<PAGE> 1
As filed with the Securities and Exchange Commission on October 17, 1994
Securities Act File No. 33-48693
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. 1 /X/
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 90 /X/
(Check appropriate box or boxes)
----------
MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND
of Merrill Lynch Multi-State Municipal Series Trust
(exact name of registrant as specified in charter)
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (609) 282-2800
Arthur Zeikel
Merrill Lynch Multi-State Municipal Series Trust
800 Scudders Mill Road, Plainsboro, New Jersey
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
----------
Copies to:
Counsel for the Trust: Philip L. Kirstein, Esq.
Brown & Wood Fund Asset Management
One World Trade Center P.O. Box 9011
New York, New York 10048-0557 Princeton, New Jersey 08543-9011
Attention: Thomas R. Smith, Jr., Esq.
Brian M. Kaplowitz, Esq.
----------
It is proposed that this filing will become effective (check appropriate
box)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on October 21, 1994 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (i)
/ / on (date) pursuant to paragraph (a) (i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a) (ii) of Rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date
for a previously filed post-effective amendment.
----------
The Registrant has registered an indefinite number of shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. The notice required by such rule for the Registrant's most
recent fiscal year was filed September 22, 1994.
==========================================================================
<PAGE> 2
MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND OF
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
Registration Statement on Form N-1A
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
N-1A Item No. Location
------------- --------
<S> <C> <C>
Part A
Item 1. Cover Page.................... Cover Page
Item 2. Synopsis...................... Fee Table
Item 3. Condensed Financial
Information.................. Not Applicable
Item 4. General Description of Investment Objective and Policies;
Registrant.................... Additional Information
Item 5. Management of the Fund........ Fee Table; Management of the
Trust; Inside Back Cover Page
Item 5A. Management's Discussion of Fund
Performance................ Not Applicable
Item 6. Capital Stock and Other
Securities.................... Cover Page; Additional Information
Item 7. Purchase of Securities Being Cover Page; Fee Table; Merrill
Offered...................... Lynch Select Pricing SM System;
Purchase of Shares; Shareholder
Services; Additional Information;
Inside Back Cover Page
Item 8. Redemption of Repurchase...... Fee Table; Merrill Lynch Select
Pricing SM System; Purchase of
Shares; Redemption of Shares
Item 9. Pending Legal Proceedings.... Not Applicable
PART B
Item 10. Cover Page.................... Cover Page
Item 11. Table of Contents............ Back Cover Page
Item 12. General Information and
History...................... Not Applicable
Item 13. Investment Objective and Investment Objective and Policies;
Policies...................... Investment Restrictions
Item 14. Management of the Fund........ Management of the Trust
Item 15. Control Persons and Principal
Holders Management of the Trust;
of Securities................ Additional Information
Item 16. Investment Advisory and Other Management of the Trust; Purchase
Services...................... of Shares; General Information
Item 17. Brokerage Allocation and Other
Practices.................... Portfolio Transactions
Item 18. Capital Stock and Other General Information-Description of
Securities.................... Series and Shares
Item 19. Purchase, Redemption and
Pricing of Purchase of Shares; Redemption of
Securities Being Offered.... Shares; Determination of Net
Asset Value; Shareholder Services
Item 20. Tax Status.................... Distributions and Taxes
Item 21. Underwriters.................. Purchase of Shares
Item 22. Calculation of Performance
Data.......................... Performance Data
Item 23. Financial Statements.......... Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item, so
numbered, in Part C to this Registration Statement.
i
</TABLE>
<PAGE> 3
PROSPECTUS
October 21, 1994
MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 * PHONE NO. (609) 282-2800
----------
Merrill Lynch Connecticut Municipal Bond Fund (the "Fund") is a mutual
fund seeking to provide shareholders with as high a level of income exempt
from Federal and Connecticut income taxes as is consistent with prudent
investment management. The Fund invests primarily in a portfolio of
long-term, investment grade obligations, the interest on which, in the
opinion of bond counsel to the issuer, is exempt from Federal and Connecticut
income taxes. The Fund may invest in certain tax-exempt securities classified
as "private activity bonds" that may subject certain investors in the Fund to
an alternative minimum tax. At times, the Fund may seek to hedge its
portfolio through the use of futures transactions and options. There can be
no assurance that the investment objective of the Fund will be realized.
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features, permits an investor to choose
the method of purchasing shares that the investor believes is most
beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing SM System" on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor,
Inc. (the "Distributor"), P.O. Box 9011, Princeton, New Jersey
08543-9011 ((609) 282-2800), and other securities dealers which have
entered into selected dealer agreements with the Distributor, including
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch").
The minimum initial purchase is $1,000 and the minimum subsequent purchase
is $50. Merrill Lynch may charge its customers a processing fee (presently
$4.85) for confirming purchases and repurchases. Purchases and redemptions
directly through the Fund's Transfer Agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares".
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------
This Prospectus is a concise statement of information about the Fund
that is relevant to making an investment in the Fund. This Prospectus
should be retained for future reference. A statement containing additional
information about the Fund, dated October 21, 1994 (the "Statement of
Additional Information"), has been filed with the Securities and Exchange
Commission and is available, without charge, by calling or by writing
Merrill Lynch Multi-State Municipal Series Trust (the "Trust") at the
above telephone number or address. The Statement of Additional Information
is hereby incorporated by reference into this Prospectus. The Fund is a
separate series of the Trust, an open-end management investment company
organized as a Massachusetts business trust.
----------
FUND ASSET MANAGEMENT-MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
<PAGE> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring
and recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
Class A(a) Class B(b) Class C(c) Class D(c)
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
Maximum Sales Charge
Imposed on Purchases (as
a percentage of offering
price)................... 4.00%(d) None None 4.00%(d)
Sales Charge Imposed on
Dividend
Reinvestments............ None None None None
Deferred Sales Charge (as a
percentage of
original purchase price
or redemption
proceeds, whichever is
lower)................... None(e) 4.0% during the first 1% for one None(e)
year, decreasing 1.0% year
annually thereafter
to 0.0% after the
fourth year
Exchange Fee............... None None None None
Annual Fund Operating
Expenses (as a percentage
of average net assets)(f):
Management Fees(g)......... 0.55% 0.55% 0.55% 0.55%
12b-1 Fees(h):
Account Maintenance Fees None 0.25% 0.25% 0.10%
Distribution Fees....... None 0.25% 0.35% None
(Class B shares
convert to Class D
shares automatically
after approximately
ten years and
cease being subject
to distribution fees
and are subject to
lower account
maintenance fees)
Other Expenses
Custodial Fees............. 0.03% 0.03% 0.03% 0.03%
Shareholder Servicing
Costs(i)................. 0.03% 0.03% 0.03% 0.03%
Miscellaneous.............. 0.93% 0.93% 0.93% 0.93%
----- ----- ----- -----
Total Other Expenses..... 0.99% 0.99% 0.99% 0.99%
----- ----- ----- -----
Total Fund Operating
Expenses +.................. 1.54% 2.04% 2.14% 1.64%
===== ===== ===== =====
</TABLE>
----------
(a) Class A shares are sold to a limited group of investors including
existing Class A shareholders, certain investment programs. See
"Purchase of Shares-Initial Sales Charge Alternatives-Class A and
Class D Shares"-page 22.
(b) Class B shares convert to Class D shares automatically approximately
10 years after initial purchase. See "Purchase of Shares-Deferred
Sales Charge Alternatives-Class B and Class C Shares"- page 24.
(c) Prior to the date of this Prospectus, the Fund has not offered its
Class C and Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. Class A or Class D
purchases of $1,000,000 or more may not be subject to an initial sales
charge. See "Purchase of Shares-Initial Sales Charge Alternatives-
Class A and Class D Shares"-page 22.
2
<PAGE> 5
(e) Class A and Class D shares are not subject to a contingent deferred
sales charge ("CDSC"), except that purchases of $1,000,000 or more
which may not be subject to an initial sales charge will instead be
subject to a CDSC if redeemed within the first year of purchase.
(f) Information under "Other Expenses" for all classes of shares is
estimated for the fiscal year ending July 31, 1995.
(g) See "Management of the Trust-Management and Advisory Arrangements"-
page 19.
(h) See "Purchase of Shares-Distribution Plans"-page 26.
(i) See "Management of the Trust-Transfer Agency Services"-page 20.
+ As of July 31, 1994, the Manager has voluntarily waived all of the
management fees due from the Fund and has voluntarily reimbursed the
Fund for a portion of other expenses (excluding 12b-1 fees). The fee
table has been restated to assume the absence of any such waiver or
reimbursement because the Manager may discontinue or reduce such waiver
of fees or reimbursement of expenses at any time without notice. During
the period from July 1, 1994 (commencement of operations) to July 31,
1994, the Manager waived management fees and reimbursed expenses
totaling 1.54% for Class A shares and 1.54% for Class B shares after
which the Fund's total expense ratio was 0.0% for Class A shares and
0.50% for Class B shares. Information is not provided with respect to
either Class C or Class D shares since no Class C shares or Class D
shares were publicly issued during this period.
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 expenses set forth under "Other
Expenses" are based on estimated amounts through the end of the Fund's
first fiscal year on an annualized basis. The Example set forth above
assumes reinvestment of all dividends and distributions and utilizes a 5%
annual rate of return as mandated by Securities and Exchange Commission
(the "Commission") regulations. The Example should not be considered a
representation of past or future expenses or annual rates of return, and
actual expenses or annual rates of return may be more or less than those
assumed for purposes of the Example. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule
12b-1 distribution fees than the economic equivalent of the maximum
front-end sales charges permitted under the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD"). Merrill Lynch
may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the
Fund's Transfer Agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares".
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 above; (2) a 5% annual return throughout
the periods and (3) redemption at the end of the period:
Class A......................................................... $55 $87 $121 $216
Class B......................................................... $61 $84 $110 $237
Class C......................................................... $32 $67 $115 $247
Class D......................................................... $56 $90 $126 $227
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A......................................................... $55 $87 $121 $216
Class B......................................................... $21 $64 $110 $237
Class C......................................................... $22 $67 $115 $247
Class D......................................................... $56 $90 $126 $227
</TABLE>
3
<PAGE> 6
MERILL LYNCH SELECT PRICING SM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price
equal to the next determined net asset value per share subject to the
sales charges and ongoing fee arrangements described below. Shares of
Class A and Class D are sold to investors choosing the initial sales
charge alternatives, and shares of Class B and Class C are sold to
investors choosing the deferred sales charge alternatives. The Merrill
Lynch Select Pricing System is used by more than 50 mutual funds advised
by Merrill Lynch Asset Management, L.P. ("MLAM") or its affiliate, Fund
Asset Management, L.P. ("FAM" or the "Manager"). Funds advised by MLAM
or FAM are referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents
an identical interest in the investment portfolio of the Fund and has the
same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees and Class B and Class C
shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred
sales charge arrangements. The deferred sales charges and account
maintenance fees that are imposed on Class B and Class C shares, as well
as the account maintenance fees that are imposed on the Class D shares,
will be imposed directly against those classes and not against all assets
of the Fund and, accordingly, such charges will not affect the net asset
value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Each class has different exchange privileges.
See "Shareholder Services-Exchange Privilege".
Investors should understand that the purpose and function of the
initial sales charges with respect to the Class A and Class D shares are
the same as those of the deferred sales charges with respect to the Class
B and Class C shares in that the sales charges applicable to each class
provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes
of shares.
The following table sets forth a summary of the distribution
arrangements for each class of shares under the Merrill Lynch Select
Pricing System, followed by a more detailed description of each class and
a discussion of the factors that investors should consider in determining
the method of purchasing shares under the Merrill Lynch Select Pricing
System that the investor believes is most beneficial under his particular
circumstances. More detailed information as to each class of shares is set
forth under "Purchase of Shares".
4
<PAGE> 7
<TABLE>
<CAPTION>
Account
Maintenance Distribution Conversion
Class Sales Charge (1) Fee Fee Feature
----- ---------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Maximum 4.00% initial sales
A charge (2)(3) No No No
B CDSC for a period of 4 0.25% 0.25% B shares convert to D
years, at a rate of 4.0% during shares automatically
the first year, decreasing after approximately
1.0% annually to 0.0% ten years (4)
C 1.0% CDSC for one year 0.25% 0.35% No
D . Maximum 4.00% initial sales 0.10% No No
charge (3)
</TABLE>
----------
(1) Initial sales charges are imposed at the time of purchase as a
percentage of the offering price. Contingent deferred sales charges
("CDSCs") are imposed if the redemption occurs within the applicable
CDSC time period. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares
being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares-Initial
Sales Charge Alternatives-Class A and Class D Shares-Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a CDSC if redeemed within one
year. See "Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares is modified.
Also, Class B shares of certain other MLAM-advised mutual funds into
which exchanges may be made have an eight year conversion period. If
Class B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period
for the shares acquired.
Class A: Class A shares incur an initial sales charge when they are
purchased and bear no ongoing distribution or account maintenance
fees. Class A shares are offered to a limited group of investors
and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A
shares in a shareholder account are entitled to purchase
additional Class A shares in that account. Other eligible
investors include participants in certain investment programs. In
addition, Class A shares will be offered to directors and
employees of Merrill Lynch & Co., Inc. and its subsidiaries (the
term "subsidiaries", when used herein with respect to Merrill
Lynch & Co., Inc., includes MLAM, the Manager and certain other
entities directly or indirectly wholly-owned and controlled by
Merrill Lynch & Co., Inc.), and to members of the Boards of
MLAM-advised mutual funds. The maximum initial sales charge is
4.00%, which is reduced for purchases of $25,000 and over.
Purchases of $1,000,000 or more may not be subject to an initial
sales charge but if the initial sales charge is waived such
purchases will be subject to a CDSC if the shares are redeemed
within one year after purchase. Sales charges also are reduced
under a right of accumulation which takes into account the
investors'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> 8
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 Class B shares, and a
CDSC if they are redeemed within four years of purchase.
Approximately ten years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are
subject to a lower account maintenance fee of 0.10% and no
distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class
D shares automatically after approximately eight years. If Class
B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, as will the
Class D account maintenance fee of the acquired fund upon the
conversion, and the holding period for the shares exchanged will
be tacked onto the holding period for the shares acquired.
Automatic conversion of Class B shares into Class D shares will
occur at least once each month on the basis of the relative net
asset values of the shares of the two classes on the conversion
date, without the imposition of any sales load, fee or other
charge. Conversion of Class B shares to Class D shares will not
be deemed a purchase or sale of the shares for Federal income tax
purposes. Shares purchased through reinvestment of dividends on
Class B shares also will convert automatically to Class D shares.
The conversion period for dividend reinvestment shares and for
certain retirement plans is modified as described under
"Purchase of Shares-Deferred Sales Charge Alternatives-Class B
and Class C Shares-Conversion of Class B Shares to Class D
Shares".
Class C: Class C shares do not incur a sales charge when they are
purchased, but they are subject to an ongoing account maintenance
fee of 0.25% and an ongoing distribution fee of 0.35% of the
Fund's average net assets attributable to Class C shares. Class C
shares are also subject to a CDSC if they are redeemed within one
year of purchase. Although Class C shares are subject to a 1.0%
CDSC for only one year (as compared to four years for Class B),
Class C shares have no conversion feature and, accordingly, an
investor that purchases Class C shares will be subject to
distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Trust's Board
of Trustees and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are
purchased and are subject to an ongoing account maintenance fee
of 0.10% of the Fund's average net assets attributable to Class D
shares. Class D shares are not subject to an ongoing distribution
fee or any CDSC when they are redeemed. Purchases of $1,000,000
or more may not be subject to an initial sales charge, but if the
initial sales charge is waived such purchases will be subject to
a CDSC of 1.0% if the shares are redeemed within one year after
purchase. The schedule of initial sales charges and reductions
for Class D shares is the same as the schedule for Class A
shares. Class D shares also will be issued upon conversion of
Class B shares as described above under "Class B". See
"Purchase of Shares-Initial Sales Charge Alternatives-Class A
and Class D Shares".
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 System that the investor believes is most beneficial
under his particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial
sales charge alternative may elect to purchase Class D shares or, if an
eligible investor, Class A shares. Investors choosing the initial sales
charge alternative who are eligible to purchase Class A shares should
purchase Class A shares rather than Class D shares because of the account
maintenance fee imposed on Class D shares. Investors qualifying for
significantly
6
<PAGE> 9
reduced initial sales charges may find the initial sales charge
alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges
imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated
ongoing account maintenance and distribution fees on Class B or Class C
shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase
Class A shares of other MLAM-advised mutual funds, those previously
purchased Class A shares, together with Class B, Class C and Class D share
holdings, will count toward a right of accumulation which may qualify the
investor for reduced initial sales charges on new initial sales charge
purchases. In addition, the ongoing Class B and Class C account
maintenance and distribution fees will cause Class B and Class C shares to
have higher expense ratios, pay lower dividends and have lower total
returns than the initial sales charge shares. The ongoing Class D account
maintenance fees will cause Class D shares to have a higher expense ratio,
pay lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges
are deducted at the time of purchase, Class B and Class C shares provide
the benefit of putting all of the investor's dollars to work from the time
the investment is made. The deferred sales charge alternatives may be
particularly appealing to investors who do not qualify for a reduction in
initial sales charges. Both Class B and Class C shares are subject to
ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be
offset to the extent any return is realized on the additional funds
initially invested in Class B or Class C shares. In addition, Class B
shares will be converted into Class D shares of the Fund after a
conversion period of approximately ten years, and thereafter investors
will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they
determine it to be most advantageous to have all their funds invested
initially and intend to hold their shares for an extended period of time.
Investors in Class B shares should take into account whether they intend
to redeem their shares within the CDSC period and, if not, whether they
intend to remain invested until the end of the conversion period and
thereby take advantage of the reduction in ongoing fees resulting from the
conversion into Class D shares. Other investors, however, may elect to
purchase Class C shares if they determine that it is advantageous to have
all their assets invested initially and they are uncertain as to the
length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period
at a lower rate, they are subject to higher distriblution 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> 10
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audit of the financial statements of the Fund
by Deloitte & Touche LLP, independent auditors. Financial statements for
the period July 1, 1994 (commencement of operations) to July 31, 1994 and
the independent auditors' report thereon are included in the Statement of
Additional Information. The following per share data and ratios have been
derived from information provided in the Fund's audited financial
statements. Financial information is not presented for Class C or Class D
shares since no shares of those classes are publicly issued as of this
Prospectus. Further information about the performance of the Fund is
contained in the Fund's most recent annual report to shareholders which
may be obtained, without charge, by calling or by writing the Fund at the
telephone number or address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
Class A Class B
For the period For the period
July 1, 1994+ July 1, 1994+
to July 31, 1994 to July 31, 1994
---------------- ----------------
<S> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period ........... $ 10.00 $ 10.00
------ ------
Investment income-net ......................... .05 .04
Realized and unrealized gain on investments-net .22 .22
------ ------
Total from investment operations ............... .27 .26
------ ------
Less dividends:
Investment income-net ......................... (.05) (.04)
------ ------
Total dividends ................................ (.05) (.04)
------ ------
Net asset value, end of period ................. $ 10.22 $ 10.22
====== ======
Total Investment Return ++:
Based on net asset value per share ............ 2.68%# 2.64%#
====== ======
Ratios to Average Net Assets:
Expenses, excluding distribution fees and net of
reimbursement ................................ --%* --%*
====== ======
Expenses, net of reimbursement ................. --%* .50%*
====== ======
Expenses ....................................... 1.54%* 2.04%*
====== ======
Investment income-net .......................... 5.48%* 5.00%*
====== ======
Supplemental Data:
Net assets, end of period (in thousands) ....... $6,557 $16,889
====== ======
Portfolio turnover ............................. 3.07% 3.07%
====== ======
</TABLE>
- ----------
+ Commencement of operations.
++ Total investment returns exclude the effects of sales loads.
* Annualized
# Aggregate total investment return.
8
<PAGE> 11
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal and Connecticut income taxes as is
consistent with prudent investment management. The Fund seeks to achieve its
objective while providing investors with the opportunity to invest in a
portfolio of securities consisting primarily of long-term obligations issued
by or on behalf of the State of Connecticut, its political subdivisions,
agencies and instrumentalities and obligations of other qualifying issuers,
such as issuers located in Puerto Rico, the Virgin Islands and Guam, which
pay interest exempt, in the opinion of bond counsel to the issuer, from
Federal and Connecticut income taxes. Obligations exempt from Federal income
taxes are referred to herein as "Municipal Bonds" and obligations exempt from
both Federal and Connecticut income taxes are referred to as "Connecticut
Municipal Bonds". Unless otherwise indicated, references to Municipal Bonds
shall be deemed to include Connecticut Municipal Bonds. The Fund at all
times, except during temporary defensive periods, will maintain at least 65%
of its total assets invested in Connecticut Municipal Bonds. The investment
objective of the Fund as set forth in the first sentence of this paragraph is
a fundamental policy and may not be changed without shareholder approval. At
times, the Fund may seek to hedge its portfolio through the use of futures
transactions to reduce volatility in the net asset value of Fund shares.
Municipal Bonds may include several types of bonds. The risks and
special considerations involved in investments in Municipal Bonds vary
with the types of instruments being acquired. Investments in Non-Municipal
Tax-Exempt Securities, as defined herein, may present similar risks,
depending on the particular product. Certain instruments in which the Fund
may invest may be characterized as derivative instruments. See
"Description of Municipal Bonds" and "Financial Futures Transactions
and Options". The interest on Municipal Bonds may bear a fixed rate or be
payable at a variable or floating rate. At least 80% of the Municipal
Bonds purchased by the Fund primarily will be what are commonly referred
to as "investment grade" securities, which are obligations rated at the
time of purchase within the four highest quality ratings as determined by
either Moody's Investors Service, Inc. ("Moody's") (currently Aaa, Aa, A
and Baa), Standard & Poor's Corporation ("Standard & Poor's") (currently
AAA, AA, A and BBB) or Fitch Investors Service, Inc. ("Fitch")
(currently AAA, AA, A and BBB). If Municipal Bonds are unrated, such
securities will possess creditworthiness comparable, in the opinion of the
Manager, to obligations in which the Fund may invest. Municipal Bonds
rated in the fourth highest rating category, while considered "investment
grade", have certain speculative characteristics and are more likely to
be downgraded to non-investment grade than obligations rated in one of the
top three rating categories. See Appendix II-"Ratings of Municipal
Bonds" in the Statement of Additional Information for more information
regarding ratings of debt securities. An issue of rated Municipal Bonds
may cease to be rated or its rating may be reduced below "investment
grade" subsequent to its purchase by the Fund. If an obligation is
downgraded below investment grade, the Manager will consider factors such
as price, credit risk, market conditions, financial condition of the
issuer and interest rates to determine whether to continue to hold the
obligation in the Fund's portfolio.
The Fund may invest up to 20% of its total assets in Municipal Bonds
that are rated below Baa by Moody's or below BBB by Standard & Poor's or
Fitch, or which in the Manager's judgment, possess similar credit
characteristics. Such securities, sometimes referred to as "high-yield"
or "junk" bonds, are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms
of the security and generally involve a greater volatility of price than
securities in higher rating categories. The market prices of
high-yielding, lower-rated securities may fluctuate more than higher-rated
securities and may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates. In
9
<PAGE> 12
purchasing such securities, the Fund will rely on the Manager's judgment,
analysis and experience in evaluating the creditworthiness of the issuer
of such securities. The Manager will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of its
management and regulatory matters. See "Investment Objective and
Policies" in the Statement of Additional Information for a more detailed
discussion of the pertinent risk factors involved in investing in "high
yield" or "junk" bonds and Appendix II-"Ratings of Municipal Bonds"-
in the Statement of Additional Information for additional information
regarding ratings of debt securities. The Fund does not intend to purchase
debt securities that are in default or which the Manager believes will be
in default.
Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In
such instances, the Trustees and the Manager will take into account in
assessing the quality of such bonds not only the creditworthiness of the
issuer of such bonds but also the creditworthiness of the financial
institution.
The Fund's investments may also include variable rate demand
obligations ("VRDOs") and VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by
a financial institution. The VRDOs in which the Fund will invest are
tax-exempt obligations which contain a floating or variable interest rate
adjustment formula and an unconditional right of demand on the part of the
holder thereof to receive payment of the unpaid principal balance plus
accrued interest on a short notice period not to exceed seven days.
Participating VRDOs provide the Fund with a specified undivided interest
(up to 100%) of the underlying obligation and the right to demand payment
of the unpaid principal balance plus accrued interest on the Participating
VRDOs from the financial institution on a specified number of days'
notice, not to exceed seven days. There is, however, the possibility that
because of a default or insolvency, the demand feature of VRDOs or
Participating VRDOs may not be honored. The Fund has been advised by its
counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment
of the unpaid principal balance plus accrued interest on a notice period
exceeding seven days may be deemed illiquid securities. A VRDO with a
demand notice period exceeding seven days will therefore be subject to the
Fund's restriction on illiquid investments unless, in the judgment of the
Trustees, such VRDO is liquid. The Trustees may adopt guidelines and
delegate to the Manager the daily function of determining and monitoring
liquidity of such VRDOs. The Trustees, however, will retain sufficient
oversight and be ultimately responsible for such determinations.
The Fund ordinarily does not intend to realize investment income not
exempt from Federal and Connecticut income taxes. However, to the extent
that suitable Connecticut Municipal Bonds are not available for investment
by the Fund, the Fund may purchase Municipal Bonds issued by other states,
their agencies and instrumentalities, the interest income on which is
exempt, in the opinion of bond counsel, from Federal, but not Connecticut,
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 total assets in Connecticut Municipal Bonds. For temporary
defensive periods or to provide liquidity, the Fund has the authority to
invest as much as 35% of its total assets
10
<PAGE> 13
in tax-exempt or taxable money market obligations with a maturity of one
year or less (such short-term obligations being referred to herein as
"Temporary Investments"), except that taxable Temporary Investments
shall not exceed 20% of the Fund's net assets. The Temporary Investments,
VRDOs and Participating VRDOs in which the Fund may invest also will be in
the following rating categories at the time of purchase: MIG-1/VMIG-1
through MIG-4/VMIG-4 for notes and VRDOs and Prime-1 through Prime-3 for
commercial paper (as determined by Moody's), SP-1 and 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 a Federal
alternative minimum tax. The percentage of the Fund's net assets invested
in "private activity bonds" will vary during the year. See
"Distributions and Taxes". In addition, the Fund reserves the right to
invest temporarily a greater portion of its assets in Temporary
Investments for defensive purposes, when, in the judgment of the Manager,
market conditions warrant. The investment objective of the Fund is a
fundamental policy of the Fund which may not be changed without a vote of
a majority of the outstanding shares of the Fund. The Fund's hedging
strategies, which are described in more detail under "Financial Futures
Transactions and Options", are not fundamental policies and may be
modified by the Trustees of the Trust without the approval of the Fund's
shareholders.
Potential Benefits
Investment in shares of the Fund offers several benefits. The Fund
offers investors the opportunity to receive income exempt from Federal and
Connecticut income taxes by investing in a professionally managed
portfolio consisting primarily of long-term Connecticut 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, account maintenance and distribution fees.
Special and Risk Considerations Relating to Connecticut Municipal Bonds
The Fund ordinarily will invest at least 65% of its total assets in
Connecticut Municipal Bonds, and therefore it is more susceptible to
factors adversely affecting issuers of Connecticut Municipal Bonds than is
a tax-exempt mutual fund that is not concentrated in issuers of
Connecticut Municipal Bonds to this degree.
Connecticut has a high level of personal income, and according to
projections made by the U.S. Department of Commerce, Connecticut is
expected to continue to rank among the highest in state per capita income.
Connecticut's economy is diverse, but defense-related business plays
an important role. In recent years, the federal government has reduced
defense-related spending, and total defense contract awards in Connecticut
have declined from approximately $6.1 billion in 1989 to approximately
$2.9 billion in 1993. Sizable state employers in this sector have
announced substantial planned labor force reductions over the next several
years, and the overall effect of these trends suggests that the defense
sector is not as promising as it once was. Unemployment rates in
Connecticut increased from 3.0% in 1988 to 7.5% in 1992 before falling
back to 6.6% in 1993. The overall U.S. unemployment rate was 5.5%, 7.4%
and 6.8% for such periods, respectively.
11
<PAGE> 14
In recent years, the State has been an active issuer of debt
obligations. At October 1, 1994, the total net direct general obligation
indebtedness of the State was $5.9 billion, a significant increase from
$2.87 billion at June 30, 1990. Per capita net direct debt increased to
$1,784 from $874 over this period. The State also has authorized or issued
significant amounts of bonds on which it has limited or contingent
liability.
The Connecticut State General Fund had an operating deficit of $28
million for the 1988-89 fiscal year based on the modified cash basis of
accounting used for statutory financial reporting. The Connecticut
Comptroller's annual reports on the state's fiscal position reported an
actual General Fund operating deficit of $259.5 million for the 1989-90
fiscal year and a General Fund operating deficit of $808.5 million for the
1990-91 fiscal year. The total accumulated deficit of approximately $966
million was funded through the issuance of five-year Economic Recovery
Notes. An income tax was introduced at the same time. Since then the State
has operated with a General Fund surplus. The Connecticut Comptroller's
annual reports reflected a General Fund operating surplus of $110.2
million for the fiscal year ended June 30, 1992, $113.5 million for the
fiscal year ended June 30, 1993 and $19.7 million for the fiscal year
ended June 30, 1994. The Comptroller's October 3, 1994 interim report
projects a surplus of $21.0 million for the fiscal year ending June 30,
1995. On a GAAP basis, the interim report estimates the cumulative deficit
of $531 million at June 30, 1995. Currently, Moody's rates Connecticut's
general obligation bonds Aa and Connecticut's outstanding commercial paper
P-1 and Standard & Poor's rates Connecticut's general obligation bonds AA-
and Connecticut's outstanding commercial paper A-1+.
The Manager does not believe that the current economic conditions in
Connecticut or other factors described above will have a significant
adverse effect on the Fund's ability to invest in high quality Connecticut
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 Connecticut Municipal Bonds. See Appendix I, "Economic and
Financial Conditions in Connecticut" in the Statement of Additional
Information.
Description of Municipal Bonds
Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including construction and equipping of a wide
range of public facilities (including water, sewer, gas, electricity,
solid waste, health care, transportation, education and housing
facilities), refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of bonds are issued by or on behalf
of public authorities to finance various privately operated facilities,
including certain facilities for the local furnishing of electric energy
or gas, sewage facilities, solid waste disposal facilities and other
specialized facilities. For purposes of this Prospectus, such obligations
are referred to as Municipal Bonds if the interest paid thereon is exempt
from Federal income tax, and, as Connecticut Municipal Bonds if the
interest thereon is exempt from Federal and Connecticut income taxes, even
though such bonds may be "private activity bonds" as discussed below.
The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" bonds which latter category includes
industrial development bonds ("IDBs") and, for bonds issued after August
15, 1986, private activity bonds. General obligation bonds are secured by
the issuer's pledge of its faith, credit and taxing power for the payment
of principal and interest. The taxing power of any governmental entity may
be limited, however, by provisions of state constitutions or laws, and an
entity's creditworthiness will depend on many factors, including potential
erosion of the tax base due to population declines, natural disasters,
declines in the state's industrial base or inability to attract new
industries, economic limits on the ability to tax without eroding the tax
base, state legislative proposals or voter initiatives to limit ad valorem
real property taxes and the
12
<PAGE> 15
extent to which the entity relies on Federal or state aid, access to
capital markets or other factors beyond the state or entity's control.
Accordingly, the capacity of the issuer of a general obligation bond as to
the timely payment of interest and the repayment of principal when due is
affected by the issuer's maintenance of its tax base.
Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as
payments from the user of the facility being financed; accordingly, the
timely payment of interest and the repayment of principal in accordance
with the terms of the revenue or special obligation bond is a function of
the economic viability of such facility or such revenue source. The Fund
will not invest more than 10% of its total assets (taken at market value
at the time of each investment) in industrial revenue bonds where the
entity supplying the revenues from which the issuer is paid, including
predecessors, has a record of less than three years of continuous business
operations. Investments involving entities with less than three years of
continuous business operations may pose somewhat greater risks due to the
lack of a substantial operating history for such entities. The Manager
believes, however, that the potential benefits of such investments
outweigh the potential risks, particularly given the Fund's limitations on
such investments.
The Fund may purchase IDBs and private activity bonds. IDBs and
private activity bonds are tax-exempt securities issued by states,
municipalities or public authorities to provide funds, usually through a
loan or lease arrangement, to a private entity for the purpose of
financing construction or improvement of a facility to be used by the
entity. Such bonds are secured primarily by revenues derived from loan
repayments or lease payments due from the entity which may or may not be
guaranteed by a parent company or otherwise secured. Neither IDBs nor
private activity bonds are secured by a pledge of the taxing power of the
issuer of such bonds. Therefore, an investor should be aware that
repayment of such bonds depends on the revenues of a private entity and be
aware of the risks that such an investment may entail. Continued ability
of an entity to generate sufficient revenues for the payment of principal
and interest on such bonds will be affected by many factors including the
size of the entity, capital structure, demand for its products or
services, competition, general economic conditions, governmental
regulation and the entity's dependence on revenues for the operation of
the particular facility being financed. The Fund may also invest in
so-called "moral obligation" bonds. If an issuer of such bonds is unable
to meet its obligations, repayment of such bonds becomes a moral
commitment, but not a legal obligation, of the issuer.
The Fund 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. Also, the Fund may
invest in so-called "inverse floating obligations" or "residual
interest bonds" on which the interest rates typically decline as market
rates increase and increase as market rates decline. To the extent the
Fund invests in these types of Municipal Bonds, the Fund's return on such
Municipal Bonds will be subject to risk with respect to the value of the
particular index. Such securities have the effect of providing a degree of
investment leverage, since they may increase or decrease in value in
response to changes, as an illustration, in market interest rates at a
rate which is a multiple (typically two) of the rate at which fixed-rate
long-term tax-exempt securities increase or decrease in response to such
changes. As a result, the market values of such securities will generally
be more volatile than the market values of fixed-rate tax-exempt
securities. To seek to limit the volatility of these
13
<PAGE> 16
securities, the Fund may purchase inverse floating obligations with
shorter term maturities or which contain limitations on the extent to
which the interest rate may vary. The Manager believes that indexed and
inverse floating obligations represent a flexible portfolio management
instrument for the Fund which allows the Manager to vary the degree of
investment leverage relatively efficiently under different market
conditions. Certain investments in such obligations may be illiquid. The
Fund may not invest in such illiquid obligations if such investments,
together with other illiquid investments, would exceed 15% of the Fund's
net assets.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or
facilities. The certificates represent participations in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively called "lease obligations") relating to such equipment,
land or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the issuer's unlimited taxing power is
pledged, a lease obligation frequently is backed by the issuer's covenant
to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations contain
"non-appropriation" clauses which provide that the issuer has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might
prove difficult. These securities represent a type of financing that has
not yet developed the depth of marketability associated with more
conventional securities. Certain investments in lease obligations may be
illiquid. The Fund may not invest in illiquid lease obligations if such
investments, together with other illiquid investments, would exceed 15% of
the Fund's net assets. The Fund may, however, invest without regard to
such limitation in lease obligations which the Manager, pursuant to
guidelines which have been adopted by the Board of Trustees and subject to
the supervision of the Board, determines to be liquid. The Manager will
deem lease obligations liquid if they are publicly offered and have
received an investment grade rating of Baa or better by Moody's, or BBB or
better by Standard & Poor's or Fitch. Unrated lease obligations, or those
rated below investment grade, will be considered liquid if the obligations
come to the market through an underwritten public offering and at least
two dealers are willing to give competitive bids. In reference to the
latter, the Manager must, among other things, also review the
creditworthiness of the municipality obligated to make payment under the
lease obligation and make certain specified determinations based on such
factors as the existence of a rating or credit enhancement such as
insurance, the frequency of trades or quotes for the obligation and the
willingness of dealers to make a market in the obligation.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a
result, this legislation and legislation which may be enacted in the
future may affect the availability of Municipal Bonds for investment by
the Fund.
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
high grade, liquid Municipal Bonds having a market value at all times at
least equal to the amount of the forward commitment.
14
<PAGE> 17
Call Rights
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the
maturity of the related Municipal Bond will expire without value. The
economic effect to holding both the Call Right and the related Municipal
Bond is identical to holding a Municipal Bond as a non-callable security.
Certain investments in such obligations may be illiquid. The Fund may not
invest in such illiquid obligations if such investments, together with
other illiquid investments, would exceed 15% of the Fund's net assets.
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 index-based futures
contracts to make and accept a cash settlement, at a specific future time
for a specified price. A sale of financial futures contracts may provide a
hedge against a decline in the value of portfolio securities because such
depreciation may be offset, in whole or in part, by an increase in the
value of the position in the financial futures contracts. A purchase of
financial futures contracts may provide a hedge against an increase in the
cost of securities intended to be purchased, because such appreciation may
be offset, in whole or in part, by an increase in the value of the
position in the futures contracts. Distributions, if any, of net long-term
capital gains from certain transactions in futures or options are taxable
at long-term capital gains rates for Federal income tax purposes,
regardless of the length of time the shareholder has owned Fund shares.
See "Distributions and Taxes-Taxes".
The Fund deals in financial futures contracts traded on the Chicago
Board of Trade based on The Bond Buyer Municipal Bond Index, a
price-weighted measure of the market value of 40 large, recently issued
tax-exempt bonds. There can be no assurance, however, that a liquid
secondary market will exist to terminate any particular financial futures
contract at any specific time. If it is not possible to close a financial
futures position entered into by the Fund, the Fund would continue to be
required to make daily cash payments of variation margin in the event of
adverse price movements. In such a situation, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily variation
margin requirements at a time when it may be disadvantageous to do so. The
inability to close financial futures positions also could have an adverse
impact on the Fund's ability to hedge effectively. There is also the risk
of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a financial futures
contract.
The Fund may purchase and sell financial futures contracts on U.S.
Government securities and write and purchase put and call options on such
futures contracts as a hedge against adverse changes in interest rates as
described more fully in the Statement of Additional Information. With
respect to U.S. Government securities, currently there are financial
futures contracts based on long-term U.S. Treasury bonds, Treasury notes,
Government National Mortgage Association ("GNMA") Certificates and
three-month U.S. Treasury bills.
15
<PAGE> 18
Subject to policies adopted by the Trustees, the Fund also may engage
in other financial futures contracts transactions and options thereon,
such as financial futures contracts or options on other municipal bond
indexes which may become available if the Manager of the Fund and the
Trustees of the Trust should determine that there is normally a sufficient
correlation between the prices of such futures contracts and the Municipal
Bonds in which the Fund invests to make such hedging appropriate.
Utilization of futures transactions and options thereon involves the
risk of imperfect correlation in movements in the price of futures
contracts and movements in the price of the security which is the subject
of the hedge. If the price of the futures contract moves more or less than
the price of the security that is the subject of the hedge, the Fund will
experience a gain or loss which will not be completely offset by movements
in the price of such security. There is a risk of imperfect correlation
where the securities underlying futures contracts have different
maturities, ratings or geographic mixes than the security being hedged. In
addition, the correlation may be affected by additions to or deletions
from the index which serves as a basis for a financial futures contract.
Finally, in the case of futures contracts on U.S. Government securities
and options on such futures contracts, the anticipated correlation of
price movements between the U.S. Government securities underlying the
futures or options and Municipal Bonds may be adversely affected by
economic, political, legislative or other developments which have a
disparate impact on the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission, the
futures trading activities described herein will not result in the Fund
being deemed to be a "commodity pool," as defined under such
regulations, provided that the Fund adheres to certain restrictions. In
particular, the Fund may purchase and sell futures contracts and options
thereon (i) for bona fide hedging purposes, and (ii) for non-hedging
purposes, if the aggregate initial margins and premiums required to
establish positions in such contracts and options does not exceed 5% of
the liquidation value of the Fund's portfolio assets after taking into
account unrealized profits and unrealized losses on any such contracts and
options. (However, as stated above, the Fund intends to engage in options
and futures transactions only for hedging purposes.) Margin deposits may
consist of cash or securities acceptable to the broker and the relevant
contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or short-term, high-grade, fixed-income securities in a segregated
account with the Fund's custodian, so that the amount so segregated plus
the amount of initial and variation margin held in the account of its
broker equals the market value of the futures contracts, thereby ensuring
that the use of such futures contract is unleveraged. It is not
anticipated that transactions in futures contracts will have the effect of
increasing portfolio turnover.
Although certain risks are involved in options and futures
transactions, the Manager believes that, because the Fund will engage in
futures transactions only for hedging purposes, the futures portfolio
strategies of the Fund will not subject the Fund to certain risks
frequently associated with speculation in futures transactions. The Fund
must meet certain Federal income tax requirements under the Internal
Revenue Code of 1986, as amended (the "Code"), in order to qualify for
the special tax treatment afforded regulated investment companies,
including a requirement that less than 30% of its gross income be derived
from the sale or other disposition of securities held for less than three
months. Additionally, the Fund is required to meet certain diversification
requirements under the Code.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges which limit the amount of fluctuation in a futures
16
<PAGE> 19
contract price during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Prices have in the past moved beyond the daily limit on a number of
consecutive trading days.
The successful use of transactions in futures also depends on the
ability of the Manager to forecast correctly the direction and extent of
interest rate movements within a given time frame. To the extent these
rates remain stable during the period in which a futures contract is held
by the Fund or moves in a direction opposite to that anticipated, the Fund
may realize a loss on the hedging transaction which is not fully or
partially offset by an increase in the value of portfolio securities. As a
result, the Fund's total return for such period may be less than if it had
not engaged in the hedging transaction. Furthermore, the Fund will only
engage in hedging transactions from time to time and may not necessarily
be engaging in hedging transactions when movements in interest rates
occur.
