account .............................. 20
Automatic Investment Plans ...................... 21
Automatic Reinvestment of Dividends and
Capital Gains Distributions .................. 21
Systematic Withdrawal Plans ..................... 21
Exchange Privilege .............................. 22
Distributions and Taxes ............................ 24
Tax Treatment of Option and Futures
Transactions ................................. 26
Performance Data ................................... 27
General Information ................................ 29
Description of Shares ........................... 29
Computation of Offering Price Per Share ......... 30
Independent Auditors ............................ 30
Custodian ....................................... 31
Transfer Agent .................................. 31
Legal Counsel ................................... 31
Reports to Shareholders ......................... 31
Additional Information .......................... 31
Financial Statements ............................... 31
Appendix I -- Economic Conditions in Minnesota...... 33
Appendix II -- Ratings of Municipal Bonds .......... 35
</TABLE>
Code #16186-1198
[MERRILL LYNCH LOGO HERE)
MERRILL LYNCH
MINNESOTA MUNICIPAL
BOND FUND
OF MERRILL LYNCH MULTI-STATE
MUNICIPAL SERIES TRUST
(COMPASS GRAPHICS APPEAR HERE)
STATEMENT OF
ADDITIONAL
INFORMATION
November 17, 1998
Distributor
Merrill Lynch
Funds Distributor
<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 six-year period ended
July 31, 1998 and for the period
March 27, 1992 (commencement of operations) to July 31, 1992.
Incorporated by reference in Part B:
Financial Statements
Schedule of Investments as of July 31, 1998*.
Statement of Assets and Liabilities as of July 31, 1998*.
Statement of Operations for the year ended July 31, 1998*.
Statements of Changes in Net Assets for each of the years in the
two-year period ended July 31, 1998*.
Financial Highlights for each of the years in the five-year period ended
July 31, 1998*.
- ---------
* Included in the Registrant's 1998 Annual Report to shareholders filed with
the Securities and Exchange Commission for the year ended July 31, 1998
pursuant to Rule 30b2-1 under the Investment Company Act of 1940, as
amended (the "1940 Act").
(B) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------------
<S> <C>
1(a) -- Declaration of Trust of the Registrant, dated August 2, 1985.(a)
(b) -- Amendment to Declaration of Trust, dated September 18, 1987.(a)
(c) -- Amendment to Declaration of Trust, dated December 21, 1987.(a)
(d) -- Amendment to Declaration of Trust, dated October 3, 1988.(a)
(e) -- Amendment to Declaration of Trust, dated October 17, 1994 and instrument establishing Class C
and Class D shares of beneficial interest.(a)
(f) -- Instrument establishing Merrill Lynch Minnesota Municipal Bond Fund (the "Fund") as a series of
Registrant.(a)
(g) -- Instrument establishing Class A and Class B shares of beneficial interest of the Fund.(a)
2 -- By-Laws of Registrant.(a)
3 -- None.
4 -- Portions of the Declaration of Trust, Establishment and Designation and By-Laws of the Registrant
defining the rights of holders of the Fund as a series of the Registrant.(b)
5(a) -- Form of Management Agreement between Registrant and Fund Asset Management, Inc.(a)
(b) -- Supplement to Management Agreement between Registrant and Fund Asset Management, Inc.(d)
6(a) -- Form of Revised Class A Shares Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (including Form of Selected Dealers Agreement).(d)
(b) -- Form of Class B Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(a)
(c) -- Form of Class C Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers Agreement).(d)
(d) -- Form of Class D Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers Agreement).(d)
(e) -- Letter Agreement between the Fund and Merrill Lynch Funds Distributor, Inc., dated
September 15, 1993, in connection with the Merrill Lynch Mutual Fund Adviser program.(c)
7 -- None.
8 -- Form of Custody Agreement between Registrant and State Street Bank & Trust Company.(d)
9 -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Merrill Lynch Financial Data Services, Inc. (formerly Financial
Data Services, Inc.)(e)
10 -- Opinion of Brown & Wood LLP, counsel for the Registrant.(g)
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
13 -- Certificate of Fund Asset Management, Inc.(a)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------------
<S> <C>
14 -- None.
