AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1998
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. 5 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 167 [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 OFFICE)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS:
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
COUNSEL FOR THE TRUST: MICHAEL J. HENNEWINKEL, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH JR., ESQ.
---------------
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED: Shares of Beneficial Interest, par value
$.10 per share
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
November 6, 1998
Merrill Lynch Connecticut Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust
P.O. Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
----------------
Merrill Lynch Connecticut Municipal Bond Fund (the "Fund") is a mutual
fund that seeks to provide shareholders with as high a level of income exempt
from Federal income tax and the Connecticut personal income tax as is
consistent with prudent investment management. The Fund invests primarily in a
portfolio of long-term, investment grade obligations issued by or on behalf of
the State of Connecticut, its political subdivisions, agencies and
instrumentalities and obligations of other qualifying issuers, such as issuers
located in Puerto Rico, the U.S. Virgin Islands and Guam, which pay interest
exempt from Federal income tax and the Connecticut personal income tax
("Connecticut Municipal Bonds"). The Fund may invest in certain tax-exempt
securities classified as "private activity bonds" that may subject certain
investors in the Fund to an alternative minimum tax. At times, the Fund may
seek to hedge its portfolio through the use of futures transactions and
options. There can be no assurance that the investment objective of the Fund
will be realized. FOR MORE INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE AND
POLICIES, PLEASE SEE "INVESTMENT OBJECTIVE AND POLICIES" ON PAGE 12.
----------------
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares and other relevant circumstances.
See "Merrill Lynch Select Pricing(SM) System" on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor (the
"Distributor"), a division of Princeton Funds Distributor, Inc. ("PFD"), P.O.
Box 9081, Princeton, New Jersey 08543-9081 [(609) 282-2800], and other
securities dealers which have entered into selected dealer agreements with the
Distributor, including Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"). The minimum initial purchase is $1,000 and the minimum
subsequent purchase is $50 except that for participants in certain fee-based
programs the minimum initial purchase is $250 and the minimum subsequent
purchase is $50. Merrill Lynch may charge its customers a processing fee
(presently $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through Financial Data Services, Inc. (the "Transfer
Agent") are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated November 6, 1998 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing
Merrill Lynch Multi-State Municipal Series Trust (the "Trust") at the above
telephone number or address. The Commission maintains a Web site
(http:/www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding the Fund.
The Statement of Additional Information is hereby incorporated by reference
into this Prospectus. The Fund is a separate series of the Trust, an open-end
management investment company organized as a Massachusetts business trust.
----------------
Fund Asset Management -- Manager
Merrill Lynch Funds Distributor -- Distributor
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a)
---------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering
price) ................................. 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments .......................... None
Deferred Sales Charge (as a percentage
of original purchase price or
redemption proceeds, whichever is
lower) ................................. None(d)
Exchange Fee ............................ None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees(g) ...................... 0.55%
Rule 12b-1 Fees(h):
Account Maintenance Fees ............... None
Distribution Fees ...................... None
Other Expenses:
Shareholder Servicing Costs(i) .......... 0.03%
Other ................................... 0.31%
----------
Total Other Expenses ................... 0.34%
----------
Total Fund Operating Expenses(+) ......... 0.89%
==========
<CAPTION>
CLASS B(b) CLASS C CLASS D
--------------------------------------- ------------------------ ---------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering
price) ................................. None None 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments .......................... None None None
Deferred Sales Charge (as a percentage
of original purchase price or
redemption proceeds, whichever is
lower) ................................. 4.0% during the first year, 1.0% for one year(f) None(d)
decreasing 1.0% annually
thereafter to 0.0% after the
fourth year(e)
Exchange Fee ............................ None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees(g) ...................... 0.55% 0.55% 0.55%
Rule 12b-1 Fees(h):
Account Maintenance Fees ............... 0.25% 0.25% 0.10%
Distribution Fees ...................... 0.25% 0.35% None
(CLASS B SHARES CONVERT TO
CLASS D SHARES AUTOMATICALLY
AFTER APPROXIMATELY TEN
YEARS AND CEASE BEING
SUBJECT TO DISTRIBUTION FEES AND ARE
SUBJECT TO LOWER ACCOUNT
MAINTENANCE FEES)
Other Expenses:
Shareholder Servicing Costs(i) .......... 0.03% 0.03% 0.03%
Other ................................... 0.32% 0.32% 0.31%
---- ---- ----------
Total Other Expenses ................... 0.35% 0.35% 0.34%
---- ---- ----------
Total Fund Operating Expenses(+) ......... 1.40% 1.50% 0.99%
==== ==== ==========
</TABLE>
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain participants in fee-based programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 25 and "Shareholder Services -- Fee-Based
Programs" -- page 36.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 26.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by participants in connection with certain fee-based
programs. Class A and Class D purchases of $1,000,000 or more may not be
subject to an initial sales charge. See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares" -- page 25.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
Such CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 36.
(e) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder Services --
Fee-Based Programs" -- page 36.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 36.
(g) See "Management of the Trust -- Management and Advisory Arrangements" --
page 21.
(h) See "Purchase of Shares -- Distribution Plans" -- page 29.
(i) See "Management of the Trust -- Transfer Agency Services" -- page 22.
(+) For the fiscal year ended July 31, 1998, Fund Asset Management, L.P. ("FAM"
or the "Manager") voluntarily waived $70,737 of the management fees due from
the Fund. Total Fund Operating Expenses in the fee table have been restated
to assume the absence of any such waiver because the Manager may discontinue
or reduce such waiver of fees at any time without notice. For the fiscal
year ended July 31, 1998, the Manager waived management fees totaling 0.12%
for Class A shares, 0.13% for Class B shares, 0.13% for Class C shares and
0.12% for Class D shares, after which the Fund's total expense ratio was
0.77% for Class A shares, 1.27% for Class B shares, 1.37% for Class C shares
and 0.87% for Class D shares.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
--------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment
including the maximum $40 initial sales charge (Class A and Class D
shares only) and assuming (1) the Total Fund Operating Expenses for
each class set forth on page 2, (2) a 5% annual return throughout the
periods and (3) redemption at the end of the period (including any
applicable CDSC for Class B and Class C shares):
Class A ........................................................... $49 $67 $87 $145
Class B ........................................................... $54 $64 $77 $168
Class C ........................................................... $25 $47 $82 $179
Class D ........................................................... $50 $70 $93 $156
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A ........................................................... $49 $67 $87 $145
Class B ........................................................... $14 $44 $77 $168
Class C ........................................................... $15 $47 $82 $179
Class D ........................................................... $50 $70 $93 $156
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charge permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$5.35) for confirming purchases and repurchases. Purchases and redemptions made
directly through the Transfer Agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares."
3
<PAGE>
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 registered investment companies advised by Merrill Lynch Asset Management,
L.P. ("MLAM") or Fund Asset Management, L.P. ("FAM" or the "Manager"), an
affiliate of MLAM. Funds advised by MLAM or FAM that use the Merrill Lynch
Select Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, are imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will
be calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be used
to finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares."
4
<PAGE>
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(2)(3)
B CDSC for a period of four 0.25% 0.25% B shares convert to
years, at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(4) ten years(5)
C 1.0% CDSC for one year(6) 0.25% 0.35% No
D Maximum 4.00% initial 0.10% No No
sales charge(3)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares -- Eligible Class
A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by participants in connection with certain fee-based programs.
Class A and Class D share purchases of $1,000,000 or more may not be
subject to an initial sales charge but instead may be subject to a 1.0%
CDSC if redeemed within one year. Such CDSC may be waived in connection
with certain fee-based programs. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-based
programs may differ. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class C Shares to
Class B Shares." Also, Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made have an eight year conversion period.
If Class B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the Class B
shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
CLASS A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares of the Fund in a shareholder
account are entitled to purchase additional Class A shares of the Fund in
that account. Other eligible investors include participants in certain
fee-based programs. In addition, Class A shares will be offered at net
asset value to Merrill Lynch & Co., Inc. ("ML & Co.") and its
subsidiaries (the term "subsidiaries," when used herein with respect to
ML & Co., includes MLAM, the Manager and certain other entities directly
or indirectly wholly owned and controlled by ML & Co.) and their
directors and employees, and to members of the Boards of MLAM-advised
mutual funds. The maximum initial sales charge of 4.00% is reduced for
purchases of $25,000 and over and waived for purchases of Class A shares
by participants in connection with certain fee-based programs. Purchases
of $1,000,000 or more may not be subject to an initial sales charge, but
if the initial sales charge is waived, such purchases may be subject to a
1.0% CDSC if the shares are redeemed within one year after purchase. Such
CDSC may be waived in connection with certain fee-based programs. Sales
charges also are reduced under a right of accumulation that takes into
account the investor's holdings of all classes of all MLAM-advised mutual
funds. See "Purchase of Shares -- Initial Sales Charge Alternatives --
Class A and Class D Shares."
5
<PAGE>
CLASS B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25% and
an ongoing distribution fee of 0.25% of the Fund's average net
assets attributable to Class B shares, and a CDSC if they are redeemed
within four years of purchase. Such CDSC may be modified in connection
with certain fee-based programs. Approximately ten years after issuance,
Class B shares will convert automatically into Class D shares of the
Fund, which are subject to a lower account maintenance fee of 0.10% and
no distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert into Class D shares
automatically after approximately eight years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired in
the exchange will apply, as will the Class D account maintenance fee of
the acquired fund upon the conversion, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares will
occur at least once each month on the basis of the relative net asset
values of the shares of the two classes on the conversion date, without
the imposition of any sales load, fee or other charge. Conversion of
Class B shares to Class D shares will not be deemed a purchase or sale of
the shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares is modified as described under "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C Shares --
Conversion of Class B Shares to Class D Shares."
CLASS C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25% and
an ongoing distribution fee of 0.35% of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a CDSC
of 1.0% if they are redeemed within one year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. Although
Class C shares are subject to a CDSC for only one year (as compared to
four years for Class B shares), Class C shares have no conversion feature
and, accordingly, an investor that purchases Class C shares will be
subject to account maintenance fees and higher distribution fees that
will be imposed on Class C shares for an indefinite period subject to
annual approval by the Trust's Board of Trustees and regulatory
limitations.
CLASS D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of the
Fund's average net assets attributable to Class D shares. Class D shares
are not subject to an ongoing distribution fee or any CDSC when they are
redeemed. The maximum initial sales charge of 4.00% is reduced for
purchases of $25,000 and over. Purchases of $1,000,000 or more may not be
subject to an initial sales charge, but if the initial sales charge is
waived such purchases may be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule for
Class A shares, except that there is no waiver for purchases of Class D
shares in connection with certain fee-based programs. Class D shares also
will be issued upon conversion of Class B shares as described above under
"Class B." See "Purchase of Shares -- Initial Sales Charge Alternatives
-- Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her particular circumstances.
6
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES. Investors that prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the CDSCs imposed in connection with purchases of Class B or Class C
shares. Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors that previously purchased Class A
shares may no longer be eligible to purchase Class A shares of other MLAM-
advised mutual funds, those previously purchased Class A shares, together with
Class B, Class C and Class D share holdings, will count toward a right of
accumulation that may qualify the investor for reduced initial sales charges on
new initial sales charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and Class C shares
to have higher expense ratios, pay lower dividends and have lower total returns
than the initial sales charge shares. The ongoing Class D account maintenance
fees will cause Class D shares to have a higher expense ratio, pay lower
dividends and have a lower total return than Class A shares.