Reference is made to the Statement of Additional Information for
further information on financial futures contracts and certain options
thereon.
Repurchase Agreements
As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or 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 all other illiquid investments, would exceed 15%
of the Fund's net 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 has adopted a number of restrictions and policies relating to
the investment of the Fund's assets and its activities, which are
fundamental policies of the Fund and may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the 1940 Act. Among the more significant
restrictions, the Fund may not: (i) purchase any securities other than
securities referred to under "Investment Objective and Policies" herein;
(ii) purchase securities of other investment companies, except in
connection with certain specified transactions and with respect to
investments of up to 10% of the Fund's total assets in securities of
closed-end investment companies; (iii) borrow amounts in excess of 20% of
its total assets taken at market value (including the amount borrowed),
and then only from banks as a temporary measure for extraordinary or
emergency purposes (The Fund will not purchase securities while borrowings
are outstanding); (iv) mortgage, pledge, hypothecate or in any manner
transfer as security for indebtedness any securities owned or held by the
Fund except in connection with certain specified transactions; (v) invest
in securities which cannot be readily resold because of legal or
contractual restrictions or which are not readily marketable, including
individually negotiated loans that constitute illiquid investments and
illiquid lease obligations, and in repurchase agreements and purchase and
sale contracts maturing in more than seven days, if, regarding all such
securities taken together, more than 15% of its net assets (taken at
market value at the time of each investment) would be
17
<PAGE> 20
invested in such securities; (vi) invest more than 10% of its total
assets (taken at market value at the time of each investment)
in industrial revenue bonds where the entity supplying the revenues
from which the issue is to be paid, and the guarantor of the obligation,
including predecessors, each have a record of less than three years'
continuous business operation; and (vii) invest more than 25% of its
total assets (taken at market value at the time of each investment) in
securities of issuers in any particular industry (other than United States
Government securities or Government agency securities, Municipal Bonds
and Non-Municipal Tax-Exempt Securities).
The Fund is classified as non-diversified within the meaning of the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that it may invest in obligations of a single
issuer. However, the Fund's investments will be limited so as to qualify
as a "regulated investment company" for purposes of the Internal Revenue
Code of 1986, as amended (the "Code"). See "Taxes". To qualify, among
other requirements, the Trust will limit the Fund's investments so that,
at the close of each quarter of the taxable year, (i) not more than 25% of
the market value of the Fund's total assets will be invested in the
securities of a single issuer, and (ii) with respect to 50% of the market
value of its total assets, not more than 5% of the market value of its
total assets will be invested in the securities of a single issuer and the
Fund will not own more than 10% of the outstanding voting securities of a
single issuer. (For purposes of this restriction, the Fund will regard
each state and each political subdivision, agency or instrumentality of
such state and each multi-state agency of which such state is a member and
each public authority which issues securities on behalf of a private
entity as a separate issuer, except that if the security is backed only by
the assets and revenues of a non-government entity then the entity with
the ultimate responsibility for the payment of interest and principal may
be regarded as the sole issuer.) These tax-related limitations may be
changed by the Trustees of the Trust to the extent necessary to comply
with changes to the Federal tax requirements. A fund which elects to be
classified as "diversified" under the 1940 Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets.
To the extent that the Fund assumes large positions in the obligations of
a small number of issuers, the Fund's total return may fluctuate to a
greater extent than that of a diversified company as a result of changes
in the financial condition or in the market's assessment of the issuers.
The Board of Trustees of the Trust, at a meeting held on August 3,
1994, approved certain changes to the fundamental and non-fundamental
investment restrictions of the Fund. These changes were proposed in
connection with the creation of a set of standard fundamental and
non-fundamental investment restrictions that would be adopted, subject to
shareholder approval, by all of the non-money market mutual funds advised
by MLAM or FAM. The proposed uniform investment restrictions are designed
to provide each of these funds, including the Fund, with as much
investment flexibility as possible under the Investment Company Act and
applicable state securities regulations, help promote operational
efficiencies and facilitate monitoring of compliance. The
investment objectives and policies of the Fund will be unaffected by the
adoption of the proposed investment restrictions.
The full text of the proposed investment restrictions is set forth
under "Investment Objective and Policies-Proposed Uniform Investment
Restrictions" in the Statement of Additional Information. Shareholders of
the Fund are currently considering whether to approve the proposed revised
investment restrictions. If such shareholder approval is obtained, the
Fund's current investment restrictions will be replaced by the proposed
restrictions, and the Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change.
Investors are referred to the Statement of Additional Information for
a complete description of the Fund's investment restrictions.
18
<PAGE> 21
MANAGEMENT OF THE TRUST
Trustees
The Trustees of the Trust consist of six individuals, five of whom are
not "interested persons" of the Trust as defined in the 1940 Act. The
Trustees are responsible for the overall supervision of the operations of
the Trust and the Fund and perform the various duties imposed on the
directors or trustees of investment companies by the 1940 Act.
The Trustees are:
Arthur Zeikel*-President and Chief Investment Officer of the Manager
and MLAM; President and Director of Princeton Services, Inc.;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co.") and of Merrill Lynch; Director of the Distributor.
Kenneth S. Axelson-Former Executive Vice President and Director, J.C.
Penney Company, Inc.
Robert R. Martin-Chairman, WTC Industries, Inc. and former Chairman,
Kinnard Investments, Inc.
Herbert I. London-John M. Olin Professor of Humanities, New York
University.
Joseph L. May-Attorney in private practice.
Andre F. Perold-Professor, Harvard Business School.
----------
*Interested person, as defined in the 1940 Act, of the Trust.
Management and Advisory Arrangements
The Manager, which is owned and controlled by ML & Co., a financial
services holding company, acts as the manager for the Fund and provides
the Fund with management services. The Manager or MLAM acts as the
investment adviser for over 100 other registered investment companies.
MLAM also provides investment advisory services to individuals and
institutions. As of August 31, 1994, the Manager and MLAM had a total of
approximately $165.7 billion in investment company and other portfolio
assets under management, including accounts of certain affiliates of the
Manager.
Subject to the direction of the Trustees, the Manager is responsible
for the actual management of the Fund's portfolio and constantly reviews
the Fund's holdings in light of its own research analysis and that from
other relevant sources. The responsibility for making decisions to buy,
sell or hold a particular security rests with the Manager. The Manager
performs certain of the other administrative services and provides all the
office space, facilities, equipment and necessary personnel for management
of the Fund.
Vincent R. Giordano and Kenneth A. Jacob are the Portfolio Managers
for the Fund. Vincent R. Giordano has been a Portfolio Manager of the
Manager and MLAM since 1977 and a Senior Vice President of the Manager and
MLAM since 1984. Kenneth A. Jacob has been a Vice President of the Manager
and MLAM since 1984.
Pursuant to the management agreement between the Manager and the Trust
on behalf of the Fund (the "Management Agreement"), the Manager is
entitled to receive from the Fund a monthly fee based upon the average
daily net assets of the Fund at the following annual rates: 0.55% of the
average daily net assets not
19
<PAGE> 22
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 period from July 1, 1994
(commencement of operations) to July 31, 1994, the total fee paid by the
Fund to the Manager was $9,061 (based on average net assets of
approximately $19.4 million), all of which was voluntarily waived.
The Management Agreement obligates the Fund to pay certain expenses
incurred in the Fund's operations, including, among other things, the
management fee, legal and audit fees, unaffiliated Trustees' fees and
expenses, registration fees, custodian and transfer agency fees, accounting
and pricing costs, and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information. Accounting
services are provided to the Fund by the Manager, and the Fund reimburses the
Manager for its costs in connection with such services. For the period from
July 1, 1994 to July 31, 1994, the Fund paid the Manager $1,813 for
accounting services, all of which was voluntarily waived. For that period,
the annualized ratio of total expenses, excluding distribution fees and net
of reimbursement to average net assets was 0% for Class A shares and 0% for
Class B shares; no Class C or Class D shares had been issued during that
period. The Manager may waive all or a portion of its management fee and may
voluntarily assume all or a portion of the Fund's expenses.
Transfer Agency Services
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of ML & Co.; acts as the Trust's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant
to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Fund pays the Transfer Agent an annual fee of $11.00 per
Class A and Class D shareholder account and $14.00 per Class B and Class C
shareholder account, and the Transfer Agent is entitled to reimbursement
from the Fund for out-of-pocket expenses incurred by the Transfer Agent
under the Transfer Agency Agreement. For the period from July 1, 1994
(commencement of operations) to July 31, 1994, the Fund paid the Transfer
Agent a total fee of $432 pursuant to the Transfer Agency Agreement for
providing transfer agency services.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Manager and of Merrill
Lynch, acts as the distributor of the shares of the Fund. Shares of the
Fund will be 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 during the
continuous offering is $1,000. The minimum subsequent purchase is $50.
The Fund will offer 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, as
described below. The applicable offering price for purchase orders is
based upon the net asset value of the Fund next determined after receipt
of the purchase orders by the Distributor. As to purchase orders received
by securities dealers prior to 4:15 P.M., New York time, which includes
orders received after the determination of net asset value on the previous
day, the applicable offering price will be based on the net asset value as
of 4:15 P.M. on the day the orders are placed with the Distributor,
provided the orders are received by the Distributor prior to 4:30 P.M.,
New York time, on that day. If the purchase orders are not received by the
Distributor prior to 4:30 P.M., New York time, such orders shall be deemed
received on the next business day. The Trust or the
20
<PAGE> 23
Distributor may suspend the continuous offering of the Fund's shares at
any time in response to conditions in the securities markets or otherwise
and may thereafter resume such offering from time to time. Any order may
be rejected by the Distributor or the Trust. Neither the Distributor nor
the dealers are permitted to withhold placing orders to benefit themselves
by a price change. Merrill Lynch may charge its customers a processing fee
(presently $4.85) to confirm a sale of shares to such customers. Purchases
directly through the Fund's Transfer Agent are not subject to the
processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing 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 contingent deferred
sales charge and ongoing distribution fees. A discussion of the factors
that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing System is set forth under
"Merrill Lynch Select Pricing System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund
represents identical interests in the investment portfolio of the Fund and
has the same rights, except that Class B, Class C and Class D shares bear
the expenses of the ongoing account maintenance fees, and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred
sales charge arrangements. The deferred sales charges and account
maintenance fees that are imposed on Class B and Class C shares, as well
as the account maintenance fees that are imposed on Class D shares, will
be imposed directly against those classes and not against all assets of
the Fund and, accordingly, such charges will not affect the net asset
value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid. See "Distribution Plans" below. Each
class has different exchange privileges. See "Shareholder Services-
Exchange Privilege".
Investors should understand that the purpose and function of the
initial sales charges with respect to Class A and Class D shares are the
same as those of the deferred sales charges with respect to Class B and
Class C shares in that the sales charges applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes
of shares. Investors are advised that only Class A and Class D shares may
be available for purchase through securities dealers, other than Merrill
Lynch, which are eligible to sell shares.
21
<PAGE> 24
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing System.
<TABLE>
<CAPTION>
Account
Maintenance Distribution Conversion
Class Sales Charge(1) Fee Fee Feature
- ----- --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales charge(2)(3) No No No
B CDSC for a period of 4 years, at a rate 0.25% 0.25% B shares convert to
of 4.0% during the first year, D shares automatically after
decreasing 1.0% annually to 0.0% approximately ten years(4)
C 1.0% CDSC for one year 0.25% 0.35% No
D Maximum 4.00% initial sales charge(3) 0.10% No No
</TABLE>
----------
(1) Initial sales charges are imposed at the time of purchase as a
percentage of the offering price. CDSCs may be imposed if the
redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives-Class A and Class D Shares-Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1% CDSC for one year.
(4) The conversion period for dividend reinvestment shares is modified.
Also, Class B shares of certain other MLAM-advised mutual funds into
which exchanges may be made have an eight year conversion period. If
Class B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period
for the shares acquired.
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.
22
<PAGE> 25
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
Sales Charge as Discount to
Sales Charge as Percentage* of Selected Dealers
Percentage of the Net Amount as Percentage of
Amount of Purchase Offering Price Invested the 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.
** Class A and Class D purchases of $1,000,000 or more made on or after
October 21, 1994 will be subject to a CDSC of 1% if the shares are
redeemed within one year after purchase. Class A purchases made prior
to October 21, 1994 may be subject to a CDSC if the shares are redeemed
within one year of purchase at the following rates: 0.75% on purchases
of $1,000,000 to $2,500,000; 0.40% on purchases of $2,500,001 to
$3,500,000; 0.25% on purchases of $3,500,001 to $5,000,000; and 0.20%
on purchases of more than $5,000,000 in lieu of paying an initial sales
charge. The charge will be assessed on an amount equal to the lesser of
the proceeds of the redemption or the cost of the shares being
redeemed.
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. During the period July 1, 1994
(commencement of operations) to July 31, 1994, the Fund sold 635,204 Class
A shares for aggregate net proceeds of $6,356,790. The gross sales charges
for the sale of Class A shares of the Fund for that period were $78,439,
of which $627 and $77,812 were received by the Distributor and Merrill
Lynch, respectively. For the period July 1, 1994 (commencement of
operations) to July 31, 1994, the Distributor received no CDSCs with
respect to redemption within one year after purchase of Class A shares
purchased subject to front-end sales charge waivers.
Eligible Class A Investors. Class A shares are offered to a limited
group of investors and also will be issued upon reinvestment of dividends
on outstanding Class A shares. Investors that currently own Class A shares
in a shareholder account are entitled to purchase additional Class A
shares in that account. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs provided that the
program has $3 million or more initially invested in MLAM-advised mutual
funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA SM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services and certain purchases made in connection with the Merrill Lynch
Mutual Fund Adviser program. In addition, Class A shares will be offered
at net asset value to ML & Co. and its subsidiaries and their directors
and employees and to members of the Boards of MLAM-advised investment
companies, including the Fund. Certain persons who acquire shares of
MLAM-advised closed-end funds who wish to reinvest the net proceeds from a
sale of their closed-end fund shares of common stock in shares of the Fund
also may purchase Class A shares of the Fund if certain conditions set
forth in the Statement of Additional Information are met. For example,
Class A shares of the Fund and certain other
23
<PAGE> 26
MLAM-advised mutual funds are offered at net asset value to shareholders
of Merrill Lynch Senior Floating Rate Fund, Inc. who wish to reinvest the
net proceeds from a sale of certain of their shares of common stock of
Merrill Lynch Senior Floating Rate Fund, Inc. in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed
upon Class A and Class D shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions. Class A and
Class D sales charges also may be reduced under a Right of Accumulation
and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible
Class A investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value, without sales charge,
to an investor who has a business relationship with a Merrill Lynch
financial consultant, if certain conditions set forth in the Statement of
Additional Information are met. Class D shares may be offered at net asset
value in connection with the acquisition of assets of other investment
companies.
Additional information concerning these reduced initial sales charges
is set forth in the Statement of Additional Information.
Deferred Sales Charge Alternatives-Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should
consider Class B shares if they intend to hold their shares for an
extended period of time and Class C shares if they are uncertain as to the
length of time they intend to hold their assets in MLAM-advised mutual
funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time
of purchase. As discussed below, Class B shares are subject to a four year
CDSC, while Class C shares are subject only to a one year 1.0% CDSC. On
the other hand, approximately ten years after Class B shares are issued,
such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted
into Class D shares of the Fund and thereafter will be subject to lower
continuing fees. See "Conversion of Class B Shares to Class D Shares"
below. Both Class B and Class C shares are subject to an account
maintenance fee of 0.25% of net assets and 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".
Class B and Class C shares are sold without an initial sales charge so
that the Fund will receive the full amount of the investor's purchase
payment. Merrill Lynch compensates its financial consultants for selling
Class B and Class C shares at the time of purchase from its own funds. See
"Distribution Plans" below.
Proceeds from the CDSCs and the distribution fees are paid to the
Distributor and are used in whole or in part by the Distributor to defray
the expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of
the Class B and Class C shares, such as the payment of compensation to
financial consultants for selling Class B and Class C shares, from the
dealer's own funds. The combination of the CDSC and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B
and Class C shares without a sales charge being deducted at the time of
purchase. Approximately ten years after issuance, Class B Shares will
convert automatically into Class D shares of the Fund, which are subject
to an account maintenance fee but 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
24
<PAGE> 27
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. The
proceeds from the ongoing account maintenance fee are used to compensate
Merrill Lynch for providing continuing account maintenance activities.
Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services-Exchange Privilege" will continue
to be subject to the Fund's CDSC schedule, if such schedule is higher than
the CDSC schedule relating to the Class B shares acquired as a result of
the exchange.
Contingent Deferred Sales Charge - Class B Shares. Class B shares
which are redeemed within four years of purchase may be subject to a CDSC
at the rates set forth below charged as a percentage of the dollar amount
subject thereto. The charge will be assessed on an amount equal to the
lesser of the proceeds of redemption or the cost of the shares being
redeemed. Accordingly, no CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions.
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 ..................................... None
</TABLE>
For the period from July 1, 1994 (commencement of operations) to July
31, 1994, the Distributor received no CDSCs with respect to redemptions of
Class B shares.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible applicable rate being charged. Therefore, it will be assumed that
the redemption is first of shares held for over four years or shares
acquired pursuant to reinvestment of dividends or distributions and then
of shares held longest during the four-year period. The charge will not be
applied to dollar amounts representing an increase in the net asset value
since the time of purchase. A transfer of shares from a shareholder's
account to another account will be assumed to be made in the same order as
redemption.
To provide an example, assume an investor purchased 100 Class B shares
at $10 per share (at a cost of $1,000) and in the third year after
purchase, the net asset value per share is $12 and, during such time, the
investor has acquired 10 additional shares upon dividend reinvestment. If
at such time the investor makes his first redemption of 50 shares
(proceeds of $600), 10 shares will not be subject to charge 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
rates in the third year after purchase). The CDSC is waived on redemptions
of shares following the death or disability (as defined in the Code) of a
shareholder.
25
<PAGE> 28
Contingent Deferred Sales Charges-Class C Shares. Class C shares which
are redeemed within one year of purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no Class
C CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no Class C CDSC will be assessed on shares
derived from reinvestment of dividends or capital gains distributions.
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 applicable
to dollar amounts representing an increase in the net asset value since
the time of purchase. A transfer of shares from a shareholder's account to
another account will be assumed to be made in the same order as a
redemption.
Conversion of Class B Shares to Class D Shares. After approximately
ten years (the "Conversion Period"), Class B shares will be converted
automatically into Class D shares of the Fund. Class D shares are subject
to an ongoing account maintenance fee of 0.10% of net assets but are not
subject to the distribution fee that is borne by Class B shares. Automatic
conversion of Class B shares into Class D shares will occur at least once
each month (on the "Conversion Date") on the basis of the relative net
asset values of the shares of the two classes on the Conversion Date,
without the imposition of any sales load, fee or other charge. Conversion
of Class B shares to Class D shares will not be deemed a purchase or sale
of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on
Class B shares also will convert automatically to Class D shares. The
Conversion Date for dividend reinvestment shares will be calculated taking
into account the length of time the shares underlying such dividend
reinvestment shares were outstanding. If at a Conversion Date the
conversion of Class B shares to Class D shares of the Fund in a single
account will result in less than $50 worth of Class B shares being left in
the account, all of the Class B shares of the Fund held in the account on
the Conversion Date will be converted to Class D shares of the Fund.
Share certificates for Class B shares of the Fund to be converted must
be delivered to the Transfer Agent at least one week prior to the
Conversion Date applicable to those shares. In the event such certificates
are not received by the Transfer Agent at least one week prior to the
Conversion Date, the related Class B shares will convert to Class D shares
on the next scheduled Conversion Date after such certificates are
delivered.
In general, Class B shares of equity MLAM-advised mutual funds will
convert approximately eight years after initial purchase, and Class B
shares of taxable and tax-exempt fixed income MLAM-advised mutual funds
will convert approximately ten years after initial purchase. If, during
the Conversion Period, a shareholder exchanges Class B shares with an
eight-year Conversion Period for Class B shares with a ten-year Conversion
Period, or vice versa, the Conversion Period applicable to the Class B
shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked on to the holding period for the shares
acquired.
Distribution Plans
The Fund has adopted separate distribution plans for Class B, Class C
and Class D shares pursuant to Rule 12b-1 under the Investment Company Act
(each a "Distribution Plan") with respect to the account maintenance
26
<PAGE> 29
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 and function of the ongoing distribution fees and the
CDSC are the same as those of the initial sales charge with respect to the
Class A and Class D shares of the Fund in that the deferred sales charges
provide for the financing of the distribution of the Fund's Class B and
Class C shares.
For the period July 1, 1994 (commencement of operations) to July 31,
1994, the Fund paid the Distributor account maintenance fees of $2,897 and
distribution fees of $2,898 under the Class B Distribution Plan. The Fund
did not begin to offer shares of Class C or Class D publicly until the
date of this Prospectus. Accordingly, no payments have been made pursuant
to the Class C or Class D Distribution Plans prior to the date of this
Prospectus.
Payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the
amount of expenses incurred, and, accordingly, distribution-related
revenues from the Distribution Plans may be more or less than
distribution-related expenses. Information with respect to the
distribution-related revenues and expenses is presented to the Trustees
for their consideration in connection with their deliberations as to the
continuance of the Class B and Class C Distribution Plans. This
information is presented annually as of December 31 of each year on a
"fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues
consist of the account maintenance fees, distribution fees, the 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 market expenses, corporate overhead and interest expense. On the
direct expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and CDSCs, and the expenses consist of
financial consultant compensation.
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
27
<PAGE> 30
the distribution of each class of shares separately. Annual data with
respect to fully allocated account expenses incurred by the Distributor
and Merrill Lynch is not yet available. As of July 31, 1994, direct cash
expenses for the period since July 1, 1994 (commencement of operations)
exceeded direct cash revenues by approximately $126,609 (0.75% of Class B
net assets at that date).
Limitations on the Payment of Deferred Sales Charges. The maximum
sales charge rule in the Rules of Fair Practice of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution
fee and the CDSC borne by the Class B and Class C shares, but not the
account maintenance fee. The maximum sales charge rule is applied
separately to each class. As applicable to the Fund, the maximum sales
charge rule limits the aggregate of distribution fee payments and CDSCs
payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares
and Class C shares, computed separately (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges) plus (2) interest on the
unpaid balance for the respective class, computed separately, at the prime
rate plus 1% (the unpaid balance being the maximum amount payable minus
amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily
agreed to waive interest charges on the unpaid balance in excess of 0.50%
of eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") in connection with
the Class B shares is 6.75% of eligible gross sales. The Distributor
retains the right to stop waiving the interest charges at any time. To the
extent payments would exceed the voluntary maximum, the Fund will not make
further payments of the distribution fee with respect to Class B shares
and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to
the voluntary maximum may exceed the amount payable under the NASD
formula. In such circumstances, payments in excess of the amount payable
under the NASD formula will not be made.
----------
The Fund has no obligation with respect to distribution and/or account
maintenance expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no
assurance that the Trustees of the Trust will approve the continuance of
the Distribution Plans from year to year. However, the Distributor intends
to seek annual continuation of the Distribution Plans. In their review of
the Distribution Plans, the Trustees will be asked to take into
consideration expenses incurred in connection with the account maintenance
and/or distribution of each class of shares separately. The initial sales
charges, the account maintenance fee, the distribution fee and/or the
CDSCs received with respect to one class will not be used to subsidize the
sale of shares of another class. Payments of the distribution fee on Class
B shares will terminate upon conversion of those Class B shares into Class
D shares as set forth under "Deferred Sales Charge Alternatives-Class B
and Class C Shares-Conversion of Class B Shares to Class D Shares".
REDEMPTION OF SHARES
The Trust is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the
net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any CDSC which may be applicable,
there will be no charge for redemption if the redemption request is sent
directly to the Transfer Agent. Shareholders liquidating their holdings
will receive upon redemption all dividends reinvested through the date of
redemption. The value of shares at the time of redemption may be more or
less than the shareholder's cost, depending on the market value of the
securities held by the Fund at such time.
28
<PAGE> 31
Redemption
A shareholder wishing to redeem shares may do so, without charge, by
tendering the shares directly to the Transfer Agent, Financial Data
Services, Inc., Transfer Agency Mutual Fund Operations, P.O. Box 45289,
Jacksonville, Florida 32232-5289. Redemption requests delivered other than
by mail should be delivered to Financial Data Services, Inc., Transfer
Agency Mutual Fund Operations, 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of shares
deposited with the Transfer Agent may be accomplished by a written letter
requesting redemption. Proper notice of redemption in the case of shares
for which certificates have been issued may be accomplished by a written
letter as noted above accompanied by certificates for the shares to be
redeemed. Redemption requests should not be sent to the Trust. The notice
in either event requires the signature(s) of all persons in whose name(s)
the shares are registered, signed exactly as such name(s) appear(s) on the
Transfer Agent's register. The signature(s) on the redemption request must
be guaranteed by an "eligible guarantor institution" as such term is
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, the existence and validity of which may be verified by the
Transfer Agent through the use of industry publications. Notarized
signatures are not sufficient. In certain instances, the Transfer Agent
may require additional documents such as, but not limited to, trust
instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payments will be mailed within
seven days of receipt of a proper notice of redemption.
At various times the Trust may be requested to redeem Fund shares for
which it has not yet received good payment (e.g., cash, Federal funds or
certified check drawn on a United States bank). The Trust may delay or
cause to be delayed the mailing of a redemption check until such time as
it has assured itself that good payment has been collected for the
purchase of such Fund shares, which may take up to 10 days.
Repurchase
The Trust also will repurchase Fund shares through a shareholder's
listed securities dealer. The Trust normally will accept orders to
repurchase Fund shares by wire or telephone from dealers for their
customers at the net asset value next computed after receipt of the order
by the dealer, provided that the request for repurchase is received by the
dealer prior to the close of business on the New York Stock Exchange on
the day received and is received by the Fund from such dealer not later
than 4:30 P.M., New York time, on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Trust not
later than 4:30 P.M., New York time, in order to obtain that day's closing
price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than any
applicable CDSC); securities firms which do not have selected dealer
agreements with the Distributor, however, may impose a transaction charge
on the shareholder for transmitting the notice of repurchase to the Trust.
Merrill Lynch may charge its customers a processing fee (presently $4.85)
to confirm a repurchase of shares of such customers. Redemptions directly
through the Fund's Transfer Agent are not subject to the processing fee.
The Trust reserves the right to reject any order for repurchase, which
right of rejection might adversely affect shareholders seeking redemption
through the repurchase procedure. However, a shareholder whose order for
repurchase is rejected by the Trust may redeem Fund shares as set forth
above.
Reinstatement Privilege - Class A and Class D Shares
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or
Class D shares of the Fund, as the case may be, at net asset value without
a sales charge up to the dollar amount redeemed. The reinstatement
privilege may be exercised by
29
<PAGE> 32
sending a notice of exercise along with a check for the amount to be
reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next
determined after the notice of reinstatement is received and cannot exceed
the amount of the redemption proceeds. The reinstatement is a one-time
privilege and may be exercised by the Class A or Class D shareholder only
the first time such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as
to each of such services and instructions as to how to participate in the
various services or plans, or to change options with respect thereto can
be obtained from the Trust by calling the telephone number on the cover
page hereof or from the Distributor or Merrill Lynch.
Investment Account. Each shareholder whose account (an "Investment
Account") is maintained at the Transfer Agent has an Investment Account
and will receive statements, at least quarterly, from the Transfer Agent.
These statements will serve as transaction confirmations for automatic
investment purchases and the reinvestment of ordinary income dividends,
and long-term capital gain distributions. The statements will also show
any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each
purchase or sale transaction other than automatic investment purchases and
the reinvestment of ordinary income dividends, and long-term capital gain
distributions. A shareholder may make additions to his Investment Account
at any time by mailing a check directly to the Transfer Agent.
Shareholders may also maintain their accounts through Merrill Lynch. Upon
the transfer of shares out of a Merrill Lynch brokerage account, an
Investment Account in the transferring shareholder's name will be opened
automatically, without charge, at the Transfer Agent. Shareholders
considering transferring their Class A or Class D shares from Merrill
Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable
CDSC) so that the cash proceeds can be transferred to the account at the
new firm or such shareholder must continue to maintain an Investment
Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares
from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the
name of the brokerage firm for the benefit of the shareholder at the
Transfer Agent.
Exchange Privilege. Shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds.
There is currently no limitation on the number of times a shareholder may
exercise the exchange privilege. The exchange privilege may be modified or
terminated at any time in accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing System, Class A shareholders
may exchange Class A shares of the Fund for Class A shares of a second
MLAM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in his account in which the exchange is made at the time
of the exchange or is otherwise eligible to purchase Class A shares of the
second fund. If the Class A shareholder wants to exchange Class A shares
for shares of a second MLAM-advised mutual fund, and the shareholder does
not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of
the second fund, the shareholder will receive Class D shares of the second
fund as a result of the exchange. Class D
30
<PAGE> 33
shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the
shareholder holds Class A shares of the second fund in the account in
which the exchange is made or is otherwise eligible to purchase Class A
shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus
an amount equal to the difference, if any, between the sales charge
previously paid on the Class A or Class D shares being exchanged and the
sales charge payable at the time of the exchange on the shares being
acquired.
Class B, Class C and Class D shares will be exchangeable with shares
of the same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be exchangeable on
the basis of relative net asset value per share without the payment of any
CDSC that might otherwise be due upon redemption of the shares of the
Fund. For purposes of computing the CDSC that may be payable upon a
disposition of the shares acquired in the exchange, the holding period for
the previously owned shares of the Fund is "tacked" to the holding
period of the newly acquired shares of the other Fund.
Class A, Class B, Class C and Class D shares also will be exchangeable
for shares of certain MLAM-advised money market funds specifically
designated as available for exchange by holders of Class A, Class B, Class
C or Class D shares. The period of time that Class A, Class B, Class C or
Class D shares are held in a money market fund, however, will not count
toward satisfaction of the holding period requirement for reduction of any
CDSC imposed on such shares, if any, and, with respect to Class B shares,
toward satisfaction of the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege
will continue to be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the new Class B shares. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of the
MLAM-advised mutual fund from which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes. For further information, see "Shareholder Services-
Exchange Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser
("MFA") program. First, the initial allocation of assets is made under
the program. Then, any subsequent exchange under the program of Class A or
Class D shares of a 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 fund
and the sales charge payable on the shares of the Fund being acquired in
the exchange under this 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 or by telephone (1-800-MER-FUND) to the Transfer
Agent, elect to have subsequent dividends or both dividends and capital
gains distributions paid in cash, rather than reinvested, in which event
payment will be mailed monthly. No CDSC will be imposed upon redemption of
shares issued as a result of the automatic reinvestment of dividends or
capital gains distributions.
31
<PAGE> 34
Systematic Withdrawal Plans. A Class A or Class D shareholder may
elect to receive systematic withdrawal payments from his Investment
Account in the form of payment by check or through automatic payment by
direct deposit to his bank account on either a monthly or quarterly basis.
A Class A or Class D shareholder whose shares are held within a CMA(Reg)
or CBA(Reg) Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program, subject to certain conditions.
Automatic Investment Plans. Regular additions of 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 regular bank account.
Alternatively, investors who maintain CMA(Reg) accounts may arrange to
have periodic investments made in the Fund in their CMA(Reg) account or in
certain related accounts in amounts of $100 or more through the CMA(Reg)
Automated Investment Program.
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities of the
Fund. Municipal Bonds and other securities in which the Fund invests are
traded primarily in the over-the-counter market. Where possible, the Trust
deals directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution
are available elsewhere. It is the policy of the Trust to obtain the best
net results in conducting portfolio transactions for the Fund, taking into
account such factors as price (including the applicable dealer spread),
the size, type and difficulty of the transactions involved, the firm's
general execution and operations facilities, and the firm's risk in
positioning the securities involved and the provision of supplemental
investment research by the firm. While reasonably competitive spreads or
commissions are sought, the Fund will not necessarily be paying the lowest
spread or commission available. The sale of shares of the Fund may be
taken into consideration as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Fund. The portfolio
securities of the Fund generally are traded on a net basis and normally do
not involve either brokerage commissions or transfer taxes. The cost of
portfolio securities transactions of the Fund primarily consists of dealer
or underwriter spreads. Under the 1940 Act, persons affiliated with the
Trust, including Merrill Lynch, are prohibited from dealing with the Trust
as a principal in the purchase and sale of securities unless such trading
is permitted by an exemptive order issued by the Commission. The Trust has
obtained an exemptive order permitting it to engage in certain principal
transactions with Merrill Lynch involving high quality short-term
municipal bonds subject to certain conditions. In addition, the Trust may
not purchase securities, including Municipal Bonds, for the Fund during
the existence of any underwriting syndicate of which Merrill Lynch is a
member except pursuant to procedures approved by the Trustees of the Trust
which comply with rules adopted by the Commission. Affiliated persons of
the Trust may serve as its broker in over-the-counter transactions
conducted for the Fund on an agency basis only.
DISTRIBUTIONS AND TAXES
Distributions
The net investment income of the Fund is declared as dividends daily as
of 4:15 P.M. on each day the New York Stock Exchange is open for business
immediately prior to the determination of the net asset value on that day.
The net investment income of the Fund for dividend purposes consists of
interest earned on portfolio
32
<PAGE> 35
securities, less expenses, in each case computed since the most recent
determination of the net asset value. Expenses of the Fund, including the
management fees and the account maintenance and distribution fees, are
accrued daily. Dividends of net investment income are declared daily and
reinvested monthly in the form of additional full and fractional shares of
the Fund at net asset value as of the close of business on the "payment
date" unless the shareholder elects to receive such dividends in cash.
Shares will accrue dividends as long as they are issued and outstanding.
Shares are issued and outstanding from the settlement date of a purchase
order to the day prior to settlement date of a redemption order.
All net realized long- or short-term capital gains, if any, are
declared and distributed to the Fund's shareholders at least annually.
Capital gains distributions will be reinvested automatically in shares
unless the shareholder elects to receive such distributions in cash.
The per share dividends and distributions on each class of shares will
be reduced as a result of any account maintenance, distribution and
transfer agency fees applicable 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
Internal Revenue Code of 1986, as amended (the "Code"). If it so
qualifies, in any taxable year in which it distributes at least 90% of its
taxable net income and 90% of its tax-exempt net income (see below), the
Fund (but not its shareholders) will not be subject to Federal income tax
to the extent that it distributes its net investment income and net
realized capital gains. The Trust intends to cause the Fund to distribute
substantially all of such income.
To the extent that the dividends distributed to the Fund's Class A,
Class B, Class C and Class D shareholders (together, the "shareholders")
are derived from interest income exempt from Federal income tax under Code
Section 103(a) and are properly designated as "exempt-interest
dividends" by the Trust, they will be excludable from a shareholder's
gross income for Federal income tax purposes. Exempt-interest dividends
are included, however, in determining the portion, if any, of a person's
social security benefits and railroad retirement benefits subject to
Federal income taxes. The portion of such exempt-interest dividends paid
from interest received by the Fund from Connecticut Municipal Bonds will
not be subject to the Connecticut income tax on individuals, estates and
trusts (the "Connecticut income tax"). Distributions from the Fund to
shareholders subject to the Connecticut corporation business tax will be
included in taxable income to the extent such distributions are treated as
exempt-interest dividends or capital gain dividends. Shareholders subject
to income taxation by states other than Connecticut will realize a lower
after-tax rate of return than Connecticut 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
Connecticut income tax. Interest on indebtedness incurred or continued to
purchase or carry Fund shares is not deductible for Federal income tax
purposes to the extent attributable to exempt-interest dividends, and such
interest expense will not reduce taxable income under the Connecticut
income tax except to the extent reflected in Federal
33
<PAGE> 36
adjusted gross income. 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.
To the extent that the Fund's distributions are derived from interest
on its taxable investments or from an excess of net short-term capital
gains over net long-term capital losses ("ordinary income dividends"),
such distributions are considered ordinary income for Federal income tax
purposes. Such distributions are not eligible for the dividends received
deduction for corporations. Distributions, if any, of net long-term
capital gains from the sale of securities or from certain transactions in
futures or options ("capital gain dividends") are taxable as long-term
capital gains for Federal income tax purposes, regardless of the length of
time the shareholder has owned Fund shares. Under the Revenue
Reconciliation Act of 1993, all or a portion of the Fund's gain from the
sale or redemption of tax-exempt obligations purchased at a market
discount will be treated as ordinary income rather than capital gain. This
rule may increase the amount of ordinary income dividends received by
shareholders. Distributions in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains
to such holder (assuming the shares are held as a capital asset). Any loss
upon the sale or exchange of Fund shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholder. In addition, such loss will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder. If the Fund pays a dividend in January which was declared in
the previous October, November or December to shareholders of record on a
specified date in one of such months, then such dividend will be treated
for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was
declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This alternative minimum tax
applies to interest received on "private activity bonds" issued after
August 7, 1986. Private activity bonds are bonds which, although
tax-exempt, are used for purposes other than those generally performed by
governmental units and which benefit non-governmental entities (e.g.,
bonds used for industrial development or housing purposes). Income
received on such bonds is classified as an item of "tax preference,"
which could subject investors in such bonds, including shareholders of the
Fund, to an alternative minimum tax. The Fund will purchase such "private
activity bonds," and the Trust will report to shareholders within 60 days
after the Fund's taxable year-end the portion of the Fund's dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that
corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings" (which
more closely reflect a corporation's economic income). Because an
exempt-interest dividend paid by the Fund will be included in adjusted
current earnings, a corporate shareholder may be required to pay
alternative minimum tax on exempt-interest dividends paid by the Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax
brackets of 36% and 39.6% for individuals and has created a graduated
structure of 26% and 28% for the alternative minimum tax applicable to
individual taxpayers. These rate increases may affect an individual
investor's after-tax return from an investment in the Fund as compared
with such investor's return from taxable investments.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's
basis in the Class D shares acquired will be the same as such
shareholder's basis in the Class B shares converted, and the holding
period of the acquired Class D shares will include the holding period for
the converted Class B shares.
34
<PAGE> 37
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales
charge paid to the Fund reduces any sales charge such shareholder would
have owed upon purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid
for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
Under certain provisions of the Code, some shareholders may be subject
to a 31% withholding tax on certain ordinary income dividends and on
capital gain dividends and redemption payments ("backup withholding").
Generally, shareholders subject to backup withholding will be those for
whom no certified taxpayer identification number is on file with the Trust
or who, to the Trust's knowledge, have furnished an incorrect number. When
establishing an account, an investor must certify under penalty of perjury
that such number is correct and that such investor is not otherwise
subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of
exempt-interest dividends received from all sources (including the Fund)
during the taxable year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and Connecticut 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 Connecticut income tax laws. The Code and
the Treasury regulations, as well as the Connecticut tax laws, are subject
to change by legislative, judicial or administrative action either
prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes (other than those
imposed by Connecticut) 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 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 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 each class of
shares, to
35
<PAGE> 38
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, distribution and any transfer agency fees
relating to each class of shares will be borne exclusively by that class.
The Fund will include performance data for all shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return and (2) the maximum
applicable sales charges will not be included with respect to annual or
annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the
average annual rates of return reflect compounding, aggregate total return
data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over a longer period of
time. In advertisements distributed to investors whose purchases are
subject to waiver of the CDSC in the case of Class B and Class C shares or
reduced sales charges in the case of Class A and Class D shares, the
performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the CDSC and therefore may
reflect greater total return since, due to the reduced sales charges or
waiver of the CDSC, a lower amount of expenses is deducted. See "Purchase
of Shares". The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return
on a hypothetical $1,000 investment in the Fund at the beginning of each
specified period.
Yield quotations will be computed based on a 30-day period by dividing
(a) the net income based on the yield of each security earned during the
period by (b) the average daily number of shares outstanding during the
period that were entitled to receive dividends multiplied by the maximum
offering price per share on the last day of the period. Tax equivalent
yield quotations will be computed by dividing (a) the part of the Fund's
yield that is tax-exempt by (b) one minus a stated tax rate and (c) adding
the result to that part, if any, of the Fund's yield that is not
tax-exempt. The yield for the 30-day period ended July 31, 1994 was 5.07%
for Class A shares and 4.82% for Class B shares and the tax equivalent
yield for the same period (based on a Federal income tax rate of 28%) was
7.04% for Class A shares and 6.69% for Class B shares. The yield without
voluntary reimbursement for the 30-day period would have been 3.59% for
Class A shares and 3.31% for Class B shares with a tax equivalent yield of
4.99% for Class A shares and 4.60% for Class B shares.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The
Fund's total return and yield will vary depending on market conditions,
the securities comprising the Fund's portfolio, the Fund's operating
expenses and the amount of realized and unrealized net capital gain or
losses during the period. The value of an investment in the Fund will
fluctuate and an investor's shares, when redeemed, may be worth more or
less than their original cost.
On occasion, the Fund may compare its performance to performance data
published by Lipper Analytical Services, Inc., Morningstar Publications,
Inc. ("Morningstar") and CDA Investment Technology, Inc., or to data
contained in publications such as Money Magazine, U.S. News & World
Report, Business Week, Forbes Magazine and Fortune Magazine. From time to
time, the Fund may include the Fund's Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales literature. As
with other performance data, performance comparisons should not be
considered representative of the Fund's relative performance for any
future period.