15(a) -- Amended and Restated Class B Distribution Plan of the Registrant and Amended and Restated
Class B Distribution Plan Sub-Agreement.(c)
(b) -- Form of Class C Distribution Plan and Class C Distribution Plan Sub-Agreement of Registrant.(d)
(c) -- Form of Class D Distribution Plan and Class D Distribution Plan Sub-Agreement of Registrant.(d)
16(a) -- Schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class A shares.(a)
(b) -- Schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class B shares.(a)
(c) -- Schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class C shares.(a)
(d) -- Schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class D shares.(a)
17(a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
18 -- Merrill Lynch Select Pricing(SM) System Plan Pursuant to Rule 18f-3.(f)
</TABLE>
- ---------
(a) Filed on November 2, 1995 as an Exhibit to Post-Effective Amendment No. 4
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended, relating to shares of the Fund (File No.
33-44734) (the "Registration Statement").
(b) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's Declaration of Trust, as amended, filed as
Exhibits 1(a), 1(b), 1(c), 1(d) and 1(e) to the Registration Statement; to
the Certificates of Establishment and Designation establishing the Fund as
a series of the Registrant and establishing Class A and Class B shares of
beneficial interest of the Fund, filed as Exhibits 1(f) and 1(g),
respectively, with Post-Effective Amendment No. 4 to the Registration
Statement; and to Articles I, V and VI of the Registrant's By-Laws, filed
as Exhibit 2 with Post-Effective Amendment No. 4 to the Registration
Statement.
(c) Filed on November 24, 1993 as an Exhibit to Post-Effective Amendment No. 2
to the Registration Statement.
(d) Filed on October 14, 1994 as an Exhibit to Post-Effective Amendment No. 3
to the Registration Statement.
(e) Incorporated by reference to Exhibit 9 to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933, as amended, filed on October 20, 1995, relating to shares of
Merrill Lynch Arizona Municipal Bond Fund series of the Registrant (File
No. 33-41311).
(f) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended, filed on January 25, 1996, relating to shares of
Merrill Lynch New York Municipal Bond Fund series of the Registrant (File
No. 2-99473).
(g) Previously filed as an Exhibit to the Registration Statement.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1998*
- ------------------------------------------------------------------ --------------------
<S> <C>
Class A Shares of beneficial interest, par value $0.10 per share.. 248
Class B Shares of beneficial interest, par value $0.10 per share.. 1,271
Class C Shares of beneficial interest, par value $0.10 per share.. 61
Class D Shares of beneficial interest, par value $0.10 per share.. 32
</TABLE>
- ---------
* The number of holders shown above includes holders of record plus beneficial
owners whose shares are held of record by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch").
C-2
<PAGE>
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a shareholder,
creditor or otherwise) against all liabilities and expenses (including amounts
paid in satisfaction of judgments, in compromise, as fines and penalties, and
as counsel fees) reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he may be involved or with which he may be threatened, while in office
or thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as to
any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of good faith and reasonable belief
as to the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no Person may satisfy any right of indemnity or
reimbursement granted herein or in Section 5.1 or to which he may be otherwise
entitled except out of the property of the Trust, and no Shareholder shall be
personally liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in
connection with indemnification under this Section 5.3, provided that the
indemnified person shall have given a written undertaking to reimburse the
Trust in the event it is subsequently determined that he is not entitled to
such indemnification."