DEFERRED SALES CHARGE ALTERNATIVES. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately ten years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine
it to be most advantageous to have all their funds invested initially and
intend to hold their shares for an extended period of time. Investors in Class
B shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they are subject to higher
distribution fees and forgo the Class B conversion feature, making their
investment subject to account maintenance and distribution fees for an
indefinite period of time. In addition, while both Class B and Class C
distribution fees are subject to the limitations on asset-based sales charges
imposed by the NASD, the Class B distribution fees are further limited under a
voluntary waiver of asset-based sales charges. See "Purchase of Shares --
Limitations on the Payment of Deferred Sales Charges."
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Financial statements for the year
ended July 31, 1998 and the independent auditors' report thereon appear in the
annual report of the Fund for the fiscal year ended July 31, 1998 (the "Annual
Report"), and are incorporated by reference in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the Fund's audited financial statements. Further
information about the performance of the Fund is contained in the Fund's most
recent annual report to shareholders which may be obtained, without charge, by
calling or by writing the Trust at the telephone number or address on the front
cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED JULY 31, JULY 1, 1994+
----------------------------------------------- TO JULY 31,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................ $ 10.68 $ 10.29 $ 10.23 $ 10.22 $ 10.00
------- ------- ------- ------- -------
Investment income -- net ................................... .52 .56 .58 .60 .05
Realized and unrealized gain on investments -- net ......... .11 .39 .06 .01 .22
------- ------- ------- ------- -------
Total from investment operations ............................ .63 .95 .64 .61 .27
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income -- net ................................... (.52) (.56) (.58) (.60) (.05)
Realized gain on investments -- net ........................ -- -- -- --++ --
-------- -------- -------- ------- --------
Total dividends and distributions ........................... (.52) (.56) (.58) (.60) (.05)
-------- -------- -------- ------- --------
Net asset value, end of period .............................. $ 10.79 $ 10.68 $ 10.29 $ 10.23 $ 10.22
======== ======== ======== ======= ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share .......................... 6.00% 9.51% 6.37% 6.30% 2.68%#
======== ======== ======== ======= ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .............................. .77% .52% .34% .07% .00%*
======== ======== ======== ======= ========
Expenses .................................................... .89% .92% .98% 1.19% 1.54%*
======== ======== ======== ======= ========
Investment income -- net .................................... 4.79% 5.38% 5.58% 6.02% 5.48%*
======== ======== ======== ======= ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) .................... $ 8,855 $ 8,380 $ 7,589 $ 7,979 $ 6,557
======== ======== ======== ======= =========
Portfolio turnover .......................................... 53.99% 32.46% 57.58% 60.99% 3.07%
======== ======== ======== ======= =========
</TABLE>
- --------
+ Commencement of operations.
++ Amount is less than $.01 per share.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# sAggregate total investment return.
8
<PAGE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED JULY 31, JULY 1, 1994+
----------------------------------------------- TO JULY 31,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................ $ 10.68 $ 10.29 $ 10.23 $ 10.22 $ 10.00
------- ------- ------- ------- -------
Investment income -- net ................................... .46 .51 .53 .55 .04
Realized and unrealized gain on investments -- net ......... .11 .39 .06 .01 .22
------- ------- ------- ------- -------
Total from investment operations ............................ .57 .90 .59 .56 .26
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income -- net ................................... (.46) (.51) (.53) (.55) (.04)
Realized gain on investments -- net ........................ -- -- -- --++ --
------- ------- ------- ------- --------
Total dividends and distributions ........................... (.46) (.51) (.53) (.55) (.04)
------- ------- ------- ------- --------
Net asset value, end of period .............................. $ 10.79 $ 10.68 $ 10.29 $ 10.23 $ 10.22
======= ======= ======= ======= ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share .......................... 5.47% 8.96% 5.82% 5.77% 2.64%#
======= ======= ======= ======= ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .............................. 1.27% 1.02% .85% .58% .50%*
======= ======= ======= ======= ========
Expenses .................................................... 1.40% 1.43% 1.49% 1.70% 2.04%*
======= ======= ======= ======= ========
Investment income -- net .................................... 4.28% 4.87% 5.07% 5.51% 5.00%*
======= ======= ======= ======= ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) .................... $41,964 $35,563 $31,359 $30,265 $ 16,889
======= ======= ======= ======= =========
Portfolio turnover .......................................... 53.99% 32.46% 57.58% 60.99% 3.07%
======= ======= ======= ======= =========
</TABLE>
- --------
+ Commencement of operations.
++ Amount is less than $.01 per share.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
9
<PAGE>
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED JULY 31, OCTOBER 21, 1994+
--------------------------------------- TO JULY 31,
1998 1997 1996 1995
----------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................ $ 10.69 $ 10.30 $ 10.24 $ 9.82
------- ------- ------- -------
Investment income -- net ................................... .45 .50 .52 .42
Realized and unrealized gain on investments -- net ......... .11 .39 .06 .42
------- ------- ------- -------
Total from investment operations ............................ .56 .89 .58 .84
------- ------- ------- -------
Less dividends and distributions:
Investment income -- net ................................... (.45) (.50) (.52) (.42)
Realized gain on investments -- net ........................ -- -- -- --++
-------- -------- -------- --------
Total dividends and distributions ........................... (.45) (.50) (.52) (.42)
-------- -------- -------- --------
Net asset value, end of period .............................. $ 10.80 $ 10.69 $ 10.30 $ 10.24
======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share .......................... 5.36% 8.84% 5.72% 8.79%#
======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .............................. 1.37% 1.12% .95% .74%*
======== ======== ======== ========
Expenses .................................................... 1.50% 1.53% 1.58% 1.77%*
======== ======== ======== ========
Investment income -- net .................................... 4.17% 4.77% 4.96% 5.43%*
======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) .................... $ 4,399 $ 2,016 $ 1,829 $ 820
======== ======== ======== =========
Portfolio turnover .......................................... 53.99% 32.46% 57.58% 60.99%
======== ======== ======== =========
</TABLE>
- --------
+ Commencement of operations
++ Amount is less than $.01 per share.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
10
<PAGE>
<TABLE>
<CAPTION>
CLASS D
------------------------------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED JULY 31, OCTOBER 21, 1994+
--------------------------------------- TO JULY 31,
1998 1997 1996 1995
----------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................ $ 10.68 $ 10.29 $ 10.23 $ 9.82
------- ------- ------- -------
Investment income -- net ................................... .51 .55 .57 .46
Realized and unrealized gain on investments -- net ......... .11 .39 .06 .41
------- ------- ------- -------
Total from investment operations ............................ .62 .94 .63 .87
------- ------- ------- -------
Less dividends and distributions:
Investment income -- net ................................... (.51) (.55) (.57) (.46)
Realized gain on investments -- net ........................ -- -- -- --++
-------- -------- -------- --------
Total dividends and distributions ........................... (.51) (.55) (.57) (.46)
-------- -------- -------- --------
Net asset value, end of period .............................. $ 10.79 $ 10.68 $ 10.29 $ 10.23
======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share .......................... 5.90% 9.40% 6.26% 9.10%#
======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement .............................. .87% .62% .44% .22%*
======== ======== ======== ========
Expenses .................................................... .99% 1.03% 1.07% 1.27%*
======== ======== ======== ========
Investment income -- net .................................... 4.67% 5.27% 5.46% 5.96%*
======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) .................... $ 4,634 $ 3,440 $ 2,657 $ 1,067
======== ======== ======== =========
Portfolio turnover .......................................... 53.99% 32.46% 57.58% 60.99%
======== ======== ======== =========
</TABLE>
- --------
+ Commencement of operations
++ Amount is less than $.01 per share.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
11
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal income tax and the Connecticut
personal income tax 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 U.S. Virgin
Islands and Guam, which pay interest exempt, in the opinion of bond counsel to
the issuer, from Federal income tax and the Connecticut personal income tax.
Obligations bearing interest exempt from Federal income taxes are referred to
herein as "Municipal Bonds" and obligations the interest on which is exempt
from both Federal income tax and the Connecticut personal income tax 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 Fund may also
invest in variable rate demand obligations ("VRDOs"). The interest on Municipal
Bonds may bear a fixed rate or be payable at a variable or floating rate. At
least 80% of the Municipal Bonds purchased by the Fund primarily will be what
are commonly referred to as "investment grade" securities, which are
obligations rated at the time of purchase within the four highest quality
ratings as determined by either Moody's Investors Service, Inc. ("Moody's")
(currently Aaa, Aa, A and Baa), Standard & Poor's ("Standard & Poor's")
(currently AAA, AA, A and BBB) or Fitch IBCA, Inc. ("Fitch") (currently AAA,
AA, A and BBB). If Municipal Bonds are unrated, such securities will possess
creditworthiness comparable, in the opinion of the Manager, to obligations in
which the Fund may invest. Municipal Bonds rated in the fourth highest rating
category, while considered "investment grade," have certain speculative
characteristics and are more likely to be downgraded to non-investment grade
than obligations rated in one of the top three rating categories. See Appendix
II -- "Ratings of Municipal Bonds" in the Statement of Additional Information
for more information regarding ratings of debt securities. An issue of rated
Municipal Bonds may cease to be rated or its rating may be reduced below
"investment grade" subsequent to its purchase by the Fund. If an obligation is
downgraded below investment grade, the Manager will consider factors such as
price, credit risk, market conditions, financial condition of the issuer and
interest rates to determine whether to continue to hold the obligation in the
Fund's portfolio.
The Fund may invest up to 20% of its total assets in Municipal Bonds that
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch, or
which, in the Manager's judgment, possess similar credit characteristics. Such
securities, sometimes referred to as "high yield" or "junk" bonds, are
predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. The market prices of high-yielding, lower-rated securities may
fluctuate more than higher-rated securities and may decline significantly in
periods of general economic difficulty, which may follow periods of rising
interest rates. In purchasing such securities, the Fund will rely on the
Manager's judgment, analysis and experience in evaluating the creditworthiness
of the issuer of such securities. The Manager will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the quality of its
management and regulatory matters. See "Investment Objective and Policies" in
the Statement of Additional Information for a more detailed discussion of the
pertinent risk factors involved in investing in "high yield" or "junk" bonds
and
12
<PAGE>
Appendix II -- "Ratings of Municipal Bonds" in the Statement of Additional
Information for additional information regarding ratings of debt securities.
The Fund does not intend to purchase debt securities that are in default or
which the Manager believes will be in default.
Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing the
quality of such bonds not only the creditworthiness of the issuer of such bonds
but also the creditworthiness of the financial institution.
The Fund's investments may also include VRDOs and VRDOs in the form of
participation interests ("Participating VRDOs") in variable rate tax-exempt
obligations held by a financial institution. The VRDOs in which the Fund will
invest are tax-exempt obligations which contain a floating or variable interest
rate adjustment formula and an unconditional right of demand on the part of the
holder thereof to receive payment of the unpaid principal balance plus accrued
interest on a short notice period not to exceed seven days. Participating VRDOs
provide the Fund with a specified undivided interest (up to 100%) of the
underlying obligation and the right to demand payment of the unpaid principal
balance plus accrued interest on the Participating VRDOs from the financial
institution on a specified number of days' notice, not to exceed seven days.