36
<PAGE> 39
ADDITIONAL INFORMATION
Determination of Net Asset Value
The net asset value of the shares of all classes of the Fund is
determined by the Manager once daily as of 4:15 P.M., New York time, on
each day during which the New York Stock Exchange is open for trading. The
net asset value per share is computed by dividing the sum of the value of
the securities held by the Fund plus any cash or other assets minus all
liabilities by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the
Manager and the Distributor, are accrued daily.
The per share net asset value per share of the 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 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 immediately after the payment of dividends
or distributions which will differ by approximately the amount of the
expense accrual differentials between the classes.
Organization of the Trust
The Trust is an unincorporated business trust organized on August 2,
1985 under the laws of Massachusetts. On October 1, 1987, the Trust
changed its name from "Merrill Lynch Multi-State Tax-Exempt Series
Trust" to "Merrill Lynch Multi-State Municipal Bond Series Trust" and
on December 22, 1987 the Trust changed its name to "Merrill Lynch
Multi-State Municipal Series Trust". The Trust is an open-end management
investment company comprised of separate series ("Series"), each of
which is a separate portfolio offering shares to selected groups of
purchasers. Each of the Series is to be managed independently in order to
provide to shareholders who are residents of the state to which such
Series relates as high a level of income exempt from Federal, state and
local income taxes as is consistent with prudent investment management.
The Trustees are authorized to create an unlimited number of Series and,
with respect to each Series, to issue an unlimited number of full and
fractional shares of beneficial interest of $.10 par value of different
classes. Shareholder approval is not required for the authorization of
additional Series or classes of a Series of the Trust. At the date of this
Prospectus, the shares of the Fund are divided into Class A, Class B,
Class C and Class D shares. Class A, Class B, Class C and Class D shares
represent interests in the same assets of the Fund and are identical in
all respects except that Class B, Class C and Class D shares bear certain
expenses related to the account maintenance associated with such shares,
and Class B and Class C shares bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to account maintenance and distribution
expenditures as applicable. See "Purchase of Shares". The Trust has
received an order (the "Order") from the Commission permitting the
issuance and sale of multiple classes of shares. The Order permits the
Trust to issue additional classes of shares of any Series if the Board of
Trustees deems such issuance to be in the best interest of the Trust. The
Trustees of the Trust may classify and reclassify the shares of the Fund
into additional classes at a future date.
Shareholders are entitled to one vote for each full share and to
fractional votes for fractional shares held in the election of Trustees
(to the extent hereinafter provided) and on other matters submitted to the
vote of shareholders. There normally will be no meeting of shareholders
for the purpose of electing Trustees unless and
37
<PAGE> 40
until such time as less than a majority of the Trustees holding office
have been elected by shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees.
Shareholders may, in accordance with the terms of the Declaration of
Trust, cause a meeting of shareholders to be held for the purpose of
voting on the removal of Trustees. Also, the Trust will be required to
call a special meeting of shareholders of a Series in accordance with the
requirements of the 1940 Act to seek approval of new management and
advisory arrangements, of a material increase in distribution fees or of a
change in the fundamental policies, objectives or restrictions of a
Series. Except as set forth above, the Trustees shall continue to hold
office and appoint successor Trustees. Each issued and outstanding share
is entitled to participate equally in dividends and distributions declared
by the respective Series and in net assets of such Series upon liquidation
or dissolution remaining after satisfaction of outstanding liabilities
except that, as noted above, Class B, Class C and Class D shares bear
certain additional expenses. The obligations and liabilities of a
particular Series are restricted to the assets of that Series and do not
extend to the assets of the Trust generally. The shares of each Series,
when issued, will be fully-paid and non-assessable by the Trust.
Shareholder Reports
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of
the number of accounts such shareholder has. If a shareholder wishes to
receive separate copies of each report and communication for each of the
shareholder's related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and/or mutual fund account numbers. If you have any questions
regarding this matter please call your Merrill Lynch financial consultant
or Financial Data Services, Inc. at 800-637-3863.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Trust at the address or
telephone number set forth on the cover page of this Prospectus.
----------
The Declaration of Trust establishing the Trust, dated August 2, 1985,
a copy of which together with all amendments thereto (the
"Declaration"), is on file in the office of the Secretary of the
Commonwealth of Massachusetts, provides that the name "Merrill Lynch
Multi-State Municipal Series Trust" refers to the Trustees under the
Declaration collectively as Trustees, but not as individuals or
personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to
such person's private property for the satisfaction of any obligation or
claim of the Trust, but the "Trust Property" only shall be liable.
38
<PAGE> 41
MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND-AUTHORIZATION FORM (PART 1)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1. Share Purchase Application
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D
shares
of Merrill Lynch Connecticut Municipal Bond Fund and establish an
Investment Account as described in the Prospectus. In the event that I am
not eligible to purchase Class A shares, I understand that Class D shares
will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Financial Data
Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price
next to be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds
that would qualify for the right of accumulation as outlined in the
Statement of Additional Information: (Please list all funds. Use a
separate sheet of paper if necessary.)
1. ................................. 4. .................................
2. ................................. 5. .................................
3. ................................. 6. .................................
Name......................................................................
First Name Initial Last Name
Name of Co-Owner (if any).................................................
First Name Initial Last Name
Address..................................................... Date...........
............................................................
(Zip Code)
Occupation.......................... Name and Address of Employer........
....................................
....................................
..........................................................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will
be presumed unless otherwise specified)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
2. Social Security Number or Taxpayer Identification Number
----------------------------------
----------------------------------
Social Security Number or Taxpayer
Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and
(2) that I am not subject to backup withholding (as discussed in the
Prospectus under "Distributions and Taxes-Taxes") either because I have
not been notified that I am subject thereto as a result of a failure to
report all interest or dividends, or the Internal Revenue Service
("IRS") has notified me that I am no longer subject thereto.
Instruction: You must strike out the language in (2) above if you have
been notified that you are subject to backup withholding due to
underreporting and if you have not received a notice from the IRS that
backup withholding has been terminated. The undersigned authorizes the
furnishing of this certification to other Merrill Lynch sponsored mutual
funds.
Signature of Owner ........... Signature of Co-Owner (if any)...........
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
39
<PAGE> 42
3. Dividend and Capital Gain Distribution Options
Ordinary Income Dividends Long-term Capital Gains
------------------------- -------------------------
------------------------- -------------------------
Select / / Reinvest Select / / Reinvest
One: / / Cash One: / / Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
If cash, specify how you would like your distributions paid to you:
/ / Check or / / Direct Deposit to bank account
If direct deposit to bank account is selected, please complete below:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with
the terms I have selected on the Merrill Lynch Connecticut Municipal Bond
Fund Authorization Form.
Specify type of account (check one) / / checking / / savings
Name on your account......................................................
Bank Name ............ Bank Number ............ Account Number ............
Bank Address..............................................................
I agree that this authorization will remain in effect until I provide
written notification to Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor....................................................
Signature of Depositor....................... Date.......................
(if joint account, both must sign)
Note: If direct deposit to bank account is selected, your blank, unsigned
check marked "VOID" or a deposit slip from your savings account should
accompany this application.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
4. Letter of Intention - Class A and D shares only (See terms and
conditions in the Statement of Additional Information)
Dear Sir/Madam: ..............................., 19....
Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of
Merrill Lynch Connecticut Municipal Bond Fund or any other investment
company with an initial sales charge or deferred sales charge for which
the Merrill Lynch Funds Distributor, Inc. acts as distributor over the
next 13 month period which will equal or exceed:
/ / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price
applicable to the amount checked above, as described in the Merrill Lynch
Connecticut Municipal Bond Fund Prospectus.
I agree to the terms and conditions of the Letter of Intention. I
hereby irrevocably constitute and appoint Merrill Lynch Funds Distributor,
Inc., my attorney, with full power of substitution, to surrender for
redemption any or all shares of Merrill Lynch Connecticut Municipal Bond
Fund held as security.
By.................................. ....................................
Signature of Owner Signature of Co-Owner (If registered
in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name........................... (2) Name...........................
Account Number..................... Account Number.....................
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
5. For Dealer Only We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
Branch Office, Address, Stamp connection with transactions under this authorization form and agree to notify the
---------------------------------------- Distributor of any purchases made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the Shareholder's signature.
---------------------------------------- ..................................................................................
Dealer Name and Address
By................................................................................
Authorized Signature of Dealer
This form, when completed, should be
mailed to: ----------------------------
Merrill Lynch Connecticut Municipal ---------------------------- .....................
Bond Fund Branch-Code F/C No. F/C Last Name
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund ----------------------------
Operations ----------------------------
P.O. Box 45289 Dealer's Customer A/C No.
Jacksonville, FL 32232-5289 ----------------------------
----------------------------
----------------------------
40
<PAGE> 43
MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND-AUTHORIZATION FORM (PART 2)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1. Account Registration
Name of Owner ........................
Name of Co-Owner (if any) ............
Address ..............................
.............................. -----------------------
-----------------------
Social Security Number
or Taxpayer Identification Number
Account Number ........................................................................
(if existing account)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
2. Systematic Withdrawal Plan-Class A and D Shares Only (See terms and
conditions in the Statement of Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch
Connecticut Municipal Bond Fund at cost or current offering price.
Withdrawals to be made either (check one) / / Monthly on the 24th day of
each month, or / / Quarterly on the 24th day of March, June, September
and December. If the 24th falls on a weekend or holiday, the next
succeeding business day will be utilized. Begin systematic withdrawal on
----------or as soon as possible thereafter.
(month)
Specify how you would like your withdrawal paid to you (check one): / /
$---------- or / /----------% of the current value of / / Class A or / /
Class D shares in the account.
Specify withdrawal method: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
Draw checks payable (check one)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of......................................................
Mail to (check one)
/ / the address indicated in item 1.
/ / Name (please print)..................................................
Address ..................................................................
..................................................................
Signature of Owner..................... Date.....................
Signature of Co-Owner (if any)....................................
(b) I hereby authorize payment by direct deposit to my bank account and,
if necessary, debit entries and adjustments for any credit entries made to
my account. I agree that this authorization will remain in effect until I
provide written notification to Financial Data Services, Inc. amending or
terminating this service.
Specify type of account (check one) / / checking / / savings
Name on your account .....................................................
Bank Name.................................................................
Bank Number........................ Account Number........................
Bank Address..............................................................
..........................................................................
Signature of Depositor....................... Date.......................
Signature of Depositor....................................................
(If joint account, both must sign)
Note: If direct deposit is elected, your blank, unsigned check marked
"VOID" or a deposit slip from your savings account should accompany this
application.
41
<PAGE> 44
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
3. Application for Automatic Investment Plan
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
</TABLE>
<TABLE>
<S> <C> <C> <C>
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch Connecticut Municipal Bond Fund subject to the terms set
forth below. In the event that I am not eligible to purchase Class A
shares, I understand that Class D shares will be purchased.
----------
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR ACH DEBITS
You are hereby authorized to draw an DRAWN BY FINANCIAL DATA SERVICES, INC.
ACH debit each month on my bank
To...............................................................................Bank
account for investment in Merrill
(Investor's Bank)
Lynch Connecticut Municipal Bond Fund
as indicated below: Bank Address ........................................................................
Amount of each ACH debit $...........
City...................... State...................... Zip Code......................
Account number.......................
As a convenience to me, I hereby request and authorize you to pay and charge to my
Please date and invest ACH debits on account ACH debits drawn on my account by and payable to Financial Data Services,
the 20th of each month beginning Inc. I agree that your rights in respect to each such debit shall be the same as if
it were a check drawn on you and signed personally by me. This authority is to remain
......................................
in effect until revoked personally by me in writing. Until you receive such notice,
......................... (Month) you shall be fully protected in honoring any such debit. I further agree that if any
or as soon thereafter as possible. such debit be dishonored, whether with or without cause and whether intentionally or
inadvertently, you shall be under no liability.
I agree that you are drawing these
ACH debits voluntarily at my request . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .
and that you shall not be liable for Date Signature of Depositor
any loss arising from any delay in
. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .
preparing or failure to prepare any
Bank Account Number Signature of Depositor
such debit. If I change banks or
(If joint account, both must sign)
desire to terminate or suspend this
program, I agree to notify you
promptly in writing. I hereby
authorize you to take any action to
correct erroneous ACH debits of my
bank account or purchases of fund
shares including liquidating shares of
the Fund and credit my bank account. I
further agree that if a check or debit
is not honored upon presentation,
Financial Data Services, Inc. is
authorized to discontinue immediately
the Automatic Investment Plan and to
liquidate sufficient shares held in my
account to offset the purchase made
with the dishonored debit.
............ ........................
Date Signature of Depositor
........................
Signature of Depositor
(If joint account, both
must sign)
Note: If Automatic Investment Plan is elected, your blank, unsigned check marked "VOID" should accompany this Application.
42
<PAGE> 45
Manager
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
Transfer Agent
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Independent Auditors
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE> 46
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
====================================================== ======================================================
Prospectus
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 Paste up art
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
Page MERRILL LYNCH
------ CONNECTICUT
Fee Table................................. 2 MUNICIPAL BOND
Merrill Lynch Select Pricing SM System ... 4 FUND
Financial Highlights...................... 8
Investment Objective and Policies......... 9 MERRILL LYNCH MULTI-STATE
Potential Benefits.................... 11 MUNICIPAL SERIES TRUST
Special and Risk Considerations
Relating to Connecticut Municipal
Bonds............................... 11
Description of Municipal Bonds........ 12
When-Issued Securities and Delayed
Delivery Transactions............... 14
Call Rights........................... 15
Financial Futures Transactions and October 21, 1994
Options............................. 15
Repurchase Agreements ................ 17 Distributor:
Investment Restrictions............... 17 Merrill Lynch
Management of the Trust................... 19 Funds Distributor, Inc.
Trustees.............................. 19
Management and Advisory Arrangements.. 19 This prospectus should be
Transfer Agency Services.............. 20 retained for future reference.
Purchase of Shares........................ 20
Initial Sales Charge Alternatives -
Class A and Class D Shares............ 22
Deferred Sales Charge Alternatives -
Class B and Class C Shares............ 24
Distribution Plans...................... 26
Redemption of Shares...................... 28
Redemption............................ 29
Repurchase............................ 29
Reinstatement Privilege - Class A and
Class D Shares...................... 29
Shareholder Services...................... 30
Portfolio Transactions.................... 32
Distributions and Taxes................... 32
Distributions......................... 32
Taxes................................. 33
Performance Data.......................... 35
Additional Information.................... 37
Determination of Net Asset Value...... 37
Organization of the Trust............. 37
Shareholder Reports................... 38
Shareholder Inquiries................. 38
Authorization Form........................ 39
Code # 18110-1094
====================================================== ======================================================
</TABLE>
<PAGE> 47
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
----------
Merrill Lynch Connecticut Municipal Bond Fund (the "Fund") is a series of
Merrill Lynch Multi-State Municipal Series Trust (the "Trust"), an open-end
management investment company organized as a Massachusetts business trust.
The investment objective of the Fund is to provide shareholders with as high
a level of income exempt from Federal and Connecticut income taxes as is
consistent with prudent investment management. The Fund invests primarily in
a portfolio of long-term investment grade obligations the interest on which
is exempt from Federal and Connecticut income taxes in the opinion of bond
counsel to the issuer ("Connecticut Municipal Bonds"). There can be no
assurance that the investment objective of the Fund will be realized.
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers
four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select Pricing
System permits an investor to choose the method of purchasing shares that
the investor believes is most beneficial, given the amount of the
purchase, the length of time the investor expects to hold the shares and
other relevant circumstances.
----------
The Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated
October 21, 1994 (the "Prospectus"), which has been filed with the
Securities and Exchange Commission and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address.
This Statement of Additional Information has been incorporated by
reference into the Prospectus. Capitalized terms used but not defined
herein have the same meanings as in the Prospectus.
----------
FUND ASSET MANAGEMENT-MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
----------
The date of this Statement of Additional Information is October 21, 1994
<PAGE> 48
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with
as high a level of income exempt from Federal and Connecticut personal
income taxes as is consistent with prudent investment management. The Fund
seeks to achieve its objective by investing primarily in a portfolio of
long-term obligations issued by or on behalf of the State of Connecticut,
its political subdivisions, agencies and instrumentalities and obligations
of other qualifying issuers, such as issuers located in Puerto Rico, the
Virgin Islands and Guam, which pay interest exempt, in the opinion of bond
counsel to the issuer, from Federal and Connecticut income taxes.
Obligations exempt from Federal income taxes are referred to herein as
"Municipal Bonds" and obligations exempt from both Federal and
Connecticut income taxes are referred to as "Connecticut Municipal
Bonds". Unless otherwise indicated, references to Municipal Bonds shall
be deemed to include Connecticut 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 Connecticut
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 of 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 Corporation ("Standard & Poor's") (currently AAA, AA,
A and BBB) or Fitch Investors Service, Inc. ("Fitch") (currently AAA,
AA, A and BBB). If unrated, such securities will possess creditworthiness
comparable, in the opinion of the manager of the Fund, Fund Asset
Management, L.P. (the "Manager"), to other obligations in which the Fund
may invest.
The Fund ordinarily does not intend to realize investment income not
exempt from Federal and Connecticut income taxes. However, to the extent
that suitable Connecticut Municipal Bonds are not available for investment
by the Fund, the Fund may purchase Municipal Bonds issued by other states,
their agencies and instrumentalities, the interest income on which is
exempt, in the opinion of bond counsel, from Federal but not Connecticut
taxation. The Fund also may invest in securities not issued by or on
behalf of a state or territory or by an agency or instrumentality thereof,
if the Fund nevertheless believes such securities to be exempt from
Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in municipal bonds, to the extent
permitted by applicable law. Other Non-Municipal Tax-Exempt Securities
also could include trust certificates or other instruments evidencing
interests in one or more long-term municipal securities.
Except when acceptable securities are unavailable as determined by the
Manager, the Fund, under normal circumstances, will invest at least 65% of
its total assets in Connecticut Municipal Bonds. For temporary periods or
to provide liquidity, the Fund has the authority to invest as much as 35%
of its total assets in tax-exempt or taxable money market obligations with
a maturity of one year or less (such short-term obligations being referred
to herein as "Temporary Investments"), except that taxable Temporary
Investments shall not exceed 20% of the Fund's net assets. The Fund 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
2
<PAGE> 49
an alternative minimum tax. The Fund may purchase such private activity
bonds. See "Distributions and Taxes". In addition, the Fund reserves the
right to invest temporarily a greater portion of its assets in Temporary
Investments for defensive purposes, when, in the judgment of the Manager,
market conditions warrant. The investment objective of the Fund set forth
in this paragraph is a fundamental policy of the Fund which may not be
changed without a vote of a majority of the outstanding shares of the
Fund. The Fund's hedging strategies are not fundamental policies and may
be modified by the Trustees of the Trust without the approval of the
Fund's shareholders.
Municipal Bonds may at times be purchased or sold on a delayed
delivery basis or a when-issued basis. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery
taking place in the future, often a month or more after the purchase. The
payment obligation and the interest rate are each fixed at the time the
buyer enters into the commitment. The Fund will make only commitments to
purchase such securities with the intention of actually acquiring the
securities, but the Fund may sell these securities prior to the settlement
date if it is deemed advisable. Purchasing Municipal Bonds on a
when-issued basis involves the risk that the yields available in the
market when the delivery takes place actually may 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 market rates increase and increase as market rates
decline. For example, to the extent the Fund invests in these types of
Municipal Bonds, the Fund's return on such Municipal Bonds will be subject
to risk with respect to the value of the particular index. Such securities
have the effect of providing a degree of investment leverage, since they
may increase or decrease in value in response to changes, as an
illustration, in market interest rates at a rate which is a multiple
(typically two) of the rate at which fixed-rate long-term tax exempt
securities increase or decrease in response to such changes. As a result,
the market values of such securities will generally be more volatile than
the market values of fixed-rate tax exempt securities. To seek to limit
the volatility of these securities, the Fund may purchase inverse floating
obligations with shorter term maturities or which contain limitations on
the extent to which the interest rate may vary. The Manager believes that
indexed and inverse floating obligations represent a flexible portfolio
management instrument for the Fund which allows the Manager to vary the
degree of investment leverage relatively efficiently under different
market conditions. Certain investments in such obligations may be
illiquid. The Fund may not invest in such illiquid obligations if such
investments, together with other illiquid investments, would exceed 15% of
the Fund's net assets.
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
3
<PAGE> 50
non-callable security. Certain investments in such obligations may be
illiquid. The Fund may not invest in such illiquid obligations if such
investments, together with other illiquid investments, would exceed 15% of
the Fund's net assets.
The Fund may invest up to 20% of its total assets in Municipal Bonds
which are rated below Baa by Moody's or below BBB by Standard & Poor's or
Fitch or which, in the Manager's judgment, possess similar credit
characteristics ("high yield securities"). See Appendix II-"Ratings of
Municipal Bonds" for additional information regarding ratings of debt
securities. The Manager considers the ratings assigned by Standard &
Poor's, Moody's or Fitch as one of several factors in its independent
credit analysis of issuers.
High yield securities are considered by Standard & Poor's, Moody's and
Fitch to have varying degrees of speculative characteristics.
Consequently, although high yield securities can be expected to provide
higher yields, such securities may be subject to greater market price
fluctuations and risk of loss of principal than lower yielding, higher
rated debt securities. Investments in high yield securities will be made
only when, in the judgment of the Manager, such securities provide
attractive total return potential relative to the risk of such securities,
as compared to higher quality debt securities. The Fund generally will not
invest in debt securities in the lowest rating categories (those rated CC
or lower by Standard & Poor's or Fitch or Ca or lower by Moody's) unless
the Manager believes that the financial condition of the issuer or the
protection afforded the particular securities is stronger than would
otherwise be indicated by such low ratings. 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 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 likely would have to replace such called security with a lower
yielding security, thus decreasing the net investment income to the Fund
and dividends to shareholders.
The Fund may have difficulty disposing of certain high yield
securities because there may be a thin trading market for such securities.
Because not all dealers maintain markets in all high yield securities,
there is no established secondary market for many of these securities, and
the Fund anticipates that such securities 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
4
<PAGE> 51
for purposes of valuing the Fund's portfolio. Market quotations generally
are available on many high yield securities only from a limited number of
dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by the Fund will be purchased upon issuance, which may involve
special risks because the securities so acquired are new issues. In such
instances the Fund may be a substantial purchaser of the issue and
therefore have the opportunity to participate in structuring the terms of
the offering. Although this may enable the Fund to seek to protect itself
against certain of such risks, the considerations discussed herein would
nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield securities are likely
to affect adversely the Fund's net asset value. In addition, the Fund may
incur additional expenses to the extent that it is required to seek
recovery upon a default on a portfolio holding or participate in the
restructuring of the obligation.
DESCRIPTION OF MUNICIPAL BONDS AND TEMPORARY INVESTMENTS
Set forth below is a description of the Municipal Bonds and Temporary
Investments in which the Fund may invest. A more complete discussion
concerning futures and options transactions is set forth under
"Investment Objective and Policies" in the Prospectus. Information with
respect to ratings assigned to tax-exempt obligations which the Fund may
purchase is set forth in Appendix II to this Statement of Additional
Information.
Description of Municipal Bonds
Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of bonds are issued by or on behalf
of public authorities to finance various privately owned or operated
facilities, including certain facilities for local furnishing of electric
energy or gas, sewage facilities, solid waste disposal facilities and
other specialized facilities. Such obligations are included within the
term Municipal Bonds if the interest paid thereon is, in the opinion of
bond counsel, excluded from gross income for Federal income tax purposes
and, in the case of Connecticut Municipal Bonds, exempt from Connecticut
income taxes. Other types of industrial development bonds or private
activity bonds, the proceeds of which are used for the construction,
equipment or improvement of privately operated industrial or commercial
facilities, may constitute Municipal Bonds, although the current Federal
tax laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" bonds which latter category includes
industrial development bonds and, for bonds issued after August 15, 1986,
private activity bonds. General obligation bonds are secured by the
issuer's pledge of faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special or limited tax or other specific
revenue source such as payments from the user of the facility being
financed. Industrial development bonds ("IDBs") and, in the case of
bonds issued after April 15, 1986, private activity bonds, are in most
cases revenue bonds and generally do not constitute the pledge of the
credit or taxing power of the issuer of such bonds. Generally, the payment
of the principal of and interest on such IDBs and private activity bonds
depends
5
<PAGE> 52
solely on the ability of the user of the facility financed by the bonds to
meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment, unless a line
of credit, bond insurance or other security is furnished. The Fund also
may invest in "moral obligation" bonds, which are normally issued by
special purpose public authorities. Under a moral obligation bond, if the
issuer thereof is unable to meet its obligations, the repayment of the
bond becomes a moral commitment, but not a legal obligation, of the state
or municipality in question.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or
facilities. The certificates represent participations in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively called "lease obligations") relating to such equipment,
land or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the issuer's unlimited taxing power is
pledged, a lease obligation is frequently backed by the issuer's covenant
to budget for, appropriate and make the payments due under the lease
obligation. Certain investments in lease obligations may be illiquid. The
Fund may not invest in illiquid lease obligations if such investments,
together with all other illiquid investments, would exceed 15% of the
Fund's net assets. The Fund may, however, invest without regard to such
limitation in lease obligations which the Manager, pursuant to the
guidelines which have been adopted by the Board of Trustees and subject to
the supervision of the Board of Trustees, determines to be liquid. The
Manager will deem lease obligations liquid if they are publicly offered
and have received an investment grade rating of Baa or better by Moody's,
or BBB or better by Standard & Poor's or Fitch. Unrated lease obligations,
or those rated below investment grade, will be considered liquid if the
obligations come to the market through an underwritten public offering and
at least two dealers are willing to give competitive bids. In reference to
the latter, the Manager must, among other things, also review the
creditworthiness of the municipality obligated to make payment under the
lease obligation and make certain specified determinations based on such
factors as the existence of a rating or credit enhancement such as
insurance, the frequency of trades or quotes for the obligation and the
willingness of dealers to make a market in the obligation.
Yields on Municipal Bonds are dependent on a variety of factors,
including the general condition of the money market and of the municipal
bond market, the size of a particular offering, the financial condition of
the issuer, the general conditions of the Municipal Bond market, the
maturity of the obligation, and the rating of the issue. The ability of
the Fund to achieve its investment objective also is dependent on the
continuing ability of the issuers of the bonds in which the Fund invests
to meet their obligations for the payment of interest and principal when
due. There are variations in the risks involved in holding Municipal
Bonds, both within a particular classification and between
classifications, depending on numerous factors. Furthermore, the rights of
owners of Municipal Bonds and the obligations of the issuer of such
Municipal Bonds may be subject to applicable bankruptcy, insolvency and
similar laws and court decisions affecting the rights of creditors
generally.
Description of Temporary Investments
The Fund may invest in short-term tax-free and taxable securities
subject to the limitations set forth under "Investment Objective and
Policies". The tax-exempt money market securities may include municipal
notes, municipal commercial paper, municipal bonds with remaining maturity
of less than one year, variable rate demand notes and participations
therein. Municipal notes include tax anticipation notes, bond anticipation
notes and grant anticipation notes. Anticipation notes are sold as interim
financing in anticipation of tax collection, bond sales, government grants
or revenue receipts. Municipal commercial paper refers to short-term
unsecured
6
<PAGE> 53
promissory notes generally issued to finance short-term credit needs. The
taxable money market securities in which the Fund may invest as Temporary
Investments consist of U.S. Government securities, U.S. Government agency
securities, domestic bank or savings institution certificates of deposit
and bankers' acceptances, short-term corporate debt securities such as
commercial paper, and repurchase agreements. These Temporary Investments
must have a stated maturity not in excess of one year from the date of
purchase.
Variable rate demand obligations ("VRDOs") are tax-exempt
obligations which contain a floating or variable interest rate adjustment
formula and an unconditional right of demand on the part of the holder
thereof to receive payment of the unpaid principal balance plus accrued
interest upon a short notice period not to exceed seven days. There is,
however, the possibility that because of default or insolvency the demand
feature of VRDOs and Participating VRDOs, described below, may not be
honored. The interest rates are adjustable at intervals (ranging from
daily to up to one year) to some prevailing market rate for similar
investments, such adjustment formula being calculated to maintain the
market value of the VRDO at approximately the par value of the VRDOs on
the adjustment date. The adjustments typically are set at a rate
determined by the remarketing agent or based upon the prime rate of a bank
or some other appropriate interest rate adjustment index. The Fund may
invest in all types of tax-exempt instruments currently outstanding or to
be issued in the future which satisfy the short-term maturity and quality
standards of the Fund.
The Fund also may invest in VRDOs in the form of participation
interests ("Participating VRDOs") in variable rate tax-exempt
obligations held by a financial institution, typically a commercial bank.
Participating VRDOs provide the Fund with a specified undivided interest
(up to 100%) of the underlying obligation and the right to demand payment
of the unpaid principal balance plus accrued interest on the Participating
VRDOs from the financial institution upon a specified number of days'
notice, not to exceed seven days. In addition, a Participating VRDO is
backed by an irrevocable letter of credit or guaranty of the financial
institution. The Fund would have an undivided interest in the underlying
obligation and thus participate on the same basis as the financial
institution in such obligation except that the financial institution
typically retains fees out of the interest paid on the obligation for
servicing the obligation, providing the letter of credit and issuing the
repurchase commitment. The Fund has been advised by its counsel that the
Fund should be entitled to treat the income received on Participating
VRDOs as interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment
of the unpaid principal balance plus accrued interest on a notice period
exceeding seven days may be deemed to be illiquid securities. A VRDO with
a demand notice period exceeding seven days therefore will be subject to
the Fund's restriction on illiquid investments unless, in the judgment of
the Trustees, such VRDO is liquid. The Trustees may adopt guidelines and
delegate to the Manager the daily function of determining and monitoring
liquidity of such VRDOs. The Trustees, however, will retain sufficient
oversight and will be ultimately responsible for such determination.
The Trust has established the following standards with respect to
money market securities and VRDOs in which the Fund invests. Commercial
paper investments at the time of purchase must be rated "A-1" through
"A-3" by Standard & Poor's, "Prime-1" through "Prime-3" by Moody's
or "F-1" through "F-3" by Fitch or, if not rated, issued by companies
having an outstanding debt issue rated at least "A" by Standard &
Poor's, Fitch or Moody's. Investments in corporate bonds and debentures
(which must have maturities at the date of purchase of one year or less)
must be rated at the time of purchase at least "A" by Standard & Poor's,
Moody's or Fitch. Notes and VRDOs at the time of purchase must be rated
SP-1/A-1 through SP-2/A-3 by Standard & Poor's, MIG-l/VMIG-1 through
MIG-4/VMIG-4 by Moody's or F-1 through F-3 by Fitch. Temporary
Investments, if not rated, must be of comparable quality to securities
rated in the above rating categories in the opinion of the Manager. The
Fund may not invest in any security issued by a commercial bank or a
savings institution
7
<PAGE> 54
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 insured fully by the FDIC.
Repurchase Agreements
The Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or primary dealer in U.S. Government securities or
an affiliate thereof. Under such agreements, the bank or primary dealer or
an affiliate thereof agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a
fixed rate of return insulated from market fluctuations during such
period. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect accrued interest on the underlying
obligations. Such agreements usually cover short periods, such as under
one week. Repurchase agreements may be construed to be collateralized
loans by the purchaser to the seller secured by the securities transferred
to the purchaser. In the case of a repurchase agreement, the Fund will
require the seller to provide additional collateral if the market value of
the securities falls below the repurchase price at any time during the
term of the repurchase agreement. In the event of default by the seller
under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute
collateral for the seller's obligation to pay the repurchase price.
Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. In the event
of a default under such a repurchase agreement, instead of the contractual
fixed rate of return, the rate of return to the Fund will depend on
intervening fluctuations of the market value of such security and the
accrued interest on the security. In such event, the Fund would have
rights against the seller for breach of contract with respect to any
losses arising from market fluctuations following the failure of the
seller to perform. The Fund may not invest in repurchase agreements
maturing in more than seven days if such investments, together with all
other illiquid investments, would exceed 15% of the Fund's net assets.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold".
Therefore, amounts earned under such agreements will not be considered
tax-exempt interest.
Financial Futures Transactions and Options
Reference is made to the discussion concerning futures transactions
under "Investment Objective and Policies" in the Prospectus. Set forth
below is additional information concerning these transactions.
As described in the Prospectus, the Fund may purchase and sell
exchange traded financial futures contracts ("financial futures
contracts") to hedge its portfolio of Municipal Bonds against declines in
the value of such securities and to hedge against increases in the cost of
securities the Fund intends to purchase. However, any transactions
involving financial futures or options (or puts and calls associated
therewith) will be in accordance with the Fund's investment policies and
limitations. See "Investment Objective and Policies-Investment
Restrictions" in the Prospectus. To hedge its portfolio, the Fund may
take an investment position in a futures contract which will move in the
opposite direction from the portfolio position being hedged. While the
Fund's use of hedging strategies is intended to moderate capital changes
in portfolio holdings and thereby reduce the volatility of the net asset
value of Fund shares, the Fund anticipates that its net asset value will
fluctuate. Set forth below is information concerning futures transactions.
8
<PAGE> 55
Description of Futures Contracts. A futures contract is an agreement
between two parties to buy and sell a security, or in the case of an
index-based futures contract, to make and accept a cash settlement for a
set price on a future date. A majority of transactions in futures
contracts, however, do not result in the actual delivery of the underlying
instrument or cash settlement, but are settled through liquidation, i.e.,
by entering into an offsetting transaction. Futures contracts have been
designed by boards of trade which have been designated "contracts
markets" by the Commodity Futures Trading Commission ("CFTC").
The purchase or sale of a futures contract differs from the purchase
or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker and the
relevant contract market, which varies, but is generally about 5% of the
contract amount, must be deposited with the broker. This amount is known
as "initial margin" and represents a "good faith" deposit assuring the
performance of both the purchaser and seller under the futures contract.
Subsequent payments to and from the broker, called "variation margin",
are required to be made on a daily basis as the price of the futures
contract fluctuates making the long and short positions in the futures
contract more or less valuable, a process known as "mark to the market".
At any time prior to the settlement date of the futures contract, the
position may be closed out by taking an opposite position which will
operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is
required to be paid to or released by the broker, and the purchaser
realizes a loss or gain. In addition, a nominal commission is paid on each
completed sale transaction.
The Fund may deal in financial futures contracts based on a long-term
municipal bond index developed by the Chicago Board of Trade ("CBT") and
The Bond Buyer (the "Municipal Bond Index"). The Municipal Bond Index is
comprised of 40 tax-exempt municipal revenue and general obligations
bonds. Each bond included in the Municipal Bond Index must be rated A or
higher by Moody's or Standard & Poor's and must have a remaining maturity
of 19 years or more. Twice a month new issues satisfying the eligibility
requirements are added to, and an equal number of old issues are deleted
from, the Municipal Bond Index. The value of the Municipal Bond Index is
computed daily according to a formula based on the price of each bond in
the Municipal Bond Index, as evaluated by six dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT.
Like other contract markets, the CBT assures performance under futures
contracts through a clearing corporation, a nonprofit organization managed
by the exchange membership which also is responsible for handling daily
accounting of deposits or withdrawals of margin.
As described in the Prospectus, the Fund may purchase and sell
financial futures contracts on U.S. Government securities as a hedge
against adverse changes in interest rates as described below. With respect
to U.S. Government securities, currently there are financial futures
contracts based on long-term U.S. Treasury bonds, Treasury notes,
Government National Mortgage Association ("GNMA") Certificates and
three-month U.S. Treasury bills. The Fund may purchase and write call and
put options on futures contracts on U.S. Government securities in
connection with its hedging strategies.
Subject to policies adopted by the Trustees, the Fund also may engage
in other futures contracts transactions such as futures contracts on other
municipal bond indices which may become available if the Manager and the
Trustees should determine that there is normally a sufficient correlation
between the prices of such futures contracts and the Municipal Bonds in
which the Fund invests to make such hedging appropriate.
Futures Strategies. The Fund may sell a financial futures contract
(i.e., assume a short position) in anticipation of a decline in the value
of its investments in Municipal Bonds resulting from an increase in
interest
9
<PAGE> 56
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 sell
exchange traded call and put options on financial futures contracts on
U.S. Government securities. The purchase of a call option on a futures
contract is analogous to the purchase of a call option on an individual
security. Depending on the pricing of the option compared to either the
futures contract on which it is based, or on the price of the underlying
debt securities, it may or may not be less risky than ownership of the
futures contract or underlying debt securities. Like the purchase of a
futures contract, the Fund will purchase a call option on a futures
contract to hedge against a market advance when the Fund is not fully
invested.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are
deliverable upon exercise of the futures contract. If the futures price at
expiration is below the exercise price, the Fund will retain the full
amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings.
Put Options on Futures Contracts. The purchase of options on a futures
contract is analogous to the purchase of protective put options on
portfolio securities. The Fund will purchase put options on futures
contracts to hedge the Fund's portfolio against the risk of rising
interest rates.
The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the securities which are
deliverable upon exercise of the futures contract. If the futures price at
expiration is higher than the exercise price, the Fund will retain the
full amount of the option premium which provides a partial hedge against
any increase in the price of Municipal Bonds which the Fund intends to
purchase.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option
10
<PAGE> 57
will be included in initial margin. The writing of an option on a futures
contract involves risks similar to those relating to futures contracts.
----------
The Trust has received an order from the Securities and Exchange
Commission (the "Commission") exempting it from the provisions of
Section 17(f) and Section 18(f) of the Investment Company Act of 1940, as
amended (the "1940 Act"), in connection with its strategy of investing
in futures contracts. Section 17(f) relates to the custody of securities
and other assets of an investment company and may be deemed to prohibit
certain arrangements between the Trust and commodities brokers with
respect to initial and variation margin. Section 18(f) of the 1940 Act
prohibits an open-end investment company such as the Trust from issuing a
"senior security" other than a borrowing from a bank. The staff of the
Commission has in the past indicated that a futures contract may be a
"senior security" under the 1940 Act.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and
sell futures contracts and options thereon (i) for bona fide hedging
purposes, and (ii) for non-hedging purposes, if the aggregate initial
margin and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Fund's
portfolio assets after taking into account unrealized profits and
unrealized losses on any such contracts and options. (However, the Fund
intends to engage in options and futures transactions only for hedging
purposes.) Margin deposits may consist of cash or securities acceptable to
the broker and the relevant contract market.
When the Fund purchases futures contracts or a call option with
respect thereto or writes a put option on a futures contract, an amount of
cash, cash equivalents or short-term, high-grade, fixed income securities
will be deposited in a segregated account with the Fund's custodian so
that the amount so segregated, plus the amount of initial and variation
margin held in the account of its broker, equals the market value of the
futures contract, thereby ensuring that the use of such futures is
unleveraged.
Risk Factors in Futures Transactions and Options. Investment in
futures contracts involves the risk of imperfect correlation between
movements in the price of the futures contract and the price of the
security being hedged. The hedge will not be fully effective when there is
imperfect correlation between the movements in the prices of two financial
instruments. For example, if the price of the futures contract moves more
than the price of the hedged security, the Fund will experience either a
loss or gain on the futures contract which is not offset completely 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
11
<PAGE> 58
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 futures contract also entails the risk that
changes in the value of the underlying futures contract will not be
reflected fully in the value of the option purchased.
Municipal Bond Index futures contracts have only recently been
approved for trading and therefore have little trading history. It is
possible that trading in such futures contracts will be less liquid than
that in other futures contracts. The trading of futures contracts also is
subject to certain market risks, such as inadequate trading activity,
which could at times make it difficult or impossible to liquidate existing
positions.
INVESTMENT RESTRICTIONS
Current Restrictions. In addition to the investment restrictions set
forth in the Prospectus, the Trust has adopted a number of restrictions
and policies relating to the investment of its assets and its activities,
which are fundamental policies and may not be changed without the approval
of the holders of a majority of the Fund's outstanding voting securities
(which for this purpose and under the 1940 Act means the lesser of (i) 67%
of the Fund's shares present at a meeting at which more than 50% of the
outstanding shares of the Fund are represented
12
<PAGE> 59
or (ii) more than 50% of the Fund's outstanding shares). The Fund may not
(1) purchase any securities other than securities referred to under
"Investment Objective and Policies" herein and in the Prospectus; (2)
invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in any particular
industry (other than U.S. Government securities or Government agency
securities, Municipal Bonds and Non-Municipal Tax-Exempt Securities); (3)
invest more than 10% of its total assets (taken at market value at the
time of each investment) in industrial revenue bonds where the entity
supplying the revenues from which the issuer is to be paid, and the
guarantor of the obligation, including predecessors, each have a record of
less than three years of continuous business operation; (4) make
investments for the purpose of exercising control or management; (5)
purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, and provided
further that the Fund may purchase securities of closed-end investment
companies if immediately thereafter not more than (i) 3% of the total
outstanding voting stock of such company is owned by the Fund, (ii) 5% of
the Fund's total assets, taken at market value, would be invested in any
one such company, or (iii) 10% of the Fund's total assets, taken at market
value, would be invested in such securities; (6) purchase or sell real
estate (including limited partnership interests, but provided that such
restriction shall not apply to readily marketable securities secured by
real estate or interests therein or issued by companies which invest in
real estate or interests therein), commodities or commodity contracts
(except that the Fund may purchase and sell financial futures contracts),
interests in oil, gas or other mineral exploration or development programs
or leases; (7) purchase any securities on margin, except for use of
short-term credit necessary for clearance of purchases and sales of
portfolio securities (the deposit or payment by the Fund of initial or
variation margin in connection with financial futures contracts is not
considered the purchase of a security on margin); (8) make short sales of
securities or maintain a short position or invest in put, call, straddle
or spread options (this restriction does not apply to options on financial
futures contracts); (9) make loans to other persons, provided that the
Fund may purchase a portion of an issue of tax-exempt securities (the
acquisition of a portion of an issue of tax-exempt securities or bonds,
debentures or other debt securities which are not publicly distributed is
considered to be the making of a loan under the 1940 Act) and provided
further that investments in repurchase agreements and purchase and sale
contracts shall not be deemed to be the making of a loan; (10) borrow
amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes (Usually only
"leveraged" investment companies may borrow in excess of 5% of their
assets; however, the Fund will not borrow to increase income but only to
meet redemption requests which might otherwise require untimely
disposition of portfolio securities. The Fund will not purchase securities
while borrowings are outstanding. Interest paid on such borrowings will
reduce net income); (11) mortgage, pledge, hypothecate or in any manner
transfer as security for indebtedness any securities owned or held by the
Fund except as may be necessary in connection with borrowings mentioned in
(10) above, and then such mortgaging, pledging or hypothecating may not
exceed 10% of its total assets, taken at market value, or except as may be
necessary in connection with transactions in financial futures contracts;
(12) invest in securities which cannot be readily resold because of legal
or contractual restrictions or which are not readily marketable, including
individually negotiated loans that constitute illiquid investments and
illiquid lease obligations, or in repurchase agreements or purchase and
sale contracts maturing in more than seven days, if, regarding all such
securities, more than 15% of its net assets (taken at market value), would
be invested in such securities; and (13) act as an underwriter of
securities, except to the extent that the Fund may technically be deemed
an underwriter when engaged in the activities described in (12) above or
insofar as the Fund may be deemed an underwriter under the Securities Act
of 1933, as amended, in selling portfolio securities.