Insofar as the conditional advancing of indemnification monies for actions
based upon the 1940 Act may be concerned, such payments will be made only on
the following conditions: (i) the advances must be limited to amounts used, or
to be used, for the preparation or presentation of a defense to the action,
including costs connected with the preparation of a settlement; (ii) advances
may be made only upon receipt of a written promise by, or on behalf of, the
recipient to repay that amount of the advance which exceeds the amount which it
is ultimately determined that he is entitled to receive from the Registrant by
reason of indemnification; and (iii) (a) such promise must be secured by a
surety bond, other suitable insurance or an equivalent form of security which
assures that any repayments may be obtained by the Registrant without delay or
litigation, which bond, insurance or other form of security must be provided by
the recipient of the advance, or (b) a majority of a quorum of the Registrant's
disinterested, non-party Trustees, or an independent legal counsel in a written
opinion, shall determine, based upon a review of readily available facts that
the recipient of the advance ultimately will be found entitled to
indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Shares
Distribution Agreements relating to the securities being offered hereby, the
Registrant agrees to indemnify the Distributor and each person, if any, who
controls the Distributor within the meaning of the Securities Act of 1933, as
amended (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 Trustee, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Manager" or "FAM") acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series
C-3
<PAGE>
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High
Yield Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
Federal Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch
Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc.,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation
Program, Inc.; and for the following closed-end registered investment
companies: Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt
Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund II,
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc., MuniHoldings
California Insured Fund III, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund III,
MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund II, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York
Insured Fund, Inc., MuniHoldings New York Insured Fund II, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California
Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield California
Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Manager, acts as the investment adviser for the following open-end registered
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund,
Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley,
a division of MLAM); and the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill
Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill
Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio,
two investment portfolios of EQ Advisors Trust.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts
02111-2646. The address of the Manager, MLAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. ("Princeton
Administrators") is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of Princeton Funds Distributor, Inc. ("PFD") and of Merrill Lynch Funds
Distributor ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081. The
address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center, North
Tower, 250 Vesey Street, New York, New York 10281-1201. The address of the
Fund's transfer agent, Financial Data Services, Inc. ("FDS"), is 4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
August 1, 1996 for his/her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President,
C-4
<PAGE>
Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President of
substantially all of the investment companies described in the first two
paragraphs of this Item 28 and Messrs. Giordano, Harvey, Kirstein and Monagle
are 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; Limited
Partner of MLAM
Princeton Services ............. General Partner General Partner of MLAM
Arthur Zeikel .................. Chairman Chairman of MLAM; President of MLAM
and FAM from 1977 to 1997; Chairman
and Director of Princeton Services;
President of Princeton Services from 1993
to 1997; Executive Vice President of ML &
Co.
Jeffrey M. Peek ................ President President of MLAM; President and Director
of Princeton Services; Executive Vice
President of ML & Co.; Managing Director
and Co-Head of the Investment Banking
Division of Merrill Lynch in 1997; Senior
Vice President and Director of the Global
Securities and Economics Division of
Merrill Lynch from 1995 to 1997
Terry K. Glenn ................. Executive Vice Executive Vice President of MLAM;
President Executive Vice President and Director of
Princeton Services; President and Director
of PFD; Director of FDS; President of
Princeton Administrators
Linda L. Federici .............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Vincent R. Giordano ............ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Elizabeth A. Griffin ........... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Norman R. Harvey ............... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Michael J. Hennewinkel ......... Senior Vice President, Senior Vice President, Secretary and General
Secretary and General Counsel of MLAM; Senior Vice President
Counsel of Princeton Services
Philip L. Kirstein ............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President, Secretary and Director of
Princeton Services
Ronald M. Kloss ................ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Debra Landsman-Yaros. .......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Vice
President of PFD
Stephen M.M. Miller ............ Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr. ......... Senior Vice President Senior Vice President of 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>
Brian A. Murdock .......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Director of
PFD
Michael L. Quinn .......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Managing
Director and First Vice President of Merrill
Lynch from 1989 to 1995
Gerald M. Richard ......... Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of PFD
Gregory D. Upah ........... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Ronald L. Welburn ......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies
referred to in the first two paragraphs of Item 28 except CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc., and The Municipal Fund Accumulation Program, Inc. and MLFD also
acts as the principal underwriter for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc. A separate division of PFD acts as the principal underwriter of
a number of other investment companies.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
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
Brian A. Murdock ................ Director None
Thomas J. Verage ................ Director None
Robert W. Crook ................. Senior Vice President None
Michael J. Brady ................ Vice President None
William M. Breen ................ Vice President None
Michael G. Clark ................ Vice President None
James T. Fatseas ................ Vice President None
Debra W. Landsman-Yaros ......... Vice President None
Michelle T. Lau ................. Vice President None
Gerald M. Richard ............... Vice President and Treasurer Treasurer
Salvatore Venezia ............... Vice President None
William Wasel ................... Vice President None
Robert Harris ................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and its transfer agent, Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
C-6
<PAGE>
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, the Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) The Registrant undertakes to furnish each person to whom a Prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the Township of Plainsboro, and the State of New Jersey, on the 17th day of
November, 1998.