There is, however, the possibility that because of 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 income tax and the Connecticut personal income tax.
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 to the issuer, from
Federal income taxation but is not exempt from the Connecticut personal income
tax. 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 instruments
evidencing interests in one or more long-term municipal securities.
Under normal circumstances, except when acceptable securities are
unavailable as determined by the Manager, the Fund will invest at least 65% of
its total assets in 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 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-3/VMIG-3 through MIG-4/VMIG-4 for notes and VRDOs and Prime-1 through
Prime-3 for commercial paper (as determined by Moody's), SP-1 or
13
<PAGE>
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 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, the account maintenance and
distribution costs.
RISK FACTORS AND SPECIAL CONSIDERATIONS RELATING TO MUNICIPAL BONDS
The risks and special considerations involved in investments in Municipal
Bonds vary with the types of instruments being acquired. Investments in
Non-Municipal Tax-Exempt Securities may present similar risks, depending on the
particular product. Certain instruments in which the Fund may invest may be
characterized as derivative instruments. See "Description of Municipal Bonds"
and "Financial Futures Transactions and Options."
Moreover, the Fund ordinarily will invest at least 65% of its total assets
in Connecticut Municipal Bonds, and therefore it is more susceptible to factors
adversely affecting issuers of Connecticut Municipal Bonds than is a municipal
bond mutual fund that is not concentrated in issuers of Connecticut Municipal
Bonds to this degree.
Connecticut's economy relies in part on activities that may be adversely
affected by cyclical change, and recent declines in defense spending have had a
significant impact on unemployment levels. However, unemployment levels have
started to improve. Also favorably noted is Connecticut's personal wealth level
which, despite the poverty of certain of its largest cities, continues to rank
among the highest in the nation in terms of per capita income. The State has
recorded General Fund surpluses in fiscal years 1992 through 1997, but had
accumulated a General Fund deficit totalling $965.7 million through the end of
fiscal year 1991. In 1991, such deficit was funded by the issuance of General
Obligation Economic Recovery Notes that were to be payable no later than June
30, 1996, but certain of such notes have been rescheduled to be paid over the
four fiscal years ending June 30, 1999. The State's general obligation bonds
are rated AA by Standard & Poor's, Aa3 by Moody's and AA by Fitch.
The value of Municipal Bonds generally may be affected by uncertainties in
the municipal markets as a result of legislation or litigation changing the
taxation of Municipal Bonds or the rights of Municipal Bond holders in the
event of a bankruptcy. Municipal bankruptcies are rare, and certain provisions
of the U.S. Bankruptcy Code governing such bankruptcies are unclear. Further,
the application of state law to Municipal Bond issuers
14
<PAGE>
could produce varying results among the states or among Municipal Bond issuers
within a state. These uncertainties could have a significant impact on the
prices of the Connecticut Municipal Bonds or Municipal Bonds in which the Fund
invests.
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 "Description of Municipal Bonds" in the Statement of Additional
Information and see also 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 excluded from gross income for purposes of Federal income taxation,
and as Connecticut Municipal Bonds if the interest thereon is exempt from
Federal income tax and Connecticut personal income tax, even though such bonds
may be "private activity bonds," as discussed below.
The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" bonds, which latter category includes
industrial development bonds ("IDBs") and, for bonds issued after August 15,
1986, private activity bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. The taxing power of any governmental entity may be
limited, however, by provisions of its state constitution or laws, and an
entity's creditworthiness will depend on many factors, including potential
erosion of the tax base due to population declines, natural disasters, declines
in the state's industrial base or inability to attract new industries, economic
limits on the ability to tax without eroding the tax base, state legislative
proposals or voter initiatives to limit ad valorem real property and income
taxes and the extent to which the entity relies on Federal or state aid, access
to capital markets or other factors beyond the state's or entity's control.
Accordingly, the capacity of the issuer of a general obligation bond as to the
timely payment of interest and the repayment of principal when due is affected
by the issuer's maintenance of its tax base.
Revenue bonds 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 may purchase IDBs and private activity bonds. IDBs and private
activity bonds are, in most cases, tax-exempt securities issued by states,
municipalities or public authorities to provide funds, usually through a loan
or lease arrangement to a private entity for the purpose of financing
construction or improvement of a facility to be used by the private entity.
Such bonds are secured primarily by revenues derived from loan repayments or
lease payments due from the entity which may or may not be guaranteed by a
parent company or otherwise
15
<PAGE>
secured. IDBs and private activity bonds are generally not secured by a pledge
of the taxing power of the issuer of such bonds. Therefore, an investor should
be aware that repayment of such bonds generally depends on the revenues of a
private entity and be aware of the risks that such an investment may entail.
Continued ability of an entity to generate sufficient revenues for the payment
of principal and interest on such bonds will be affected by many factors
including the size of the entity, capital structure, demand for its products or
services, competition, general economic conditions, 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, which are normally issued by special purpose authorities. If
an issuer of moral obligation bonds is unable to meet its obligations,
repayment of such bonds becomes a moral commitment, but not a legal obligation,
of the state or municipality in question.
The Fund may invest in Municipal Bonds (and Non-Municipal Tax-Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an index.
To the extent the Fund invests in these types of Municipal Bonds, the Fund's
return on such Municipal Bonds will be subject to risk with respect to the
value of the particular index. Interest and principal payable on the Municipal
Bonds may also be based on relative changes among particular indices. Also, the
Fund may invest in so-called "inverse floating obligations" or "residual
interest bonds" on which the interest rates typically decline as short-term
market rates increase and increase as short-term market rates decline. The
Fund's return on such types of Municipal Bonds (and Non-Municipal Tax-Exempt
Securities) will be subject to risk with respect to the value of the particular
index, which may include reduced or eliminated interest payments and losses of
invested principal. Such securities have the effect of providing a degree of
investment leverage, since they may increase or decrease in value in response
to changes, as an illustration, in market interest rates at a rate which is a
multiple (typically two) of the rate at which fixed-rate long-term tax-exempt
securities increase or decrease in response to such changes. As a result, the
market values of such securities will generally be more volatile than the
market values of fixed-rate tax-exempt securities. To seek to limit the
volatility of these securities, the Fund may purchase inverse floating
obligations with shorter-term maturities or which contain limitations on the
extent to which the interest rate may vary. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's total assets. The Manager believes, however,
that indexed and inverse floating obligations represent flexible portfolio
management instruments for the Fund which allow the Fund to seek potential
investment rewards, hedge other portfolio positions or vary the degree of
investment leverage relatively efficiently under different market conditions.
Also included within the general category of Municipal Bonds are
participation certificates government authorities or entities to finance the
acquisition or construction of equipment, land and/or facilities. The
certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called
"lease obligations") relating to such equipment, land or facilities. Although
lease obligations do not constitute general obligations of the issuer for which
the issuer's unlimited taxing power is pledged, a lease obligation is
frequently backed by the issuer's covenant to budget for, appropriate and make
the payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the issuer has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a type of financing that has not yet developed the
depth of marketability associated with
16
<PAGE>
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 total assets. The Fund may, however, invest without regard to such
limitation in lease obligations which the Manager, pursuant to guidelines which
have been adopted by the Board of Trustees and subject to the supervision of
the Board, determines to be liquid. The Manager will deem lease obligations
liquid if they are publicly offered and have received an investment grade
rating of Baa or better by Moody's, or BBB or better by Standard & Poor's or
Fitch. Unrated lease obligations, or those rated below investment grade, will
be considered liquid if the obligations come to the market through an
underwritten public offering and at least two dealers are willing to give
competitive bids. In reference to obligations rated below investment grade, the
Manager must, among other things, also review the creditworthiness of the
entity obligated to make payment under the lease obligation and make certain
specified determinations based on such factors as the existence of a rating or
credit enhancement such as insurance, the frequency of trades or quotes for the
obligation and the willingness of dealers to make a market in the obligation.
The value of bonds and other fixed-income obligations may fall when
interest rates rise and rise when interest rates fall. In general, bonds and
other fixed-income obligations with longer maturities will be subject to
greater volatility resulting from interest rate fluctuations than will similar
obligations with shorter maturities. Under normal conditions, it is generally
anticipated that the Fund's average weighted maturity would be in excess of ten
years.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
CALL RIGHTS
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to that
of holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's total assets.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase or sell Municipal Bonds on a delayed delivery basis
or a when-issued basis at fixed purchase terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund enters
into the commitment and the value of the obligation will thereafter be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery date may be more or less than its purchase price. A
separate account of the Fund will be established with its custodian consisting
of cash, cash equivalents or liquid securities having a market value at all
times at least equal to the amount of the forward commitment.
17
<PAGE>
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.
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
18
<PAGE>
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
"CFTC"), the futures trading activities described herein will not result in the
Fund being deemed to be a "commodity pool," as defined under such regulations,
provided that the Fund adheres to certain restrictions. In particular, the Fund
may purchase and sell futures contracts and options thereon (i) for bona fide
hedging purposes, and (ii) for non-hedging purposes, if the aggregate initial
margins and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Fund's portfolio
assets after taking into account unrealized profits and unrealized losses on
any such contracts and options. (However, as stated above, the Fund intends to
engage in options and futures transactions only for hedging purposes.) Margin
deposits may consist of cash or securities acceptable to the broker and the
relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (E.G., high grade commercial paper and daily tender adjustable
notes) or liquid securities in a segregated account with the Fund's custodian,
so that the amount so segregated plus the amount of initial and variation
margin held in the account of its broker equals the market value of the futures
contracts, thereby ensuring that the use of such futures contract is
unleveraged. It is not anticipated that transactions in futures contracts will
have the effect of increasing portfolio turnover.
Although certain risks are involved in options and futures transactions,
the Manager believes that, because the Fund will engage in futures transactions
only for hedging purposes, the futures portfolio strategies of the Fund will
not subject the Fund to certain risks frequently associated with speculation in
futures transactions.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past moved beyond the
daily limit on a number of consecutive trading days.
The successful use of transactions in futures also depends on the ability
of the Manager to forecast correctly the direction and extent of interest rate
movements within a given time frame. To the extent these rates remain stable
during the period in which a futures contract is held by the Fund or 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
19
<PAGE>
the contract, to repurchase the security from the Fund at a mutually agreed
upon time and price, thereby determining the yield during the term of the
agreement. This results in a fixed rate of return insulated from market
fluctuations during such period. The Fund may not invest in repurchase
agreements maturing in more than seven days if such investments, together with
the Fund's other illiquid investments, would exceed 15% of the Fund's total
assets. In the event of default by the seller under a repurchase agreement, the
Fund may suffer time delays and incur costs or possible losses in connection
with the disposition of the underlying securities.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act which means the lesser of (i) 67%
of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares. Among its fundamental policies, the Fund may not invest more than 25%
of its assets, taken at market value at the time of each investment, in the
securities of issuers in any particular industry (excluding the U.S. Government
and its agencies and instrumentalities). (For purposes of this restriction,
states, municipalities and their political subdivisions are not considered to
be part of any industry.) Investment restrictions and policies that are
non-fundamental policies may be changed by the Board of Trustees without
shareholder approval. As a non-fundamental policy, the Fund may not borrow
amounts in excess of 20% of its total assets taken at market value (including
the amount borrowed), and then only from banks as a temporary measure for
extraordinary or emergency purposes. In addition, the Fund will not purchase
securities while borrowings are outstanding.