13
<PAGE> 60
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.
Proposed Uniform Investment Restrictions. As discussed in the
Prospectus under "Investment Objective and Policies-Investment
Restrictions", the Board of Trustees of the Trust has approved the
replacement of the Fund's existing investment restrictions with the
fundamental and non-fundamental investment restrictions set forth below.
These uniform investment restrictions have been proposed for adoption by
all of the non-money market mutual funds advised by Fund Asset Management,
L.P. (the "Manager") or its affiliate, Merrill Lynch Asset Management,
L.P. ("MLAM"). The investment objective and policies of the Fund will be
unaffected by the adoption of the proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve
the proposed revised investment restrictions. If such shareholder approval
is obtained, the Fund's current investment restrictions will be replaced
by the proposed restrictions, and the Fund's Prospectus and Statement of
Additional Information will be supplemented to reflect such change.
Under the proposed fundamental investment restrictions, the Fund may
not:
1. Invest more than 25% of its assets, taken at market value, in
the securities of issuers in any particular industry (excluding the
U.S. Government and its agencies and instrumentalities).
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 on interests therein or
issued by companies which invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of
bonds, debentures or other corporate debt securities and investment in
government obligations, commercial paper, pass-through instruments,
certificates of deposit, bankers acceptances, repurchase agreements or
any similar instruments shall not be deemed to be the making of a
loan, and except further that the Fund may lend its portfolio
securities, provided that the lending of portfolio securities may be
made only in accordance with applicable law and the guidelines set
forth in the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time.
5. Issue senior securities to the extent such issuance would
violate applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks
(as defined in the Investment Company Act) in amounts up to 331/3% of
its total assets (including the amount borrowed), (ii) the Fund may
borrow up to an additional 5% of its total assets for temporary
purposes, (iii) the Fund may obtain
14
<PAGE> 61
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 transaction 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 of sell commodities or contracts on commodities,
except to the extent that the Fund may do so in accordance with
applicable law and the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time, and without
registering as a commodity pool operator under the Commodity Exchange
Act.
Under the proposed non-fundamental investment restrictions, the
Fund may not:
a. Purchase securities of other investment companies, except to
the extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position,
except to the extent permitted by applicable law. The Fund currently
does not intend to engage in short sales, except short sales "against
the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be
marketed, redeemed or put to the issuer or a third party, if at the
time of acquisition more than 15% of its total assets would be
invested in such securities. This restriction shall not apply to
securities which mature within seven days or securities which the
Board of Directors of the Fund has otherwise determined to be liquid
pursuant to applicable law. Notwithstanding the 15% limitation herein,
to the extent the laws of any state in which the Fund's shares are
registered or qualified for sale require a lower limitation, the Fund
will observe such limitation. As of the date hereof, therefore, the
Fund will not invest more than 10% of its total assets in securities
which are subject to this investment restriction (c).
d. Invest in warrants if, at the time of acquisition, its
investments in warrants, valued at the lower of cost or market value,
would exceed 5% of the Fund's net assets; included within such
limitation, but not to exceed 2% of the Fund's net assets, are
warrants which are not listed on the New York Stock Exchange or
American Stock Exchange or a major foreign exchange. For purposes of
this restriction, warrants acquired by the Fund in units or attached
to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together
with predecessors, of less than three years of continuous operation,
if more than 5% of the Fund's total assets would be invested in such
securities. This restriction shall not apply to mortgage-backed
securities, asset-backed securities or obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and
general partner of the Investment Adviser, the directors of such
general partner or the officers and directors of any subsidiary
thereof each owning beneficially more than one-half of one percent of
the securities of such issuer own in the aggregate more than 5% of the
securities of such issuer.
15
<PAGE> 62
g. Invest in real estate limited partnership interests or
interests in oil, gas or other mineral leases, or exploration or
development programs, except that the Fund may invest in securities
issued by companies that engage in oil, gas or other mineral
exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be
amended from time to time.
i. Notwithstanding fundamental investment restriction (7) above,
borrow amounts in excess of 20% of its total assets, taken at market
value (including the amount borrowed), and then only from banks as
a temporary measure for extraordinary or emergency purposes.In
addition, the Fund will not purchase securities while borrowings are
outstanding.
Notwithstanding non-fundamental investment restriction (c) above,
certain states in which the Fund's shares are registered or qualified for
sale do not permit the Fund to invest more than 10% of its total assets in
illiquid securities.
----------
Because of the affiliation of Merrill Lynch with the Fund, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch
except pursuant to a permissive order or otherwise in compliance with the
provisions of the Investment Company Act and the rules and regulations
thereunder. Included among such restricted transactions are purchases from
or sales to Merrill Lynch or securities in transactions in which it acts
as principal and purchases of securities from underwriting syndicates of
which Merrill Lynch is a member.
MANAGEMENT OF THE TRUST
Trustees and Officers
The Trustees and executive officers of the Trust and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each Trustee and executive officer is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL - President and Trustee(1)(2) - President and Chief
Investment Officer of the Manager (which term as used herein includes the
Manager's corporate predecessors) since 1977; President of MLAM (which
term as used herein included MLAM's corporate predecessors) since 1977 and
Chief Investment Officer thereof since 1976; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive
Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990;
Executive Vice President of Merrill Lynch since 1990 and a Senior Vice
President thereof from 1985 to 1990; Director of Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor").
KENNETH S. AXELSON - Trustee(2) - 75 Jameson Point Road, Rockland,
Maine 04841. Executive Vice President and Director, J.C. Penney Company,
Inc. until 1982; Director, UNUM Corporation, Protection Mutual Insurance
Company, and, until 1994, Grumman Corporation, and Zurn Industries, Inc.
and, until 1992, of Central Maine Power Company and Key Trust Company of
Maine; Trustee, The Chicago Dock and Canal Trust.
HERBERT I. LONDON - Trustee(2) - New York University - Gallatin
Division, 113-115 University Place, New York, New York 10003. John M.
Olin, Professor of Humanities, New York University since 1993 and
Professor thereof since 1973, Dean, Gallatin Division of New York
University from 1978 to 1993 and Director from 1975 to 1976; Distinguished
Fellow, Herman Kahn Chair, Hudson Institute from 1984 to 1985; Trustee,
Hudson Institute since 1980; Director, Damon Corporation since 1991;
Overseer, Center for Naval Analyses.
16
<PAGE> 63
ROBERT R. MARTIN - Trustee(2) - 513 Grand Hill, St. Paul, Minnesota
55102. Chairman, WTC Industries, Inc. since 1994; Chairman and Chief
Executive Officer, Kinnard Investments, Inc. from 1990 to 1993; Executive
Vice President, Dain Bosworth from 1974 to 1989; Director, Carnegie
Capital Management from 1977 to 1985 and Chairman thereof in 1979;
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Trustee, Northland College since
1992.
JOSEPH L. MAY - Trustee(2) - 424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May
and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to
1983; Vice President, Wayne-Gossard Corporation from 1972 to 1983;
Chairman, The May Corporation (personal holding company) from 1972 to
1983; Director, Signal Apparel Co. from 1972 to 1989.
ANDRE F. PEROLD - Trustee(2) - Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since
1989; Director, Quantec Limited since 1991 and Teknekron Software Systems
since 1994.
TERRY K. GLENN - Executive Vice President(1)(2) - Executive Vice
President of the Manager and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of MLFD since 1986
and Director thereof since 1991.
VINCENT R. GIORDANO - Vice President and Portfolio Manager(1)(2) -
Portfolio Manager of the Manager and MLAM since 1977 and Senior Vice
President of the Manager and MLAM since 1984; Vice President of MLAM from
1980 to 1984; Senior Vice President of Princeton Services since 1993.
KENNETH A. JACOB - Vice President and Portfolio Manager(1)(2) - Vice
President of the Manager and MLAM since 1984.
DONALD C. BURKE - Vice President(1)(2) - Vice President and Director
of Taxation of MLAM since 1990; Employee of Deloitte & Touche LLP from
1982 to 1990.
GERALD M. RICHARD - Treasurer(1)(2) - Senior Vice President and
Treasurer of the Manager and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Treasurer of MLFD since 1984
and Vice President since 1981.
JERRY WEISS - Secretary(1)(2) - Vice President of MLAM since 1990;
Attorney in private practice from 1982 to 1990.
----------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At September 30, 1994, the Trustees and officers of the Trust as a
group (12 persons) owned an aggregate of less than 1% of the outstanding
shares of Common Stock of ML & Co. and owned an aggregate of less than 1%
of the outstanding shares of the Fund.
The Trust pays each Trustee not affiliated with the Manager a fee of
$10,000 per year plus $1,000 per meeting attended, together with such
Trustee's actual out-of-pocket expenses relating to attendance at
meetings. The Trust also compensates members of its Audit and Nomination
Committee, which consists of all the non-affiliated Trustees. The Trust
did not pay any fees and expenses to the unaffiliated Trustees for the
period from July 1, 1994 (commencement of operations) to July 31, 1994.
17
<PAGE> 64
Management and Advisory Arrangements
Reference is made to "Management of the Trust-Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, the Fund
as well as other funds or investment advisory clients of the Manager or
its affiliates. Because of different objectives or other factors, a
particular security may be bought for one or more clients when one or more
clients are selling the same security. If the Manager or its affiliates
purchase or sell securities for the Fund or other funds for which they act
as manager or for their advisory clients and such sales or purchases arise
for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Manager or its
affiliates during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an
adverse effect on price.
Pursuant to a management agreement between the Trust on behalf of the
Fund and the Manager (the "Management Agreement"), the Manager receives
for its services to the Fund monthly compensation based upon the average
daily net assets of the Fund at the following annual rates: 0.55% of the
average daily net assets not exceeding $500 million; 0.525% of the average
daily net assets exceeding $500 million but not exceeding $1.0 billion;
and 0.50% of the average daily net assets exceeding $1.0 billion. For the
period from July 1, 1994 (commencment of operations) to July 31, 1994, the
total advisory fees paid by the Fund to the Manager aggregated $9,061, all
of which was voluntarily waived.
California imposes limitations on the expenses of the Fund. These
annual expense limitations require that the Manager reimburse the Fund in
an amount necessary to prevent the aggregate ordinary operating expenses
(excluding taxes, brokerage fees and commissions, distribution fees and
extraordinary charges such as litigation costs) from exceeding in any
fiscal year 2.5% of the Fund's first $30,000,000 of average net assets,
2.0% of the next $70,000,000 of average net assets and 1.5% of the
remaining average net assets. The Manager's obligation to reimburse the
Fund is limited to the amount of the management fee. Expenses not covered
by this limitation are interest, taxes, brokerage commissions and other
items such as extraordinary legal expenses. No fee payment will be made to
the Manager during any fiscal year which will cause such expenses to
exceed limitations at the time of such payment. No fee reimbursements were
made during the period July 1, 1994 (the Fund's commencement of
operations) to July 31, 1994 (the Fund's fiscal year end) pursuant to
these operating expense limitations.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space
for officers and employees of the Trust connected with investment and
economic research, trading and investment management of the Trust, as well
as the compensation of all Trustees of the Trust who are affiliated
persons of the Manager or any of its subsidiaries. The Fund pays all other
expenses incurred in its operation and, if other Series shall be added
("Series"), a portion of the Trust's general administrative expenses
will be allocated on the basis of the asset size of the respective Series.
Expenses that will be borne directly by the Series include, among other
things, redemption expenses, expenses of portfolio transactions, expenses
of registering the shares under Federal and state securities laws, pricing
costs (including the daily calculation of net asset value), expenses of
printing shareholder reports, prospectuses and statements of additional
information (except to the extent paid by the Distributor as described
below), fees for legal and auditing services, Commission fees, interest,
certain taxes, and other expenses attributable to a particular Series.
Expenses which will be allocated on the basis of asset size of the
respective Series include fees and expenses of unaffiliated Trustees,
state franchise taxes, costs of printing proxies and other expenses
related to shareholder
18
<PAGE> 65
meetings, and other expenses properly payable by the Trust. The
organizational expenses of the Trust were paid by the Trust, and as
additional Series are added to the Trust, the organizational expenses are
allocated among the Series (including the Fund) in a manner deemed
equitable by the Trustees. Depending upon the nature of a lawsuit,
litigation costs may be assessed to the specific Series to which the
lawsuit relates or allocated on the basis of the asset size of the
respective Series. The Trustees have determined that this is an
appropriate method of allocation of expenses. Accounting services are
provided to the Fund by the Manager and the Fund reimburses the Manager
for its costs in connection with such services. For the period from July
1, 1994 (commencement of operations) to July 31, 1994, the Fund paid the
Manager $1,813 for accounting services, all of which was voluntarily waived.
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 account
maintenance and the distribution of Class B shares will be financed by the
Fund pursuant to the Distribution Plan in compliance with Rule 12b-1 under
the 1940 Act. See "Purchase of Shares - Distribution Plans".
The Manager is a limited partnership, the partners of which are ML &
Co. Fund Asset Management, Inc. and Princeton Services, Inc.
Duration and Termination. Unless earlier terminated as described
herein, the Management Agreement will remain in effect from year to year
if approved annually (a) by the Trustees of the Trust or by a majority of
the outstanding shares of the Fund and (b) by a majority of the Trustees
who are not parties to such contract or interested persons (as defined in
the 1940 Act) of any such party. Such contracts are not assignable and may
be terminated without penalty on 60 days' written notice at the option of
either party thereto or by vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for
certain information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing System; shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives, and shares of Class B and
Class C are sold to investors choosing the deferred sales charge
alternatives. Each Class A, Class B, Class C and Class D share of the Fund
represents identical interests in the investment portfolio of the Fund and
has the same rights, except that Class B, Class C and Class D shares bear
the expenses of the ongoing account maintenance fees, and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred
sales charge arrangements. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid. Each class has different exchange
privileges. See "Shareholder Services-Exchange Privilege".
The Merrill Lynch Select Pricing System is used by more than 50 mutual
funds advised by MLAM or its affiliate, the Manager. Funds advised by MLAM
or the Manager are referred to herein as "MLAM-advised mutual funds".
The Fund has entered into four separate distribution agreements with
the Distributor in connection with the continuous offering of each class
of shares of the Fund (the "Distribution Agreements"). The Distribution
Agreements obligate the Distributor to pay certain expenses in connection
with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports
have been
19
<PAGE> 66
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 Fund commenced the public offering of its Class A shares on July
1, 1994. The gross sales charges for the sale of Class A shares for the
period July 1, 1994, the Fund's commencement of operations, to July 31,
1994, the Fund's fiscal year end, were $78,439, of which the Distributor
received $627 and Merrill Lynch received $77,812.
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and
Class D shares of the Fund, refers to a single purchase by an individual,
or to concurrent purchases, which in the aggregate are at least equal to
the prescribed amounts, by an individual, his spouse and their children
under the age of 21 years purchasing shares for his or their own account
and to single purchases by a trustee or other fiduciary purchasing shares
for a single trust estate or single fiduciary account although more than
one beneficiary is involved. The term "purchase" also includes purchases
by any "company", as that term is defined in the 1940 Act, but does not
include purchases by any such company which has not been in existence for
at least six months or which has no purpose other than the purchase of
shares of the Fund or shares of other registered investment companies at a
discount; provided, however, that it shall not include purchases by any
group of individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or
clients of an investment adviser.
Reduced Initial Sales Charges - Class A and Class D Shares
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to
purchase shares of the Fund subject to an initial sales charge at the
offering price applicable to the total of (a) the public offering price of
the shares then being purchased plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of the purchaser's
combined holdings of all classes of shares of the Fund and of other
MLAM-advised mutual funds. For any such right of accumulation to be made
available, the Distributor must be provided at the time of purchase, by
the purchaser or the purchaser's securities dealer, with sufficient
information to permit confirmation of qualification. Acceptance of the
purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a
nominee or custodian under pension, profit sharing or other employee
benefit plans may not be combined with other shares to qualify for the
right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund
or any other MLAM-advised mutual funds made within a 13-month period
starting with the first purchase pursuant to a Letter of Intention in the
form provided in the Prospectus. The Letter of Intention is available only
to investors whose accounts are maintained at the Fund's transfer agent.
The Letter of Intention is not available to employee benefit plans for
which Merrill Lynch provides plan participant, record-keeping services.
The Letter of Intention is not a binding obligation to purchase any amount
of Class A or Class D shares; however, its execution will result in the
purchaser paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to a Letter of Intention
may be included under a subsequent Letter of Intention executed within 90
days of such purchase if the Distributor is
20
<PAGE> 67
informed in writing of this intent within such 90-day period. The value of
Class A and Class D shares of the Fund and of other MLAM-advised mutual
funds presently held, at cost or maximum offering price (whichever is
higher), on the date of the first purchase under the Letter of Intention,
may be included as a credit toward the completion of such Letter, but the
reduced sales charge applicable to the amount covered by such Letter will
be applied only to new purchases. If the total amount of shares does not
equal the amount stated in the Letter of Intention (minimum of $25,000),
the investor will be notified and must pay, within 20 days of the
expiration of such Letter, the difference between the sales charge on the
Class A and Class D shares purchased at the reduced rate and the sales
charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to at least five percent of the intended
amount will be held in escrow during the 13-month period (while remaining
registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intention must be at least five percent of
the dollar amount of such Letter. If a purchase during the term of such
Letter, would otherwise be subject to a further reduced sales charge based
on the right of accumulation, the purchaser will be entitled on that
purchase and subsequent purchases to that further reduced percentage sales
charge, but there will be no retroactive reduction of the sales charges on
any previous purchase. The value of any shares redeemed or otherwise
disposed of by the purchaser prior to termination or completion of the
Letter of Intention will be deducted from the total purchases made under
such Letter. An exchange from a MLAM-advised money market fund into the
Fund that creates a sales charge will count toward completing a new or
existing Letter of Intention from the Fund.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Purchase Privilege of Certain Persons. Trustees of the Trust, members
of the Board of other MLAM-advised mutual funds, directors and employees
of 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 any trust, pension, profit-sharing or other benefit plan for such
persons, may purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a
financial consultant who joined Merrill Lynch from another investment firm
within six months prior to the date of purchase by such investor, if the
following conditions are satisfied. First, the investor must advise
Merrill Lynch that it will purchase Class D shares of the Fund with
proceeds from a redemption of a mutual fund that was sponsored by the
financial consultant's previous firm and was subject to a sales charge
either at the time of purchase or on a deferred basis. Second, the
investor also must establish that such redemption had been made within 60
days prior to the investment in the Fund, and the proceeds from the
redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at the net asset value,
without sales charge, to an investor who has a business relationship with
a Merrill Lynch financial consultant and who has invested in a mutual fund
sponsored by a non-Merrill Lynch company for which Merrill Lynch has
served as a selected dealer and where Merrill Lynch has either received or
given notice that such arrangement will be terminated ("notice"), if the
following conditions are satisfied: First, the investor must purchase
Class D shares of the Fund with proceeds from a redemption of shares of
such other mutual fund and such fund was subject to a sales charge either
at the time of purchase or on a deferred basis. Second, such purchase of
Class D shares must be made within 90 days after such notice.
Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a
Merrill Lynch financial consultant and who has invested in a mutual fund
for
21
<PAGE> 68
which Merrill Lynch has not served as a selected dealer if the following
conditions are satisfied: First, the investor must advise Merrill Lynch
that it will purchase Class D shares of the Fund with proceeds from the
redemption of such shares of other mutual funds and that such shares have
been outstanding for a period of no less than six months. Second, such
purchase of Class D shares must be made within 60 days after the
redemption and the proceeds from the redemption must be maintained in the
interim in cash or a money market fund.
Closed-End Fund Option. Class A shares of the Fund and other
MLAM-advised mutual funds (the "Eligible Class A shares") are offered at
net asset value to shareholders of certain closed-end funds advised by the
Manager or MLAM who purchased such closed-end fund shares prior to October
21, 1994 and who wish to reinvest the net proceeds of a sale of their
closed-end fund shares of common stock in Eligible Class A shares, if the
conditions set forth below are satisfied. Alternatively, closed-end fund
shareholders who purchased such shares on or after October 21, 1994 and
who wish to reinvest the net proceeds from a sale of their closed-end fund
shares are offered Class A shares (if eligible to buy Class A shares) or
Class D shares of the Fund and other MLAM-advised mutual funds ("Eligible
Class D shares"), if the following conditions are met. First, the sale of
closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or
Class D shares. Second, the closed-end fund shares must have either been
acquired in the initial public offering or be shares representing
dividends from shares of common stock acquired in such offering. Third,
the closed-end fund shares must have been continuously maintained in a
Merrill Lynch securities account. Fourth, there must be a minimum purchase
of $250 to be eligible for the investment option. Class A shares of the
Fund are offered at net asset value to shareholders of Merrill Lynch
Senior Floating Rate Fund, Inc. ("Senior Floating Rate Fund") who wish
to reinvest the net proceeds from a sale of certain of their shares of
common stock of Senior Floating Rate Fund in shares of the Fund. In order
to exercise this investment option, Senior Floating Rate Fund shareholders
must sell their Senior Floating Rate shares to the Senior Floating Rate
Fund in connection with a tender offer conducted by the Senior Floating
Rate Fund and reinvest the proceeds immediately in the Fund. This
investment option is available only with respect to the proceeds of Senior
Floating Rate Fund shares as to which no Early Withdrawal Charge (as
defined in the Senior Floating Rate Fund prospectus) is applicable.
Purchase orders from Senior Floating Rate Fund shareholders wishing to
exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be
effected at the net asset value of the Fund at such day.
Acquisition of Certain Investment Companies. The public offering price
of Class A shares may be reduced to the net asset value per Class A share
in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private
investment company. The value of the assets or company acquired in a
tax-free transaction may be adjusted in appropriate cases to reduce
possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund.
The issuance of Class D shares for consideration other than cash is
limited to bona fide reorganizations, statutory mergers or other
acquisitions of portfolio securities which (i) meet the investment
objectives and policies of the Fund; (ii) are acquired for investment and
not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control);
(iii) are liquid securities, the value of which is readily ascertainable,
which are not restricted as to transfer either by law or liquidity of
market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed
the applicable limits on acquisition of such securities set forth under
"Investment Objective and Policies" herein).
22
<PAGE> 69
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 fee and/or distribution fees paid by the Fund
to the Distributor with respect to such classes.
Payments of the account maintenance and/or distribution fees are
subject to the provisions of Rule 12b-1 under the 1940 Act. Among other
things, each Distribution Plan provides that the Distributor shall provide
and the Trustees shall review quarterly reports of the disbursement of the
account maintenance and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Trustees must consider
all factors they deem relevant, including information as to the benefits
of the Distribution Plan to the Fund and its related class of
shareholders. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of
Trustees who are not "interested persons" of the Trust, as defined in
the 1940 Act (the "Independent Trustees"), shall be committed to the
discretion of the Independent Trustees then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Trustees
concluded that there is reasonable likelihood that such Distribution Plan
will benefit the Fund and its related class of shareholders. Each
Distribution Plan can be terminated at any time, without penalty, by the
vote of a majority of the Independent Trustees or by the vote of the
holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders and all material amendments are required to
be approved by the vote of Trustees, including a majority of the
Independent Trustees who have no direct or indirect financial interest in
such Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that the Trust preserve copies of
such Distribution Plan and any report made pursuant to such plan for a
period of not less than six years from the date of such Distribution Plan
or such report, the first two years in an easily accessible place.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD") imposes a
limitation on certain asset-based sales charges such as the distribution
fee and the CDSC borne by the Class B and Class C shares but not the
account maintenance fee. The maximum sales charge rule is applied
separately to each class. As applicable to the Fund, the maximum sales
charge rule limits the aggregate of distribution fee payments and CDSCs
payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares
and Class C shares, computed separately (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges), plus (2) interest on
the unpaid balance for the respective class, computed separately, at the
prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts 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 to the distribution fee with respect to the Class B
shares,
23
<PAGE> 70
and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to
the voluntary maximum may exceed the amount payable under the NASD
formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
The following table sets forth comparative information as of July 31,
1994 with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge
rule and the Distributor's voluntary maximum for the period July 1, 1994
(commencement of the public issuance of Class B shares) to July 31, 1994.
Since Class C shares of the Fund had not been publicly issued prior to the
date of this Statement of Additional Information, information concerning
Class C shares is not yet provided below.
<TABLE>
<CAPTION>
Data Calculated as of July 31, 1994
-------------------------------------------------------------------------------------
(In Thousands)
Annual
Distribution
Allowable Amounts Fee at
Eligible Aggregate Interest on Maximum Previously Aggregate Current
Gross Sales Unpaid Amount Paid to Unpaid Net Asset
Sales(1) Charges Balance(2) Payable Distributor(3) Balance Level(4)
-------- ------- ----------- ------- -------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule
As Adopted.......... $9,372 $586 $ 2 $588 $3 $586 $42
Under Distributor's
Voluntary Waiver.... $9,372 $586 $47 $633 $3 $630 $42
</TABLE>
----------
(1) Purchase price of all eligible Class B shares sold since July 1, 1994
(commencement of operations) other than shares acquired through
dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the
NASD Rule.
(3) Consist of CDSC payments, distribution fee payments and accruals.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any contingent deferred sales
charge payments) is amortizing the unpaid balance. No assurance can be
given that payments of the distribution fee will reach either the
voluntary maximum or the NASD maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for
certain information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any
such redemption may be suspended only for any period during which trading
on the New York Stock Exchange is restricted as determined by the
Commission or such Exchange is closed (other than customary weekend and
holiday closings), for any period during which an emergency exists, as
defined by the Commission, as a result of which disposal of portfolio
securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Commission may
by order permit for the protection of shareholders of the Fund.
Deferred Sales Charge - Class B Shares
As discussed in the Prospectus under "Purchase of Shares - Deferred
Sales Charge Alternatives - Class B and Class C Shares", while Class B
shares redeemed within four years of purchase are subject to a CDSC under
most circumstances, the charge is waived on redemptions of Class B shares
following the death or disability of a Class B shareholder. Redemptions
for which the waiver applies are any partial or complete redemption
following the death or disability (as defined in the Code) of a Class B
shareholder (including one who owns the
24
<PAGE> 71
Class B shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial
determination of disability. For the period from July 1, 1994
(commencement of operations ) to July 31, 1994, the Distributor received
no CDSCs.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies" and
"Portfolio Transactions" in the Prospectus.
Under the 1940 Act, persons affiliated with the Trust are prohibited
from dealing with the Fund as a principal in the purchase and sale of
securities unless such trading is permitted by an exemptive order issued
by the Commission. Since over-the-counter transactions are usually
principal transactions, affiliated persons of the Trust, including Merrill
Lynch, may not serve as dealer in connection with transactions with the
Fund. The Trust has obtained an exemptive order permitting it to engage in
certain principal transactions with Merrill Lynch involving high quality
short-term municipal bonds subject to certain conditions. For the period
from July 1, 1994 (commencement of operations) to July 31, 1994, the Fund
engaged in no transactions pursuant to such order. Affiliated persons of
the Trust may serve as broker for the Fund in over-the-counter
transactions conducted on an agency basis. Certain court decisions have
raised questions as to the extent to which investment companies should
seek exemptions under the 1940 Act in order to seek to recapture
underwriting and dealer spreads from affiliated entities. The Trustees
have considered all factors deemed relevant, and have made a determination
not to seek such recapture at this time. The Trustees will reconsider this
matter from time to time.
As a non-fundamental restriction, the Trust will prohibit the purchase
or retention by the Fund of the securities of any issuer if the officers,
directors or trustees of the Trust or the Manager owning beneficially more
than one-half of one per cent of the securities of an issuer together own
beneficially more than five per cent of the securities of that issuer. In
addition, under the 1940 Act, the Fund may not purchase securities during
the existence of any underwriting syndicate of which Merrill Lynch is a
member except pursuant to an exemptive order or rules adopted by the
Commission. Rule 10f-3 under the 1940 Act sets forth conditions under
which the Fund may purchase municipal bonds in such transactions. The rule
sets forth requirements relating to, among other things, the terms of an
issue of municipal bonds purchased by the Fund, the amount of municipal
bonds which may be purchased in any one issue and the assets of the Fund
which may be invested in a particular issue.
The Fund does not expect to use any particular dealer in the execution
of transactions but, subject to obtaining the best net results, dealers
who provide supplemental investment research (such as information
concerning tax-exempt securities, economic data and market forecasts) to
the Manager may receive orders for transactions by the Fund. Information
so received will be in addition to and not in lieu of the services
required to be performed by the Manager under its Management Agreement and
the expenses of the Manager will not necessarily be reduced as a result of
the receipt of such supplemental information.
The Trust has no obligation to deal with any broker in the execution
of transactions for the Fund's portfolio securities. In addition,
consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., 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. While it is not possible
to predict turnover rates with any certainty, at present it is anticipated
that the Fund's annual portfolio turnover rate, under normal circumstances
after the
25
<PAGE> 72
Fund's portfolio is invested in accordance with its investment objective,
will be less than 100%. (The portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the
particular fiscal year by the monthly average of the value of the
portfolio securities owned by the Fund during the particular fiscal year.
For purposes of determining this rate, all securities whose maturities at
the time of acquisition are one year or less are excluded.) The portfolio
turnover rate for the period from July 1, 1994 (commencement of
operations) to July 31, 1994 was 3.07%.
Section 11(a) of the Securities Exchange Act of 1934, as amended,
generally prohibits members of the U.S. national securities exchanges from
executing exchange transactions for their affiliates and institutional
accounts which they manage unless the member (i) has obtained prior
express authorization from the account to effect such transactions, (ii)
at least annually furnishes the account with a statement setting forth the
aggregate compensation received by the member in effecting such
transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To
the extent Section 11(a) would apply to Merrill Lynch acting as a broker
for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have
been obtained from the Fund and annual statements as to aggregate
compensation will be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Manager once
daily, Monday through Friday, as of 4:15 P.M., New York City time, on each
day during which the New York Stock Exchange is open for trading. The New
York Stock Exchange is not open on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Net asset value per share is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of shares outstanding at
such time, rounded to the nearest cent. Expenses, including the investment
advisory fees 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 fees and higher transfer agency costs applicable
with respect to the Class B and Class C shares and the daily expense
accruals of the account maintenance fees applicable with respect to the
Class D shares; moreover, the per share net asset value of Class B and
Class C shares generally will be lower than the per share net asset value
of Class D shares reflecting the daily expense accruals of the
distribution fees 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
immediately after the payment of dividends, which will differ by
approximately the amount of the expense accrual differentials between the
classes.
The Municipal Bonds, and other portfolio securities in which the Fund
invests are traded primarily in over-the-counter municipal bond and money
markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained
from one or more dealers that make markets in the securities. One bond is
the "yield equivalent" of another bond when, taking into account market
price, maturity, coupon rate, credit rating and ultimate return of
principal, both bonds will theoretically produce an equivalent return to
the bondholder. Financial futures contracts and options thereon, which are
traded on exchanges, are valued at their settlement prices as of the close
of such exchanges. Short-term investments with a remaining maturity of 60
days or less are valued on an amortized cost basis, which approximates
market value. Securities and assets for which market quotations are not
readily available are valued at fair value as determined
26
<PAGE> 73
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 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 gain distributions. The
statements will also show any other activity in the account since the
preceding statement. Shareholders will receive separate transaction
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of ordinary income dividends and
long-term capital gain distributions. 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.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder who has an Investment Account.
Issuance of certificates representing all or only part of the full shares
in an Investment Account may be requested by a shareholder directly from
the Transfer Agent.
Automatic Investment 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
clearinghouse debits of $50 or more to charge the regular bank account of
the shareholder on a regular basis to provide systematic additions to the
Investment Account of such shareholder. Alternatively, investors who
maintain CMA(Reg) accounts may arrange to have periodic investments made
in the Fund in their CMA(Reg) account or in certain related accounts in
amounts of $100 or more through the CMA(Reg) Automated Investment Program.
27
<PAGE> 74
Automatic Reinvestment of Dividends and Capital Gains Distributions
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions
will be reinvested automatically in additional shares of the Fund. Such
reinvestment will be at the net asset value of shares of the Fund as of
the close of business on the monthly payment date for such dividends and
distributions. Shareholders may elect in writing to receive either their
income dividends or capital gains distributions, or both, in cash, in
which event payment will be mailed on or about the payment date. Cash
payments can also be directly deposited to the shareholder's bank account.
Shareholders may, at any time, notify the Transfer Agent in writing or
by telephone (1-800-MER-FUND) that they no longer wish to have their
dividends and/or capital gains distributions reinvested in shares of the
Fund or vice versa and, commencing ten days after the receipt by the
Transfer Agent of such notice, such instructions will be effected.
Systematic Withdrawal Plans-Class A and Class D Shares
A Class A or Class D shareholder may elect to make systematic
withdrawals from an Investment Account on either a monthly or quarterly
basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired Class A or Class D shares of the Fund
having a value, based on cost or the current offering price, of $5,000 or
more, and monthly withdrawals are available for shareholders with Class A
or Class D shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The
shareholder may specify either a dollar amount or a percentage of the
value of his Class A or Class D shares. Redemptions will be made at net
asset value as determined at the normal close of business on the New York
Stock Exchange (currently 4:00 P.M., New York City time) on the 24th day
of each month or the 24th day of the last month of each quarter, whichever
is applicable. If the Exchange is not open for business on such date, the
Class A or Class D shares will be redeemed at the close of business on the
following business day. The check for the withdrawal payment will be
mailed, or the direct deposit for the withdrawal payment will be made, on
the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all Class A or
Class D shares in the Investment Account are reinvested automatically in
the Fund's Class A or Class D shares, respectively. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge
or penalty, by the shareholder, the Trust, the Transfer Agent or the
Distributor. Withdrawal payments should not be considered as dividends,
yield or income. Each withdrawal is a taxable event. If periodic
withdrawals continuously exceed reinvested dividends, the shareholder's
original investment may be reduced correspondingly. Purchases of
additional Class A or Class D shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and
tax liabilities. The Trust will not knowingly accept purchase orders for
Class A or Class D shares of the Fund from investors who maintain a
Systematic Withdrawal Plan unless such purchase is equal to at least one
year's scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account in which the
shareholder has elected to make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a
CMA(Reg) or CBA(Reg) Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the
Systematic Redemption Program. The minimum fixed dollar amount redeemable
is $25. The proceeds of systematic redemptions will be posted to the
shareholder's account five business days after the date the shares are
redeemed.
28
<PAGE> 75
Monthly systematic redemptions will be made at net asset value on the
first Monday of each month, bimonthly systematic redemption will be made
at net asset value on the first Monday of every other month, and
quarterly, semiannual or annual redemptions are made at net asset value on
the first Monday of months selected at the shareholder's option. If the
first Monday of the month is a holiday, the redemption will be processed
at net asset value on the next business day. The Systematic Redemption
Program is not available if Company shares are being purchased within the
account pursuant to the Automatic Investment Program. For more information
on the Systematic Redemption Program, eligible shareholders should contact
their Financial Consultant.
Exchange Privilege
Shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds listed below. Under
the Merrill Lynch Select Pricing System, Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund
in his account in which the exchange is made at the time of the exchange
or is otherwise eligible to purchase Class A shares of the second fund. If
the Class A shareholder wants to exchange Class A shares for shares of a
second MLAM-advised mutual fund, and the shareholder does not hold Class A
shares of the second fund in his account at the time of the exchange and
is not otherwise eligible to acquire Class A shares of the second fund,
the shareholder will receive Class D shares of the second fund as a result
of the exchange. Class D shares also may be exchanged for Class A shares
of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund
in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund. Class B, Class C and Class D
shares will be exchangeable with shares of the same class of other
MLAM-advised mutual funds. For purposes of computing the CDSC that may be
payable upon a disposition of the shares acquired in the exchange, the
holding period for the previously owned shares of the Fund is "tacked"
to the holding period of the newly acquired shares of the other fund as
more fully described below. Class A, Class B, Class C and Class D shares
also will be exchangeable for shares of certain MLAM-advised money market
funds specifically designated below as available for exchange by holders
of Class A, Class B, Class C or Class D shares. Shares with a net asset
value of at least $100 are required to qualify for the exchange privilege,
and any shares utilized in an exchange must have been held by the
shareholder for 15 days. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding
Class A or Class D shares") for Class A or Class D shares of other
MLAM-advised mutual funds ("new Class A or Class D shares") are
transacted on the basis of relative net asset value per Class A or Class D
share, respectively, plus an amount equal to the difference, if any,
between the sales charge previously paid on the outstanding Class A or
Class D shares and the sales charge payable at the time of the exchange on
the new Class A or Class D shares. With respect to outstanding Class A or
Class D shares as to which previous exchanges have taken place, the
"sales charge previously paid" shall include the aggregate of the sales
charges paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of
the funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A and Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal
to the sales charge previously paid on the Class A or Class D shares on
which the dividend was paid. Based on this formula, Class A and Class D
shares generally may be exchanged into the Class A or Class D shares of
the other funds or into shares of the Class A and Class D money market
funds without a sales charge.
29
<PAGE> 76
In addition, each of the funds with Class B and Class C shares
outstanding ("outstanding Class B and Class C shares") offers to
exchange its Class B or Class C shares for Class B or Class C shares,
respectively, of another MLAM-advised mutual fund ("new Class B or Class
C shares") on the basis of relative net asset value per Class B or Class
C share, without the payment of any CDSC that might otherwise be due on
redemption of the outstanding shares. Class B shareholders of the Fund
exercising the exchange privilege will continue to be subject to the
Fund's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of
the exchange privilege will be subject to the Fund's schedule if such
schedule is higher than the schedule relating to the Class B shares of the
fund from which the exchange has been made. For purposes of computing the
sales load that may be payable on a disposition of the new Class B or
Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C
shares. For example, an investor may exchange Class B shares of the Fund
for those of Merrill Lynch Special Value Fund, Inc. ("Special Value
Fund") after having held the Fund's Class B shares for two and a half
years. The 2% sales load that generally would apply to a redemption would
not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of Special Value Fund and receive cash. There
will be no CDSC due on this redemption, since by "tacking" the two and a
half year holding period of the Fund's Class B shares to the three-year
holding period for the Special Value Fund Class B shares, the investor
will be deemed to have held the new Class B shares for more than five
years.
Shareholders also may exchange shares of the Fund into shares of a
money market fund advised by the Manager or its affiliates, but the period
of time that Class B or Class C shares are held in a Class B money market
fund will not count towards satisfaction of the holding period requirement
for purposes of reducing the CDSC or, with respect to Class B shares,
towards satisfaction of the conversion period. However, shares of a money
market fund which were acquired as a result of an exchange for Class B or
Class C shares of a fund may, in turn, be exchanged back into Class B or
Class C shares, respectively, of any fund offering such shares, in which
event the holding period for Class B or Class C shares of the Fund will be
aggregated with previous holding periods for purposes of reducing the
CDSC. Thus, for example, an investor may exchange Class B shares of the
Fund for shares of Merrill Lynch Institutional Fund ("Institutional
Fund") after having held the Fund Class B shares for two and a half years
and three years later decide to redeem the shares of Institutional Fund
for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If, instead of
such redemption the shareholder exchanged such shares for Class B shares
of a fund which the shareholder continues to hold for an additional two
and a half years, any subsequent redemption will not incur a CDSC.
30
<PAGE> 77
Set forth below is a description of the investment objectives of the
other funds into which exchanges can be made:
Funds Issuing Class A, Class B, Class C and Class D Shares:
<TABLE>
<CAPTION>
<S> <C>
MERRILL LYNCH ADJUSTABLE RATE SECURITIES
FUND, INC................................. High current income consistent with a policy of
limiting the degree of fluctuation in net asset value
of fund shares resulting from movement in interest
rates through investment primarily in a portfolio of
adjustable rate securities, consisting principally of
mortgage-backed and asset-backed securities.
MERRILL LYNCH AMERICAS INCOME FUND, INC..... A high level of current income, consistent with prudent
investment risk, by investing primarily in debt
securities denominated in a currency of a country
located in the Western Hemisphere (i.e., North and
South America and the surrounding waters).
MERRILL LYNCH ARIZONA LIMITED MATURITY
MUNICIPAL BOND FUND....................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income
exempt from Federal and Arizona income taxes as is
consistent with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade Arizona Municipal
Bonds.
MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide investors with as high a level of income
exempt from Federal and Arizona income taxes as is
consistent with prudent investment management.
MERRILL LYNCH ARKANSAS MUNICIPAL
BOND FUND ................................ A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and Arkansas income taxes as is consistent with
prudent investment management.
</TABLE>
31
<PAGE> 78
<TABLE>
<CAPTION>
<S> <C>
MERRILL LYNCH ASSET GROWTH
FUND, INC. ............................... High total investment return, consistent with prudent
risk from investment in United States and foreign
equity, debt and money market securities the
combination of which will be varied both with respect
to types of securities and markets in response to
changing market and economic trends.
MERRILL LYNCH ASSET INCOME
FUND, INC. ............................... A high level of current income through investment
primarily in United States fixed income securities.
MERRILL LYNCH BALANCED FUND FOR INVESTMENT
AND RETIREMENT............................ As high a level of total investment return as is
consistent with relatively low level of risk through
investing in common stocks and other types of
securities, including fixed income securities and
convertible securities.
MERRILL LYNCH BASIC VALUE FUND, INC......... Capital appreciation and, secondarily, income through
investment in securities, primarily equities, that are
undervalued and therefore represent basic investment
value.
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL
BOND FUND................................. A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and California income taxes as is consistent with
prudent investment management through investment in a
portfolio primarily of insured California Municipal
Bonds.
MERRILL LYNCH CALIFORNIA LIMITED MATURITY
MUNICIPAL BOND FUND....................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income
exempt from Federal and California income taxes as is
consistent with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade California
Municipal Bonds.
</TABLE>
32
<PAGE> 79
<TABLE>
<CAPTION>
<S> <C>
MERRILL LYNCH CALIFORNIA MUNICIPAL BOND A portfolio of Merrill Lynch California Municipal Series
FUND...................................... Trust, a series fund, whose objective is to provide as
high a level of income exempt from Federal and
California income taxes as is consistent with prudent
investment management.
MERRILL LYNCH CAPITAL FUND, INC............. The highest total investment return consistent with
prudent risk through a fully managed investment policy
utilizing equity, debt and convertible securities.
MERRILL LYNCH COLORADO MUNICIPAL BOND FUND.. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and Colorado income taxes as is consistent with
prudent investment management.
MERRILL LYNCH CORPORATE BOND FUND, INC...... Current income from three separate diversified
portfolios of fixed income securities.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS
FUND, INC................................. Long-term appreciation through investment in
securities, principally equities, of issuers in
countries having smaller capital markets.
MERRILL LYNCH DRAGON FUND, INC.............. Capital appreciation primarily through investment in
equity and debt securities of issuers domiciled in
developing countries located in Asia and the Pacific
Basin, other than Japan, Australia and New Zealand.
MERRILL LYNCH EUROFUND...................... Capital appreciation primarily through investment in
equity securities of corporations domiciled in Europe.
MERRILL LYNCH FEDERAL SECURITIES TRUST...... High current return through investments in U.S.
Government and Government agency securities, including
GNMA mortgage-backed certificates and other
mortgage-backed Government securities.
</TABLE>
33
<PAGE> 80
<TABLE>
<CAPTION>
<S> <C>
MERRILL LYNCH FLORIDA LIMITED MATURITY
MUNICIPAL BOND FUND....................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income
exempt from Federal income taxes as is consistent with
prudent investment management while seeking to offer
shareholders the opportunity to own securities exempt
from Florida intangible personal property taxes
through investment in a portfolio primarily of
intermediate-term investment grade Florida Municipal
Bonds.
MERRILL LYNCH FLORIDA MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
income taxes as is consistent with prudent investment
management while seeking to offer shareholders the
opportunity to own securities exempt from Florida
intangible personal property taxes.
MERRILL LYNCH FUND FOR TOMORROW, INC........ Long-term growth through investment in a portfolio of
good quality securities, primarily common stock,
potentially positioned to benefit from demographic and
cultural changes as they affect consumer markets.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.. Long-term growth through investment in a diversified
portfolio of equity securities placing particular
emphasis on companies that have exhibited
above-average growth rates in earnings.
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC... High total investment return, consistent with prudent
risk, through a fully managed investment policy
utilizing United States and foreign equity, debt and
money market securities, the combination of which will
be varied from time to time both with respect to the
types of securities and markets in response to
changing market and economic trends.
MERRILL LYNCH GLOBAL BOND FUND FOR
INVESTMENT AND RETIREMENT................. High total investment return from investment in
government and corporate bonds denominated in various
currencies and multi-national currency units.
</TABLE>
34
<PAGE> 81
<TABLE>
<CAPTION>
<S> <C>
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.. High total return from investment primarily in an
internationally diversified portfolio of convertible
debt securities, convertible preferred stock and
"synthetic" convertible securities consisting of a
combination of debt securities or preferred stock and
warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS, Inc.
(residents of Arizona must meet investor The highest total investment return consistent with
suitability standards) ................... prudent risk through worldwide investment in an
internationally diversified portfolio of securities.
MERRILL LYNCH GLOBAL RESOURCES TRUST........ Long-term growth and protection of capital from
investment in securities of domestic and foreign
companies that possess substantial natural resource
assets.
MERRILL LYNCH GLOBAL SMALLCAP
FUND, INC................................. Long-term growth of capital by investing primarily in
equity securities of companies with relatively small
market capitalizations located in various foreign
countries and in the United States.
MERRILL LYNCH GLOBAL UTILITY FUND, INC...... Capital appreciation and current income through
investment of at least 65% of its total assets in
equity and debt securities issued by domestic and
foreign companies which are primarily engaged in the
ownership or operation of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH GROWTH FUND FOR INVESTMENT AND
RETIREMENT................................ Growth of capital and, secondarily, income from
investment in a diversified portfolio of equity
securities placing principal emphasis on those
securities which management of the fund believes to be
undervalued.
MERRILL LYNCH HEALTHCARE FUND, INC.
(residents of Wisconsin must meet investor
suitability standards).................... Capital appreciation through worldwide investment in
equity securities of companies that derive or are
expected to derive a substantial portion of their
sales from products and services in healthcare.
</TABLE>
35
<PAGE> 82
<TABLE>
<CAPTION>
<S> <C>
MERRILL LYNCH INTERNATIONAL EQUITY FUND..... Capital appreciation and, secondarily, income by
investing in a diversified portfolio of equity
securities of issuers located in countries other than
the United States.
MERRILL LYNCH LATIN AMERICA FUND, INC....... Capital appreciation by investing primarily in Latin
American equity and debt securities.
MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND.. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and Maryland income taxes as is consistent with
prudent investment management.
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY
MUNICIPAL BOND FUND....................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income
exempt from Federal and Massachusetts income taxes as
is consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade Massachusetts
Municipal Bonds.
MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND
FUND...................................... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and Massachusetts income taxes as is consistent with
prudent investment management.
MERRILL LYNCH MICHIGAN LIMITED MATURITY
MUNICIPAL BOND FUND....................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income
exempt from Federal and Michigan income taxes as is
consistent with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade Michigan Municipal
Bonds.
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND.. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and Michigan income taxes as is consistent with
prudent investment management.
</TABLE>
36
<PAGE> 83
<TABLE>
<CAPTION>
<S> <C>
MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and Minnesota personal income taxes as is consistent
with prudent investment management.
MERRILL LYNCH MUNICIPAL BOND FUND, INC...... Tax-exempt income from three separate diversified
portfolios of municipal bonds.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM
FUND...................................... Currently the only portfolio of Merrill Lynch Municipal
Series Trust, a series fund, whose objective is to
provide as high a level as possible of income exempt
from Federal income taxes by investing in investment
grade obligations with a dollar weighted average
maturity of five to twelve years.
MERRILL LYNCH NEW JERSEY LIMITED MATURITY
MUNICIPAL BOND FUND....................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income
exempt from Federal and New Jersey income taxes as is
consistent with prudent investment management through
a portfolio primarily of intermediate-term investment
grade New Jersey Municipal Bonds.
MERRILL LYNCH NEW JERSEY MUNICIPAL BOND A portfolio of Merrill Lynch Multi-State Municipal
FUND...................................... Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and New Jersey income taxes as is consistent with
prudent investment management.
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND
FUND...................................... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and New Mexico income taxes as is consistent with
prudent investment management.
</TABLE>
37
<PAGE> 84
<TABLE>
<CAPTION>
<S> <C>
MERRILL LYNCH NEW YORK LIMITED MATURITY
MUNICIPAL BOND FUND....................... A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income
exempt from Federal, New York State and New York City
income taxes as is consistent with
prudent investment management through invest- ment in
a portfolio primarily of intermediate-term investment
grade New York Municipal Bonds.
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND.. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal,
New York State and New York City income taxes as is
consistent with prudent investment management.
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND
FUND...................................... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and North Carolina income taxes as is consistent with
prudent investment management.
MERRILL LYNCH OHIO MUNICIPAL BOND FUND...... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and Ohio income taxes as is consistent with prudent
investment management.
MERRILL LYNCH OREGON MUNICIPAL BOND FUND.... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and Oregon income taxes as is consistent with prudent
investment management.
MERRILL LYNCH PACIFIC FUND, INC............. Capital appreciation by investing in equity securities
of corporations domiciled in Far Eastern and Western
Pacific countries, including Japan, Australia, Hong
Kong and Singapore.
</TABLE>
38
<PAGE> 85
<TABLE>
<CAPTION>
<S> <C>
MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY A portfolio of Merrill Lynch Multi-State Limited
MUNICIPAL BOND FUND....................... Maturity Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income
exempt from Federal and Pennsylvania income taxes as
is consistent with prudent investment management
through investment in a portfolio of intermediate-term
investment grade Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA MUNICIPAL BOND
FUND...................................... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and Pennsylvania personal income taxes as is
consistent with prudent investment management.
MERRILL LYNCH PHOENIX FUND, INC............. Long-term growth of capital by investing in equity and
fixed income securities, including tax-exempt
securities, of issuers in weak financial condition or
experiencing poor operating results believed to be
undervalued relative to the current or prospective
condition of such issuer.
MERRILL LYNCH SHORT-TERM GLOBAL INCOME
FUND, INC................................. As high a level of current income as is consistent with
prudent investment management from a global portfolio
of high quality debt securities denominated in various
currencies and multinational currency units and having
remaining maturities not exceeding three years.
MERRILL LYNCH SPECIAL VALUE FUND, INC....... Long-term growth of capital from investments in
securities, primarily equities, of relatively small
companies believed to have special investment value
and emerging growth companies regardless of size.
MERRILL LYNCH STRATEGIC DIVIDEND FUND....... Long-term total return from investment in dividend
paying common stocks which yield more than Standard &
Poor's 500 Composite Stock Price Index.
MERRILL LYNCH TECHNOLOGY FUND, INC.......... Capital appreciation through worldwide investment in
equity securities of companies that derive or are
expected to derive a substantial portion of their
sales from products and services in technology.
</TABLE>
39
<PAGE> 86
<TABLE>
<CAPTION>
<S> <C>
MERRILL LYNCH TEXAS MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
income taxes as is consistent with prudent investment
management by investing primarily in a portfolio of
long-term, investment grade obligations issued by the
State of Texas, its political subdivisions, agencies
and instrumentalities.
MERRILL LYNCH UTILITY INCOME FUND, INC...... High current income through investment in equity and
debt securities issued by companies which are
primarily engaged in the ownership or operation of
facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
MERRILL LYNCH WORLD INCOME FUND, INC........ High current income by investing in a global portfolio
of fixed income securities denominated in various
currencies, including multinational currencies.
Class A Share Money Market Funds:
MERRILL LYNCH READY ASSETS TRUST............ Preservation of capital, liquidity and the highest
possible current income consistent with the foregoing
objectives from the short-term money market securities
in which the Trust invests.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
(available only if the exchange occurs
within certain retirement plans).......... Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund, whose
objectives are current income, preservation of capital
and liquidity available from investing in a
diversified portfolio of short-term money market
securities.
MERRILL LYNCH U.S.A. GOVERNMENT RESERVES.... Preservation of capital, current income and liquidity
available from investing in direct obligations of the
U.S. Government and repurchase agreements relating to
such securities.
MERRILL LYNCH U.S. TREASURY MONEY FUND...... Preservation of capital, liquidity and current income
through investment exclusively in a diversified
portfolio of short-term marketable securities which
are direct obligations of the U.S. Treasury.
</TABLE>
40
<PAGE> 87
<TABLE>
<CAPTION>
<S> <C>
Class B, Class C and Class D Share Money Market Funds:
MERRILL LYNCH GOVERNMENT FUND............... A portfolio of Merrill Lynch Funds For Institutions
Series, a series fund, whose objective is to provide
current income consistent with liquidity and security
of principal from investment in securities issued or
guaranteed by the U.S. Government, its agencies and
instrumentalities and in repurchase agreements secured
by such obligations.
MERRILL LYNCH INSTITUTIONAL FUND............ A portfolio of Merrill Lynch Funds For Institutions
Series, a series fund, whose objective is to provide
maximum current income consistent with liquidity and
the maintenance of a high quality portfolio of money
market securities.
MERRILL LYNCH INSTITUTIONAL TAX-EXEMPT FUND. A portfolio of Merrill Lynch Funds For Institutions
Series, a series fund, whose objective is to provide
current income exempt from Federal income taxes,
preservation of capital and liquidity available from
investing in a diversified portfolio of short-term,
high quality municipal bonds.
MERRILL LYNCH TREASURY FUND................. A portfolio of Merrill Lynch Funds For Institutions
Series, a series fund, whose objective is to provide
current income consistent with liquidity and security
of principal from investment in direct obligations of
the U.S. Treasury and up to 10% of its total assets in
repurchase agreements secured by such obligations.
</TABLE>
DISTRIBUTIONS AND TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the
Internal Revenue Code of 1986, as amended (the "Code"). If it so
qualifies, in any taxable year in which it distributes at least 90% of its
taxable net income and 90% of its tax-exempt net income (see below), the
Fund (but not its shareholders) will not be subject to Federal income tax
to the extent that it distributes its net investment income and net
realized capital gains. The Trust intends to cause the Fund to distribute
substantially all of such income.
As discussed in the Fund's Prospectus, the Trust has established other
series in addition to the Fund (together with the Fund, the "Series").
Each Series of the Trust is treated as a separate corporation for Federal
income tax purposes. Each Series, therefore, is considered to be a
separate entity in determining its treatment under the rules for RICs
described in the Prospectus. Losses in one Series do not offset gains in
another Series, and the requirements (other than certain organizational
requirements) for qualifying for RIC status are determined at the Series
level rather than at the Trust level.
41
<PAGE> 88
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute, during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its
capital gains, determined, in general, on an October 31 year end, plus
certain undistributed amounts from previous years. The required
distributions, however, are based only on the taxable income of a RIC. The
excise tax, therefore, generally will not apply to the tax-exempt income
of a RIC, such as the Fund, that pays exempt-interest dividends.
The Trust intends to qualify the Fund to pay "exempt-interest
dividends" as defined in Section 852(b)(5) of the Code. Under such
section if, at the close of each quarter of the Fund's taxable year, at
least 50% of the value of the Fund's total assets consists of obligations
exempt from Federal income tax ("tax-exempt obligations") under Section
103(a) of the Code (relating generally to obligations of a state or local
governmental unit), the Fund shall be qualified to pay exempt-interest
dividends to its Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). Exempt-interest dividends are dividends
or any part thereof paid by the Fund which are attributable to interest on
tax-exempt obligations and designated by the Trust as exempt-interest
dividends in a written notice mailed to the Fund's shareholders within 60
days after the close of the Fund's taxable year. For this purpose, the
Fund will allocate interest from tax-exempt obligations (as well as
ordinary income, capital gains and tax preference items, discussed below)
among the Class A, Class B, Class C and Class D shareholders according to
a method (which it believes is consistent with the Commission's exemptive
order permitting the issuance and sale of multiple classes of shares) that
is based on the gross income allocable to Class A, Class B, Class C and
Class D shareholders during the taxable year, or such other method as the
Internal Revenue Service may prescribe. To the extent that the dividends
distributed to the Fund's shareholders are derived from interest income
exempt from Federal income tax under Code Section 103(a) and are properly
designated as exempt-interest dividends, they will be excludable from a
shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends are included, however, in determining the
portion, if any, of a person's social security benefits and railroad
retirement benefits subject to Federal income taxes. Interest on
indebtedness incurred or continued to purchase or carry shares of a RIC
paying exempt-interest dividends, such as the Fund, will not be deductible
by the investor for Federal income tax purposes to the extent attributable
to exempt-interest dividends, and such interest expense will not reduce
taxable income under the Connecticut income tax except to the extent
reflected in Federal adjusted gross income. Shareholders are advised to
consult their tax advisers with respect to whether exempt-interest
dividends retain the exclusion under Code Section 103(a) if a shareholder
would be treated as a "substantial user" or "related person" under
Code Section 147(a) with respect to property financed with the proceeds of
an issue of "industrial development bonds" or "private activity
bonds," if any, held by the Fund.
The portion of the Fund's exempt-interest dividends paid from interest
received by the Fund from Connecticut Municipal Bonds will not be subject
to the Connecticut income tax. Distributions from the Fund to shareholders
subject to the Connecticut corporation business tax will be included in
taxable income to the extent such distributions are treated as
exempt-interest or capital gains dividends. Shareholders subject to income
taxation in states other than Connecticut will realize a lower after-tax
rate of return than Connecticut 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 Connecticut income taxes. The Trust will allocate
exempt-interest dividends among Class A, Class B, Class C and Class D
shareholders for Connecticut income tax purposes based on a method similar
to that described above for Federal income tax purposes.
42
<PAGE> 89
To the extent that the Fund's distributions are derived from interest
on its taxable investments or from an excess of net short-term capital
gains over net long-term capital losses ("ordinary income dividends"),
such distributions are considered ordinary income for Federal income tax
purposes. Such distributions are not eligible for the dividends received
deduction for corporations. Distributions, if any, of net long-term
capital gains from the sale of securities or from certain transactions in
futures or options ("capital gain dividends") are taxable as long-term
capital gains for Federal income tax purposes, regardless of the length of
time the shareholder has owned Fund shares. Under the Revenue
Reconciliation Act of 1993, all or a portion of the Fund's gain from the
sale or redemption of tax-exempt obligations purchased at a market
discount will be treated as ordinary income rather than capital gain. This
rule may increase the amount of ordinary income dividends received by
shareholders. Distributions in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains
to such holder (assuming the shares are held as a capital asset). Any loss
upon the sale or exchange of Fund shares held for six months or less,
however, will be treated as long-term capital loss to the extent of
capital gain dividends received by the shareholder. In addition, such loss
will be disallowed to the extent of any exempt-interest dividends received
by the shareholder. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of
record on a specific date in one of such months, then such dividend will
be treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was
declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax
applies to interest received on "private activity bonds" issued after
August 7, 1986. Private activity bonds are bonds which, although
tax-exempt, are used for purposes other than those generally performed by
governmental units and which benefit non-governmental entities (e.g.,
bonds used for industrial development or housing purposes). Income
received on such bonds is classified as an item of "tax preference,"
which could subject investors in such bonds, including shareholders of the
Fund, to an alternative minimum tax. The Fund will purchase such "private
activity bonds," and the Trust will report to shareholders within 60 days
after the Fund's taxable year-end the portion of the Fund's dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that
corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings" (which
more closely reflect a corporation's economic income). Because an
exempt-interest dividend paid by the Fund will be included in adjusted
current earnings, a corporate shareholder may be required to pay
alternative minimum tax on exempt-interest dividends paid by the Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax
brackets of 36% and 39.6% for individuals and has created a graduated
structure of 26% and 28% for the alternative minimum tax applicable to
individual taxpayers. These rate increases may affect an individual
investor's after-tax return from an investment in the Fund as compared
with such investor's return from taxable investments.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's
basis in the Class D shares acquired will be the same as such
shareholder's basis in the Class B shares converted, and the holding
period of the acquired Class D shares will include the holding period for
the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales
charge
43
<PAGE> 90
paid to the Fund reduces any sales charge such shareholder would have owed
upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
Under certain provisions of the Code, some shareholders may be subject
to a 31% withholding tax on certain ordinary income dividends and on
capital gain dividends and redemption payments ("backup withholding").
Generally, shareholders subject to backup withholding will be those for
whom no certified taxpayer identification number is on file with the Trust
or who, to the Trust's knowledge, have furnished an incorrect number. When
establishing an account, an investor must certify under penalty of perjury
that such number is correct and that such investor is not otherwise
subject to backup withholding.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% 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 advisers 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.
Environmental Tax
The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed
without regard to the alternative tax net operating loss deduction and the
deduction for the Environmental Tax) at a rate of $12 per $10,000 (0.12%)
of alternative minimum taxable income in excess of $2,000,000. The
Environmental Tax is imposed for taxable years beginning after December
31, 1986, and before January 1, 1996. The Environmental Tax is imposed
even if the corporation is not required to pay an alternative minimum tax
because the corporation's regular income tax liability exceeds its minimum
tax liability. The Code provides, however, that a RIC, such as the Fund,
is not subject to the Environmental Tax. However, exempt-interest
dividends paid by the Fund that create alternative minimum taxable income
for corporate shareholders under the Code (as described above) may subject
corporate shareholders of the Fund to the Environmental Tax.
Tax Treatment of Options and Futures Transactions
The Fund may purchase or sell municipal bond index futures contracts
and interest rate futures contracts on U.S. Government securities
("financial futures contracts"). The Fund may also purchase and write
call and put options on such financial futures contracts. In general,
unless an election is available to the Fund or an exception applies, such
options and financial futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes
at the end of each taxable year, i.e., each such option or financial
futures contract will be treated as sold for its fair market value on the
last day of the taxable year, and any gain
44
<PAGE> 91
or loss attributable to Section 1256 contracts will be 60% long-term and
40% short-term capital gain or loss. Application of these rules to Section
1256 contracts held by the Fund may alter the timing and character of
distributions to shareholders.
Code Section 1092, which applies to certain "straddles," may affect
the taxation of the Fund's transactions in financial futures contracts and
related options. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing
transactions in financial futures contracts or the related options.
One of the requirements for qualification as a RIC is that less than
30% of the Fund's gross income be derived from gains from the sale or
other disposition of securities held for less than three months.
Accordingly, the Fund may be restricted in effecting closing transactions
within three months after entering into an option or financial futures
contract.
----------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and Connecticut 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 Connecticut tax laws. The Code and the
Treasury regulations, as well as the Connecticut tax laws, are subject to
change by legislative or administrative action either prospectively or
retroactively.
Shareholders are urged to consult their own tax advisers regarding the
availability of any exemptions from state or local taxes (other than those
imposed by Connecticut) and with specific questions as to Federal, state,
local or foreign taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return
and other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective
shareholders. Total return and yield and tax-equivalent yield figures are
based on the Fund's historical performance and are not intended to
indicate future performance. Average annual total return and yield are
determined separately for Class A, Class B, Class C and Class D shares in
accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based
on net investment income and any realized and unrealized capital gains or
losses on portfolio investments over such periods) that would equate the
initial amount invested to the redeemable value of such investment at the
end of each period. Average annual total return is computed assuming all
dividends and distributions are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including the maximum
sales charge in the case of Class A and Class D shares and the CDSC that
would be applicable to a complete redemption of the investment at the end
of the specified period in the case of the Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total
return and aggregate total return performance data, both as a percentage
and as a dollar amount based on a hypothetical $1,000 investment, for
various periods other than those noted below. Such data will be computed
as described above, except that (1) as required by the periods of the
quotations, actual annual, annualized or aggregate data, rather than
average annual data, may be quoted and (2) the maximum applicable sales
charges will not be included with respect to annual
45
<PAGE> 92
or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the
average rates of return reflect compounding of return; aggregate total
return data generally will be higher than average annual total return data
since the aggregate rates of return reflect compounding over a longer
period of time.
Set forth below is the total return, yield and tax-equivalent yield
information for Class A and Class B shares of the Fund for the period
indicated. Since Class B and Class C shares have not been issued prior to
the date of this Statement of Additional Information, performance
information concerning Class C and Class D shares is not yet provided.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
--------------------------------------------------------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
$1,000 investment the period $1,000 investment the period
----------------- ----------------- ----------------- -----------------
Average Annual Total Return (including maximum applicable sales charge)
<S> <C> <C> <C> <C>
July 1, 1994 (Inception) to July
31, 1994...................... -16.06% $ 985.70 -15.31% $ 986.40
Annual Total Return (excluding maximum applicable sales charge)
July 1, 1994 (Inception) to July
31, 1994...................... 2.68% $1,026.80 2.64% $1,026.40
Aggregate Total Return (including maximum applicable sales charge)
July 1, 1994 (Inception) to July
31, 1994...................... -1.43% $ 985.70 -1.36% $ 986.40
30 days ended on July 31, 1994.. 5.07% Yield 4.82%
30 days ended on July 31, 1994.. 7.04% Tax-Equivalent Yield* 6.69%
</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 take into account the CDSC and therefore may reflect greater
total return since, due to the reduced sales charge or the waiver of sales
charges, a lower amount of expenses is deducted.
GENERAL INFORMATION
Description of Shares
The Declaration of Trust provides that the Trust shall be comprised of
separate Series each of which will consist of a separate portfolio which
will issue separate shares. The Trust is presently comprised of the Fund,
Merrill Lynch Arizona Municipal Bond Fund, Merrill Lynch Arkansas
Municipal Bond Fund, Merrill Lynch Colorado Municipal Bond Fund, Merrill
Lynch Florida Municipal Bond Fund, Merrill Lynch Maryland Municipal Bond
Fund, Merrill Lynch Massachusetts Municipal Bond Fund, Merrill Lynch
Michigan Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund,
Merrill Lynch New Jersey Municipal Bond Fund, Merrill Lynch New Mexico
Municipal Bond Fund, Merrill Lynch New York Municipal Bond Fund, Merrill
Lynch
46
<PAGE> 93
North Carolina Municipal Bond Fund, Merrill Lynch Ohio Municipal Bond
Fund, Merrill Lynch Oregon Municipal Bond Fund, Merrill Lynch Pennsylvania
Municipal Bond Fund and Merrill Lynch Texas Municipal Bond Fund. The
Trustees are authorized to create an unlimited number of Series and, with
respect to each Series, to issue an unlimited number of full and
fractional shares of beneficial interest, par value $.10 per share, of
different classes and to divide or combine the shares into a greater or
lesser number of shares without thereby changing the proportionate
beneficial interests in the Series. Shareholder approval is not necessary
for the authorization of additional Series or classes of a Series of the
Trust. At the date of this Statement of Additional Information, the shares
of the Fund are divided into Class A, Class B, Class C and Class D shares.
Class A, Class B, Class C and Class D shares represent an interest in the
same assets of the Fund and are identical in all respects except that the
Class B, Class C and Class D shares bear certain expenses related to the
account maintenance and/or distribution of such shares and have exclusive
voting rights with respect to matters relating to such account maintenance
and/or distribution expenditures. The Trust has received an order ("the
Order") from the Commission permitting the issuance and sale of multiple
classes of shares. The Order permits the Trust to issue additional classes
of shares of any Series if the Board of Trustees deems such issuance to be
in the best interest of the Trust.
All shares of the Trust have equal voting rights, except that only
shares of the respective Series are entitled to vote on matters concerning
only that Series and, as noted above, Class B, Class C and Class D shares
will have exclusive voting rights with respect to matters relating to the
account maintenance and/or distribution expenses being borne solely by
such class. Each issued and outstanding share is entitled to one vote and
to participate equally in dividends and distributions declared by the Fund
and in the net assets of such Series upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities, except that, as
noted above, expenses related to the account maintenance and/or
distribution of the Class B, Class C and Class D shares will be borne
solely by such class. There normally will be no meeting of shareholders
for the purposes of electing Trustees unless and until such time as less
than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders may, in
accordance with the terms of the Declaration of Trust, cause a meeting of
shareholders to be held for the purpose of voting on the removal of
Trustees. Also, the Trust will be required to call a special meeting of
shareholders in accordance with the requirements of the 1940 Act to seek
approval of new management and advisory arrangements, of a material
increase in distribution fees or of a change in the fundamental policies,
objectives or restrictions of a Series.
The obligations and liabilities of a particular Series are restricted
to the assets of that Series and do not extend to the assets of the Trust
generally. The shares of each Series, when issued, will be fully paid and
nonassessable, have no preference, preemptive, conversion, exchange or
similar rights, and are freely transferable. Holders of shares of any
Series are entitled to redeem their shares as set forth elsewhere herein
and in the Prospectus. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Trust voting for the
election of Trustees can elect all of the Trustees if they choose to do so
and in such event the holders of the remaining shares would not be able to
elect any Trustees. No amendments may be made to the Declaration of Trust
without the affirmative vote of a majority of the outstanding shares of
the Trust.
The Manager provided the initial capital for the Fund by purchasing
10,000 shares of the Fund for $100,000. Such shares were acquired for
investment and can only be disposed of by redemption. The organizational
expenses of the Fund (estimated at approximately $47,600) were paid by the
Fund and are being amortized over a period not exceeding five years. The
proceeds realized by the Manager (or any subsequent holder) upon the
redemption of any of the shares initially purchased by it will be reduced
by the proportionate amount of
47
<PAGE> 94
unamortized organizational expenses which the number of shares redeemed
bears to the number of shares initially purchased. Such organizational
expenses include certain of the initial organizational expenses of the
Trust which have been allocated to the Fund by the Trustees. If additional
Series are added to the Trust, the organizational expenses will be
allocated among the Series in a manner deemed equitable by the Trustees.
Computation of Offering Price Per Share
An illustration of the computation of the offering price for Class A
and Class B shares of the Fund based on the Fund's net assets and number
of shares outstanding on July 31, 1994, is calculated as set forth below.
Information is not provided for Class C or Class D shares since no Class C
or Class D shares were publicly offered prior to the date of this
Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Class B
--------------------------
<S> <C> <C>
Net Assets ............................................................... $6,557,221 $16,888,747
==========================
Number of Shares Outstanding ............................................. 641,497 1,652,211
==========================
Net Asset Value Per Share (net assets divided by number of shares
outstanding) ........................................................... $ 10.22 $ 10.22
Sales Charge (for Class A shares: 4.00% of offering price (4.17% of net
asset value per share))* ............................................... .43 **
--------------------------
Offering Price ........................................................... $ 10.65 $ 10.22
==========================
</TABLE>
----------
* Rounded to the nearest one-hundredth percent; assumes maximum sales
charge is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares
- Deferred Sales Charge Alternatives - Class B and Class C Shares" in
the Prospectus and "Redemption of Shares - Deferred Sales Charges -
Class B Shares" herein.
Independent Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540,
has been selected as the independent auditors of the Fund. The selection
of independent auditors is subject to ratification by the shareholders of
the Fund. In addition, the employment of such auditors may be terminated
without any penalty by vote of a majority of the outstanding shares of the
Trust at a meeting called for the purpose of terminating such employment.
The independent auditors are responsible for auditing the annual financial
statements of the Fund.
Custodian
State Street Bank and Trust Company, P.O. Box 351, Boston,
Massachusetts 02101, acts as the custodian of the Fund's assets. The
custodian is responsible for safeguarding and controlling the Fund's cash
and securities, handling the delivery of securities and collecting
interest on the Fund's investments.
Transfer Agent
Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, 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.
48
<PAGE> 95
Legal Counsel
Brown & Wood, 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 of 1933 and the Investment Company Act of 1940, to which reference is
hereby made.
The Declaration of Trust establishing the Trust dated August 2, 1985,
a copy of which, together with all amendments thereto (the
"Declaration") is on file in the office of the Secretary of The
Commonwealth of Massachusetts, provides that the name "Merrill Lynch
Multi-State Municipal Series Trust" refers to the Trustees under the
Declaration collectively as Trustees, but not as individuals or
personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability; nor shall resort be had to
any such person's private property for the satisfaction of any obligation
or claim of the Trust but the "Trust Property" only shall be liable.
To the knowledge of the Fund, the following persons or entities owned
beneficially or of record 5% or more of the Fund's outstanding shares on
September 30, 1994.
Percent of
Name Address Fund
---- ------- ----------
Helen L. Dillon......................... 4 Smith Cove Mews 8.21%
Greenwich, CT 06830
John Fullmer............................ c/o CUC International 5.12%
707 Summer Street
Stamford, CT 06901
Anne N. Traynor......................... 3100 Bronson Road 5.70%
Fairfield, CT 06430
49
<PAGE> 96
APPENDIX I
ECONOMIC AND FINANCIAL INFORMATION CONCERNING CONNECTICUT
The information set forth below is derived from official statements
prepared in connection with the issuance of municipal bonds in Connecticut
and other sources that are generally available to investors. The
information is provided as general information intended to give a recent
historical description and is not intended to indicate future or
continuing trends affecting the financial or other positions of the State
of Connecticut (the "State"). The Trust has not independently verified
this information.
The Fund invests in obligations issued by or on behalf of the State,
its political subdivisions, agencies and instrumentalities and obligations
of other qualifying issuers, such as issuers located in Puerto Rico, the
Virgin Islands and Guam, each of which has unique credit characteristics.
Certain of these obligations may be entitled to the benefits of letters of
credit or similar credit enhancements. Accordingly, the information which
follows does not necessarily bear on the level of creditworthiness of the
obligations purchased by the Fund.
The State of Connecticut
Current Economic Outlook
Connecticut has a high level of personal income. According to figures
provided by the Bureau of Economic Analysis, the State's per capita income
for calendar year 1993 was $27,957, which was a 3.0% increase over per
capita income for calendar year 1992. Per capita income increased 20.7%
from 1988 to 1993 and 9.9% from 1990 to 1993, compared with national
increases of 25.1% and 11.3%, respectively, and New England increases of
19.1% and 10.1%, respectively. According to projections made by the U.S.
Department of Commerce, Connecticut is expected to continue to rank among
the highest in state per capita income.
Connecticut's economy is diverse, with manufacturing, services and
trade accounting for approximately 70% of total non-agricultural
employment. Manufacturing employment has been on a downward trend since
1984 while non-manufacturing employment has risen significantly.
Defense-related business plays an important role, and in recent years the
federal government has reduced defense-related spending. Total defense
contract awards in Connecticut have declined from approximately $6.1
billion in 1989 to approximately $2.9 billion in 1993. Sizable state
employers in this sector have announced substantial planned labor force
reductions over the next several years, and the overall effect of these
trends suggests that the defense sector is not as promising as it once
was. Non-agricultural employment overall has decreased from a peak of
1,674,800 in 1988 to a low of 1,526,200 in 1992 before increasing to
1,528,800 in 1993. Unemployment rates in Connecticut increased from 3.0%
in 1988 to 7.5% in 1992 before falling back to 6.6% in 1993. The overall
U.S. unemployment rate was 5.5%, 7.4% and 6.8% for such periods,
respectively.
State Indebtedness
In recent years, the State and its political subdivisions, agencies
and instrumentalities have been active issuers of debt obligations. At
October 1, 1994, the total net direct general obligation indebtedness of
the State was $5.9 billion, a significant increase from $2.87 billion at
June 30, 1990. Per capita net direct debt increased to $1,784 from $874
over this period. The General Assembly has empowered the State Bond
Commission to authorize a total of $10.18 billion in general obligation
bonds. Of this amount, $1.20 billion is authorized but unissued and a
further $1.87 billion is available for authorization.
50
<PAGE> 97
The State has also authorized or issued significant amounts of bonds
on which it has limited or contingent liability, including transportation
infrastructure bonds, bonds of the Connecticut Housing Finance Authority,
the Connecticut Development Authority, the Connecticut Higher Education
Supplemental Loan Authority, the Connecticut Resources Recovery Authority,
the Connecticut Health and Educational Facilities Authority, and bonds
issued for the benefit of the Cities of Bridgeport and West Haven.
Financial Condition
The State finances its operations primarily through the State's
general fund (the "General Fund"). The State derives over 70% of its
revenues from taxes, including sales and use taxes, corporation business
taxes, and income taxes imposed by the State. The remainder of the State's
revenues are derived from federal grants, miscellaneous fees, receipts and
transfers.
For fiscal years ended June 30, 1984 to 1987, the Comptroller's annual
report to the Governor of the State stated a surplus in the General Fund.
Beginning in 1988, the State had operating deficits, stated on the
modified cash basis of accounting used for statutory financial reporting.
Through fiscal year 1991, the total deficit was $965.7 million.
The legislation enacting the fiscal 1991-92 budget contained two key
provisions designed to balance the budget in fiscal year 1991-92 and to
address and eliminate the cumulative deficit. They were the imposition of
a broad based personal income tax and a five-year note financing. In
September and October, the State issued $965.7 million of general
obligation economic recovery notes with a final maturity of June 15, 1996
to finance the cumulative general fund deficit. The Comptroller's annual
report to the Governor for the fiscal year ended June 30, 1992 found the
General Fund to have a surplus of $110.2 million, which was used to retire
$110.1 million of the economic recovery notes.
The Comptroller's annual reports reported a General Fund operating
surplus of $113.5 million for the fiscal year ended June 30, 1993 and a
General Fund operating surplus of $19.7 million for the fiscal year ended
June 30, 1994.
The Comptroller is required to issue cumulative monthly financial
statements relating to the financial condition of the State. This report
compares revenues already received and expenditures already made to
estimated revenues to be collected and estimated expenditures to be made
during the balance of the year. The Comptroller's October 3, 1994 report
on the State's fiscal position as of June 30, 1995 estimates a General
Fund operating surplus of $21.0 million. On a GAAP basis, however, the
Comptroller estimated a cumulative projected deficit in the General Fund
as of June 30, 1995 of $531 million.
Ratings
Currently, Moody's Investors Service, Inc. rates Connecticut's general
obligation bonds Aa and Connecticut's outstanding commercial paper P-1 and
Standard and Poor's Corporation rates Connecticut's general obligation
bonds AA- and Connecticut's outstanding commercial paper A-1+.
Ratings reflect only the respective views of such organizations, and
an explanation of the significance of such ratings must be obtained from
the rating agency furnishing the same. There is no assurance that a
particular rating will continue for any given period of time or that any
such rating will not be revised downward or withdrawn entirely if, in the
judgment of the agency originally establishing the rating, circumstances
so warrant. A downward revision or withdrawal of such ratings, or either
of them, may have an effect on the market price of the Connecticut
Municipal Bonds in which the Fund invests.
51
<PAGE> 98
Other Issuers
Issuers other than the State, including the authorities referred to
above, municipal issuers in the State, and other issuers outside the
State, vary widely in terms of their financial condition and available
revenues. Certain of these issuers have experienced significant fiscal
stress, including notably the City of Bridgeport, which filed for
bankruptcy in mid-1991. (In 1992, the City stipulated to the dismissal of
its bankruptcy petition.) Financial problems of such issuers could of
course be reflected in the value of obligations of such issuers held by
the Fund.
52
<PAGE> 99
APPENDIX II
RATINGS OF MUNICIPAL BONDS
Description of Moody's Investors Service, Inc.'s ("Moody's") Municipal
Bond 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 edge".
Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure.
While the various protective elements are likely to
change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to
principal and interest are considered adequate, but
elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payment and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well
assured. Often the protection of interest and principal
payments may be very moderate and thereby not well
safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in
this class.
B Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present
elements of danger with respect to principal or
interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
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.
53
<PAGE> 100
Short-term Notes: The four ratings of Moody's for short-term notes are
MIG 1/VMIG1, MIG 2/VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes
"best quality . . . strong protection by established cash flows"; MIG
2/VMIG2 denotes "high quality" with ample margins of protection; MIG
3/VMIG3 notes are of "favorable quality . . . but . . . lacking the
undeniable strength of the preceding grades"; MIG 4/VMIG4 notes are of
"adequate quality . . . (p)rotection commonly regarded as required of an
investment security is present . . . there is specific risk."
Description of Moody's Corporate Bond Ratings
Excerpts from Moody's description of its corporate bond ratings: Aaa-
judged to be the best quality, carry the smallest degree of investment
risk; Aa-judged to be of high quality by all standards; A-possess many
favorable investment attributes and are to be considered as upper medium
grade obligations.
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection;
broad margins in earning coverage of fixed financial charges and high
internal cash generation; and well established access to a range of
financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
The effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement
for relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's Corporation's ("Standard & Poor's")
Municipal Debt Ratings
A Standard & Poor's municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
54
<PAGE> 101
The ratings are based on current information furnished by the issuer
or obtained by Standard & Poor's from other sources Standard & Poor's
considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn
as a result of changes in, or unavailability of, such information, or for
other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default-capacity and willingness of the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of
the obligation;
II. Nature of and provisions of the obligations;
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay
interest and repay principal and differs from the
higher-rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest
and repay principal although it is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in
higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category
than for debt in higher-rated categories.
BB, B, CCC, Debt rated "BB", "B", "CCC", "CC" and "C" is
CC, C regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal
in accordance with the terms of the obligations. "BB"
indicates the lowest degree of speculation and "CC"
the highest degree of speculation. While such debt will
likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major
exposures to adverse conditions.
CI The rating "CI" is reserved for income bonds on which
no interest is being paid.
D Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal
payments are not made on the date due even if the
applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during
such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or Minus (|m-): 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.
55
<PAGE> 102
Description of Standard & Poor's Corporate Bond Ratings
A Standard & Poor's corporate debt rating is a current assessment of
the creditworthiness of an obligor with respect to specific obligation.
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong. Debt
rated "AA" has a very strong capacity to pay interest and to repay
principal and differs from the highest rated issues only in small degree.
Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt of a higher rated
category. Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
The ratings from "AA" to "BBB" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's Commercial Paper Rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into four categories, ranging from
"A" for the highest quality obligations to "D" for the lowest. Ratings
are applicable to both taxable and tax-exempt commercial paper. Issues
assigned the highest rating are regarded as having the greatest capacity
for timely payment. Issues in this category are further refined with the
designation 1, 2 and 3 to indicate the relative degree of safety. The
three designations in the "A" category are as follows:
A-1 This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very
strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus
sign (+) designation.
A-2 Capacity for timely payment on issues with this
designation is strong. However, the relative degree of
safety is not as overwhelming as for issues designated
"A-1".
A-3 Issues carrying this designation have a satisfactory
capacity for timely payment. They are, however, somewhat
more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only
speculative capacity for timely payment.
C This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal
payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P
believes that such payments will be made during such
grace period.
A Commercial Paper Rating is not a recommendation to purchase or sell
a security. The ratings are based on current information furnished to
Standard & Poor's by the issuer and obtained by Standard & Poor's from
other sources it considers reliable. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of,
such information.
56
<PAGE> 103
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in 3 years or less will
likely receive a note rating. Notes maturing beyond 3 years will most
likely receive a long-term debt rating. The following criteria will be
used in making that assessment.
- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 A very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
Standard & Poor's may continue to rate note issues with a maturity
greater than three years in accordance with the same rating scale
currently employed for municipal bond ratings.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuers belongs to a group of securities that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date information to permit a judgment to
be formed; if a bond is called for redemption; or for other reasons.
Description of Fitch Investors Service, Inc.'s ("Fitch") Investment
Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The
ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and
prospective financial condition and operating performance of the issuer
and of any guarantor, as well as the economic and political environment
that might affect the issuer's future financial strength and credit
quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless otherwise
indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect
small differences in the degrees of credit risk.
57
<PAGE> 104
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt
nature or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to
be reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result
of changes in, or the unavailability of, information or for any other
reasons.
AAA Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal,
which is unlikely to be affected by reasonably
foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest
and repay principal is very strong, although not quite
as strong as bonds rated "AAA". Because bonds rated in
the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated
"F-1+".
A Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest
and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse
impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for
bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
Improving [Arrow Pointing Upward]
Stable [Arrow Pointing Left and Right]
Declining [Arrow Pointing Downward]
Uncertain [Arrow Pointing Upward and Downward]
Credit trend indicators are not predictions that any rating change
will occur, and have a longer-term time frame than issues placed on
FitchAlert.
58
<PAGE> 105
NR indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful
completion of a project or the occurrence of a specific
event.
Suspended A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate
for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is
called or refinanced and, at Fitch's discretion, when an
issuer fails to furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of
an occurrence that is likely to result in a rating
change and the likely direction of such change. These
are designated as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or
"Evolving," where ratings may be raised or lowered.
FitchAlert is relatively short-term, and should be
resolved within 12 months.
Description of Fitch Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The
ratings ("BB" to "C") represent Fitch's assessment of the likelihood
of timely payment of principal and interest in accordance with the terms
of obligation for bond issues not in default. For defaulted bonds, the
rating ("DDD" to "D") is an assessment of the ultimate recovery value
through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and
prospective financial condition and operating performance of the issuer
and any guarantor, as well as the economic and political environment that
might affect the issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability
to pay interest and repay principal may be affected over
time by adverse economic changes. However, business and
financial alternatives can be identified which could
assist the obligor in satisfying its debt service
requirements.
B Bonds are considered highly speculative. While bonds in
this class are currently meeting debt service
requirements, the probability of continued timely
payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable
business and economic activity throughout the life of
the issue.
CCC Bonds have certain identifiable characteristics which,
if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC Bonds are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
59
<PAGE> 106
DDD, DD Bonds are in default on interest and/or principal
and D payments. Such bonds are extremely speculative and
should be valued on the basis of their ultimate recovery
value in liquidation or reorganization of the obligor.
"DDD" represents the highest potential for recovery on
these bonds, and "D" represents the lowest potential
for recovery.
Plus (+) or Minus (|m-): Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the "DDD",
"DD", or "D" categories.
Description of Fitch Investment Grade Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term notes,
and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations
in a timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned
this rating are regarded as having the strongest degree
of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly
less in degree than issues rated "F-1+".
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but
the margin of safety is not as great as for issues
assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance
for timely payment is adequate; however, near-term
adverse changes could cause these securities to be rated
below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance
for timely payment and are vulnerable to near-term
adverse changes in financial and economic conditions.
D Default. Issues assigned this rating are in actual or
imminent payment default.
LOC The symbol "LOC" indicates that the rating is based on
a letter of credit issued by a commercial bank.
INS The symbol "INS" indicates that the rating is based on
an insurance policy or financial guaranty issued by an
insurance company.
60
<PAGE> 107
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Connecticut Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch Connecticut
Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust as
of July 31, 1994, the related statements of operations and changes in net
assets, and the financial highlights for the period July 1, 1994
(commencement of operations) to July 31, 1994. These financial statements
and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at July 31, 1994 by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Connecticut Municipal Bond Fund of Merrill Lynch Multi-State Municipal
Series Trust as of July 31, 1994, the results of its operations, the
changes in its net assets and the financial highlights for the period July
1, 1994 to July 31, 1994 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 29, 1994
61
<PAGE> 108
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Connecticut--69.3%
<S> <C> <C> <C> <C>
AA+ Aa $ 500 Connecticut State Clean Water Fund Revenue Bonds, 5.80% due 6/01/2016 $ 485
A1+ VMIG1 200 Connecticut State Development Authority, PCR, Refunding (Connecticut Light
& Power Co.), VRDN, Series A, 2.80% due 9/01/2028 (a) 200
Connecticut State Development Authority, Water Facilities, Revenue
Refunding Bonds:
AAA Aaa 1,000 (Bridgeport Hydraulic), Series A, AMT, 5.60% due 6/01/2028 (b) 922
AAA Aaa 1,150 (The Connecticut Water Company Project), Series A, 5.75% due 7/01/2028 (d) 1,086
A+ NR 500 (Stamford Water Company Project), 5.30% due 9/01/2028 433
AA- Aa 500 Connecticut State GO, Refunding, Series B, UT, 5.50% due 3/15/2012 480
Connecticut State Health and Educational Facilities Authority Revenue
Bonds:
AAA Aaa 1,000 (Bridgeport Hospital), Series A, 6.625% due 7/01/2018 (b) 1,052
NR Baa1 500 (Griffin Hospital), Series A, 5.75% due 7/01/2023 435
AAA Aaa 500 (New Britain Hospital), Series B, 6% due 7/01/2024 (d) 495
AAA Aaa 500 Refunding (Trinity College), Series D, 6.125% due 7/01/2024 (c) 500
AA- A1 2,000 (Saint Camillus Health Center Project), 6.25% due 11/01/2018 1,980
AAA Aaa 500 (Saint Francis Hospital and Medical Center), Series C, 5% due 7/01/2023 (c) 420
A NR 500 (Taft School Issue), Series B, 5.40% due 7/01/2020 441
NR A1 820 Connecticut State Higher Education, Supplemental Loan Authority Revenue
Bonds (Family Education Loan Program), Series A, AMT, 6.40% due 11/15/2014 823
AAA Aaa 2,500 Connecticut State Housing Finance Authority Revenue Bonds (Housing Mortgage
Finance Program), Series B, 6.75% due 11/15/2023 (b) 2,570
Connecticut State Special Assessment, Unemployment Compensation, Advanced
Fund Revenue Bonds:
A-1 VMIG1 300 Series B, VRDN, 2.95% due 11/01/2001 (a) 300
A-1+ P1 700 Series C, 3.85% due 7/01/1995 (c) 699
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch Connecticut
Municipal Bond Fund's portfolio holdings in the Schedule
of Investments, we have abbreviated the names of many
of the securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
CP Commercial Paper
GO General Obligation Bonds
PCR Pollution Control Revenue Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
62
<PAGE> 109
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Connecticut (concluded)
<S> <C> <C> <C> <C>
Connecticut State Special Tax Obligation Revenue Bonds (Transportation
Infrastructure):
A1 VMIG1 $ 500 Second Lien, Series 1, VRDN, 3.05% due 12/01/2010 (a) $ 500
AA- A1 500 Series C, 5% due 10/01/2013 438
AAA Aaa 500 South Central Connecticut, Regulation Water Authority, Water System Revenue
Bonds, 11th Series, 5.75% due 8/01/2012 (c) 486
Westport, Connecticut, GO, UT:
NR Aaa 580 5.75% due 6/15/2012 575
NR Aaa 250 5.75% due 6/15/2013 248
Woodstock, Connecticut, GO, UT (Bank Qualified) (c):
AAA Aaa 345 6% due 2/15/2011 350
AAA Aaa 340 6% due 2/15/2012 344
Puerto Rico--31.5%
A Baa1 2,500 Puerto Rico Commonwealth, GO, UT, 6.50% due 7/01/2023 2,577
A Baa1 2,500 Puerto Rico Commonwealth Highway and Transportation Authority, Highway
Revenue Refunding Bonds, Series V, 6.62% due 7/01/2012 2,608
Puerto Rico Electric Power Authority, Power Revenue Bonds:
A- Baa1 500 Series R, 6.25% due 7/01/2017 503
A- Baa1 500 Series T, 6% due 7/01/2016 489
A1+ P1 200 Puerto Rico Maritime Shipping Authority Revenue Bonds, CP, 2.65% due 8/04/1994 200
A+ A 1,000 Puerto Rico Telephone Authority, Revenue Refunding Bonds, Series L, 6.125%
due 1/01/2022 1,005
Total Investments (Cost--$23,160)--100.8% 23,644
Liabilities in Excess of Other Assets--(0.8%) (198)
-------
Net Assets--100.0% $23,446
=======
<FN>
(a)The interest rate is subject to change periodically based upon
the prevailing market rate. The interest rate shown is the rate in
effect at July 31, 1994.
(b)MBIA Insured.
(c)FGIC Insured.
(d)AMBAC Insured.
NR--Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
See Notes to Financial Statements.
</TABLE>
63
<PAGE> 110
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of July 31, 1994
<CAPTION>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$23,159,839) (Note 1a) $23,644,459
Cash 56,452
Receivables:
Beneficial interest sold $ 554,241
Securities sold 498,961
Interest 217,976
Investment adviser (Note 2) 16,461 1,287,639
-----------
Deferred organization expenses (Note 1e) 46,792
Prepaid registration fees and other assets (Note 1e) 5,053
-----------
Total assets 25,040,395
-----------
Liabilities: Payables:
Securities purchased 1,504,589
Dividends to shareholders (Note 1f) 20,790
Distributor (Note 2) 5,795 1,531,174
-----------
Accrued expenses and other liabilities 63,253
-----------
Total liabilities 1,594,427
-----------
Net Assets: Net assets $23,445,968
===========
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $ 64,150
Class B Shares of beneficial interest, $.10 par value, unlimited
number of shares authorized 165,221
Paid-in capital in excess of par 22,726,225
Undistributed realized capital gains--net 5,752
Unrealized appreciation on investments--net 484,620
-----------
Net assets $23,445,968
===========
Net Asset Class A--Based on net assets of $6,557,221 and 641,497 shares of
Value: beneficial interest outstanding $ 10.22
===========
Class B--Based on net assets of $16,888,747 and 1,652,211 shares of
beneficial interest outstanding $ 10.22
===========
See Notes to Financial Statements.
</TABLE>
64
<PAGE> 111
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Period July 1, 1994++ to
July 31, 1994
<S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 90,519
Income
(Note 1d):
Expenses: Registration fees (Note 1e) 9,891
Investment advisory fees (Note 2) 9,061
Distribution fees--Class B (Note 2) 5,795
Accounting services (Note 2) 1,813
Professional fees 1,700
Amortization of organization expenses (Note 1e) 808
Custodian fees 537
Transfer agent fees--Class B (Note 2) 317
Pricing fees 275
Transfer agent fees--Class A (Note 2) 115
Other 1,005
-----------
Total expenses before reimbursement 31,317
Reimbursement of expenses (Note 2) (25,522)
-----------
Total expenses after reimbursement 5,795
-----------
Investment income--net 84,724
-----------
Realized & Realized gain on investments--net 5,752
Unrealized Unrealized appreciation on investments--net 484,620
Gain on -----------
Investments Net Increase in Net Assets Resulting from Operations $ 575,096
- --Net (Notes ===========
1d & 3):
</TABLE>
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
For the Period July 1, 1994++ to
Increase (Decrease) in Net Assets: July 31, 1994
<S> <C> <C>
Operations: Investment income--net $ 84,724
Realized gain on investments--net 5,752
Unrealized appreciation on investments--net 484,620
-----------
Net increase in net assets resulting from operations 575,096
-----------
Dividends to Investment income--net:
Shareholders Class A (26,747)
(Note 1f): Class B (57,977)
-----------
Net decrease in net assets resulting from dividends to shareholders (84,724)
-----------
Beneficial Net increase in net assets derived from beneficial interest transactions 22,855,596
Interest -----------
Transactions
(Note 4):
Net Assets: Total increase in net assets 23,345,968
Beginning of period 100,000
-----------
End of period $23,445,968
===========
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
65
<PAGE> 112
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period July 1, 1994++
to July 31, 1994
Increase (Decrease) in Net Asset Value: Class A Class B
<S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 10.00
Operating ----------- -----------
Performance: Investment income--net .05 .04
Realized and unrealized gain on investments--net .22 .22
----------- -----------
Total from investment operations .27 .26
----------- -----------
Less dividends:
Investment income--net (.05) (.04)
----------- -----------
Total dividends (.05) (.04)
----------- -----------
Net asset value, end of period $ 10.22 $ 10.22
=========== ===========
Total Based on net asset value per share 2.68%+++ 2.64%+++
Investment =========== ===========
Return:**
Ratios to Expenses, net of reimbursement and excluding distribution fees -- --
Average =========== ===========
Net Assets: Expenses, net of reimbursement -- .50%*
=========== ===========
Expenses 1.54%* 2.04%*
=========== ===========
Investment income--net 5.48%* 5.00%*
=========== ===========
Supplemental Net assets, end of period (in thousands) $ 6,557 $ 16,889
Data: =========== ===========
Portfolio turnover 3.07% 3.07%
=========== ===========
++Commencement of Operations.
+++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
66
<PAGE> 113
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Connecticut Municipal Bond Fund (the "Fund") is part
of Merrill Lynch Multi-State Municipal Series Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940 as a
non-diversified, open-end management investment company. Prior to
commencement of operations on July 1, 1994, the Fund had no
operations other than those relating to organizational matters and
the issuance of 5,000 Class A Shares of beneficial interest and
5,000 Class B Shares of beneficial interest of the Fund to Fund
Asset Management, L.P. ("FAM") for $100,000. The Fund offers both
Class A and Class B Shares. Class A Shares are sold with a front-end
sales charge. Class B Shares may be subject to a contingent deferred
sales charge. Both classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and
conditions, except that Class B Shares bear certain expenses related
to the distribution of such shares and have exclusive voting rights
with respect to matters relating to such distribution expenditures.
The following is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of investments--Municipal bonds and other portfolio
securities in which the Fund invests are traded primarily in the
over-the-counter municipal bond and money markets and are valued at
the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers
that make markets in the securities. Financial futures contracts and
options thereon, which are traded on exchanges, are valued at their
settlement prices as of the close of such exchanges. Options, which
are traded on exchanges, are valued at their last sale price as of
the close of such exchanges or, lacking any sales, at the last
available bid price. Short-term investments with a remaining
maturity of sixty 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
Board of Trustees of the Trust, including valuations furnished by a
pricing service retained by the Trust, which may utilize a matrix
system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Trust under the
general supervision of the Trustees.
(b) Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period beginning with the commencement
of operations. Prepaid registration fees are charged to expense as
the related shares are issued.
(f) Dividends and distributions--Dividends from net investment income
are declared daily and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
67
<PAGE> 114
NOTES TO FINANCIAL STATEMENTS (concluded)
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM.
Effective January 1, 1994, the investment advisory business of FAM
was reorganized from a corporation to a limited partnership. Both
prior to and after the reorganization, ultimate control of FAM was
vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general
partner of FAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of ML & Co. The limited partners are ML &
Co. and Fund Asset Management, Inc. ("FAMI"), which is also an
indirect wholly-owned subsidiary of ML & Co. The Fund has also
entered into Distribution Agreements and a Distribution Plan with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of Merrill Lynch Investment Management, Inc.
("MLIM"), which is also an indirect wholly-owned subsidiary of ML
&Co.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets at the following annual rates: 0.55%
of the Fund's average daily net assets not exceeding $500 million;
0.525% of the average daily net assets exceeding $500 million but
not exceeding $1.0 billion; and 0.50% of average daily net assets in
excess of $1 billion. For the period ended July 31, 1994, FAM earned
fees of $9,061, all of which was voluntarily waived. FAM also
reimbursed the Fund for additional expenses of $16,461.
Pursuant to a distribution plan (the "Distribution Plan") adopted by
the Fund in accordance with Rule 12b-1 under the Investment Company
Act of 1940, the Fund pays the Distributor ongoing account
maintenance and distribution fees which are accrued daily and paid
monthly at the annual rates of 0.25% and 0.25%, respectively, of the
average daily net assets of the Class B Shares of the Fund. Pursuant
to a sub-agreement with the Distributor, Merrill Lynch also provides
account maintenance and distribution services to the Fund. The
ongoing account maintenance fee compensates the Distributor and
Merrill Lynch for providing account maintenance services to Class B
shareholders. As authorized by the Plan, the Distributor has entered
into an agreement with Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), an affiliate of ML & Co., which provides for the
compensation of MLPF&S for providing distribution-related services
to the Fund. For the period ended July 31, 1994, MLFD earned
underwriting discounts of $627, and MLPF&S earned dealer concessions
of $77,812 on sales of the Fund's Class A Shares.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, FAMI, PSI, MLFD, MLIM, FDS, MLPF&S, and/or ML &
Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period ended July 31, 1994 were $21,750,595 and $496,335,
respectively.
Net realized and unrealized gains (losses) as of July 31, 1994 were
as follows:
Unrealized
Realized Gains
Gains (Losses)
Long-term investments $ 5,740 $ 485,922
Short-term investments 12 (1,302)
----------- -----------
Total $ 5,752 $ 484,620
=========== ===========
As of July 31, 1994, net unrealized appreciation for Federal income
tax purposes aggregated $484,620, of which $485,922 related to
appreciated securities and $1,302 related to depreciated securities.
The aggregate cost of investments at July 31, 1994 for Federal
income tax purposes was $23,159,839.
68
<PAGE> 115
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest
transactions was $22,855,596 for the period ended July 31, 1994.
Transactions in shares of beneficial interest for Class A and Class
B Shares were as follows:
Class A Shares for the Period Dollar
July 1, 1994++ to July 31, 1994 Shares Amount
Shares sold 635,204 $ 6,356,790
Shares issued to shareholders
in reinvestment of dividends 1,293 13,068
----------- -----------
Total issued 636,497 6,369,858
----------- -----------
Net increase 636,497 $ 6,369,858
=========== ===========
++Prior to July 1, 1994 (commencement of operations), the Fund
issued 5,000 shares to FAM for $50,000.
Class B Shares for the Period Dollar
July 1, 1994++ to July 31, 1994 Shares Amount
Shares sold . 1,702,575 $17,045,224
Shares issued to shareholders
in reinvestment of dividends. 2,852 28,836
----------- -----------
Total issued 1,705,427 17,074,060
Shares redeemed (58,216) (588,322)
----------- -----------
Net increase 1,647,211 $16,485,738
=========== ===========
++Prior to July 1, 1994 (commencement of operations), the Fund
issued 5,000 shares to FAM for $50,000.
69
<PAGE> 116
<TABLE>
<CAPTION>
<S> <C>
====================================================== ======================================================
TABLE OF CONTENTS Statement of
Additional Information
Page
----
Investment Objective and Policies........... 2
Description of Municipal Bonds and Temporary
Investments............................... 5
Description of Municipal Bonds.......... 5
Description of Temporary Investments ... 6
Repurchase Agreements .................. 8
Financial Futures Transactions and (Art to come)
Options............................... 8
Investment Restrictions..................... 12
Management of the Trust..................... 16
Trustees and Officers................... 16
Management and Advisory Arrangements.... 18
Purchase of Shares.......................... 19
Initial Sales Charge Alternatives-Class
A and Class D Shares.................. 20
Reduced Initial Sales Charges-Class A
and Class D Shares.................... 20 MERRILL LYNCH
Distribution Plans...................... 23 CONNECTICUT
Limitations on the Payment of MUNICIPAL BOND
Deferred Sales Charges................ 23 FUND
Redemption of Shares........................ 24
Deferred Sales Charge-Class B Shares.... 24 MERRILL LYNCH MULTI-STATE
Portfolio Transactions...................... 25 MUNICIPAL SERIES TRUST
Determination of Net Asset Value............ 26
Shareholder Services........................ 27
Investment Account...................... 27
Automatic Investment Plans.............. 27
Automatic Reinvestment of Dividends and
Capital Gains Distributions........... 28
Systematic Withdrawal Plans-Class A and
Class D Shares........................ 28
Exchange Privilege...................... 29
Distributions and Taxes..................... 41 October 21, 1994
Environmental Tax....................... 44
Tax Treatment of Options and Futures Distributor:
Transactions.......................... 44 Merrill Lynch
Performance Data............................ 45 Funds Distributor, Inc.
General Information......................... 46
Description of Shares................... 46
Computation of Offering Price Per Share. 48
Independent Auditors.................... 48
Custodian............................... 48
Transfer Agent.......................... 48
Legal Counsel........................... 49
Reports to Shareholders................. 49
Additional Information.................. 49
Appendix I-Economic and Financial
Information
Concerning Connecticut.................... 50
Appendix II-Ratings of Municipal Bonds...... 53
Independent Auditors' Report................ 61
Financial Statements........................ 62
Code # 18111-1094
====================================================== ======================================================
</TABLE>
<PAGE> 117
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
Contained in Part A:
Financial Highlights for the period July 1, 1994 (commencement of operations)
to July 31, 1994.
Contained in Part B:
Schedule of Investments, as of July 31, 1994.
Statement of Assets and Liabilities, as of July 31, 1994.
Statement of Operations for the period July 1, 1994 (commencement of
operations) to July 31, 1994.
Statement of Changes in Net Assets for the period July 1, 1994 (commencement
of operations) to July 31, 1994.
Financial Highlights for the period July 1, 1994 (commencement of operations)
to July 31, 1994.
Notes to Financial Statements.
(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 October 3, 1988. (b)
(c) -Instrument establishing Merrill Lynch Connecticut Municipal Bond Fund
(the "Fund") as a series of Registrant. (d)
(d) -Instrument establishing Class A and Class B shares of beneficial
interest of the Fund. (d)
2 -By-Laws of Registrant. (e)
3 -None.
4(a) -Portions of the Declaration of Trust, Establishment and Designation
and By-Laws of the Registrant defining the rights of holders of the
Fund as a series of the Registrant. (c)
(b) -Specimen share certificates for Class A and Class B shares. (d)
5(a) -Management Agreement between Registrant and Fund Asset Management,
L.P. (d)
(b) -Supplement to Management Agreement between Registrant and Fund Asset
Management, L.P.
6(a)(1) -Class A Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc. (d)
(a)(2) -Form of Revised Class A Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.(including Form of
Selected Dealers Agreement).
(b) -Class B Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc. (d)
(c) -Form of Class C Shares Distribution Agreement between Registrant and
Merill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).
(d) -Form of Class D Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement.)
</TABLE>
C-1
<PAGE> 118
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<S> <C>
(e) -Letter Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc., dated March 31, 1993, in connection with the
Merrill Lynch Mutual Fund Adviser Program. (d)
7 -None.
8 -Form of Custody Agreement between Registrant and State Street Bank and
Trust Company. (e)
9 -Amended Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc. (d)
10 -None.
11 -Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 -None.
13 -Certificate of Fund Asset Management, L.P. (d)
14 -None.
15(a) -Class B Shares Distribution Plan and Class B Shares Distribution Plan
Sub-Agreement of the Registrant. (d)
(b) -Form of Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of the Registrant.
(c) -Form of Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of the Registrant.
16(a) -Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class A shares
(b) -Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class B Shares.
17(a) -Financial Data Schedule for Class A Shares.
(b) -Financial Data Schedule for Class B Shares.
</TABLE>
----------
(a) Filed on August 6, 1985 as an Exhibit to the Registration Statement on Form
N-1A (File No. 2-99473) under the Securities Act of 1933 of Merrill Lynch
New York Municipal Bond Fund, a series of the Registrant.
(b) Filed on October 11, 1988 as an Exhibit to Post-Effective Amendment No. 4
to the Registration Statement on Form N-1A (File No. 2-99473) under the
Securities Act of 1933 of Merrill Lynch New York Municipal Bond Fund, a
series of the Registrant.
(c) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's Declaration of Trust, previously filed as
Exhibit 1(a) to the Registration Statement referred to in paragraph (a)
above; to the Certificates of Establishment and Designation establishing
the Fund as a series of the Registrant and establishing Class A and Class B
shares of beneficial interest of the Fund, which will be filed as Exhibits
1(c) and 1(d), respectively, to the Registration Statement; and to Articles
I, V and VI of the Registrant's By-Laws, previously filed as Exhibit 2 to
the Registration Statement referred to in paragraph (a) above.
(d) Filed on May 16, 1994 as an Exhibit to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A (File No. 33-48693) under
the Securities Act of 1933.
(e) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 3
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended, relating to shares of the Merrill Lynch
Minnesota Municipal Bond Fund series of the Registrant
(File No. 33-44734).
Item 25. Persons Controlled by or under Common Control with Registrant.
The Registrant is not controlled by or under common control with any
person.
C-2
<PAGE> 119
Item 26. Number of Holders of Securities.
<TABLE>
<CAPTION>
Number of
Record Holders at
Title of Class September 30, 1994
-------------- ------------------
<S> <C>
Class A shares of beneficial interest, par value $0.10 per share...................... 5
Class A shares of beneficial interest, par value $0.10 per share...................... 5
Class B shares of beneficial interest, par value $0.10 per share ..................... 22
Class C shares of beneficial interest, par value $0.10 per share...................... 0
Class D shares of beneficial interest, par value $0.10 per share...................... 0
</TABLE>
Item 27. Indemnification.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a shareholder,
creditor or otherwise) against all liabilities and expenses (including amounts
paid in satisfaction of judgments, in compromise, as fines and penalties and as
counsel fees) reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he may be involved or with which he may be threatened, while in office
or thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as to
any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of good faith and reasonable belief as
to the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no person may satisfy any right in indemnity or
reimbursement granted herein or in Section 5.1 or to which he may be otherwise
entitled except out of the property of the Trust, and no Shareholder shall be
personally liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in connection
with indemnification under this Section 5.3, provided that the indemnified
person shall have given a written undertaking to reimburse the Trust in the
event it is subsequently determined that he is not entitled to such
indemnification."
Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended may be concerned, such
payments will be made only on the following conditions: (i) the advances must be
limited to amounts used, or to be used, for the preparation or presentation of a
defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only upon receipt of a written promise by,
or on behalf of, the recipient to repay that amount of the advance which exceeds
the amount to which it is ultimately determined that he is entitled to receive
from the Registrant by reason of indemnification; and (iii) (a) such promise
must be secured by a surety bond, other suitable insurance or an equivalent form
of security which assures that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance, or (b) a majority of a quorum
of the Registrant's disinterested, non-party Trustees, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts that the recipient of the advance ultimately will be found
entitled to indemnification.
C-3
<PAGE> 120
In Section 9 of the Distribution Agreements relating to the securities
being offered hereby, the Registrant agrees to indemnify the Distributor and
each person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 ("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") acts as the investment adviser
for the following registered investment companies: Apex Municipal Fund, Inc.,
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Emerging Tigers Fund, Inc., Financial Institutions Series
Trust, Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal
Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Municipal Series Trust, Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World
Income Fund, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund
II, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund,
Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund,
Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II, Inc.,
Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus
MuniNew York Holdings, Inc. and Worldwide DollarVest Fund, Inc. Merrill Lynch
Asset Management, L.P. ("MLAM"), an affiliate of the Manager, acts as the
investment adviser for the following companies: Convertible Holdings, Inc.,
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset
Income Fund, Inc., Merrill Lynch Balanced Fund for Investment and Retirement,
Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund,
Inc.,
C-4
<PAGE> 121
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund,
Inc., Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Series Trust, Merrill Lynch Senior Floating Rate Fund, Inc.,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc. The address of each of these investment companies is Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Institutional Intermediate Fund
is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The
address of the Manager, MLAM, Merrill Lynch Funds Distributor, Inc. ("MLFD"),
Princeton Services, Inc. ("Princeton Services") and Princeton Administrators,
L.P. is also Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch &
Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey Street,
New York, New York 10281. The address of Financial Data Services, Inc. is 4800
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
December 31, 1991 for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the preceding paragraph and also hold the
same positions with all or substantially all of the investment companies advised
by MLAM as they do with those advised by the Manager, and Messrs. Durnin,
Giordano, Harvey, Hewitt, Kirstein and Monagle and Ms. Griffin are directors or
officers of one or more of such companies.
Officers and Partners of FAM are set forth as follows:
<TABLE>
<CAPTION>
Other Substantial
Position(s) with Business, Profession,
Name the Manager Vocation or Employment
---- ----------------- ----------------------
<S> <C> <C>
ML & Co....................... Limited Partner Financial Services Holding Company
Fund Asset Management,
Inc. ....................... Limited Partner Investment Advisory Services
Princeton Services ........... General Partner General Partner of MLAM
Arthur Zeikel................. President President of MLAM; President and Director of
Princeton Services; Director of MLFD; Executive
Vice President of ML & Co.; Executive Vice
President of Merrill Lynch
</TABLE>
C-5
<PAGE> 122
<TABLE>
<CAPTION>
Other Substantial
Position(s) with Business, Profession,
Name the Manager Vocation or Employment
---- ---------------- ----------------------
<S> <C> <C>
Terry K. Glenn................ Executive Vice President Executive Vice President of MLAM; Executive Vice
President and Director of Princeton Services;
President and Director of MLFD; President of
Princeton Administrators, L.P.
Bernard J. Durnin............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Vincent R. Giordano........... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Elizabeth Griffin............. Senior Vice President Senior Vice President of MLAM
Norman R. Harvey.............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
N. John Hewitt................ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Philip L. Kirstein............ Senior Vice President, Senior Vice President, General Counsel and
General Counsel and Secretary of MLAM; Senior Vice President, General
Secretary Counsel, Director and Secretary of Princeton
Services; Director of MLFD
Ronald M. Kloss............... Senior Vice President and Senior Vice President and Controller of MLAM;
Controller Senior Vice President and Controller of Princeton
Services
Joseph T. Monagle, Jr. ....... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Gerald M. Richard............. Senior Vice President and Senior Vice President and Treasurer of MLAM;
Treasurer Senior Vice President and Treasurer of Princeton
Services; Vice President and Treasurer of MLFD
Richard L. Rufener............ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Vice President of
MLFD
Ronald L. Welburn............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Anthony Wiseman............... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>
Item 29. Principal Underwriters.
(a) MLFD acts as the principal underwriter for the Registrant and, for each of
the open-end investment companies referred to in the first paragraph of
Item 28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust,
CMA Tax-Exempt Fund, CMA Treasury Fund, Convertible Holdings, Inc., The
Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Emerging Tigers Fund, Inc.,
C-6
<PAGE> 123
Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc.,
MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II, Inc.,
Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus
MuniNewYork Holdings, Inc. and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Breen, Crook, Graczyk, Fatseas and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2646.
<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
Arthur Zeikel................. Director President and Trustee
Philip L. Kirstein............ Director None
William E. Aldrich............ Senior Vice President None
Robert W. Crook............... Senior Vice President None
Michael J. Brady.............. Vice President None
William M. Breen.............. Vice President None
Kevin P. Boman................ Vice President None
Sharon Creveling.............. Vice President and Assistant Treasurer None
Mark A. DeSario............... Vice President None
James T. Fatseas.............. Vice President None
Stanley Graczyk............... Vice President None
Debra W. Landsman-Yaros....... Vice President None
Michelle T. Lau............... Vice President None
Gerald M. Richard............. Vice President and Treasurer Treasurer
Richard L. Rufener............ Vice President None
Salvatore Venezia............. Vice President None
William Wasel................. Vice President None
Robert Harris................. Secretary None
</TABLE>
(c) Not applicable.
C-7
<PAGE> 124
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder are maintained at the offices of the Registrant and Financial Data
Services, Inc.
Item 31. Management Services.
Other than as set forth under the caption "Management of the Trust-
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Trust- Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management-related service contract.
C-8
<PAGE> 125
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 Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Township of Plainsboro, and State of New Jersey, on the
14th day of October, 1994.
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
(Registrant)
By: /s/ ARTHUR ZEIKEL
----------------------------------------------
(Arthur Zeikel, President)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
----------- ----- ----
<S> <C> <C>
/s/ ARTHUR ZEIKEL President and Trustee October 14, 1994
- ------------------------------------ (Principal Executive Officer)
(Arthur Zeikel)
/s/ GERALD M. RICHARD Treasurer (Principal October 14, 1994
- ------------------------------------ Financial and Accounting Officer)
(Gerald M. Richard)
KENNETH S. AXELSON* Trustee
- ------------------------------------
(Kenneth S. Axelson)
HERBERT I. LONDON* Trustee
- ------------------------------------
(Herbert I. London)
ROBERT R. MARTIN* Trustee
- ------------------------------------
(Robert R. Martin)
JOSEPH L. MAY* Trustee
-----------------------------------
(Joseph L. May)
ANDRE F. PEROLD* Trustee
- ------------------------------------
(Andre F. Perold)
*By: /s/ ARTHUR ZEIKEL October 14, 1994
---------------------------------
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>
C-9
<PAGE> 126
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
[S] [C]
5(b) -Supplement to Management Agreement between Registrant
and Fund Asset Management, L.P.
6(a)(2) -Form of Revised Class A Shares Distribution Agreement
between Registrant and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers
Agreement).
(c) -Form of Class C Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.
(including Form of Selected Dealers Agreement).
(d) -Form of Class D Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.
(including Form of Selected Dealers Agreement).
11 -Consent of Deloitte & Touche LLP, independent auditors
for Registrant.
15(b) -Form of Class C Shares Distribution Plan and Class C
Shares Distribution Plan Sub-Agreement.
(c) -Form of Class D Shares Distribution Plan and Class D
Shares Distribution Plan Sub-Agreement.
16(a) -Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating
to Class A shares
(b) -Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating
to Class B Shares.
17(a) -Financial Data Schedule for Class A Shares.
(b) -Financial Data Schedule for Class B Shares.
<PAGE> 127
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR submission file due to ASCII-incompatibility and cross-references
this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<PAGE> 1
Exhibit 5(b)
SUPPLEMENT TO INVESTMENT ADVISORY AGREEMENT
WITH
FUND ASSET MANAGEMENT
As of January 1, 1994 Fund Asset Management was reorganized as a limited
partnership, formally known as Fund Asset Management, L.P. ("FAM"). The general
partner of FAM is Princeton Services, Inc. and the limited partners are Fund
Asset Management, Inc. and Merrill Lynch & Co, Inc. Pursuant to Rule 202(a)(1)-1
under the Investment Advisors Act of 1940 and Rule 2a-6 under the Investment
Company Act of 1940 such reorganization did not constitute an assignment of this
investment advisory agreement since it did not involve a change of control or
management of the investment adviser. Pursuant to the requirements of Section
205 of the Investment Advisers Act of 1940, however, Fund Asset Management
hereby supplements this investment advisory agreement by undertaking to advise
you of any change in the membership of the partnership within a reasonable time
after any such change occurs.
By /s/ Arthur Zeikel
------------------
Dated: January 3, 1994
<PAGE> 1
CLASS A SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____ day of October, 1994, between
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST, a Massachusetts
business trust (the "Trust"), and MERRILL LYNCH FUNDS
DISTRIBUTOR, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Trust is registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"),
as an open-end investment company, and it is affirmatively in the
interest of the Trust to offer its shares for sale continuously;
and
WHEREAS, the Trustees of the Trust (the "Trustees") are
authorized to establish separate series (the "Series") relating
to separate portfolios of securities, each of which will offer
separate classes of shares of beneficial interest, par value
$0.10 per share (collectively referred to as "shares") to
selected groups of purchasers; and
WHEREAS, the Trustees have established and designated the
Merrill Lynch [State] Municipal Bond Fund (the "Fund") as a
series of the Trust; and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either
directly to purchasers or through other securities dealers; and
<PAGE> 2
WHEREAS, the Trust and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Class A shares of beneficial interest in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Trust
hereby appoints the Distributor as the principal underwriter and
distributor of the Trust to sell Class A shares of beneficial
interest in the Fund (sometimes herein referred to as "Class A
shares") to eligible investors (as defined below) and hereby
agrees during the term of this Agreement to sell Class A shares
of the Fund to the Distributor upon the terms and conditions
herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Trust to act as
principal underwriter and distributor, except that:
(a) The Trust may, upon written notice to the Distributor,
from time to time designate other principal underwriters and dis-
tributors of Class A shares with respect to areas other than the
United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
Agreement to sell Class A shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full
effect until terminated in accordance with the other provisions
hereof.
<PAGE> 3
(b) The exclusive right granted to the Distributor
to purchase Class A shares from the Trust shall not apply to
Class A shares issued in connection with the merger or
consolidation of any other investment company or personal
holding company with the Trust or the acquisition by purchase
or otherwise of all (or substantially all) the assets or the
outstanding Class A shares of any such company by the Trust.
(c) Such exclusive right also shall not apply to Class A
shares issued pursuant to reinvestment of dividends or capital
gains distributions.
(d) Such exclusive right also shall not apply to Class A
shares issued pursuant to any conversion, exchange or
reinstatement privilege afforded redeeming shareholders or to any
other Class A shares as shall be agreed between the Trust and the
Distributor from time to time.
Section 3. Purchase of Class A shares from the Trust.
(a) The Distributor shall have the right to buy from the
Trust the Class A shares needed, but not more than the Class A
shares needed (except for clerical errors in transmission) to
fill unconditional orders for Class A shares of the Fund placed
with the Distributor by eligible investors or securities dealers.
Investors eligible to purchase Class A shares shall be those
persons so identified in the currently effective prospectus and
statement of additional information of the Fund (the "prospectus"
and "statement of additional information", respectively) under
the Securities Act of 1933, as amended (the "Securities Act"),
<PAGE> 4
relating to such Class A shares ("eligible investors"). The
price which the Distributor shall pay for the Class A shares so
purchased from the Trust shall be the net asset value, determined
as set forth in Section 3(d) hereof, used in determining the
public offering price on which such orders were based.
(b) The Class A shares are to be resold by the Distributor
to eligible investors at the public offering price, as set forth
in Section 3(c) hereof, or to securities dealers having
agreements with the Distributor upon the terms and conditions set
forth in Section 7 hereof.
(c) The public offering price(s) of the Class A shares,
i.e., the price per share at which the Distributor or selected
dealers may sell Class A shares to eligible investors, shall be
the public offering price as set forth in the prospectus and
statement of additional information relating to such Class A
shares, but not to exceed the net asset value at which the
Distributor is to purchase the Class A shares, plus a sales
charge not to exceed 4.00% of the public offering price (4.17% of
the net amount invested), subject to reductions for volume
purchases. Class A shares may be sold to certain Trustees,
officers and employees of the Trust, directors and employees of
Merrill Lynch & Co., Inc. and its subsidiaries, and to certain
other persons described in the prospectus and statement of
additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the
prospectus and statement of additional information. If the
<PAGE> 5
public offering price does not equal an even cent, the public
offering price may be adjusted to the nearest cent. All payments
to the Trust hereunder shall be made in the manner set forth in
Section 3(f).
(d) The net asset value of Class A shares shall be deter-
mined by the Trust or any agent of the Trust in accordance with
the method set forth in the prospectus and statement of
additional information of the Fund and guidelines established by
the Trustees.
(e) The Trust shall have the right to suspend the sale of
its Class A shares at times when redemption is suspended pursuant
to the conditions set forth in Section 4(b) hereof. The Trust
shall also have the right to suspend the sale of its Class A
shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some
other event, which, in the judgment of the Trust, makes it
impracticable or inadvisable to sell the Class A shares.
(f) The Trust, or any agent of the Trust designated in
writing by the Trust, shall be promptly advised of all purchase
orders for Class A shares received by the Distributor. Any order
may be rejected by the Trust; provided, however, that the Trust
will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Class A shares from
eligible investors. The Trust (or its agent) will confirm orders
upon their receipt, will make appropriate book entries and, upon
<PAGE> 6
receipt by the Trust (or its agent) of payment therefor, will
deliver deposit receipts or certificates for such Class A shares
pursuant to the instructions of the Distributor. Payment shall
be made to the Trust in New York Clearing House funds. The
Distributor agrees to cause such payment and such instructions to
be delivered promptly to the Trust (or its agent).
Section 4. Repurchase or Redemption of Class A shares by
the Trust.
(a) Any of the outstanding Class A shares may be tendered
for redemption at any time, and the Trust agrees to repurchase or
redeem the Class A shares so tendered in accordance with its
obligations as set forth in Article VIII of its Declaration of
Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement
of additional information. The price to be paid to redeem or
repurchase the Class A shares shall be equal to the net asset
value calculated in accordance with the provisions of Section
3(d) hereof, less any contingent deferred sales charge ("CDSC"),
redemption fee or other charge(s), if any, set forth in the
prospectus and statement of additional information of the Fund.