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
(Registrant)
By: /s/ GERALD M. RICHARD
-------------------------------------
(GERALD M. RICHARD, TREASURER)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------- ----------------------------------- ------------------
<S> <C> <C>
ARTHUR ZEIKEL* President and Trustee (Principal
- ---------------------------------- Executive Officer)
(ARTHUR ZEIKEL)
GERALD M. RICHARD* Treasurer (Principal Financial and
- ---------------------------------- Accounting Officer)
(GERALD M. RICHARD)
JAMES H. BODURTHA* Trustee
- ----------------------------------
(JAMES H. BODURTHA)
HERBERT I. LONDON* Trustee
- ----------------------------------
(HERBERT I. LONDON)
ROBERT R. MARTIN* Trustee
- ----------------------------------
(ROBERT R. MARTIN)
JOSEPH L. MAY* Trustee
- ----------------------------------
(JOSEPH L. MAY)
ANDRE F. PEROLD* Trustee
- ----------------------------------
(ANDRE F. PEROLD)
*By: /S/ GERALD M. RICHARD November 17, 1998
------------------------------
(GERALD M. RICHARD, ATTORNEY-IN-FACT)
</TABLE>
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- -------------------------------------------------------------------------------
<S> <C>
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
17(a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 111
<NAME> MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND -- CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 44141913
<INVESTMENTS-AT-VALUE> 47255674
<RECEIVABLES> 812816
<ASSETS-OTHER> 318484
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 48386974
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 230711
<TOTAL-LIABILITIES> 230711
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 45587045
<SHARES-COMMON-STOCK> 647914
<SHARES-COMMON-PRIOR> 502811
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (526274)
<OVERDISTRIBUTION-GAINS> (18269)
<ACCUM-APPREC-OR-DEPREC> 3113761
<NET-ASSETS> 6992916
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2822673
<OTHER-INCOME> 0
<EXPENSES-NET> (645353)
<NET-INVESTMENT-INCOME> 2177320
<REALIZED-GAINS-CURRENT> 616732
<APPREC-INCREASE-CURRENT> (284517)
<NET-CHANGE-FROM-OPS> 2509535
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (315526)
<DISTRIBUTIONS-OF-GAINS> (2415)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 214660
<NUMBER-OF-SHARES-REDEEMED> (89788)
<SHARES-REINVESTED> 20231
<NET-CHANGE-IN-ASSETS> (632268)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1143007)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 263497
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 645353
<AVERAGE-NET-ASSETS> 6300189
<PER-SHARE-NAV-BEGIN> 10.72
<PER-SHARE-NII> .54
<PER-SHARE-GAIN-APPREC> .07
<PER-SHARE-DIVIDEND> (.54)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.79
<EXPENSE-RATIO> .91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 112
<NAME> MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND--CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 44141913
<INVESTMENTS-AT-VALUE> 47255674
<RECEIVABLES> 812816
<ASSETS-OTHER> 318484
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 48386974
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 230711
<TOTAL-LIABILITIES> 230711
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 45587045
<SHARES-COMMON-STOCK> 3574517
<SHARES-COMMON-PRIOR> 3850119
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (526274)
<OVERDISTRIBUTION-GAINS> (18269)
<ACCUM-APPREC-OR-DEPREC> 3113761
<NET-ASSETS> 38584824
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2822673
<OTHER-INCOME> 0
<EXPENSES-NET> (645353)
<NET-INVESTMENT-INCOME> 2177320
<REALIZED-GAINS-CURRENT> 616732
<APPREC-INCREASE-CURRENT> (284517)
<NET-CHANGE-FROM-OPS> 2509535
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1761245)
<DISTRIBUTIONS-OF-GAINS> (15060)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 316348
<NUMBER-OF-SHARES-REDEEMED> (679243)