As a non-fundamental policy, the Fund will not invest in securities which
cannot be readily resold because of legal or contractual restrictions or which
cannot otherwise be marketed, redeemed or put to the issuer or a third party,
if at the time of acquisition more than 15% of its total assets would be
invested in such securities. This restriction shall not apply to securities
which mature within seven days or securities which the Board of Trustees of the
Trust has otherwise determined to be liquid pursuant to applicable law.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the proportion
of its assets that it may invest in obligations of a single issuer. However,
the Fund's investments will be limited so as to qualify as a "regulated
investment company" for purposes of the Code. See "Distributions and Taxes --
Taxes." To qualify, among other requirements, the Trust will limit the Fund's
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of the Fund's total assets will be invested
in the securities of a single issuer and (ii) with respect to 50% of the market
value of its total assets, not more than 5% of the market value of its total
assets will be invested in the securities of a single issuer and the Fund will
not own more than 10% of the outstanding voting securities of a single issuer.
For purposes of this restriction, the Fund will regard each state and each
political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public authority
which issues securities on behalf of a private entity as a separate issuer,
except that if the security is backed only by the assets and revenues of a
non-government entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the Trustees of the Trust to the
extent necessary to comply with changes to the 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
20
<PAGE>
a greater extent than that of a diversified company as a result of changes in
the financial condition or in the market's assessment of the issuers.
Investors are referred to the Statement of Additional Information for a
complete description of the Fund's investment restrictions.
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
The Trustees are:
ARTHUR ZEIKEL* -- Chairman of the Manager and its affiliate, MLAM;
Chairman and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.
JAMES H. BODURTHA -- Director and Executive Vice President, The China
Business Group, Inc.
HERBERT I. LONDON -- John M. Olin Professor of Humanities, New York
University.
ROBERT R. MARTIN -- Former Chairman, Kinnard Investments, Inc.
JOSEPH L. MAY -- Attorney in private practice.
ANDRE F. PEROLD -- Professor, Harvard Business School.
- --------
* Interested person, as defined in the 1940 Act, of the Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, which is an affiliate of MLAM and is owned and controlled by
ML & Co., a financial services holding company, acts as the manager for the Fund
and provides the Fund with management services. The Merrill Lynch Asset
Management Group (which includes the Manager) acts as the investment adviser for
more than 100 registered investment companies and offers portfolio management
services to individuals and institutions. As of September 1998, the Asset
Management Group had a total of approximately $467 billion in investment company
and other portfolio assets under management. This amount includes assets managed
for certain affiliates of the Manager.
Subject to the direction of the Trustees, the Manager is responsible for
the actual management of the Fund's portfolio and constantly reviews the Fund's
holdings in light of its own research analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Manager. The Manager performs certain of the
other administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of the Fund.
William R. Bock is the Portfolio Manager of the Fund and has been
responsible for the day-to-day management of the Fund's investment portfolio
since 1995. He has been a Vice President of MLAM since 1989.
Pursuant to the management agreement between the Manager and the Trust on
behalf of the Fund (the "Management Agreement"), the Manager is entitled to
receive from the Fund a monthly fee based upon the
21
<PAGE>
average daily net assets of the Fund at the following annual rates: 0.55% of
the average daily net assets not exceeding $500 million; 0.525% of the average
daily net assets exceeding $500 million but not exceeding $1.0 billion; and
0.50% of the average daily net assets exceeding $1.0 billion. For the fiscal
year ended July 31, 1998, the total fee payable by the Fund to the Manager was
$310,622 (based on average daily net assets of approximately $56.2 million), of
which $70,737 was voluntarily waived.
The Management Agreement obligates the Trust on behalf of the Fund to pay
certain expenses incurred in the Fund's operations, including, among other
things, the management fee, legal and audit fees, unaffiliated Trustees' fees
and expenses, registration fees, custodian and transfer agency fees, accounting
and pricing costs, and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information. Accounting
services are provided to the Fund by the Manager, and the Fund reimburses the
Manager for its costs in connection with such services. For the fiscal year
ended July 31, 1998, the Fund reimbursed the Manager $38,764 for accounting
services. For the fiscal year ended July 31, 1998, the ratio of total expenses
to average net assets was .89% for Class A shares, 1.40% for Class B shares,
1.50% for Class C shares and .99% for Class D shares.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act that incorporates the Code of Ethics of the Manager
(together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
TRANSFER AGENCY SERVICES
The Transfer Agent, which is a subsidiary of ML & Co., acts as the Trust's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement,
the Transfer Agent receives an annual fee of up to $11.00 per Class A or Class
D account and up to $14.00 per Class B or Class C account, and is entitled to
reimbursement for certain transaction charges and out-of-pocket expenses
incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of the
calendar year, no further fees will be due. For purposes of the Transfer Agency
Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the
beneficial interest of a person in the relevant share class on a record keeping
system, provided the record keeping
22
<PAGE>
system is maintained by a subsidiary of ML & Co. For the fiscal year ended July
31, 1998, the total fee paid by the Fund to the Transfer Agent was $17,621
pursuant to the Transfer Agency Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of each of the Manager, MLAM and Merrill
Lynch, acts as the distributor of the shares of the Fund. Shares of the Fund
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 is $1,000 and the minimum
subsequent purchase is $50, except that for shareholders who are participants
in certain fee-based programs, the minimum initial purchase is $250 and the
minimum subsequent purchase is $50.
The Fund offers its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
Pricing(SM) System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (the "NYSE") (generally, 4:00 p.m., New York time), which
includes orders received after the close of business on the previous day, the
applicable offering price will be based on the net asset value determined as of
15 minutes after the close of business on the NYSE on that day, provided the
Distributor in turn receives the order from the securities dealer prior to 30
minutes after the close of business on the NYSE on that day. If the purchase
orders are not received by the Distributor prior to 30 minutes after the close
of business on the NYSE on that day, such orders shall be deemed received on
the next business day. The Trust or the Distributor may suspend the continuous
offering of the Fund's shares at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Distributor or the Trust.
Neither the Distributor nor the dealers are permitted to withhold placing
orders to benefit themselves by a price change. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a sale of shares to
such customers. Purchases made directly through the Fund's Transfer Agent are
not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees and higher
account maintenance fees. A discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill Lynch
Select Pricing(SM) System is set forth under "Merrill Lynch Select Pricing(SM)
System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, are imposed directly against
23
<PAGE>
those classes and not against all assets of the Fund and, accordingly, such
charges do not affect the net asset value of any other class or have any impact
on investors choosing another sales charge option. Dividends paid by the Fund
for each class of shares are calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan). See
"Distribution Plans" below. Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System
followed by a more detailed description of each class.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(2) (3)
B CDSC for a period of four years, 0.25% 0.25% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(4) ten years(5)
C 1.0% CDSC for one year(6) 0.25% 0.35% No
D Maximum 4.00% initial 0.10% No No
sales charge(3)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge Alternatives
-- Class A and Class D Shares -- Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by participants in connection with certain fee-based programs.
Certain Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead may be subject to a 1.0%
CDSC if redeemed within one year. Such CDSC may be waived in connection
with certain fee-based programs.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-based
programs may differ. See "Deferred Sales Charge Alternatives--Class B and
Class C Shares--Conversion of Class B Shares to Class D Shares." Also, Class
B shares of certain other MLAM-advised mutual funds into which exchanges may
be made have an eight year conversion period. If Class B shares of the Fund
are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
24
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
INVESTORS CHOOSING THE INITIAL SALES CHARGE ALTERNATIVES WHO ARE ELIGIBLE
TO PURCHASE CLASS A SHARES SHOULD PURCHASE CLASS A SHARES RATHER THAN CLASS D
SHARES BECAUSE THERE IS AN ACCOUNT MAINTENANCE FEE IMPOSED ON CLASS D SHARES.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge 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.
** The initial sales charge may be waived on certain Class A and Class D
purchases of $1,000,000 or more and on Class A purchases by participants
in connection with certain fee-based programs. If the sales charge is
waived in connection with a purchase of $1,000,000 or more, such purchases
may be subject to a 1.0% CDSC if the shares are redeemed within one year
after purchase. Such CDSC may be waived in connection with certain
fee-based programs. The charge will be assessed on an amount equal to the
lesser of the proceeds of redemption or the cost of the shares being
redeemed.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended. The proceeds from account maintenance fees are used to compensate
the Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.
For the fiscal year ended July 31, 1998, the Fund sold 170,255 Class A
shares for aggregate net proceeds of $1,827,909. The gross sales charges for
the sale of Class A shares of the Fund for the year were $2,473, of which $311
and $2,162 were received by the Distributor and Merrill Lynch, respectively.
For the fiscal year ended July 31, 1998, the Distributor received no CDSCs with
respect to redemption within one year after purchase of Class A shares
purchased subject to a front-end sales charge waiver. For the fiscal year ended
July 31, 1998, the Fund sold 211,578 Class D shares for aggregate net proceeds
of $2,284,155. The gross sales charges for the sale of Class D shares of the
Fund for the year were $14,436, of which $1,450 and $12,986 were received by
the Distributor and Merrill Lynch, respectively. For the fiscal year ended July
31, 1998, the Distributor received no CDSCs with respect to redemption within
one year after purchase of Class D shares purchased subject to a front-end
sales charge waiver.
ELIGIBLE CLASS A INVESTORS. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional Class A
shares of the Fund in that account. Class A shares are available at net asset
value to corporate warranty insurance reserve fund programs and U.S. branches
of foreign banking institutions provided that the program or branch has $3
million or more initially invested in MLAM-advised mutual funds. Also eligible
to purchase Class A shares at net asset value are participants
25
<PAGE>
in certain investment programs including TMA(SM) Managed Trusts to which Merrill
Lynch Trust Company provides discretionary trustee services, collective
investment trusts for which Merrill Lynch Trust Company serves as trustee and
purchases made in connection with certain fee-based programs. In addition,
Class A shares are offered at net asset value to ML & Co. and its subsidiaries
and their directors and employees, and to members of the Boards of MLAM-advised
investment companies, including the Trust. Certain persons who acquire shares
of MLAM-advised closed-end funds in their initial offerings who wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in shares of the Fund also may purchase Class A shares of the Fund if
certain conditions set forth in the Statement of Additional Information are
met. In addition, Class A shares of the Fund and certain other MLAM-advised
mutual funds are offered at net asset value to shareholders of Merrill Lynch
Senior Floating Rate Fund, Inc. and, if certain conditions set forth in the
Statement of Additional Information are met, to shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock pursuant to a tender offer conducted by such funds
in shares of the Fund and certain MLAM-advised mutual funds.
REDUCED INITIAL SALES CHARGES. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors." See
"Shareholder Services -- Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or
Class D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Class A shares are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and,
subject to certain conditions, Class A and Class D shares are offered at net
asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch High Income Municipal Bond Fund, Inc., who wish to reinvest in
shares of the Fund the net proceeds from a sale of certain of their shares of
common stock, pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
INVESTORS CHOOSING THE DEFERRED SALES CHARGE ALTERNATIVES SHOULD CONSIDER
CLASS B SHARES IF THEY INTEND TO HOLD THEIR SHARES FOR AN EXTENDED PERIOD OF
TIME AND CLASS C SHARES IF THEY ARE UNCERTAIN AS TO THE LENGTH OF TIME THEY
INTEND TO HOLD THEIR ASSETS IN MLAM-ADVISED MUTUAL FUNDS.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
which declines each year, while Class C shares are subject only to a one-year
1.0% CDSC. On the other hand, approximately ten years after Class B shares are
issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted into
Class D shares of the Fund and thereafter will be
26
<PAGE>
subject to lower continuing fees. See "Conversion of Class B Shares to Class D
Shares" below. Both Class B and Class C shares are subject to an account
maintenance fee of 0.25% of net assets and Class B and Class C shares are
subject to distribution fees of 0.25% and 0.35%, respectively, of net assets as
discussed below under "Distribution Plans." The proceeds from the account
maintenance fees are used to compensate the Distributor and Merrill Lynch
(pursuant to sub-agreement) for providing continuing account maintenance
activities.