All payments by the Trust hereunder shall be made in the manner
set forth below. The redemption or repurchase by the Trust of
any of the Class A shares purchased by or through the Distributor
will not affect the sales charge secured by the Distributor or
any selected dealer in the course of the original sale, except
that if any Class A shares are tendered for redemption or repur-
<PAGE> 7
chase within seven business days after the date of the confirma-
tion of the original purchase, the right to the sales charge
shall be forfeited by the Distributor and the selected dealer
which sold such Class A shares.
The Trust shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
the Distributor in New York Clearing House funds on or before the
seventh business day subsequent to its having received the notice
of redemption in proper form. The proceeds of any redemption of
shares shall be paid by the Trust as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall
be paid to or for the account of the shareholder, in each case in
accordance with the applicable provisions of the prospectus and
statement of additional information.
(b) Redemption of Class A shares or payment may be
suspended at times when the New York Stock Exchange is closed,
when trading on said Exchange is suspended, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Trust fairly to determine the value of the net assets of the
Fund, or during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Trust.
(a) The Trust shall furnish to the Distributor copies of
all information, financial statements and other papers which the
<PAGE> 8
Distributor may reasonably request for use in connection with the
distribution of Class A shares of the Fund, and this shall in-
clude, upon request by the Distributor, one certified copy of all
financial statements prepared for the Trust by independent public
accountants. The Trust shall make available to the Distributor
such number of copies of the prospectus and statement of addi-
tional information relating to the Fund as the Distributor shall
reasonably request.
(b) The Trust shall take, from time to time, but subject to
any necessary approval of the Class A shareholders, all necessary
action to fix the number of authorized Class A shares and such
steps as may be necessary to register the same under the Securi-
ties Act, to the end that there will be available for sale such
number of Class A shares as the Distributor may reasonably be
expected to sell.
(c) The Trust shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its Class
A shares for sale under the securities laws of such states as the
Distributor and the Trust may approve. Any such qualification
may be withheld, terminated or withdrawn by the Trust at any time
in its discretion. As provided in Section 8(c) hereof, the
expense of qualification and maintenance of qualification shall
be borne by the Trust. The Distributor shall furnish such
information and other material relating to its affairs and
activities as may be required by the Trust in connection with
such qualification.
<PAGE> 9
(d) The Trust will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of Class A shares of the Fund but shall not be
obligated to sell any specific number of Class A shares. The
services of the Distributor to the Trust hereunder are not to be
deemed exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other in-
vestment companies so long as the performance of its obligations
hereunder is not impaired thereby.
(b) In selling the Class A shares of the Fund, the Distri-
butor shall use its best efforts in all respects duly to conform
with the requirements of all Federal and state laws relating to
the sale of such securities. Neither the Distributor nor any
selected dealer, as defined in Section 7 hereof, nor any other
person is authorized by the Trust to give any information or to
make any representations, other than those contained in the
registration statement or related prospectus and statement of
additional information and any sales literature specifically
approved by the Trust.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Trust, for the confirmation of
sales to eligible investors and selected dealers, the collection
of amounts payable by eligible investors and selected dealers on
<PAGE> 10
such sales, and the cancellation of unsettled transactions, as
may be necessary to comply with the requirements of the National
Association of Securities Dealers, Inc. (the "NASD"), as such
requirements may from time to time exist.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into
selected dealers agreements with securities dealers of its choice
("selected dealers") for the sale of Class A shares and fix
therein the portion of the sales charge which may be allocated to
the selected dealers; provided that the Trust shall approve the
forms of agreements with dealers and the dealer compensation set
forth therein. Class A shares sold to selected dealers shall be
for resale by such dealers only at the public offering price(s)
set forth in the prospectus and statement of additional
information. The form of agreement with selected dealers to be
used during the continuous offering of the Class A shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer
and sell Class A shares only to such selected dealers as are mem-
bers in good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Trust shall bear all costs and expenses of the
Fund, including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any
required registration statements and/or prospectuses and
statements of additional information under the Investment Company
<PAGE> 11
Act, the Securities Act, and all amendments and supplements
thereto, and preparing and mailing annual and interim reports and
proxy materials to Class A shareholders (including but not
limited to the expense of setting in type any such registration
statements, prospectuses, statements of additional information,
annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial con-
sultants. In addition, after the prospectuses, statements of
additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of Class A
shares to selected dealers or eligible investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class A shares for sale to
eligible investors and any expenses of advertising incurred by
the Distributor in connection with such offering.
(c) The Trust shall bear the cost and expenses of qualifi-
cation of the Class A shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
fying the Trust as a broker or dealer in such states of the
United States or other jurisdictions as shall be selected by the
<PAGE> 12
Trust and the Distributor pursuant to Section 5(c) hereof and the
cost and expenses payable to each such state for continuing
qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Trust shall indemnify and hold harmless the Distri-
butor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any Class A shares, which may be
based upon the Securities Act, or on any other statute or at com-
mon law, on the ground that the registration statement or related
prospectus and statement of additional information relating to
the Fund, as from time to time amended and supplemented, or an
annual or interim report to shareholders of the Fund, includes an
untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make
the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with,
information furnished to the Trust in connection therewith by or
on behalf of the Distributor; provided, however, that in no case
(i) is the indemnity of the Trust in favor of the Distributor and
any such controlling persons to be deemed to protect such
Distributor or any such controlling persons thereof against any
<PAGE> 13
liability to the Trust or its security holders to which the
Distributor or any such controlling persons would otherwise be
subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of their duties or by reason of the
reckless disregard of their obligations and duties under this
Agreement; or (ii) is the Trust to be liable under its indemnity
agreement contained in this paragraph with respect to any claim
made against the Distributor or any such controlling persons,
unless the Distributor or such controlling persons, as the case
may be, shall have notified the Trust in writing within a
reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been
served upon the Distributor or such controlling persons (or after
the Distributor or such controlling persons shall have received
notice of such service on any designated agent), but failure to
notify the Trust of any such claim shall not relieve it from any
liability which it may have to the person against whom such
action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Trust will be
entitled to participate at its own expense in the defense or, if
it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Trust elects to assume the
defense, such defense shall be conducted by counsel chosen by it
and satisfactory to the Distributor or such controlling person or
persons, defendant or defendants in the suit. In the event the
Trust elects to assume the defense of any such suit and retain
<PAGE> 14
such counsel, the Distributor or such controlling person or
persons, defendant or defendants in the suit shall bear the fees
and expenses of any additional counsel retained by them, but in
case the Trust does not elect to assume the defense of any such
suit, it will reimburse the Distributor or such controlling
person or persons, defendant or defendants in the suit, for the
reasonable fees and expenses of any counsel retained by them.
The Trust shall promptly notify the Distributor of the
commencement of any litigation or proceedings against it or any
of its officers or Trustees in connection with the issuance or
sale of any of the Class A shares.
(b) The Distributor shall indemnify and hold harmless the
Trust and each of its Trustees and officers and each person, if
any, who controls the Trust against any loss, liability, claim,
damage or expense described in the foregoing indemnity contained
in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity
with, information furnished to the Trust in writing by or on
behalf of the Distributor for use in connection with the
registration statement or related prospectus and statement of
additional information, as from time to time amended, or the
annual or interim reports to Class A shareholders. In case any
action shall be brought against the Trust or any person so
indemnified, in respect of which indemnity may be sought against
the Distributor, the Distributor shall have the rights and duties
given to the Trust, and the Trust and each person so indemnified
<PAGE> 15
shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Adviser Program. In
connection with the Merrill Lynch Mutual Fund Adviser Program,
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, are authorized to offer and sell shares of
the Fund, as agent for the Fund, to participants in such program.
The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid
to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the
Distributor.
Section 11. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until October __, 1996 and
thereafter, but only for so long as such continuance is
specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding Class A voting
securities of the Fund and (ii) by the vote of a majority of
those Trustees who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Trustees or by vote of a majority
of the outstanding Class A voting securities of the Fund, or by
the Distributor, on sixty days' written notice to the other
<PAGE> 16
party. This Agreement shall automatically terminate in the event
of its assignment.
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 12. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifi-
cally approved by (i) the Trustees or by the vote of a majority
of outstanding Class A voting securities of the Fund and (ii) by
the vote of a majority of those Trustees of the Trust who are not
parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on
such approval.
Section 13. Governing Law. The provisions of this
Agreement shall be construed and interpreted in accordance with
the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
Section 14. This Agreement supersedes the prior
Distribution Agreement entered into by the parties hereto with
respect to the Class A shares of the Fund.
Section 15. Personal Liability. The Declaration of Trust
establishing Merrill Lynch Multi-State Municipal Series Trust,
<PAGE> 17
dated August 2, 1985, a copy of which, together with all
amendments thereto (the "Declaration"), is on file in the office
of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal Series Trust"
refers to the Trustees under the Declaration collectively as
trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of said Trust shall be
held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of said Trust, but
the "Trust Property" only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH MULTI-STATE
MUNICIPAL SERIES TRUST
By---------------------------------------=-
Title:
MERRILL LYNCH TRUSTS DISTRIBUTOR, INC.
By-----------------------------------------
Title:
<PAGE> 18
EXHIBIT A
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
CLASS A SHARES OF BENEFICIAL INTEREST
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES
TRUST, a Massachusetts business trust (the "Trust"), pursuant to
which it acts as the distributor for the sale of Class A shares
of beneficial interest, par value $0.10 per share (herein
referred to as "Class A shares"), of the Trust relating to
Merrill Lynch [State] Municipal Bond Fund (the "Fund"), and as
such has the right to distribute Class A shares of the Fund for
resale. The Trust is an open-end investment company registered
under the Investment Company Act of 1940, as amended, and the
Fund's Class A shares are registered under the Securities Act of
1933, as amended. You have received a copy of the Class A shares
Distribution Agreement (the "Distribution Agreement") between
ourself and the Trust and reference is made herein to certain
provisions of such Distribution Agreement. The terms
"Prospectus" and "Statement of Additional Information" used
herein refer to the prospectus and statement of additional
information, respectively, on file with the Securities and
Exchange Commission which is part of the most recent effective
registration statement pursuant to the Securities Act of 1933, as
amended. We offer to sell to you, as a member of the Selected
Dealers Group, Class A shares of the Fund for resale to investors
identified in the Prospectus and Statement of Additional
Information as eligible to purchase Class A shares ("eligible
investors") upon the following terms and conditions:
1. In all sales of these Class A shares to eligible
investors, you shall act as dealer for your own account and in no
transaction shall you have any authority to act as agent for the
Trust, for us or for any other member of the Selected Dealers
Group, except in connection with the Merrill Lynch Mutual Fund
Adviser program and such other special programs as we from time
to time agree, in which case you shall have authority to offer
and sell shares, as agent for the Trust, to participants in such
program.
<PAGE> 19
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. The procedure relating to the handling
of orders shall be subject to Section 5 hereof and instructions
which we or the Trust shall forward from time to time to you.
All orders are subject to acceptance or rejection by the
Distributor or the Trust in the sole discretion of either. The
minimum initial and subsequent purchase requirements are as set
forth in the current Prospectus and Statement of Additional
Information of the Fund.
3. The sales charges for sales to eligible investors,
computed as percentages of the public offering price and the
amount invested, and the related discount to Selected Dealers are
as follows:
Discount to
Sales Charge Selected
Sales Charge as Percentage* Dealers as
as Percentage of the Net Percentage
of the Amount of the
Amount of Purchase Offering Price Invested Offering Price
- ------------------ -------------- ----------- ---------------
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%
______________________
* Rounded to the nearest one-hundredth percent.
** Initial sales charges may be waived for certain classes of offerees as
set forth in the current Prospectus and Statement of Additional Information
of the Fund. Such purchase may be subject to a contingent deferred sales
<PAGE> 20
charge as set forth in the current Prospectus and Statement of Additional
Information.
The term "purchase" refers to a single purchase by an indi-
vidual, or to concurrent purchases, which in the aggregate are at
least equal to the prescribed amounts, by an individual, his
spouse and their children under the age of 21 years purchasing
Class A shares for his or their own account and to single pur-
chases by a trustee or other fiduciary purchasing Class A shares
for a single trust estate or single fiduciary account although
more than one beneficiary is involved. The term "purchase" also
includes purchases by any "company" as that term is defined in
the Investment Company Act of 1940, as amended, but does not
include purchases by any such company which has not been in
existence for at least six months or which has no purpose other
than the purchase of Class A shares of the Fund or Class A shares
of other registered investment companies at a discount; provided,
however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank
or broker-dealer or clients of an investment adviser.
The reduced sales charges are applicable through a right of
accumulation under which certain eligible investors are permitted
to purchase Class A shares of the Fund at the offering price
applicable to the total of (a) the public offering price of the
shares then being purchased plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of the
purchaser's combined holdings of Class A, Class B, Class C and
Class D shares of the Fund and of any other investment company
with an initial sales charge for which the Distributor acts as
the distributor. For any such right of accumulation to be made
available, the Distributor must be provided at the time of pur-
chase, by the purchaser or you, with sufficient information to
permit confirmation of qualification, and acceptance of the pur-
chase order is subject to such confirmation.
The reduced sales charges are applicable to purchases aggre-
gating $25,000 or more of Class A shares or of Class D shares of
any other investment company with an initial sales charge for
which the Distributor acts as the distributor made through you
within a thirteen-month period starting with the first purchase
pursuant to a Letter of Intention in the form provided in the
Prospectus. A purchase not originally made pursuant to a Letter
of Intention may be included under a subsequent letter executed
within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. If the
<PAGE> 21
intended amount of shares is not purchased within the
thirteen-month period, an appropriate price adjustment will be
made pursuant to the terms of the Letter of Intention.
You agree to advise us promptly at our request as to amounts
of any sales made by you to eligible investors qualifying for
reduced sales charges. Further information as to the reduced
sales charges pursuant to the right of accumulation or a Letter
of Intention is set forth in the Prospectus and Statement of
Additional Information.
4. You shall not place orders for any of the Class A
shares unless you have already received purchase orders for such
Class A shares at the applicable public offering prices and
subject to the terms hereof and of the Distribution Agreement.
You agree that you will not offer or sell any of the Class A
shares except under circumstances that will result in compliance
with the applicable Federal and state securities laws and that in
connection with sales and offers to sell Class A shares you will
furnish to each person to whom any such sale or offer is made a
copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will
not furnish to any person any information relating to the Class A
shares of the Fund which is inconsistent in any respect with the
information contained in the Prospectus and Statement of
Additional Information (as then amended or supplemented) or
cause any advertisement to be published in any newspaper or
posted in any public place without our consent and the consent of
the Trust.
5. As a selected dealer, you are hereby authorized (i) to
place orders directly with the Trust for Class A shares of the
Fund to be resold by us to you subject to the applicable terms
and conditions governing the placement of orders by us set forth
in Section 3 of the Distribution Agreement and subject to the
compensation provisions of Section 3 hereof and (ii) to tender
Class A shares directly to the Trust or its agent for redemption
subject to the applicable terms and conditions set forth in
Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from
your customers so as to profit yourself as a result of such with-
holding: e.g., by a change in the "net asset value" from that
used in determining the offering price to your customers.
7. If any Class A shares sold to you under the terms of
this Agreement are repurchased by the Trust or by us for the
account of the Trust or are tendered for redemption within seven
<PAGE> 22
business days after the date of the confirmation of the original
purchase by you, it is agreed that you shall forfeit your right
to, and refund to us, any discount received by you on such Class
A shares.
8. No person is authorized to make any representations con-
cerning Class A shares of the Fund except those contained in the
current Prospectus and Statement of Additional Information of the
Fund and in such printed information subsequently issued by us or
the Trust as information supplemental to such Prospectus and
Statement of Additional Information. In purchasing Class A
shares through us you shall rely solely on the representations
contained in the Prospectus and Statement of Additional
Information and supplemental information above mentioned. Any
printed information which we furnish you other than the Fund's
Prospectus, Statement of Additional Information, periodic reports
and proxy solicitation material is our sole responsibility and
not the responsibility of the Trust, and you agree that the Trust
shall have no liability or responsibility to you in these
respects unless expressly assumed in connection therewith.
9. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to
the time of offering or sale and you agree thereafter to deliver
to such purchasers copies of the annual and interim reports and
proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional
copies of the Prospectus and Statement of Additional Information,
annual or interim reports and proxy solicitation materials of the
Fund will be supplied to you in reasonable quantities upon
request.
10. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of Class A shares
entirely or to certain persons or entities in a class or classes
specified by us. Each party hereto has the right to cancel this
agreement upon notice to the other party.
11. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering. We shall be under no liability to you
except for lack of good faith and for obligations expressly
assumed by us herein. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of
compliance with any provision of the Securities Act of 1933, as
<PAGE> 23
amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
12. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association.
13. Upon application to us, we will inform you as to the
states in which we believe the Class A shares have been qualified
for sale under, or are exempt from the requirements of, the
respective securities laws of such states, but we assume no
responsibility or obligation as to your right to sell Class A
shares in any jurisdiction. We will file with the Department of
State in New York a Further State Notice with respect to the
Class A shares, if necessary.
14. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or tele-
graphed to you at the address specified by you below.
15. Your first order placed pursuant to this Agreement for
the purchase of Class A shares of the Fund will represent your
acceptance of this Agreement.
MERRILL LYNCH TRUSTS DISTRIBUTOR, INC.
By------------------------------------
(Authorized Signature)
<PAGE> 24
Please return one signed copy
of this agreement to:
MERRILL LYNCH TRUSTS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
------------------------------------------
By:--------------------------------------------------
Address: 800 Scudders Mill Road
-------------------------------------------
Plainsboro, New Jersey 08536
-----------------------------------------------------
Date: , 1994
------------------------------------------------
<PAGE> 1
CLASS C SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ______ day of October, 1994,
between MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST, a
Massachusetts business trust (the "Trust"), and MERRILL LYNCH
FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").
W I T N E S S E T H :
WHEREAS, the Trust is registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"),
as an open-end investment company, and it is affirmatively in the
interest of the Trust to offer its shares for sale continuously;
and
WHEREAS, the Trustees of the Trust (the "Trustees") are
authorized to establish separate series (the "Series") relating
to separate portfolios of securities, each of which will offer
separate classes of shares of beneficial interest, par value
$0.10 per share (collectively referred to as "shares") to
selected groups of purchasers; and
WHEREAS, the Trustees have established and designated the
Merrill Lynch [State] Municipal Bond Fund (the "Fund") as a
series of the Trust; and
<PAGE> 2
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either direct-
ly to purchasers or through other securities dealers; and
WHEREAS, the Trust and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Fund's Class C shares in order to promote the growth of
the Fund and facilitate the distribution of its Class C shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Trust here-
by appoints the Distributor as the principal underwriter and
distributor of the Trust to sell Class C shares of beneficial
interest in the Fund (sometimes herein referred to as "Class C
shares") to the public and hereby agrees during the term of this
Agreement to sell shares of the Fund to the Distributor upon the
terms and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Trust to act as
principal underwriter and distributor of the Class C shares of
the Fund, except that:
(a) The Trust may, upon written notice to the Distributor,
from time to time designate other principal underwriters and
distributors of Class C shares with respect to areas other than
the United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
<PAGE> 3
Agreement to sell Class C shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full
effect until terminated in accordance with the other provisions
hereof.
(b) The exclusive right granted to the Distributor to
purchase Class C shares from the Trust shall not apply to Class C
shares of the Fund issued in connection with the merger or conso-
lidation of any other investment company or personal holding
company with the Trust or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the
outstanding Class C shares of any such company by the Trust.
(c) Such exclusive right also shall not apply to Class C
shares issued pursuant to reinvestment of dividends or capital
gains distributions.
(d) Such exclusive right also shall not apply to Class C
shares issued pursuant to any conversion, exchange or
reinstatement privilege afforded redeeming shareholders or to any
other Class C shares as shall be agreed between the Trust and the
Distributor from time to time.
Section 3. Purchase of Class C Shares from the Trust.
(a) The Distributor shall have the right to buy from the
Trust the Class C shares needed, but not more than the Class C
shares needed (except for clerical errors in transmission) to
fill unconditional orders for Class C shares of the Fund placed
with the Distributor by eligible investors or securities dealers.
<PAGE> 4
Investors eligible to purchase Class C shares shall be those
persons so identified in the currently effective prospectus and
statement of additional information of the Fund (the "prospectus"
and "statement of additional information", respectively) under
the Securities Act of 1933, as amended (the "Securities Act"),
relating to such Class C shares. The price which the Distributor
shall pay for the Class C shares so purchased from the Trust
shall be the net asset value, determined as set forth in Section
3(c) hereof.
(b) The Class C shares are to be resold by the Distributor
to investors at net asset value, as set forth in Section 3(c)
hereof, or to securities dealers having agreements with the Dis-
tributor upon the terms and conditions set forth in Section 7
hereof.
(c) The net asset value of Class C shares of the Fund shall
be determined by the Trust or any agent of the Trust in
accordance with the method set forth in the prospectus and
statement of additional information and guidelines established by
the Board of Trustees.
(d) The Trust shall have the right to suspend the sale of
its Class C shares at times when redemption is suspended pursuant
to the conditions set forth in Section 4(b) hereof. The Trust
shall also have the right to suspend the sale of its Class C
shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by
<PAGE> 5
Federal or New York authorities, or if there shall have been some
other event, which, in the judgment of the Trust, makes it
impracticable or inadvisable to sell the Class C shares.
(e) The Trust, or any agent of the Trust designated in
writing by the Trust, shall be promptly advised of all purchase
orders for Class C shares received by the Distributor. Any order
may be rejected by the Trust; provided, however, that the Trust
will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Class C shares. The Trust
(or its agent) will confirm orders upon their receipt, will make
appropriate book entries and, upon receipt by the Trust (or its
agent) of payment therefor, will deliver deposit receipts or
certificates for such Class C shares pursuant to the instructions
of the Distributor. Payment shall be made to the Trust in New
York Clearing House funds. The Distributor agrees to cause such
payment and such instructions to be delivered promptly to the
Trust (or its agent).
Section 4. Repurchase or Redemption of Class C Shares by
the Trust.
(a) Any of the outstanding Class C shares may be tendered
for redemption at any time, and the Trust agrees to repurchase or
redeem the Class C shares so tendered in accordance with its
obligations as set forth in Article VIII of its Declaration of
Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement
<PAGE> 6
of additional information of the Fund. The price to be paid to
redeem or repurchase the Class C shares shall be equal to the net
asset value calculated in accordance with the provisions of
Section 3(c) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in
the prospectus and statement of additional information of the
Fund. All payments by the Trust hereunder shall be made in the
manner set forth below.
The Trust shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
the Distributor on or before the seventh business day subsequent
to its having received the notice of redemption in proper form.
The proceeds of any redemption of shares shall be paid by the
Trust as follows: (i) any applicable CDSC shall be paid to the
Distributor, and (ii) the balance shall be paid to or for the
account of the shareholder, in each case in accordance with the
applicable provisions of the prospectus and statement of
additional information.
(b) Redemption of Class C shares or payment may be sus-
pended at times when the New York Stock Exchange is closed, when
trading on said Exchange is suspended, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Trust fairly to determine the value of the net assets of the
<PAGE> 7
Fund, or during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Trust.
(a) The Trust shall furnish to the Distributor copies of
all information, financial statements and other papers which the
Distributor may reasonably request for use in connection with the
distribution of Class C shares of the Fund, and this shall in-
clude, upon request by the Distributor, one certified copy of all
financial statements prepared for the Trust by independent public
accountants. The Trust shall make available to the Distributor
such number of copies of the prospectus and statement of addi-
tional information relating to the Fund as the Distributor shall
reasonably request.
(b) The Trust shall take, from time to time, but subject to
any necessary approval of the shareholders, all necessary action
to fix the number of authorized shares and such steps as may be
necessary to register the same under the Securities Act to the
end that there will be available for sale such number of Class C
shares as the Distributor reasonably may be expected to sell.
(c) The Trust shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its Class
C shares for sale under the securities laws of such states as the
Distributor and the Trust may approve. Any such qualification
may be withheld, terminated or withdrawn by the Trust at any time
in its discretion. As provided in Section 8(c) hereof, the
<PAGE> 8
expense of qualification and maintenance of qualification shall
be borne by the Trust. The Distributor shall furnish such
information and other material relating to its affairs and
activities as may be required by the Trust in connection with
such qualification.
(d) The Trust will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of Class C shares of the Fund but shall not be
obligated to sell any specific number of shares. The services of
the Distributor to the Trust hereunder are not to be deemed
exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other in-
vestment companies so long as the performance of its obligations
hereunder is not impaired thereby.
(b) In selling the Class C shares of the Fund, the Distri-
butor shall use its best efforts in all respects duly to conform
with the requirements of all Federal and state laws relating to
the sale of such securities. Neither the Distributor nor any se-
lected dealer, as defined in Section 7 hereof, nor any other
person is authorized by the Trust to give any information or to
make any representations, other than those contained in the
registration statement or related prospectus and statement of
<PAGE> 9
additional information and any sales literature specifically
approved by the Trust.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Trust, for the confirmation of
sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales,
and the cancellation of unsettled transactions, as may be neces-
sary to comply with the requirements of the National Association
of Securities Dealers, Inc. (the "NASD"), as such requirements
may from time to time exist.
Section 7. Selected Dealer Agreements.
(a) The Distributor shall have the right to enter into
selected dealer agreements with securities dealers of its choice
("selected dealers") for the sale of Class C shares; provided,
that the Trust shall approve the forms of agreements with
dealers. Class C shares sold to selected dealers shall be for
resale by such dealers only at net asset value determined as set
forth in Section 3(c) hereof. The form of agreement with
selected dealers to be used during the continuous offering of the
shares is attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer
and sell Class C shares only to such selected dealers that are
members in good standing of the NASD.
Section 8. Payment of Expenses.
<PAGE> 10
(a) The Trust shall bear all costs and expenses of the
Fund, including fees and disbursements of its counsel and audi-
tors, in connection with the preparation and filing of any re-
quired registration statements and/or prospectuses and statements
of additional information under the Investment Company Act, the
Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
materials to Class C shareholders (including but not limited to
the expense of setting in type any such registration statements,
prospectuses, statements of additional information, annual or
interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial con-
sultants. In addition, after the prospectuses, statements of
additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of Class C
shares to selected dealers or investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class C shares for sale to
the public and any expenses of advertising incurred by the Dis-
<PAGE> 11
tributor in connection with such offering. It is understood and
agreed that so long as the Fund's Class C Shares Distribution
Plan pursuant to Rule 12b-1 under the Investment Company Act
remains in effect, any expenses incurred by the Distributor here-
under may be paid from amounts recovered by it from the Fund
under such Plan.
(c) The Trust shall bear the cost and expenses of qualifi-
cation of the Class C shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
fying the Trust as a broker or dealer in such states of the
United States or other jurisdictions as shall be selected by the
Trust and the Distributor pursuant to Section 5(c) hereof and the
cost and expenses payable to each such state for continuing
qualification therein until the Trust decides to discontinue such
qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Trust shall indemnify and hold harmless the Distri-
butor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any Class C shares, which may be
based upon the Securities Act, or on any other statute or at
common law, on the ground that the registration statement or
<PAGE> 12
related prospectus and statement of additional information
relating to the Fund, as from time to time amended and
supplemented, or an annual or interim report to Class C
shareholders of the Fund, includes an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements
therein not misleading, unless such statement or omission was
made in reliance upon, and in conformity with, information
furnished to the Trust in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the
indemnity of the Trust in favor of the Distributor and any such
controlling persons to be deemed to protect such Distributor or
any such controlling persons thereof against any liability to the
Trust or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the
performance of their duties or by reason of the reckless
disregard of their obligations and duties under this Agreement;
or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made
against the Distributor or any such controlling persons, unless
the Distributor or such controlling persons, as the case may be,
shall have notified the Trust in writing within a reasonable time
after the summons or other first legal process giving information
of the nature of the claim shall have been served upon the
<PAGE> 13
Distributor or such controlling persons (or after the Distributor
or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Trust
of any such claim shall not relieve it from any liability which
it may have to the person against whom such action is brought
otherwise than on account of its indemnity agreement contained in
this paragraph. The Trust will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but if
the Trust elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or
defendants in the suit. In the event the Trust elects to assume
the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or
defendants in the suit shall bear the fees and expenses, as
incurred, of any additional counsel retained by them, but in case
the Trust does not elect to assume the defense of any such suit,
it will reimburse the Distributor or such controlling person or
persons, defendant or defendants in the suit, for the reasonable
fees and expenses, as incurred, of any counsel retained by them.
The Trust shall promptly notify the Distributor of the commence-
ment of any litigation or proceedings against it or any of its
officers or Trustees in connection with the issuance or sale of
any of the Class C shares.
<PAGE> 14
(b) The Distributor shall indemnify and hold harmless the
Trust and each of its Trustees and officers and each person, if
any, who controls the Trust against any loss, liability, claim,
damage or expense, as incurred, described in the foregoing indem-
nity contained in subsection (a) of this Section, but only with
respect to statements or omissions made in reliance upon, and in
conformity with, information furnished to the Trust in writing by
or on behalf of the Distributor for use in connection with the
registration statement or related prospectus and statement of
additional information, as from time to time amended, or the
annual or interim reports to shareholders. In case any action
shall be brought against the Trust or any person so indemnified,
in respect of which indemnity may be sought against the Distri-
butor, the Distributor shall have the rights and duties given to
the Trust, and the Trust and each person so indemnified shall
have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Adviser Program. In
connection with the Merrill Lynch Mutual Fund Adviser Program,
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, are authorized to offer and sell shares of
the Fund, as agent for the Fund, to participants in such program.
The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid
to the Fund, the duties of the Distributor, the payment of
<PAGE> 15
expenses and indemnification obligations of the Fund and the
Distributor.
Section 11. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until October __, 1996 and
thereafter, but only for so long as such continuance is
specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding Class C voting
securities of the Fund and (ii) by the vote of a majority of
those Trustees who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Trustees or by vote of a majority
of the outstanding Class C voting securities of the Fund, or by
the Distributor, on sixty days' written notice to the other
party. This Agreement shall automatically terminate in the event
of its assignment.
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 12. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifi-
cally approved by (i) the Trustees or by the vote of a majority
<PAGE> 16
of outstanding Class C voting securities of the Fund and (ii) by
the vote of a majority of those Trustees of the Trust who are not
parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on
such approval.
Section 13. Governing Law. The provisions of this Agree-
ment shall be construed and interpreted in accordance with the
laws of the State of New York as at the time in effect and the
applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
Section 14. Personal Liability. The Declaration of Trust
establishing Merrill Lynch Multi-State Municipal Series Trust,
dated August 2, 1985, a copy of which, together with all
amendments thereto (the "Declaration"), is on file in the office
of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal Series Trust"
refers to the Trustees under the Declaration collectively as
trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of said Trust shall be
held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of said Trust, but
the "Trust Property" only shall be liable.
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH MULTI-STATE MUNICIPAL
SERIES TRUST
By------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By------------------------------------
Title:
<PAGE> 18
EXHIBIT A
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
CLASS C SHARES OF BENEFICIAL INTEREST
SELECTED DEALER AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with Merrill Lynch Multi-State Municipal Series
Trust, a Massachusetts business trust (the "Trust"), pursuant to
which it acts as the distributor for the sale of Class C shares
of beneficial interest, par value $0.10 per share (herein
referred to as the "Class C shares"), of the Trust relating to
Merrill Lynch [State] Municipal Bond Fund (the "Fund") and as
such has the right to distribute Class C shares of the Fund for
resale. The Trust is an open-end investment company registered
under the Investment Company Act of 1940, as amended, and the
Fund's Class C shares being offered to the public are registered
under the Securities Act of 1933, as amended. You have received
a copy of the Class C Shares Distribution Agreement (the
"Distribution Agreement") between ourself and the Trust and
reference is made herein to certain provisions of such
Distribution Agreement. The terms "Prospectus" and "Statement of
Additional Information" as used herein refer to the prospectus
and statement of additional information, respectively, on file
with the Securities and Exchange Commission which is part of the
most recent effective registration statement pursuant to the
Securities Act of 1933, as amended. We offer to sell to you, as
a member of the Selected Dealers Group, Class C shares of the
Fund upon the following terms and conditions:
1. In all sales of these Class C shares to the public, you shall
act as dealer for your own account and in no transaction shall
you have any authority to act as agent for the Trust, for us or
for any other member of the Selected Dealers Group, except in
connection with the Merrill Lynch Mutual Fund Adviser program and
such other special programs as we from time to time agree, in
which case you shall have authority to offer and sell shares, as
agent for the Trust, to participants in such program.
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. The procedure relating to the handling
of orders shall be subject to Section 4 hereof and instructions
<PAGE> 19
which we or the Trust shall forward from time to time to you.
All orders are subject to acceptance or rejection by the
Distributor or the Trust in the sole discretion of either. The
minimum initial and subsequent purchase requirements are as set
forth in the current Prospectus and Statement of Additional
Information of the Fund.
3. You shall not place orders for any of the Class C shares
unless you have already received purchase orders for such Class C
shares at the applicable public offering prices and subject to
the terms hereof and of the Distribution Agreement. You agree
that you will not offer or sell any of the Class C shares except
under circumstances that will result in compliance with the
applicable Federal and state securities laws and that in
connection with sales and offers to sell Class C shares you will
furnish to each person to whom any such sale or offer is made a
copy of the Prospectus and, if requested, the Statement of Addi-
tional Information (as then amended or supplemented) and will not
furnish to any person any information relating to the Class C
shares of the Fund which is inconsistent in any respect with the
information contained in the Prospectus and Statement of Addi-
tional Information (as then amended or supplemented) or cause any
advertisement to be published in any newspaper or posted in any
public place without our consent and the consent of the Trust.
4. As a selected dealer, you are hereby authorized (i) to
place orders directly with the Trust for Class C shares of the
Fund to be resold by us to you subject to the applicable terms
and conditions governing the placement of orders by us set forth
in Section 3 of the Distribution Agreement and (ii) to tender
Class C shares directly to the Trust or its agent for redemption
subject to the applicable terms and conditions set forth in Sec-
tion 4 of the Distribution Agreement.
5. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such with-
holding: e.g., by a change in the "net asset value" from that
used in determining the offering price to your customers.
6. No person is authorized to make any representations
concerning Class C shares of the Fund except those contained in
the current Prospectus and Statement of Additional Information of
the Fund and in such printed information subsequently issued by
us or the Trust as information supplemental to such Prospectus
and Statement of Additional Information. In purchasing Class C
shares through us you shall rely solely on the representations
contained in the Prospectus and Statement of Additional Informa-
tion and supplemental information above mentioned. Any printed
information which we furnish you other than the Fund's Prospec-
tus, Statement of Additional Information, periodic reports and
<PAGE> 20
proxy solicitation material is our sole responsibility and not
the responsibility of the Trust, and you agree that the Trust
shall have no liability or responsibility to you in these
respects unless expressly assumed in connection therewith.
7. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to
the time of offering or sale and you agree thereafter to deliver
to such purchasers copies of the annual and interim reports and
proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional
copies of the Prospectus and Statement of Additional Information,
annual or interim reports and proxy solicitation materials of the
Fund will be supplied to you in reasonable quantities upon re-
quest.
8. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of Class C shares
entirely or to certain persons or entities in a class or classes
specified by us. Each party hereto has the right to cancel this
Agreement upon notice to the other party.
9. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering. We shall be under no liability to you
except for lack of good faith and for obligations expressly
assumed by us herein. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of
compliance with any provision of the Securities Act of 1933, as
amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
10. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association.
11. Upon application to us, we will inform you as to the
states in which we believe the Class C shares have been qualified
for sale under, or are exempt from the requirements of, the
respective securities laws of such states, but we assume no
responsibility or obligation as to your right to sell Class C
shares in any jurisdiction. We will file with the Department of
State in New York a Further State Notice with respect to the
Class C shares, if necessary.
<PAGE> 21
12. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or tele-
graphed to you at the address specified by you below.
13. Your first order placed pursuant to this Agreement for
the purchase of Class C shares of the Fund will represent your
acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By-----------------------------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
------------------------------------------
By:--------------------------------------------------
Address: 800 Scudders Mill Road
--------------------------------------------
Plainsboro, New Jersey 08536
------------------------------------------------------
Date: , 1994
------------------------------------------------
<PAGE> 1
CLASS D SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____ day of October, 1994, between
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST, a Massachusetts
business trust (the "Trust"), and MERRILL LYNCH FUNDS
DISTRIBUTOR, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Trust is registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"),
as an open-end investment company, and it is affirmatively in the
interest of the Trust to offer its shares for sale continuously;
and
WHEREAS, the Trustees of the Trust (the "Trustees") are
authorized to establish separate series (the "Series") relating
to separate portfolios of securities, each of which will offer
separate classes of shares of beneficial interest, par value
$0.10 per share (collectively referred to as "shares") to
selected groups of purchasers; and
WHEREAS, the Trustees have established and designated the
Merrill Lynch [State] Municipal Bond Fund (the "Fund") as a
series of the Trust; and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either
directly to purchasers or through other securities dealers; and
<PAGE> 2
WHEREAS, the Trust and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Class D shares of beneficial interest in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Trust
hereby appoints the Distributor as the principal underwriter and
distributor of the Trust to sell Class D shares of beneficial
interest in the Fund (sometimes herein referred to as "Class D
shares") to the public and hereby agrees during the term of this
Agreement to sell Class D shares of the Fund to the Distributor
upon the terms and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Trust to act as
principal underwriter and distributor of the Class D shares of
the Fund, except that:
(a) The Trust may, upon written notice to the Distributor,
from time to time designate other principal underwriters and dis-
tributors of Class D shares with respect to areas other than the
United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
Agreement to sell Class D shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full
effect until terminated in accordance with the other provisions
hereof.
<PAGE> 3
(b) The exclusive right granted to the Distributor to pur-
chase Class D shares from the Trust shall not apply to Class D
shares issued in connection with the merger or consolidation of
any other investment company or personal holding company with the
Trust or the acquisition by purchase or otherwise of all (or sub-
stantially all) the assets or the outstanding Class D shares of
any such company by the Trust.
(c) Such exclusive right also shall not apply to Class D
shares issued pursuant to reinvestment of dividends or capital
gains distributions.
(d) Such exclusive right also shall not apply to Class D
shares issued pursuant to any conversion, exchange or
reinstatement privilege afforded redeeming shareholders or to any
other Class D shares as shall be agreed between the Trust and the
Distributor from time to time.
Section 3. Purchase of Class D Shares from the Trust.
(a) The Distributor shall have the right to buy from the Trust
the Class D shares needed, but not more than the Class D shares
needed (except for clerical errors in transmission) to fill
unconditional orders for Class D shares of the Fund placed with
the Distributor by eligible investors or securities dealers.
Investors eligible to purchase Class D shares shall be those
persons so identified in the currently effective prospectus and
statement of additional information of the Fund (the "prospectus"
and "statement of additional information", respectively) under
the Securities Act of 1933, as amended (the "Securities Act"),
<PAGE> 4
relating to such Class D shares. The price which the Distributor
shall pay for the Class D shares so purchased from the Trust
shall be the net asset value, determined as set forth in Section
3(d) hereof, used in determining the public offering price on
which such orders were based.
(b) The Class D shares are to be resold by the Distributor
to investors at the public offering price, as set forth in Sec-
tion 3(c) hereof, or to securities dealers having agreements
with the Distributor upon the terms and conditions set forth in
Section 7 hereof.
(c) The public offering price(s) of the Class D shares,
i.e., the price per share at which the Distributor or selected
dealers may sell Class D shares to the public, shall be the
public offering price as set forth in the prospectus and
statement of additional information relating to such Class D
shares, but not to exceed the net asset value at which the
Distributor is to purchase the Class D shares, plus a sales
charge not to exceed 4.00% of the public offering price (4.17% of
the net amount invested), subject to reductions for volume
purchases. Class D shares may be sold to certain Trustees,
officers and employees of the Trust, directors and employees of
Merrill Lynch & Co., Inc. and its subsidiaries, and to certain
other persons described in the prospectus and statement of
additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the
prospectus and statement of additional information. If the
<PAGE> 5
public offering price does not equal an even cent, the public
offering price may be adjusted to the nearest cent. All payments
to the Trust hereunder shall be made in the manner set forth in
Section 3(f).
(d) The net asset value of Class D shares shall be deter-
mined by the Trust or any agent of the Trust in accordance with
the method set forth in the prospectus and statement of
additional information of the Fund and guidelines established by
the Trustees.
(e) The Trust shall have the right to suspend the sale of
its Class D shares at times when redemption is suspended pursuant
to the conditions set forth in Section 4(b) hereof. The Trust
shall also have the right to suspend the sale of its Class D
shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some
other event, which, in the judgment of the Trust, makes it
impracticable or inadvisable to sell the Class D shares.
(f) The Trust, or any agent of the Trust designated in
writing by the Trust, shall be promptly advised of all purchase
orders for Class D shares received by the Distributor. Any order
may be rejected by the Trust; provided, however, that the Trust
will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Class D shares. The Trust
(or its agent) will confirm orders upon their receipt, will make
appropriate book entries and, upon receipt by the Trust (or its
<PAGE> 6
agent) of payment therefor, will deliver deposit receipts or
certificates for such Class D shares pursuant to the instructions
of the Distributor. Payment shall be made to the Trust in New
York Clearing House funds. The Distributor agrees to cause such
payment and such instructions to be delivered promptly to the
Trust (or its agent).
Section 4. Repurchase or Redemption of Class D Shares by
the Trust.