<SHARES-REINVESTED> 87293
<NET-CHANGE-IN-ASSETS> (632268)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1143007)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 263497
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 645353
<AVERAGE-NET-ASSETS> 39159814
<PER-SHARE-NAV-BEGIN> 10.72
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> .07
<PER-SHARE-DIVIDEND> (.48)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.79
<EXPENSE-RATIO> 1.42
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 113
<NAME> MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND--CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 44141913
<INVESTMENTS-AT-VALUE> 47255674
<RECEIVABLES> 812816
<ASSETS-OTHER> 318484
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 48386974
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 230711
<TOTAL-LIABILITIES> 230711
<SENIOR-EQUITY> 0
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<OVERDISTRIBUTION-GAINS> (18269)
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<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2822673
<OTHER-INCOME> 0
<EXPENSES-NET> (645353)
<NET-INVESTMENT-INCOME> 2177320
<REALIZED-GAINS-CURRENT> 616732
<APPREC-INCREASE-CURRENT> (284517)
<NET-CHANGE-FROM-OPS> 2509535
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (58204)
<DISTRIBUTIONS-OF-GAINS> (477)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 33779
<NUMBER-OF-SHARES-REDEEMED> (16648)
<SHARES-REINVESTED> 4014
<NET-CHANGE-IN-ASSETS> (632268)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1143007)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<AVERAGE-NET-ASSETS> 1324254
<PER-SHARE-NAV-BEGIN> 10.72
<PER-SHARE-NII> .47
<PER-SHARE-GAIN-APPREC> .08
<PER-SHARE-DIVIDEND> (.47)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.80
<EXPENSE-RATIO> 1.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 114
<NAME> MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND--CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 44141913
<INVESTMENTS-AT-VALUE> 47255674
<RECEIVABLES> 812816
<ASSETS-OTHER> 318484
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 48386974
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 230711
<TOTAL-LIABILITIES> 230711
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 45587045
<SHARES-COMMON-STOCK> 105633
<SHARES-COMMON-PRIOR> 86089
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (526274)
<OVERDISTRIBUTION-GAINS> (18269)
<ACCUM-APPREC-OR-DEPREC> 3113761
<NET-ASSETS> 1140997
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2822673
<OTHER-INCOME> 0
<EXPENSES-NET> (645353)
<NET-INVESTMENT-INCOME> 2177320
<REALIZED-GAINS-CURRENT> 616732
<APPREC-INCREASE-CURRENT> (284517)
<NET-CHANGE-FROM-OPS> 2509535
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (42345)
<DISTRIBUTIONS-OF-GAINS> (317)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 38981
<NUMBER-OF-SHARES-REDEEMED> (20983)
<SHARES-REINVESTED> 1546
<NET-CHANGE-IN-ASSETS> (632268)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1143007)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 263497
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 645353
<AVERAGE-NET-ASSETS> 863111
<PER-SHARE-NAV-BEGIN> 10.73
<PER-SHARE-NII> .53
<PER-SHARE-GAIN-APPREC> .07
<PER-SHARE-DIVIDEND> (.53)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.80
<EXPENSE-RATIO> 1.01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Minnesota Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 7 to Registration Statement No. 33-44734 of our report dated September 4,
1998 appearing in the annual report to shareholders of Merrill Lynch Minnesota
Municipal Bond Fund for the year ended July 31, 1998, and to the reference to us
under the caption "Financial Highlights" in the Prospectus, which is a part of
such Registration Statement.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Princeton, New Jersey
November 12, 1998