Class B and Class C shares are sold without an initial sales charge so
that the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the 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) that are paid from the dealers'
own funds. These expenses relate to providing distribution-related services to
the Fund in connection with the sale of the Class B and Class C shares, such as
the payment of compensation to financial consultants for selling such shares.
The combination of the CDSC and the ongoing distribution fee facilitates the
ability of the Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. Approximately ten years after
issuance, Class B Shares will convert automatically into Class D shares of the
Fund, which are subject to a lower account maintenance fee and no distribution
fee; Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made convert into Class D shares automatically after
approximately eight years. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and the
holding period for the shares exchanged will be tacked onto the holding period
for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations
on the Payment of Deferred Sales Charges" below. Class B shareholders of the
Fund exercising the exchange privilege described under "Shareholder Services --
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule, if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES. Class B shares that
are redeemed within four years of purchase may be subject to a CDSC at the
rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption 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 ................. 0.0%
</TABLE>
27
<PAGE>
For the fiscal year ended July 31, 1998, the Distributor received CDSCs of
approximately $39,760 with respect to redemptions of Class B shares, all of
which were paid to Merrill Lynch. Additional CDSCs payable to the Distributor
may have been waived or converted to a contingent obligation in connection with
a shareholder's participation in certain fee-based programs.
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 a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor
makes his first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to a CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the CDSC is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Code) of a shareholder. The Class B CDSC also is
waived for any Class B shares that are purchased within qualifying Employee
Access(SM) Accounts. Additional information concerning the waiver of the Class B
CDSC is set forth in the Statement of Additional Information. The terms of the
CDSC may be modified in connection with redemptions to fund participation in
certain fee-based programs. See "Shareholder Services -- Fee-Based Programs."
CONTINGENT DEFERRED SALES CHARGES -- CLASS C SHARES. Class C shares that
are redeemed within one year of purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. The CDSC may be waived in connection
with certain fee-based programs. See "Shareholder Services -- Fee-Based
Programs." For the fiscal year ended July 31, 1998, the Distributor received
CDSCs of approximately $758 with respect to redemptions of Class C shares, all
of which were paid to Merrill Lynch.
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
28
<PAGE>
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.
The Conversion Period also may be modified for investors who participate
in certain fee-based programs. See "Shareholder Services -- Fee-Based
Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the 1940 Act (each a "Distribution
Plan") with respect to the account maintenance and/or distribution fees paid by
the Fund to the Distributor with respect to such classes. The Class B and Class
C Distribution Plans provide for the payment of account maintenance fees and
distribution fees, and the Class D Distribution Plan provides for the payment
of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each
provides that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid monthly, at the
annual rates of 0.25%, 0.25% and 0.10%, respectively, of the average daily net
assets of the Fund attributable to shares of the relevant class in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub- agreement) in
connection with account maintenance activities.
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
29
<PAGE>
its financial consultants in connection with the sale of the Class B and Class
C shares. In this regard, the purpose and function of the ongoing distribution
fees and the CDSC are the same as those of the initial sales charge with
respect to the Class A and Class D shares of the Fund in that the deferred
sales charges provide for the financing of the distribution of the Fund's Class
B and Class C shares.
For the fiscal year ended July 31, 1998, the Fund paid the Distributor
$197,228 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $39.2
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended July 31, 1998, the Fund paid the
Distributor $24,341 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately
$4.0 million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended July 31, 1998, the Fund paid the
Distributor $4,360 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan of approximately
$4.3 million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
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.
As of December 31, 1997, the fully allocated accrual expenses incurred by
the Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated accrual revenues for such
period by approximately $640,000 (1.65% of Class B net assets at that date). As
of July 31, 1998, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $210,911 (0.50%
of Class B net assets at that date). As of December 31, 1997, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for
the period since the commencement of operations of Class C shares exceeded
fully allocated accrual revenues for such period by approximately $21,000 (.49%
of Class C net assets at that date). As of July 31, 1998, direct cash revenues
for the period since the commencement of operations of Class C shares exceeded
direct cash expenses by $25,314 (0.58% of Class C net assets at that date).
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset- based sales charges such as the distribution fee
and the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately
30
<PAGE>
(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 that may be applicable, there will be
no charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so, without charge, by
tendering the shares directly to the Transfer Agent, Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper
notice of redemption in the case of shares deposited with the Transfer Agent
may be accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. Redemption requests should not be sent to the Trust.
The redemption request in either event requires the signature(s) of all persons
in whose name(s) the shares are registered, signed exactly as such name(s)
appear(s) on the Transfer Agent's register. The signature(s) on the redemption
request must be guaranteed by an "eligible guarantor institution" as such term
is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, the existence and validity of which may be
31
<PAGE>
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 NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) on the day
received and such request is received by the Trust from such dealer not later
than 30 minutes after the close of business on the NYSE on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Trust not later than 30 minutes after the close of business on the NYSE in
order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than any
applicable CDSC). Securities firms that do not have selected dealer agreements
with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Trust. Merrill
Lynch may charge its customers a processing fee (presently $5.35) to confirm a
repurchase of shares to such customers. Repurchases made directly through the
Fund's Transfer Agent are not subject to the processing fee. The Trust reserves
the right to reject any order for repurchase, which right of rejection might
adversely affect shareholders seeking redemption through the repurchase
procedure. However, a shareholder whose order for repurchase is rejected by the
Trust may redeem Fund shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares
of the Fund, as the case may be, at net asset value without a sales charge up
to the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will
be made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
32
<PAGE>
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various
services or plans, or to change options with respect thereto, can be obtained
from the Trust by calling the telephone number on the cover page hereof or from
the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements at least quarterly from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and capital gains distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gains distributions. A
shareholder may make additions to his or her Investment Account at any time by
mailing a check directly to the Transfer Agent. Shareholders may also maintain
their accounts through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened automatically at the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an
account registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he or she be issued certificates for such shares and then must turn the
certificates over to the new firm for re- registration as described in the
preceding sentence.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM- advised mutual funds and Summit Cash
Reserves Fund ("Summit"), a Merrill Lynch-sponsored money market fund
specifically designated as available for exchange by holders of Class A, Class
B, Class C and Class D shares of MLAM-advised mutual funds. There is currently
no limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated at any time in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
the account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in the 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.
33
<PAGE>
Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of the
second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM- advised mutual funds.
Shares of the Fund that are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC
that might otherwise be due upon redemption of the shares of the Fund. For
purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period for the newly acquired
shares of the other Fund.
Class A and Class D shares are exchangeable for Class A shares of, and
Class B and Class C shares are exchangeable for Class B shares of, Summit.
Class A shares of Summit have an exchange privilege back into Class A or Class
D shares of MLAM-advised mutual funds; Class B shares of Summit have an
exchange privilege back into Class B or Class C shares of MLAM-advised mutual
funds and, in the event of such an exchange, the period of time that Class B
shares of Summit are held will count toward satisfaction of the holding period
requirement for purposes of reducing any CDSC and, with respect to Class B
shares, toward satisfaction of any Conversion Period. Class B shares of Summit
will be subject to a distribution fee at an annual rate of 0.75% of average
daily net assets of such Class B shares. This exchange privilege does not apply
with respect to certain Merrill Lynch fee-based programs, for which alternative
exchange arrangements may exist. Please see your Merrill Lynch Financial
Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other MLAM-advised
mutual funds into a money market fund were directed to certain Merrill
Lynch-sponsored money market funds other than Summit. Shareholders who have
exchanged shares of a MLAM-advised mutual fund for shares of such other money
market funds and subsequently wish to exchange those money market fund shares
for shares of the Fund will be subject to the CDSC schedule applicable to such
Fund shares, if any. The holding period for those money market fund shares will
not count toward satisfaction of the holding period requirement for reduction
of the CDSC imposed on such shares, if any, and, with respect to Class B
shares, toward satisfaction of the Conversion Period. However, the holding
period for Class B or Class C shares received in exchange for such money market
fund shares will be aggregated with the holding period for the original shares
for purposes of reducing the CDSC or satisfying the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services -- Exchange Privilege" in
the Statement of Additional Information.
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The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares by non-retirement plan investors under the Merrill
Lynch Mutual Fund Advisor (Merrill Lynch MFA(SM)) program(the "MFA program").
First, the initial allocation of assets is made under the MFA program. Then, any
subsequent exchange under the MFA program of Class A or Class D shares of a
MLAM-advised mutual fund for Class A or Class D shares of the Fund will be made
solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without a sales charge, at the net
asset value per share at the close of business on the monthly payment date for
such dividends and distributions. A shareholder may at any time, by written
notification to Merrill Lynch, if the shareholder's account is maintained with
Merrill Lynch or by written notification or by telephone (1-800- MER-FUND) to
the Transfer Agent, if the shareholder's account is maintained with the Transfer
Agent, elect to have subsequent dividends or both dividends and capital gains
distributions paid in cash, rather than reinvested, in which event payment will
be mailed on or about the payment date (provided that, in the event a payment on
an account maintained at the Transfer Agent would amount to $10.00 or less, a
shareholder will not receive such payment in cash and such payment will
automatically be reinvested in additional shares). Cash payments can also be
directly deposited to the shareholder's bank account. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed distribution or
redemption checks. No CDSC will be imposed upon redemption of shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to receive systematic withdrawal payments from his
or her Investment Account in the form of payment by check or through automatic
payment by direct deposit to his or her bank account on either a monthly or
quarterly basis. A shareholder whose shares are held within a CMA(R) or CBA(R)
account may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the CMA(R) or CBA(R) Systematic Redemption
Program, subject to certain conditions. With respect to redemptions of Class B
or Class C shares pursuant to a systematic withdrawal plan, the maximum number
of Class B or Class C shares that can be redeemed from an account annually
shall not exceed 10% of the value of shares of such class in that account at
the time the election to join the systematic withdrawal plan was made. Any CDSC
that otherwise might be due on such redemption of Class B or Class C shares
will be waived. Shares redeemed pursuant to a systematic withdrawal plan will
be redeemed in the same order as Class B or Class C shares are otherwise
redeemed. See "Purchase of Shares -- Deferred Sales Charge Alternatives --
Class B and Class C Shares -- Contingent Deferred Sales Charges -- Class B
Shares" and " -- Contingent Deferred Sales Charges -- Class C Shares." Where
the systematic withdrawal plan is applied to Class B shares, upon conversion of
the last Class B shares in an account to Class D shares, the systematic
withdrawal plan will be applied thereafter to Class D shares if the shareholder
so elects. See "Purchase of Shares -- Deferred Sales Charge Alternatives --
Class B and Class C Shares -- Conversion of Class B Shares to Class D Shares."