(a) Any of the outstanding Class D shares may be tendered
for redemption at any time, and the Trust agrees to repurchase or
redeem the Class D shares so tendered in accordance with its
obligations as set forth in Article VIII of its Declaration of
Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement
of additional information. The price to be paid to redeem or
repurchase the Class D shares shall be equal to the net asset
value calculated in accordance with the provisions of Section
3(d) hereof, less any contingent deferred sales charge ("CDSC"),
redemption fee or other charge(s), if any, set forth in the
prospectus and statement of additional information of the Fund.
All payments by the Trust hereunder shall be made in the manner
set forth below. The redemption or repurchase by the Trust of
any of the Class D shares purchased by or through the Distributor
will not affect the sales charge secured by the Distributor or
any selected dealer in the course of the original sale, except
that if any Class D shares are tendered for redemption or repur-
<PAGE> 7
chase within seven business days after the date of the confirma-
tion of the original purchase, the right to the sales charge
shall be forfeited by the Distributor and the selected dealer
which sold such Class D shares.
The Trust shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
the Distributor in New York Clearing House funds on or before the
seventh business day subsequent to its having received the notice
of redemption in proper form. The proceeds of any redemption of
shares shall be paid by the Trust as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall
be paid to or for the account of the shareholder, in each case in
accordance with the applicable provisions of the prospectus and
statement of additional information.
(b) Redemption of Class D shares or payment may be
suspended at times when the New York Stock Exchange is closed,
when trading on said Exchange is suspended, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Trust fairly to determine the value of the net assets of the
Fund, or during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Trust.
(a) The Trust shall furnish to the Distributor copies of
all information, financial statements and other papers which the
<PAGE> 8
Distributor may reasonably request for use in connection with the
distribution of Class D shares of the Fund, and this shall in-
clude, upon request by the Distributor, one certified copy of all
financial statements prepared for the Trust by independent public
accountants. The Trust shall make available to the Distributor
such number of copies of the prospectus and statement of addi-
tional information relating to the Fund as the Distributor shall
reasonably request.
(b) The Trust shall take, from time to time, but subject to
any necessary approval of the Class D shareholders, all necessary
action to fix the number of authorized Class D shares and such
steps as may be necessary to register the same under the Securi-
ties Act, to the end that there will be available for sale such
number of Class D shares as the Distributor may reasonably be
expected to sell.
(c) The Trust shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its Class
D shares for sale under the securities laws of such states as the
Distributor and the Trust may approve. Any such qualification
may be withheld, terminated or withdrawn by the Trust at any time
in its discretion. As provided in Section 8(c) hereof, the
expense of qualification and maintenance of qualification shall
be borne by the Trust. The Distributor shall furnish such
information and other material relating to its affairs and
activities as may be required by the Trust in connection with
such qualification.
<PAGE> 9
(d) The Trust will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of Class D shares of the Fund but shall not be
obligated to sell any specific number of Class D shares. The
services of the Distributor to the Trust hereunder are not to be
deemed exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other in-
vestment companies so long as the performance of its obligations
hereunder is not impaired thereby.
(b) In selling the Class D shares of the Fund, the Distri-
butor shall use its best efforts in all respects duly to conform
with the requirements of all Federal and state laws relating to
the sale of such securities. Neither the Distributor nor any
selected dealer, as defined in Section 7 hereof, nor any other
person is authorized by the Trust to give any information or to
make any representations, other than those contained in the
registration statement or related prospectus and statement of
additional information and any sales literature specifically
approved by the Trust.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Trust, for the confirmation of
sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales,
<PAGE> 10
and the cancellation of unsettled transactions, as may be
necessary to comply with the requirements of the National
Association of Securities Dealers, Inc. (the "NASD"), as such
requirements may from time to time exist.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into
selected dealers agreements with securities dealers of its choice
("selected dealers") for the sale of Class D shares and fix
therein the portion of the sales charge which may be allocated to
the selected dealers; provided that the Trust shall approve the
forms of agreements with dealers and the dealer compensation set
forth therein. Class D shares sold to selected dealers shall be
for resale by such dealers only at the public offering price(s)
set forth in the prospectus and statement of additional
information. The form of agreement with selected dealers to be
used during the continuous offering of the Class D shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer
and sell Class D shares only to such selected dealers as are mem-
bers in good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Trust shall bear all costs and expenses of the
Fund, including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any
required registration statements and/or prospectuses and
statements of additional information under the Investment Company
<PAGE> 11
Act, the Securities Act, and all amendments and supplements
thereto, and preparing and mailing annual and interim reports and
proxy materials to Class D shareholders (including but not
limited to the expense of setting in type any such registration
statements, prospectuses, statements of additional information,
annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial con-
sultants. In addition, after the prospectuses, statements of
additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of Class D
shares to selected dealers or investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class D shares for sale to
the public and any expenses of advertising incurred by the
Distributor in connection with such offering. It is understood
and agreed that so long as the Fund's Class D Shares Distribution
Plan pursuant to Rule 12b-1 under the Investment Company Act
remains in effect, any expenses incurred by the Distributor
hereunder in connection with account maintenance activities may
<PAGE> 12
be paid from amounts recovered by it from the Fund under such
plan.
(c) The Trust shall bear the cost and expenses of qualifi-
cation of the Class D shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
fying the Trust as a broker or dealer in such states of the
United States or other jurisdictions as shall be selected by the
Trust and the Distributor pursuant to Section 5(c) hereof and the
cost and expenses payable to each such state for continuing
qualification therein until the Trust decides to discontinue such
qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Trust shall indemnify and hold harmless the Distri-
butor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any Class D shares, which may be
based upon the Securities Act, or on any other statute or at com-
mon law, on the ground that the registration statement or related
prospectus and statement of additional information relating to
the Fund, as from time to time amended and supplemented, or an
annual or interim report to shareholders of the Fund, includes an
untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make
<PAGE> 13
the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with,
information furnished to the Trust in connection therewith by or
on behalf of the Distributor; provided, however, that in no case
(i) is the indemnity of the Trust in favor of the Distributor and
any such controlling persons to be deemed to protect such
Distributor or any such controlling persons thereof against any
liability to the Trust or its security holders to which the
Distributor or any such controlling persons would otherwise be
subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of their duties or by reason of the
reckless disregard of their obligations and duties under this
Agreement; or (ii) is the Trust to be liable under its indemnity
agreement contained in this paragraph with respect to any claim
made against the Distributor or any such controlling persons,
unless the Distributor or such controlling persons, as the case
may be, shall have notified the Trust in writing within a
reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been
served upon the Distributor or such controlling persons (or after
the Distributor or such controlling persons shall have received
notice of such service on any designated agent), but failure to
notify the Trust of any such claim shall not relieve it from any
liability which it may have to the person against whom such
action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Trust will be
<PAGE> 14
entitled to participate at its own expense in the defense or, if
it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Trust elects to assume the
defense, such defense shall be conducted by counsel chosen by it
and satisfactory to the Distributor or such controlling person or
persons, defendant or defendants in the suit. In the event the
Trust elects to assume the defense of any such suit and retain
such counsel, the Distributor or such controlling person or
persons, defendant or defendants in the suit shall bear the fees
and expenses of any additional counsel retained by them, but in
case the Trust does not elect to assume the defense of any such
suit, it will reimburse the Distributor or such controlling
person or persons, defendant or defendants in the suit, for the
reasonable fees and expenses of any counsel retained by them.
The Trust shall promptly notify the Distributor of the
commencement of any litigation or proceedings against it or any
of its officers or Trustees in connection with the issuance or
sale of any of the Class D shares.
(b) The Distributor shall indemnify and hold harmless the
Trust and each of its Trustees and officers and each person, if
any, who controls the Trust against any loss, liability, claim,
damage or expense described in the foregoing indemnity contained
in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity
with, information furnished to the Trust in writing by or on
behalf of the Distributor for use in connection with the
<PAGE> 15
registration statement or related prospectus and statement of
additional information, as from time to time amended, or the
annual or interim reports to Class D shareholders. In case any
action shall be brought against the Trust or any person so
indemnified, in respect of which indemnity may be sought against
the Distributor, the Distributor shall have the rights and duties
given to the Trust, and the Trust and each person so indemnified
shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Adviser Program. In
connection with the Merrill Lynch Mutual Fund Adviser Program,
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, are authorized to offer and sell shares of
the Fund, as agent for the Fund, to participants in such program.
The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid
to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the
Distributor.
Section 11. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until October __, 1996 and
thereafter, but only for so long as such continuance is
specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding Class D voting
securities of the Fund and (ii) by the vote of a majority of
<PAGE> 16
those Trustees who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Trustees or by vote of a majority
of the outstanding Class D voting securities of the Fund, or by
the Distributor, on sixty days' written notice to the other
party. This Agreement shall automatically terminate in the
event of its assignment.
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 12. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifi-
cally approved by (i) the Trustees or by the vote of a majority
of outstanding Class C voting securities of the Fund and (ii) by
the vote of a majority of those Trustees of the Trust who are not
parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on
such approval.
Section 13. Governing Law. The provisions of this
Agreement shall be construed and interpreted in accordance with
the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
<PAGE> 17
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
Section 14. Personal Liability. The Declaration of Trust
establishing Merrill Lynch Multi-State Municipal Series Trust,
dated August 2, 1985, a copy of which, together with all
amendments thereto (the "Declaration"), is on file in the office
of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal Series Trust"
refers to the Trustees under the Declaration collectively as
trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of said Trust shall be
held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of said Trust, but
the "Trust Property" only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
By----------------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By----------------------------------------------
Title:
<PAGE> 18
EXHIBIT A
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
CLASS D SHARES OF BENEFICIAL INTEREST
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES
TRUST, a Massachusetts business trust (the "Trust"), pursuant to
which it acts as the distributor for the sale of Class D shares
of beneficial interest, par value $0.10 per share (herein
referred to as "Class D shares"), of the Trust relating to
Merrill Lynch [State] Municipal Bond Fund (the "Fund"), and as
such has the right to distribute Class D shares of the Fund for
resale. The Trust is an open-end investment company registered
under the Investment Company Act of 1940, as amended, and the
Fund's Class D shares being offered to the public are registered
under the Securities Act of 1933, as amended. You have received
a copy of the Class D Shares Distribution Agreement (the
"Distribution Agreement") between ourself and the Trust and
reference is made herein to certain provisions of such
Distribution Agreement. The terms "Prospectus" and "Statement of
Additional Information" used herein refer to the prospectus and
statement of additional information, respectively, on file with
the Securities and Exchange Commission which is part of the most
recent effective registration statement pursuant to the
Securities Act of 1933, as amended. We offer to sell to you, as
a member of the Selected Dealers Group, Class D shares of the
Fund upon the following terms and conditions:
1. In all sales of these Class D shares to the public, you
shall act as dealer for your own account and in no transaction
shall you have any authority to act as agent for the Trust, for
us or for any other member of the Selected Dealers Group, except
in connection with the Merrill Lynch Mutual Fund Adviser program
and such other special programs as we from time to time agree, in
which case you shall have authority to offer and sell shares, as
agent for the Trust, to participants in such program.
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. The procedure relating to the handling
<PAGE> 19
of orders shall be subject to Section 5 hereof and instructions
which we or the Trust shall forward from time to time to you.
All orders are subject to acceptance or rejection by the
Distributor or the Trust in the sole discretion of either. The
minimum initial and subsequent purchase requirements are as set
forth in the current Prospectus and Statement of Additional
Information of the Fund.
3. The sales charges for sales to the public, computed as
percentages of the public offering price and the amount invested,
and the related discount to Selected Dealers are as follows:
Discount to
Sales Charge Selected
Sales Charge as Percentage* Dealers as
as Percentage of the Net Percentage
of the Amount of the
Amount of Purchase Offering Price Invested Offering Price
- ------------------ -------------- ----------- ---------------
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%
___________________
* Rounded to the nearest one-hundredth percent.
** Initial sales charges will be waived for certain classes of
offerees as set forth in the current Prospectus and Statement of
Additional Information of the Fund. Such purchase may be subject
to a contingent deferred sales charge as set forth in the current
Prospectus and Statement of Additional Information.
The term "purchase" refers to a single purchase by an indi-
vidual, or to concurrent purchases, which in the aggregate are at
least equal to the prescribed amounts, by an individual, his
<PAGE> 20
spouse and their children under the age of 21 years purchasing
Class D shares for his or their own account and to single pur-
chases by a trustee or other fiduciary purchasing Class D shares
for a single trust estate or single fiduciary account although
more than one beneficiary is involved. The term "purchase" also
includes purchases by any "company" as that term is defined in
the Investment Company Act of 1940, as amended, but does not
include purchases by any such company which has not been in
existence for at least six months or which has no purpose other
than the purchase of Class D shares of the Fund or Class D shares
of other registered investment companies at a discount; provided,
however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank
or broker-dealer or clients of an investment adviser.
The reduced sales charges are applicable through a right of
accumulation under which eligible investors are permitted to pur-
chase Class D shares of the Fund at the offering price applicable
to the total of (a) the dollar amount then being purchased plus
(b) an amount equal to the then current net asset value or cost,
whichever is higher, of the purchaser's combined holdings of
Class A, Class B, Class C and Class D shares of the Fund and of
any other investment company with an initial sales charge for
which the Distributor acts as the distributor. For any such
right of accumulation to be made available, the Distributor must
be provided at the time of purchase, by the purchaser or you,
with sufficient information to permit confirmation of
qualification, and acceptance of the purchase order is subject to
such confirmation.
The reduced sales charges are applicable to purchases aggre-
gating $25,000 or more of Class A shares or of Class D shares of
any other investment company with an initial sales charge for
which the Distributor acts as the distributor made through you
within a thirteen-month period starting with the first purchase
pursuant to a Letter of Intention in the form provided in the
Prospectus. A purchase not originally made pursuant to a Letter
of Intention may be included under a subsequent letter executed
within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. If the
intended amount of shares is not purchased within the
thirteen-month period, an appropriate price adjustment will be
made pursuant to the terms of the Letter of Intention.
You agree to advise us promptly at our request as to amounts
of any sales made by you to the public qualifying for reduced
sales charges. Further information as to the reduced sales
charges pursuant to the right of accumulation or a Letter of
<PAGE> 21
Intention is set forth in the Prospectus and Statement of Addi-
tional Information.
4. You shall not place orders for any of the Class D
shares unless you have already received purchase orders for such
Class D shares at the applicable public offering prices and
subject to the terms hereof and of the Distribution Agreement.
You agree that you will not offer or sell any of the Class D
shares except under circumstances that will result in compliance
with the applicable Federal and state securities laws and that in
connection with sales and offers to sell Class D shares you will
furnish to each person to whom any such sale or offer is made a
copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will
not furnish to any person any information relating to the Class D
shares of the Fund which is inconsistent in any respect with the
information contained in the Prospectus and Statement of
Additional Information (as then amended or supplemented) or
cause any advertisement to be published in any newspaper or
posted in any public place without our consent and the consent of
the Trust.
5. As a selected dealer, you are hereby authorized (i) to
place orders directly with the Trust for Class D shares of the
Fund to be resold by us to you subject to the applicable terms
and conditions governing the placement of orders by us set forth
in Section 3 of the Distribution Agreement and subject to the
compensation provisions of Section 3 hereof and (ii) to tender
Class D shares directly to the Trust or its agent for redemption
subject to the applicable terms and conditions set forth in
Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from
your customers so as to profit yourself as a result of such with-
holding: e.g., by a change in the "net asset value" from that
used in determining the offering price to your customers.
7. If any Class D shares sold to you under the terms of
this Agreement are repurchased by the Trust or by us for the
account of the Trust or are tendered for redemption within seven
business days after the date of the confirmation of the original
purchase by you, it is agreed that you shall forfeit your right
to, and refund to us, any discount received by you on such Class
D shares.
8. No person is authorized to make any representations con-
cerning Class D shares of the Fund except those contained in the
current Prospectus and Statement of Additional Information of the
Fund and in such printed information subsequently issued by us or
the Trust as information supplemental to such Prospectus and
<PAGE> 22
Statement of Additional Information. In purchasing Class D
shares through us you shall rely solely on the representations
contained in the Prospectus and Statement of Additional
Information and supplemental information above mentioned. Any
printed information which we furnish you other than the Fund's
Prospectus, Statement of Additional Information, periodic reports
and proxy solicitation material is our sole responsibility and
not the responsibility of the Trust, and you agree that the Trust
shall have no liability or responsibility to you in these
respects unless expressly assumed in connection therewith.
9. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to
the time of offering or sale and you agree thereafter to deliver
to such purchasers copies of the annual and interim reports and
proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional
copies of the Prospectus and Statement of Additional Information,
annual or interim reports and proxy solicitation materials of the
Fund will be supplied to you in reasonable quantities upon
request.
10. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of Class D shares
entirely or to certain persons or entities in a class or classes
specified by us. Each party hereto has the right to cancel this
agreement upon notice to the other party.
11. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering. We shall be under no liability to you
except for lack of good faith and for obligations expressly
assumed by us herein. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of
compliance with any provision of the Securities Act of 1933, as
amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
12. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association.
13. Upon application to us, we will inform you as to the
states in which we believe the Class D shares have been qualified
for sale under, or are exempt from the requirements of, the
respective securities laws of such states, but we assume no
responsibility or obligation as to your right to sell Class D
<PAGE> 23
shares in any jurisdiction. We will file with the Department of
State in New York a Further State Notice with respect to the
Class D shares, if necessary.
14. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or tele-
graphed to you at the address specified by you below.
15. Your first order placed pursuant to this Agreement for
the purchase of Class D shares of the Fund will represent your
acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By------------------------------------
(Authorized Signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
------------------------------------------
By:--------------------------------------------------
Address: 800 Scudders Mill Road
-------------------------------------------
Plainsboro, New Jersey 08536
-----------------------------------------------------
Date: , 1994
------------------------------------------------
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Connecticut Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We consent to the use in Post-Effective Amendment No. 1 to
Registration Statement No. 33-48693 of our report dated August 29, 1994
appearing in the Statement of Additional Information, which is a part of
such Registration Statement, and to the reference to us under the caption
"Financial Highlights" appearing in the Prospectus, which also is a part
of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
October 12, 1994
<PAGE> 1
CLASS C SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the day of October, 1994, by and
between Merrill Lynch Funds Distributor, Inc., a Delaware corpo-
ration ("MLFD"), and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a Delaware corporation ("Securities Firm").
W I T N E S S E T H :
WHEREAS, MLFD has entered into an agreement with Merrill
Lynch Multi-State Municipal Series Trust, a Massachusetts
business trust (the "Trust"), pursuant to which it acts as the
exclusive distributor for the sale of Class C shares of
beneficial interest, par value $0.10 per share (the "Class C
shares"), of the Merrill Lynch [State] Municipal Bond Fund (the
"Fund") series of the Trust; and
WHEREAS, MLFD and the Trust have entered into a Class C
Shares Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended (the "Act"),
pursuant to which MLFD receives an account maintenance fee from
the Fund at the annual rate of 0.25% of average daily net assets
of the Fund relating to Class C shares for account maintenance
activities related to Class C shares of the Fund and a
distribution fee from the Fund at the annual rate of 0.35% of
average daily net assets of the Fund relating to Class C shares
for providing sales and promotional activities and services
related to the distribution of Class C shares of the Fund; and
WHEREAS, MLFD desires the Securities Firm to perform certain
account maintenance activities and sales and promotional
activities and services for the Fund's Class C shareholders and
the Securities Firm is willing to perform such activities and
services;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance
activities and services with respect to the Class C shares of the
Fund and incur expenditures in connection with such activities
and services of the types referred to in Paragraph 1 of the Plan.
2. The Securities Firm shall provide sales and promotional
activities and services with respect to the sale of the Class C
shares of the Fund, and incur distribution expenditures, of the
types referred to in Paragraph 2 of the Plan.
<PAGE> 2
3. As compensation for its activities and services
performed under this Agreement, MLFD shall pay the Securities
Firm an account maintenance fee and a distribution fee at the end
of each calendar month in an amount agreed upon by the parties
hereto.
4. The Securities Firm shall provide MLFD, at least
quarterly, such information as reasonably requested by MLFD to
enable MLFD to comply with the reporting requirements of Rule
12b-1 regarding the disbursement of the account maintenance fee
and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been
approved by votes of a majority of both (a) the Trustees of the
Trust and (b) those Trustees of the Trust who are not "interested
persons" of the Trust, as defined in the Act, and have no direct
or indirect financial interest in the operation of the Plan, this
Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Trustees"), cast in person at a meeting or
meetings called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as
such continuance is specifically approved at least annually in
the manner provided for approval of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the
event of its assignment or in the event of the termination of the
Plan or any amendment to the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By------------------------------------
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By------------------------------------
Title:
<PAGE> 3
CLASS C DISTRIBUTION PLAN
OF
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the day of October, 1994,
by and between Merrill Lynch Multi-State Municipal Series Trust,
a Massachusetts business trust (the "Trust"), and Merrill Lynch
Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H:
WHEREAS, the Trust is engaged in business as an open-end
investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, the Trust is authorized to establish separate
("Series") each of which will offer separate classes of shares of
beneficial interest par value $0.10 per share (the "Shares") to
selected groups of purchasers; and
WHEREAS, MLFD is a securities firm engaged in the business
of selling shares of investment companies either directly to
purchasers or through other securities dealers; and
WHEREAS, the Trust proposes to enter into a Class C Shares
Distribution Agreement with MLFD, pursuant to which MLFD will act
as the exclusive distributor and representative of the Trust in
the offer and sale of Class C shares of beneficial interest, par
value $0.10 per share (the "Class C shares"), of the Merrill
Lynch [State] Municipal Bond Fund (the "Fund") series of the
Trust to the public; and
WHEREAS, the Trust desires to adopt this Class C Dis-
tribution Plan (the "Plan") pursuant to Rule 12b-1 under the
Investment Company Act, pursuant to which the Trust will pay an
account maintenance fee and a distribution fee to MLFD with
respect to the Fund's Class C shares; and
WHEREAS, the Trustees of the Trust have determined that
there is a reasonable likelihood that adoption of the Plan will
benefit the Fund and its shareholders.
NOW, THEREFORE, the Trust hereby adopts, and MLFD hereby
agrees to the terms of, the Plan in accordance with Rule 12b-1
<PAGE> 4
under the Investment Company Act on the following terms and
conditions:
1. The Trust shall pay MLFD an account maintenance fee
under the Plan at the end of each month at the annual rate of
0.25% of average daily net assets of the Fund relating to Class C
shares to compensate MLFD and securities firms with which MLFD
enters into related agreements pursuant to Paragraph 3 hereof
("Sub-Agreements") for providing account maintenance activities
with respect to Class C shareholders of the Fund. Expenditures
under the Plan may consist of payments to financial consultants
for maintaining accounts in connection with Class C shares of the
Fund and payment of expenses incurred in connection with such
account maintenance activities including the costs of making
services available to shareholders including assistance in
connection with inquiries related to shareholder accounts.
2. The Trust shall pay MLFD a distribution fee under the
Plan at the end of each month at the annual rate of 0.35% of
average daily net assets of the Fund relating to Class C shares
to compensate MLFD and securities firms with which MLFD enters
into related Sub-Agreements for providing sales and promotional
activities and services. Such activities and services will
relate to the sale, promotion and marketing of the Class C shares
of the Fund. Such expenditures may consist of sales commissions
to financial consultants for selling Class C shares of the Fund,
compensation, sales incentives and payments to sales and
marketing personnel, and the payment of expenses incurred in its
sales and promotional activities, including advertising
expenditures related to the Fund and the costs of preparing and
distributing promotional materials. The distribution fee may
also be used to pay the financing costs of carrying the
unreimbursed expenditures described in this Paragraph 2. Payment
of the distribution fee described in this Paragraph 2 shall be
subject to any limitations set forth in any applicable regulation
of the National Association of Securities Dealers, Inc.
3. The Trust hereby authorizes MLFD to enter into
Sub-Agreements with certain securities firms ("Securities
Firms"), including Merrill Lynch, Pierce, Fenner & Smith
Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs
1 and 2 hereof. MLFD may reallocate all or a portion of its
account maintenance fee or distribution fee to such Securities
Firms as compensation for the above-mentioned activities and
services. Such Sub-Agreement shall provide that the Securities
Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting require-
ments set forth in Paragraph 4 hereof.
<PAGE> 5
4. MLFD shall provide the Trust for review by the Board of
Trustees, and the Trustees shall review, at least quarterly, a
written report complying with the requirements of Rule 12b-1
regarding the disbursement of the account maintenance fee and the
distribution fee during such period.
5. This Plan shall not take effect until it has been
approved by a vote of at least a majority, as defined in the
Investment Company Act, of the outstanding Class C voting securi-
ties of the Fund.
6. This Plan shall not take effect until it has been
approved, together with any related agreements, by votes of a
majority of both (a) the Trustees of the Trust and (b) those
Trustees of the Trust who are not "interested persons" of the
Trust, as defined in the Investment Company Act, and have no
direct or indirect financial interest in the operation of this
Plan or any agreements related to it (the "Rule 12b-1 Trustees
cast in person at a meeting or meetings called for the purpose of
voting on the Plan and such related agreements.
7. The Plan shall continue in effect for so long as such
continuance is specifically approved at least annually in the
manner provided for approval of the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a
majority of the Rule 12b-1 Trustees, or by vote of a majority of
the outstanding Class C voting securities of the Fund.
9. The Plan may not be amended to increase materially the
rate of payments provided for herein unless such amendment is
approved by at least a majority, as defined in the Investment
Company Act, of the outstanding Class C voting securities of the
Fund, and by the Trustees of the Trust in the manner provided for
in Paragraph 6 hereof, and no material amendment to the Plan
shall be made unless approved in the manner provided for approval
and annual renewal in Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomina-
tion of Trustees who are not interested persons, as defined in
the Investment Company Act, of the Trust shall be committed to
the discretion of the Trustees who are not interested persons.
11. The Fund shall preserve copies of the Plan and any
related agreements and all reports made pursuant to Paragraph 4
hereof, for a period of not less than six years from the date of
the Plan, or the agreements or such report, as the case may be,
the first two years in an easily accessible place.
<PAGE> 6
12. The Declaration of Trust establishing the Trust, dated
August 2, 1985, a copy of which, together with all amendments
thereto (the "Declaration"), is on file in the office of the
Secretary of the Commonwealth of Massachusetts, provides that the
name "Merrill Lynch Multi-State Municipal Series Trust" refers to
the Trustees under the Declaration collectively as trustees, but
not as individuals or personally; and no Trustee, shareholder,
officer, employee or agent of the Trust shall be held to any
personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or claim or
otherwise in connection with the affairs of the Trust, but the
"Trust Property" only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this
Distribution Plan as of the date first above written.
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES
TRUST
By-----------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By-----------------------------------------
Title:
<PAGE> 1
CLASS D SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the day of October, 1994, by and
between Merrill Lynch Funds Distributor, Inc. a Delaware corpo-
ration ("MLFD"), and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a Delaware corporation ("Securities Firm").
W I T N E S S E T H :
WHEREAS, MLFD has entered into an agreement with Merrill
Lynch Multi-State Municipal Series Trust, a Massachusetts
business trust (the "Trust"), pursuant to which it acts as the
exclusive distributor for the sale of Class D shares of
beneficial interest, par value $0.10 per share (the "Class D
shares"), of the Merrill Lynch [State] Municipal Bond Fund (the
"Fund") series of the Trust; and
WHEREAS, MLFD and the Trust have entered into a Class D
Shares Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended (the "Act"),
pursuant to which MLFD receives an account maintenance fee from
the Fund at the annual rate of 0.10% of average daily net assets
of the Fund relating to Class D shares for providing account
maintenance activities and services with respect to Class D
shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain
account maintenance activities and services, including assistance
in connection with inquiries related to shareholder accounts, for
the Fund's Class D shareholders and the Securities Firm is
willing to perform such services;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance
activities and services with respect to the Class D shares of the
Fund and incur expenditures in connection with such activities
and services, of the types referred to in Paragraph 1 of the
Plan.
2. As compensation for its services performed under this
Agreement, MLFD shall pay the Securities Firm a fee at the end of
each calendar month in an amount agreed upon by the parties
hereto.
3. The Securities Firm shall provide MLFD, at least
quarterly, such information as reasonably requested by MLFD to
enable MLFD to comply with the reporting requirements of Rule
<PAGE> 2
12b-1 regarding the disbursement of the fee during such period
referred to in Paragraph 3 of the Plan.
4. This Agreement shall not take effect until it has been
approved by votes of a majority of both (a) the Trustees of the
Trust and (b) those Trustees of the Trust who are not "interested
persons" of the Trust, as defined in the Act, and have no direct
or indirect financial interest in the operation of the Plan, this
Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Trustees"), cast in person at a meeting or
meetings called for the purpose of voting on this Agreement.
5. This Agreement shall continue in effect for as long as
such continuance is specifically approved at least annually in
the manner provided for approval of the Plan in Paragraph 5.
6. This Agreement shall automatically terminate in the
event of its assignment or in the event of the termination of the
Plan or any amendment to the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By------------------------------------
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By------------------------------------
Title:
<PAGE> 3
CLASS D DISTRIBUTION PLAN
OF
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the day of October, 1994,
by and between Merrill Lynch Multi-State Municipal Series Trust,
a Massachusetts business trust (the "Trust"), and Merrill Lynch
Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H :
WHEREAS, the Trust is engaged in business as an open-end
investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, the Trust is authorized to establish separate
("Series") each of which will offer separate classes of shares of
beneficial interest par value $0.10 per share (the "Shares") to
selected groups of purchasers; and
WHEREAS, MLFD is a securities firm engaged in the business
of selling shares of investment companies either directly to
purchasers or through other securities dealers; and
WHEREAS, the Trust proposes to enter into a Class D Shares
Distribution Agreement with MLFD, pursuant to which MLFD will act
as the exclusive distributor and representative of the Trust in
the offer and sale of Class D shares of beneficial interest, par
value $0.10 per share (the "Class D shares"), of the Merrill
Lynch [State] Municipal Bond Fund (the "Fund") series of the
Trust to the public; and
WHEREAS, the Trust desires to adopt this Class D Dis-
tribution Plan (the "Plan") pursuant to Rule 12b-1 under the
Investment Company Act, pursuant to which the Trust will pay an
account maintenance fee to MLFD with respect to the Fund's Class
D shares; and
WHEREAS, the Trustees of the Trust have determined that
there is a reasonable likelihood that adoption of the Plan will
benefit the Fund and its shareholders.
NOW, THEREFORE, the Trust hereby adopts, and MLFD hereby
agrees to the terms of, the Plan in accordance with Rule 12b-1
<PAGE> 4
under the Investment Company Act on the following terms and
conditions:
1. The Trust shall pay MLFD an account maintenance fee
under the Plan at the end of each month at the annual rate of
0.10% of average daily net assets of the Fund relating to Class D
shares to compensate MLFD and securities firms with which MLFD
enters into related agreements ("Sub-Agreements") pursuant to
Paragraph 2 hereof for providing account maintenance activities
with respect to Class D shareholders of the Fund. Expenditures
under the Plan may consist of payments to financial consultants
for maintaining accounts in connection with Class D shares of the
Fund and payment of expenses incurred in connection with such
account maintenance activities including the costs of making
services available to shareholders including assistance in
connection with inquiries related to shareholder accounts.
2. The Trust hereby authorizes MLFD to enter into
Sub-Agreements with certain securities firms ("Securities
Firms"), including Merrill Lynch, Pierce, Fenner & Smith
Incorporated, to provide compensation to such Securities Firms
for activities of the type referred to in Paragraph 1. MLFD may
reallocate all or a portion of its account maintenance fee to
such Securities Firms as compensation for the above-mentioned
activities. Such Sub-Agreement shall provide that the Securities
Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting
requirements set forth in Paragraph 3 hereof.
3. MLFD shall provide the Trust for review by the Board of
Trustees, and the Trustees shall review, at least quarterly, a
written report complying with the requirements of Rule 12b-1
regarding the disbursement of the account maintenance fee during
such period.
4. This Plan shall not take effect until it has been
approved by a vote of at least a majority, as defined in the
Investment Company Act, of the outstanding Class D voting securi-
ties of the Fund.
5. This Plan shall not take effect until it has been
approved, together with any related agreements, by votes of a
majority of both (a) the Trustees of the Trust and (b) those
Trustees of the Trust who are not "interested persons" of the
Trust, as defined in the Investment Company Act, and have no
direct or indirect financial interest in the operation of this
Plan or any agreements related to it (the "Rule 12b-1 Trustees"),
cast in person at a meeting or meetings called for the purpose of
voting on the Plan and such related agreements.
<PAGE> 5
6. The Plan shall continue in effect for so long as such
continuance is specifically approved at least annually in the
manner provided for approval of the Plan in Paragraph 5.
7. The Plan may be terminated at any time by vote of a
majority of the Rule 12b-1 Trustees, or by vote of a majority of
the outstanding Class D voting securities of the Fund.
8. The Plan may not be amended to increase materially the
rate of payments provided for in Paragraph 1 hereof unless such
amendment is approved by at least a majority, as defined in the
Investment Company Act, of the outstanding Class D voting
securities of the Fund, and by the Trustees of the Trust in the
manner provided for in Paragraph 5 hereof, and no material
amendment to the Plan shall be made unless approved in the
manner provided for approval and annual renewal in Paragraph 5
hereof.
9. While the Plan is in effect, the selection and nomina-
tion of Trustees who are not interested persons, as defined in
the Investment Company Act, of the Trust shall be committed to
the discretion of the Trustees who are not interested persons.
10. The Fund shall preserve copies of the Plan and any
related agreements and all reports made pursuant to Paragraph 3
hereof, for a period of not less than six years from the date of
the Plan, or the agreements or such report, as the case may be,
the first two years in an easily accessible place.
11. The Declaration of Trust establishing the Trust, dated
August 2, 1985, a copy of which, together with all amendments
thereto (the "Declaration"), is on file in the office of the
Secretary of the Commonwealth of Massachusetts, provides that the
name "Merrill Lynch Multi-State Municipal Series Trust" refers to
the Trustees under the Declaration collectively as trustees, but
not as individuals or personally; and no Trustee, shareholder,
officer, employee or agent of the Trust shall be held to any
personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or claim or
otherwise in connection with the affairs of the Trust, but the
"Trust Property" only shall be liable.
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this
Distribution Plan as of the date first above written.
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES
TRUST
By------------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By------------------------------------------
Title:
<PAGE> 1
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
CONNECTICUT MUNICIPAL BOND FUND - CLASS A
FOR THE PERIOD ENDING 7-31-94
<TABLE>
<CAPTION>
<S> <C>
Long term income generally based on yield to maturity times market value of each security $ 23,017
Plus short term income accrued for the past thirty days................................... 2,645
------------
Equals Total Income....................................................................... 25,661
Less expenses for the past thirty days.................................................... 0
------------
Equals net monthly income for yield calculation........................................... 25,661
------------
Average shares outstanding for 30 days.................................................... 576,701
Times the Maximum Offering Price.......................................................... 10.65
------------
Equals total dollars...................................................................... $ 6,141,861
============
Net monthly income divided by total dollars equals........................................ 0.004178103
Add 1..................................................................................... 1.004178103
Raise to the power of 6................................................................... 1.025331931
Subtract 1................................................................................ 0.025331931
Times 2................................................................................... 0.050663862
Expressed as a percantage equals the standardized yield for 30 day period................. 5.07%
============
Tax Rate.................................................................................. 28.00%
X = 1 minus Tax Rate...................................................................... 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30 day period............. 7.04%
============
</TABLE>
1
<PAGE> 2
MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND - CLASS A
07/01/94 - 07/31/94
<TABLE>
<CAPTION>
Since Since
Inception Inception
Avg. Annual Total
Return Return*
---------- ---------
<S> <C> <C>
Initial Investment........................................................ $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price................................. 10.42
--------- ---------
Divided by Net Asset Value................................................ 10.00
---------
Equals Shares Purchased................................................... 96.00 100.00
Plus Shares Acquired through Dividend Reinvestment........................ 0.36 0.37
--------- ---------
Equals Shares Held at 07/31/94............................................ 96.36 100.37
Multiplied by Net Asset Value at 07/31/94................................. 10.23 10.23
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment (ERV) at 07/31/94..... $ 985.71 $1.026.79
Divided by $1,000 (P)..................................................... 0.9857 1.0268
Subtract 1................................................................ -0.0143 0.0262
Expressed as a percentage equals the Aggregate Total Return for the
Period (T).............................................................. -1.43%
=========
Expressed as a percentage equals the Aggregate Total Return for the
Period.................................................................. 2.68%
========
ERV divided by P.......................................................... 0.9857
Raise to the power of..................................................... 12.1667
Equals.................................................................... 0.8394
Subtract 1................................................................ -0.1606
Expressed as a percentage equals the Average Annualized Total Return...... -16.06%
=========
</TABLE>
* Does not include sales charge for the period.
2
<PAGE> 1
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
CONNECTICUT MUNICIPAL BOND FUND - CLASS B
FOR THE PERIOD ENDING 7-31-94
<TABLE>
<CAPTION>
<S> <C>
Long term income generally based on yield to maturity times market value of each security $ 55,095
Plus short term income accrued for the past thirty days................................... 6,330
------------
Equals Total Income....................................................................... 61,426
Less expenses for the past thirty days.................................................... 5,678
------------
Equals net monthly income for yield calculation........................................... 55,747
------------
Average shares outstanding for 30 days.................................................... 1,370,893
Times the Net Asset Value................................................................. 10.22
------------
Equals total dollars...................................................................... $ 14,010,531
============
Net monthly income divided by total dollars equals........................................ 0.003978956
Add 1..................................................................................... 1.003978956
Raise to the power of 6................................................................... 1.024112478
Subtract 1................................................................................ 0.024112478
Times 2................................................................................... 0.048224956
Expressed as a percentage equals the standardized yield for the 30 day period............. 4.82%
============
Tax Rate.................................................................................. 28.00%
X = 1 minus Tax Rate...................................................................... 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30 day period............. 6.69%
============
</TABLE>
1
<PAGE> 2
MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND - CLASS B
07/01/94 - 07/31/94
<TABLE>
<CAPTION>
Since Since
Inception Inception
Avg. Annual Total
Return Return*
---------- ---------
<S> <C> <C>
Initial Investment...................... $1,000.00 $1,000.00
Divided by Net Asset Value.............. 10.00 10.00
--------- ---------
Equals Shares Purchased................. 100.00 100.00
Plus Shares Acquired through Dividend
Reinvestment.......................... 0.34 0.34
--------- ---------
Equals Shares Held at 07/31/94.......... 100.34 100.34
Multiplied by Net Asset Value at
07/31/94.............................. 10.23 10.23
--------- ---------
Equals Ending Value before deduction for
contingent deferred sales charge...... 1,026.44 1,026.44
Less deferred sales charge.............. (40.00) 0.00
--------- ---------
Equals Ending Redeemable Value at $1,000
Investment (ERV) at 07/31/94.......... $ 986.44 $1,026.44
--------- ---------
Divided by $1,000 (P)................... 0.9864 1.0264
Subtract 1.............................. -0.0136 0.0264
Expressed as a percentage equals the
Aggregate Total Return for the
Period (T)............................ -1.36%
==========
Expressed as a percentage equals the
Aggregate Total Return for the
Period................................ 2.64%
========
ERV divided by P........................ 0.9864
Raise to the power of .................. 12.1667
Equals.................................. 0.8469
Subtract 1.............................. -0.1531
Expressed as a percentage equals the
Average Annualized Total Return....... -15.31%
=========
</TABLE>
----------
*Does not include sales charge for the period.
2
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000888957
<NAME> MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
<SERIES>
<NUMBER> 18
<NAME> MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 23159839
<INVESTMENTS-AT-VALUE> 23644459
<RECEIVABLES> 1287639
<ASSETS-OTHER> 108297
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25040395
<PAYABLE-FOR-SECURITIES> 1504589
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 89838
<TOTAL-LIABILITIES> 1594427
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22955596
<SHARES-COMMON-STOCK> 641497
<SHARES-COMMON-PRIOR> 5000
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5752
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 484620
<NET-ASSETS> 6557221
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 90519
<OTHER-INCOME> 0
<EXPENSES-NET> 5795
<NET-INVESTMENT-INCOME> 84724
<REALIZED-GAINS-CURRENT> 5752
<APPREC-INCREASE-CURRENT> 484620
<NET-CHANGE-FROM-OPS> 575096
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 26747
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 635204
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 1293
<NET-CHANGE-IN-ASSETS> 23345968
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9061
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 31317
<AVERAGE-NET-ASSETS> 5751152
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> .22
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.22
<EXPENSE-RATIO> 1.54
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000888957
<NAME> MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
<SERIES>
<NUMBER> 18
<NAME> MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 23159839
<INVESTMENTS-AT-VALUE> 23644459
<RECEIVABLES> 1287639
<ASSETS-OTHER> 108297
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25040395
<PAYABLE-FOR-SECURITIES> 1504589
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 89838
<TOTAL-LIABILITIES> 1594427
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22955596
<SHARES-COMMON-STOCK> 1652211
<SHARES-COMMON-PRIOR> 5000
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5752
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 484620
<NET-ASSETS> 16888747
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 90519
<OTHER-INCOME> 0
<EXPENSES-NET> 5795
<NET-INVESTMENT-INCOME> 84724
<REALIZED-GAINS-CURRENT> 5752
<APPREC-INCREASE-CURRENT> 484620
<NET-CHANGE-FROM-OPS> 575096
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 57977
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1702575
<NUMBER-OF-SHARES-REDEEMED> 58216
<SHARES-REINVESTED> 2852
<NET-CHANGE-IN-ASSETS> 23345968
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9061
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 31317
<AVERAGE-NET-ASSETS> 13646576
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> .22
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.22
<EXPENSE-RATIO> 2.04
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