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AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C and Class D shares may be
made to an investor's Investment Account by prearranged charges of $50 or more
to his or her regular bank account. Alternatively, investors who maintain CMA(R)
or CBA(R) accounts may arrange to have periodic investments made in the Fund in
their CMA(R) or CBA(R) account or in certain related accounts in amounts of $100
or more through the CMA(R) or CBA(R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a
"Program"), may permit the purchase of Class A shares at net asset value. Under
specified circumstances, participants in certain Programs may deposit other
classes of shares which will be exchanged for Class A shares. Initial or
deferred sales charges otherwise due in connection with such exchanges may be
waived or modified, as may the Conversion Period applicable to the deposited
shares. Termination of participation in a Program may result in the redemption
of shares held therein or the automatic exchange thereof to another class at
net asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(800) MER-FUND or (800) 637-3863.
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities of the Fund. Municipal
Bonds and other securities in which the Fund invests are traded primarily in
the over-the-counter market. Where possible, the Trust deals directly with the
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Trust to obtain the best net results in conducting portfolio
transactions for the Fund, taking into account such factors as price (including
the applicable dealer spread), the size, type and difficulty of the
transactions involved, the firm's general execution and operations facilities,
and the firm's risk in positioning the securities involved and the provision of
supplemental investment research by the firm. While reasonably competitive
spreads or commissions are sought, the Fund will not necessarily be paying the
lowest spread or commission available. The sale of shares of the Fund may be
taken into consideration as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Fund. The portfolio securities of the
Fund generally are traded on a net basis and normally do not involve either
brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Fund primarily consists of dealer or underwriter spreads.
Under the 1940 Act, persons affiliated with the Trust, including Merrill Lynch,
are prohibited from dealing with the Trust as a principal in the purchase and
sale of securities unless such trading is permitted by an exemptive order
issued by the Commission. The Trust has obtained an exemptive order permitting
it to engage in certain principal transactions with Merrill Lynch involving
high quality short-term municipal bonds subject to certain conditions. In
addition, the Trust may not purchase securities, including Municipal Bonds, for
the Fund during the existence of any
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underwriting syndicate of which Merrill Lynch is a member or in a private
placement in which Merrill Lynch serves as placement agent except pursuant to
procedures approved by the Trustees of the Trust which either comply with rules
adopted by the Commission or with interpretations of the Commission staff. An
affiliated person 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
DIVIDENDS AND DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily prior
to the determination of the net asset value which is calculated 15 minutes
after the close of business on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time) on that day. The net investment income of the Fund for
dividend purposes consists of interest earned on portfolio securities, less
expenses, in each case computed since the most recent determination of the net
asset value. Expenses of the Fund, including the management fees and the
account maintenance and distribution fees, are accrued daily. Dividends of net
investment income are declared daily and reinvested monthly in the form of
additional full and fractional shares of the Fund at net asset value as of the
close of business on the "payment date" unless the shareholder elects to
receive such dividends in cash. Shares will accrue dividends as long as they
are issued and outstanding. Shares are issued and outstanding from the
settlement date of a purchase order to the day prior to the settlement date of
a redemption order.
All net realized capital gains, if any, are declared and distributed to
the Fund's shareholders at least annually. Capital gains distributions will be
reinvested automatically in shares unless the shareholder elects to receive
such distributions in cash.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer
agency fees applicable with respect to that class. See "Additional Information
- -- Determination of Net Asset Value."
See "Shareholder Services" for information as to how to elect either
dividend reinvestment or cash payments. Portions of dividends and distributions
which are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of the Fund or received in cash.
TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Code. As
long as it so qualifies, the Fund (but not its shareholders) will not be
subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Trust intends to cause
the Fund to distribute substantially all of such income.
To the extent that the dividends distributed to the Fund's Class A, Class
B, Class C and Class D shareholders (together, the "shareholders") are derived
from interest income exempt from Federal income tax under Code Section 103(a)
and are properly designated as "exempt-interest dividends" by the Trust, they
are 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 derived from interest received by the Fund from Connecticut Municipal
Bonds is not subject to the Connecticut personal income tax on individuals,
estates and trusts (the "Connecticut income tax"), but other exempt-interest
dividends are subject to that tax. Distributions, including exempt-interest
dividends, from the Fund made to shareholders subject to the Connecticut
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corporation business tax are included in gross income for purposes of the
corporation business tax, but a dividends received deduction may be available
for a portion thereof except to the extent such distributions constitute exempt-
interest dividends or capital gain dividends for Federal income tax purposes.
Shareholders other than those subject to the corporation business tax that are
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 the 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 it
reduces the shareholder's Federal 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 and are subject
to the Connecticut income tax. Distributions, if any, from an excess of net
long-term capital gains over net short-term capital losses derived from the sale
of securities or from certain transactions in futures or options ("capital gain
dividends") are taxable as long-term capital gains for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares. Certain categories of capital gains are taxable at different rates.
Generally not later than 60 days after the close of the Fund's taxable year, the
Trust will provide shareholders with a written notice designating the amounts of
any exempt-interest dividends, ordinary income dividends or capital gain
dividends as well as any amounts of capital gain dividends in the different
categories of capital gain referred to above. Neither the Connecticut income tax
nor the Connecticut corporation business tax makes a distinction in the
treatment of amounts taxable thereunder that are treated as capital gains or as
ordinary income for Federal income tax purposes. In the case of shareholders
holding shares of the Fund as capital assets, capital gain dividends are not
subject to the Connecticut income tax to the extent they are derived from
obligations issued by or on behalf of the State of Connecticut, any political
subdivision thereof, or public instrumentality, state or local authority,
district, or similar public entity created under Connecticut law, but other
capital gain dividends are subject to that tax. Distributions by the Fund,
whether from exempt-interest income, ordinary income or capital gains, will not
be eligible for the dividends received deduction allowed to corporations under
the Code.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of shares held for six months
or less will be disallowed to the extent of any exempt-interest dividends
received by the shareholder. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
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The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This alternative minimum tax applies
to interest received on certain "private activity bonds" issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (E.G., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference," which could subject certain investors in such bonds,
including shareholders of the Fund, to an alternative minimum tax. Dividends
paid by the Fund that constitute items of tax preference for Federal
alternative minimum tax purposes, other than exempt-interest dividends derived
from Connecticut Municipal Bonds, could cause liability for the net Connecticut
minimum tax, applicable to shareholders subject to the Connecticut income tax
who are required to pay the Federal alternative minimum tax. The Fund will
purchase such "private activity bonds," and the Trust will report to
shareholders within 60 days after the calendar year-end the portion of
the Fund's dividends declared during the year which constitutes an item of tax
preference for Federal alternative minimum tax purposes and the portion thereof
derived from Connecticut Municipal Bonds and not subject to the net Connecticut
minimum tax. The Code further provides that corporations are subject to an
alternative minimum tax based, in part, on certain differences between taxable
income as adjusted for other tax preferences and the corporation's "adjusted
current earnings," which more closely reflect a corporation's economic income.
Because an exempt-interest dividend paid by the Fund will be included in
adjusted current earnings, a corporate shareholder may be required to pay
alternative minimum tax on exempt-interest dividends paid by the Fund.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis
in the Class D shares acquired will be the same as such shareholder's basis in
the Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge such
shareholder would have owed 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.
Amounts required to be treated as gain or loss by a shareholder for
Federal income tax purposes as a result of transactions by the shareholder in
shares of the Fund are taken into account in computing the Connecticut tax
liability of a shareholder subject to the Connecticut income tax or the
Connecticut corporation business tax.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
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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 and regulations. 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 advisors regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign and Connecticut or other state or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return,
yield and tax-equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return, yield and tax-equivalent yield are computed
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such
as in the case of Class B and Class C shares and the maximum sales charge in
the case of Class A and Class D shares. Dividends paid by the Fund with respect
to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner at the same time on the same day and will be in
the same amount, except that account maintenance, distribution charges and any
incremental transfer agency costs relating to each class of shares will be
borne by that class. The Fund will include performance data for all classes of
shares of the Fund in any advertisement or information including performance
data of the Fund.
The Fund also may quote total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time. In advertisements distributed to investors whose
purchases are subject to waiver of the CDSC in the case of Class B and Class C
shares or reduced sales charges in the case of Class A and Class D shares, the
performance data may take into account the reduced, and not the maximum, sales
charge or may not take into account the CDSC and therefore may reflect greater
total return since, due to the reduced sales charges or waiver of the CDSC, a
lower amount of expenses is deducted. See "Purchase of Shares." The Fund's
total return may be expressed either as a percentage or as a dollar amount in
order to illustrate such total return on a hypothetical $1,000 investment in
the Fund at the beginning of each specified period.
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Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period. Tax-equivalent yield quotations will be
computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b)
one minus a stated tax rate and (c) adding the result to that part, if any, of
the Fund's yield that is not tax-exempt. The yield for the 30-day period ended
July 31, 1998 was 3.96% for Class A shares, 3.62% for Class B shares, 3.52% for
Class C shares and 3.87% for Class D shares and the tax equivalent yield for
the same period (based on a Federal income tax rate of 28%) was 5.50% for Class
A shares, 5.03% for Class B shares, 4.89% for Class C shares and 5.38% for
Class D shares. The yield without voluntary reimbursement or waiver of Fund
expenses for the 30-day period would have been 3.97% for Class A shares, 3.63%
for Class B shares, 3.53% for Class C shares and 3.88% for Class D shares with
a tax equivalent yield of 5.51% for Class A shares, 5.04% for Class B shares,
4.90% for Class C shares and 5.39% for Class D shares.
Total return, yield and tax-equivalent yield figures are based on the
Fund's historical performance and are not intended to indicate future
performance. The Fund's total return, yield and tax-equivalent yield will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Lehman Brothers
Municipal Bond Index or other market indices or to performance data published by
Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar"), CDA Investment Technology, Inc., MONEY MAGAZINE, U.S. NEWS &
WORLD REPORT, BUSINESS WEEK, FORBES MAGAZINE, FORTUNE MAGAZINE or other industry
publications. When comparing its performance to a market index, the Fund may
refer to various statistical measures derived from the historical performance of
the Fund and the index, such as standard deviation and beta. In addition, from
time to time, the Fund may include the Fund's risk-adjusted performance ratings
assigned by Morningstar in advertising or supplemental sales literature. As with
other performance data, performance comparisons should not be considered
indicative of the Fund's relative performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily 15 minutes after the close of business on the NYSE
(generally, the NYSE closes at 4:00 p.m., Eastern time), on each day during
which the NYSE is open for trading. The net asset value per share is computed
by dividing the sum of the value of the securities held by the Fund plus any
cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the fees payable to the Manager and the Distributor, are
accrued daily.
The per share net asset value 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 fees, higher account maintenance fees and higher
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transfer agency fees applicable with respect to Class B and Class C shares. It
is expected, however, that the per share net asset value of the classes will
tend to converge (although not necessarily meet) immediately after the payment
of dividends or distributions which will differ by approximately the amount of
the expense accrual differentials between the classes.
ORGANIZATION OF THE TRUST
The Trust is a business trust organized on August 2, 1985 under the laws
of Massachusetts. On October 1, 1987 the Trust changed its name from "Merrill
Lynch Multi-State Tax-Exempt Series Trust" to "Merrill Lynch Multi-State
Municipal Bond Series Trust," and on December 22, 1987 the Trust again changed
its name to "Merrill Lynch Multi-State Municipal Series Trust." The Trust is an
open-end management investment company comprised of separate series ("Series"),
each of which is a separate portfolio offering shares to selected groups of
purchasers. Each of the Series is managed independently in order to provide to
shareholders who are residents of the state to which such Series relates as
high a level of income exempt from Federal and, in certain cases, state and
local income taxes as is consistent with prudent investment management. The
Trustees are authorized to create an unlimited number of Series and, with
respect to each Series, to issue an unlimited number of full and fractional
shares of beneficial interest, $.10 par value per share, of different classes.
Shareholder approval is not required for the authorization of additional Series
or classes of a Series of the Trust. At the date of this Prospectus, the shares
of the Fund are divided into Class A, Class B, Class C and Class D shares.
Class A, Class B, Class C and Class D shares represent interests in the same
assets of the Fund and are identical in all respects except that Class B, Class
C and Class D shares bear certain expenses relating to the account maintenance
associated with such shares, and Class B and Class C shares bear certain
expenses relating to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to distribution and/or account
maintenance expenditures, as applicable. See "Purchase of Shares." The Trustees
of the Trust may classify and reclassify the shares of any Series into
additional or other classes at a future date.
Shareholders are entitled to one vote for each full share and to
fractional votes for fractional shares held in the election of Trustees (to the
extent hereinafter provided) and on other matters submitted to the vote of
shareholders. There normally will be no meeting of shareholders for the purpose
of electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Shareholders may, in accordance with the terms of the Declaration of
Trust, cause a meeting of shareholders to be held for the purpose of voting on
the removal of Trustees. Also, the Trust will be required to call a special
meeting of shareholders of a Series in accordance with the requirements of the
1940 Act to seek approval of new management and advisory arrangements, of a
material increase in distribution fees or of a change in the fundamental
policies, objectives or restrictions of a Series. Except as set forth above,
the Trustees shall continue to hold office and appoint successor Trustees. Upon
liquidation or dissolution of a Series, each issued and outstanding share of
that Series is entitled to participate equally in dividends and distributions
declared by the respective Series and in net assets of such Series remaining
after satisfaction of outstanding liabilities except that, as noted above,
Class B, Class C and Class D shares bear certain additional expenses. The
obligations and liabilities of a particular Series are restricted to the assets
of 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
42
<PAGE>
receive separate copies of each report and communication for each of the
shareholder's related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, 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.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Fund could be adversely
affected if the computer systems used by the Manager or other Fund service
providers do not properly address this problem prior to January 1, 2000. The
Manager has established a dedicated group to analyze these issues and to
implement any systems modifications necessary to prepare for the Year 2000.
Currently, the Manager does not anticipate that the transition to the Year 2000
will have any material impact on its ability to continue to service the Fund at
current levels. In addition, the Manager has sought assurances from the Fund's
other service providers that they are taking all necessary steps to ensure that
their computer systems will accurately reflect the Year 2000, and the Manager
will continue to monitor the situation. At this time, however, no assurance can
be given that the Fund's other service providers have anticipated every step
necessary to avoid any adverse effect on the Fund attributable to the Year 2000
Problem.
----------------
The Declaration of Trust establishing the Trust, dated August 2, 1985, a
copy of which together with all amendments thereto (the "Declaration") is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch Multi-State Municipal Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Trust shall be held to any personal liability, nor shall resort be
had to such person's private property for the satisfaction of any obligation or
claim of the Trust, but the "Trust Property" only shall be liable.
43
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<PAGE>
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<PAGE>
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<PAGE>
MANAGER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor,
a division of Princeton Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
----------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fee Table ............................................. 2
Merrill Lynch Select Pricing(SM) System ............... 4
Financial Highlights .................................. 8
Investment Objective and Policies ..................... 12
Potential Benefits .................................. 14
Risk Factors and Special Considerations Relating
to Municipal Bonds ............................... 14
Description of Municipal Bonds ...................... 15
Call Rights ......................................... 17
When-Issued Securities and Delayed Delivery
Transactions ..................................... 17
Financial Futures Transactions and Options .......... 18
Repurchase Agreements ............................... 19
Investment Restrictions ............................. 20
Management of the Trust ............................... 21
Trustees ............................................ 21
Management and Advisory Arrangements ................ 21
Code of Ethics ...................................... 22
Transfer Agency Services ............................ 22
Purchase of Shares .................................... 23
Initial Sales Charge Alternatives -- Class A and
Class D Shares ................................... 25
Deferred Sales Charge Alternatives -- Class B
and Class C Shares ............................... 26
Distribution Plans .................................. 29
Limitations on the Payment of Deferred
Sales Charges .................................... 30
Redemption of Shares .................................. 31
Redemption .......................................... 31
Repurchase .......................................... 32
Reinstatement Privilege -- Class A and Class D
Shares ........................................... 32
Shareholder Services .................................. 33
Investment Account .................................. 33
Exchange Privilege .................................. 33
Automatic Reinvestment of Dividends and
Capital Gains Distributions ...................... 35
Systematic Withdrawal Plans ......................... 35
Automatic Investment Plans .......................... 36
Fee-Based Programs .................................. 36
Portfolio Transactions ................................ 36
Distributions and Taxes ............................... 37
Dividends and Distributions ......................... 37
Taxes ............................................... 37
Performance Data ...................................... 40
Additional Information ................................ 41
Determination of Net Asset Value .................... 41
Organization of the Trust ........................... 42
Shareholder Reports ................................. 42
Shareholder Inquiries ............................... 43
Year 2000 Issues .................................... 43
</TABLE>
Code #18110-1198
(LOGO) MERRILL LYNCH
MERRILL LYNCH
CONNECTICUT MUNICIPAL
BOND FUND
of Merrill Lynch Multi-State
Municipal Series Trust
PROSPECTUS
November 6, 1998
Distributor:
Merrill Lynch
Funds Distributor
This Prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch Connecticut Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust
P.O. Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
---------------
Merrill Lynch 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 income tax and the Connecticut personal
income tax as is consistent with prudent investment management. The Fund
invests primarily in a portfolio of long-term investment grade obligations
issued by or on behalf of the State of Connecticut, its political subdivisions,
agencies and instrumentalities and obligations of other qualifying issuers,
such as issuers located in Puerto Rico, the U.S. Virgin Islands and Guam, which
pay interest exempt from Federal income tax and the Connecticut personal income
tax. There can be no assurance that the investment objective of the Fund will
be realized.
---------------
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial, given the amount of the purchase, the length of
time the investor expects to hold the shares and other relevant circumstances.
---------------
The Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated November 6,
1998 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling or
by writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectus.
---------------
Fund Asset Management -- Manager
Merrill Lynch Funds Distributor -- Distributor
---------------
The date of this Statement of Additional Information is November 6, 1998.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal income tax and the Connecticut
personal income tax as is consistent with prudent investment management. The
Fund seeks to achieve its objective by investing primarily in a portfolio of
long-term obligations issued by or on behalf of the State of Connecticut, its
political subdivisions, agencies and instrumentalities and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the U.S. Virgin
Islands and Guam, which pay interest exempt, in the opinion of bond counsel to
the issuer, from Federal income tax and the Connecticut personal income tax.
Obligations exempt from Federal income tax are referred to herein as "Municipal
Bonds" and obligations exempt from both Federal income tax and the Connecticut
personal income tax 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 ("Standard & Poor's") (currently AAA, AA, A and BBB) or
Fitch IBCA, Inc. ("Fitch") (currently AAA, AA, A and BBB). If unrated, such
securities will possess creditworthiness comparable, in the opinion of the
manager of the Fund, Fund Asset Management, L.P. (the "Manager"), to other
obligations in which the Fund may invest.
The Fund ordinarily does not intend to realize investment income not
exempt from Federal income tax and the Connecticut personal income tax.
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 to the issuer, from
Federal income taxation but is not exempt from the Connecticut personal income
tax. 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 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
2
<PAGE>
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, which may include reduced or eliminated interest payments and
losses of invested principal. Such securities have the effect of providing a
degree of investment leverage, since they may increase or decrease in value in
response to changes, as an illustration, in market interest rates at a rate
which is a multiple (typically two) of the rate at which fixed-rate long-term
tax-exempt securities increase or decrease in response to such changes. As a
result, the market values of such securities will generally be more volatile
than the market values of fixed-rate tax-exempt securities. To seek to limit
the volatility of these securities, the Fund may purchase inverse floating
obligations with shorter term maturities or which contain limitations on the
extent to which the interest rate may vary. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's total assets. The Manager believes, however,
that indexed and inverse floating obligations represent flexible portfolio
management instruments for the Fund which allow the Fund to seek potential
investment rewards, hedge other portfolio positions or vary the degree of
investment leverage relatively efficiently under different market conditions.
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's total assets.
The Fund may invest up to 20% of its total assets in Municipal Bonds which
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or
which, in the Manager's judgment, possess similar credit characteristics ("high
yield securities"). See Appendix II -- "Ratings of Municipal Bonds" for
additional information regarding ratings of debt securities. The Manager
considers the ratings assigned by Standard & Poor's, Moody's or Fitch as one of
several factors in its independent credit analysis of issuers.
High yield securities are considered by Standard & Poor's, Moody's and
Fitch to have varying degrees of speculative characteristics. Consequently,
although high yield securities can be expected to provide higher yields, such
securities may be subject to greater market price fluctuations and risk of loss
of principal than lower-yielding, higher-rated debt securities. Investments in
high yield securities will be made only when, in the judgment of the Manager,
such securities provide attractive total return potential relative to the risk
of such securities, as compared to higher quality debt securities. The Fund
generally will not invest in debt securities in the lowest rating categories
(those rated CC or lower by Standard & Poor's or Fitch or Ca or lower by
Moody's) unless the Manager believes that the financial condition of the issuer
or the protection afforded the particular securities is stronger than would
otherwise be indicated by such low ratings. The Fund does not intend to
purchase debt securities that are in default or which the Manager believes will
be in default.
Issuers or obligors of high yield securities may be highly leveraged and
may not have available to them more traditional methods of financing.
Therefore, the risks associated with acquiring the securities of such issuers
or obligors generally are greater than is the case with higher rated
securities. For example, during an economic downturn or a sustained period of
rising interest rates, issuers or obligors of high yield securities may be more
likely to experience financial stress, especially if such issuers or obligors
are highly leveraged. In addition, the market for high yield securities is
relatively new and has not weathered a major economic recession, and it is
unknown what effects such a recession might have on such securities. During
such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of high yield securities
because such securities may be unsecured and may be subordinated to other
creditors of the issuer.
3
<PAGE>
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 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 to the issuer,
excluded from gross income for Federal income tax purposes and, in the case of
Connecticut Municipal Bonds, exempt from Connecticut personal income taxes.
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 ("IDBs") and, for bonds issued after August 15, 1986, private
activity bonds. General obligation bonds are secured by the issuer's pledge of
faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special or limited tax or other specific revenue source such as payments from
the user of the facility being financed. IDBs and, in the case of bonds issued
after August 15, 1986, private activity bonds are in most cases revenue bonds
and generally do not constitute the pledge of the credit or taxing power of the
issuer of such bonds. Generally, the payment of the principal of and interest
on such bonds depends solely on the ability of the user of the facility
financed by the bonds to meet its financial obligations and the pledge, if any,
of real and personal property so financed as security for such payment, unless
a line of credit, bond insurance or other security is furnished. The Fund also
may invest
4
<PAGE>
in "moral obligation" bonds, which are normally issued by special purpose
public authorities. If an issuer of moral obligation bonds is unable to meet
its obligations, repayment of such bonds becomes a moral commitment, but not a
legal obligation, of the state or municipality in question.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called
"lease obligations") relating to such equipment, land or facilities. Although
lease obligations do not constitute general obligations of the issuer for which
the issuer's unlimited taxing power is pledged, a lease obligation is
frequently backed by the issuer's covenant to budget for, appropriate and make
the payments due under the lease obligation. Certain investments in lease
obligations may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with all other illiquid investments,
would exceed 15% of the Fund's total assets. The Fund may, however, invest
without regard to such limitation in lease obligations which the Manager,
pursuant to 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 and to general
equitable principles, which may limit the enforcement of certain remedies.
DESCRIPTION OF TEMPORARY INVESTMENTS
The Fund may invest in short-term tax-free and taxable securities subject
to the limitations set forth under "Investment Objective and Policies." The
tax-exempt money market securities may include municipal notes, municipal
commercial paper, municipal bonds with remaining maturity of less than one
year, variable rate demand notes and participations therein. Municipal notes
include tax anticipation notes, bond anticipation notes and grant anticipation
notes. Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales, government grants or revenue receipts. Municipal
commercial paper refers to short-term unsecured promissory notes generally
issued to finance short-term credit needs. The taxable money market securities
in which the Fund may invest as Temporary Investments consist of U.S.
Government securities, U.S. Government agency securities, domestic bank or
savings institution certificates of deposit and bankers' acceptances,
short-term corporate debt securities such as commercial paper and repurchase
agreements. These Temporary Investments must have a stated maturity not in
excess of one year from the date of purchase.
Variable rate demand obligations ("VRDOs") are tax-exempt obligations
which contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility that
because of default or insolvency the demand feature of VRDOs and Participating
VRDOs, described below, may not be honored. The interest rates are adjustable
at intervals (ranging from daily to up to one year) to some prevailing market
rate for similar investments, such adjustment formula being calculated to
maintain the market value of the VRDOs at approximately the par value of the
VRDOs on the adjustment date. The adjustments typically are set at a rate
determined by the remarketing agent or based upon the Public Securities
Association Index or some other appropriate interest rate adjustment index. The
Fund may invest in all types of tax-exempt instruments currently outstanding or
to be issued in the future which satisfy the short-term maturity and quality
standards of the Fund.
The Fund also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank. Participating VRDOs provide
the Fund
5
<PAGE>
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-3/VMIG-3 by Moody's or F-1 through F-3 by Fitch. Temporary Investments, if
not rated, must be of comparable quality to securities rated in the above
rating categories in the opinion of the Manager. The Fund may not invest in any
security issued by a commercial bank or a savings institution unless the bank
or institution is organized and operating in the United States, has total
assets of at least one billion dollars and is a member of the Federal Deposit
Insurance Corporation ("FDIC"), except that up to 10% of total assets may be
invested in certificates of deposit of small institutions if such certificates
are 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 a 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 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 total 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.
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As described in the Prospectus, the Fund may purchase and sell exchange
traded financial futures contracts ("financial futures contracts") to hedge its
portfolio of Municipal Bonds against declines in the value of such securities
and to hedge against increases in the cost of securities the Fund intends to
purchase. However, any transactions involving financial futures or options will
be in accordance with the Fund's investment policies and limitations. To hedge
its portfolio, the Fund may take an investment position in a futures contract
which will move in the opposite direction from the portfolio position being
hedged. While the Fund's use of hedging strategies is intended to moderate
capital changes in portfolio holdings and thereby reduce the volatility of the
net asset value of Fund shares, the Fund anticipates that its net asset value
will fluctuate. Set forth below is information concerning futures transactions.
DESCRIPTION OF FUTURES CONTRACTS. A futures contract is an agreement
between two parties to buy and sell a security, or in the case of an
index-based futures contract, to make and accept a cash settlement for a set
price on a future date. A majority of transactions in futures contracts,
however, do not result in the actual delivery of the underlying instrument or
cash settlement, but are settled through liquidation, I.E., by entering into an
offsetting transaction. Futures contracts have been designed by boards of trade
which have been designated "contracts markets" by the Commodity Futures Trading
Commission ("CFTC").
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the
purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin," are required to be made on a daily
basis as the price of the futures contract fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"mark to the market." At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or
gain. In addition, a nominal commission is paid on each completed sale
transaction.
The Fund may deal in financial futures contracts based on a long-term
municipal bond index developed by the Chicago Board of Trade ("CBT") and The
Bond Buyer (the "Municipal Bond Index"). The Municipal Bond Index is comprised
of 40 tax-exempt municipal revenue and general obligations bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
Standard & Poor's and must 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, U.S. Treasury notes, Government National Mortgage
Association ("GNMA") Certificates and three-month U.S. Treasury bills. The Fund
may purchase and write call and put options on futures contracts on U.S.
Government securities in connection with its hedging strategies.
Subject to policies adopted by the Trustees, the Fund also may engage in
other futures contracts transactions such as futures contracts on other
municipal bond indices that may become available if the Manager and the
Trustees should determine that there is normally a sufficient correlation
between the prices of such futures contracts and the Municipal Bonds in which
the Fund invests to make such hedging appropriate.
FUTURES STRATEGIES. The Fund may sell a financial futures contract (I.E.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This strategy,
however, entails increased transaction costs in the form of dealer spreads and
typically would reduce the average yield of the Fund's portfolio securities as
a result of the shortening of maturities. The sale of futures contracts
provides an alternative means of hedging against declines in the value of its
investments in Municipal Bonds. As such values decline, the value of the Fund's
positions in the futures contracts will tend to increase, thus offsetting all
or a portion of the depreciation in the market value of the Fund's Municipal
Bond investments which are being hedged. While the Fund will incur commission
expenses in selling and closing
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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 will be included in initial margin. The writing of an option on a
futures contract involves risks similar to those relating to futures contracts.
---------------
The Trust has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "1940 Act"), in connection with its strategy of investing
in futures contracts. Section 17(f) relates to the custody of securities and
other assets of an investment company and may be deemed to prohibit certain
arrangements between the Trust and commodities brokers with respect to initial
and variation margin. Section 18(f) of the 1940 Act prohibits an open-end
investment company such as the Trust from issuing a "senior security" other
than a borrowing from a bank. The staff of the Commission has in the past
indicated that a futures contract may be a "senior security" under the 1940
Act.
RESTRICTIONS ON USE OF FUTURES TRANSACTIONS. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio assets after taking into
account unrealized profits and unrealized losses on any such contracts and
options. (However, the Fund intends to engage in options and futures
transactions only for hedging purposes.) Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When the Fund purchases futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or liquid securities will be deposited in a segregated account with
the Fund's
8
<PAGE>
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 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 were approved for trading in 1986.
Trading in such futures contracts may tend to be less liquid than that in other
futures contracts. The trading of futures contracts also is subject to certain
market risks, such as inadequate trading activity, which could at times make it
difficult or impossible to liquidate existing positions.
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INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the 1940 Act means the lesser of
(i) 67% of the Fund's shares present at a meeting at which more than 50% of the
outstanding shares of the Fund are represented or (ii) more than 50% of the
Fund's outstanding shares). The Fund may not:
1. Invest more than 25% of its assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities). For
purposes of this restriction, states, municipalities and their political
subdivisions are not considered part of any industry.
2. Make investments for the purpose of exercising control or management.
3. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate 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 1940 Act) in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) the Fund may, to the extent permitted
by applicable law, borrow up to an additional 5% of its total assets for
temporary purposes, (iii) the Fund may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio
securities and (iv) the Fund may purchase securities on margin to the
extent permitted by applicable law. The Fund may not pledge its assets
other than to secure such borrowings or, to the extent permitted by the
Fund's investment policies as set forth in its Prospectus and Statement of
Additional Information, as they may be amended from time to time, in
connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.
7. Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, which may be changed
by the Board of Trustees without shareholder approval, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d) (1) (F) or (G) (the "fund of funds" provisions)
of the 1940 Act at any time the Fund's shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Trustees of the Trust has otherwise
determined to be liquid pursuant to applicable law.
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d. Notwithstanding fundamental investment restriction (6) above, borrow
amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes. In addition, the Fund will
not purchase securities while borrowings are outstanding.
In addition, to comply with Federal income tax requirements for
qualification as a "regulated investment company," the Fund's investments will
be limited in a manner such that, at the close of each quarter of each fiscal
year, (a) no more than 25% of the Fund's total assets are invested in the
securities of a single issuer, and (b) with regard to at least 50% of the
Fund's total assets, no more than 5% of its total assets are invested in the
securities of a single issuer. For purposes of this restriction, the Fund will
regard each state and each political subdivision, agency or instrumentality of
such state and each multi-state agency of which such state is a member and each
public authority which issues securities on behalf of a private entity as a
separate issuer, except that if the security is backed only by the assets and
revenues of a non-governmental entity then the entity with the ultimate
responsibility for the payment of interest and principal may be regarded as the
sole issuer. These tax-related limitations may be changed by the Trustees of
the Trust to the extent necessary to comply with changes to the Federal income
tax requirements. An exemptive order has been obtained which permits the Trust
to effect principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities subject to conditions set forth in such
order.
---------------
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Manager, the Fund is prohibited from
engaging in certain transactions involving Merrill Lynch or its affiliates
except for brokerage transactions permitted under the 1940 Act involving only
usual and customary commissions or transactions pursuant to an exemptive order
under the 1940 Act. Included among such restricted transactions are purchases
from or sales to Merrill Lynch of securities in transactions in which it acts
as principal. See "Portfolio Transactions." An exemptive order has been
obtained which permits the Trust to effect principal transactions with Merrill
Lynch in high quality, short-term, tax-exempt securities subject to conditions
set forth in such order.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
Information about the Trustees and executive officers of the Trust, and
the Portfolio Manager of the Fund, including their ages and their principal
occupations for at least the last five years, is set forth below. Unless
otherwise noted, the address of each Trustee, executive officer and the
portfolio manager is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66) -- PRESIDENT AND TRUSTEE(1)(2) -- Chairman of the
Manager and of Merrill Lynch Asset Management, L.P. ("MLAM") (which terms as
used herein include their corporate predecessors) since 1997; President of the
Manager and MLAM from 1977 to 1997; Chairman of Princeton Services, Inc.
("Princeton Services") since 1997 and Director thereof since 1993; President of
Princeton Services from 1993 to 1997; Executive Vice President of Merrill Lynch
& Co., Inc. ("ML & Co.") since 1990.
JAMES H. BODURTHA (54) -- TRUSTEE(2) -- 36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (59) -- TRUSTEE(2) -- 113-115 University Place, New
York, New York 10003. John M. Olin Professor of Humanities, New York University
since 1993 and Professor thereof since 1980; President, Hudson Institute since
1997 and Trustee since 1980; Dean, Gallatin Division of New York University
from 1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute
from 1984 to 1985; Director, Damon Corporation from 1991 to 1995; Overseer,
Center for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech LP
since 1996.
ROBERT R. MARTIN (71) -- TRUSTEE(2) -- 513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from
1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989;
Director, Carnegie Capital Management from 1977 to 1985 and Chairman thereof in
1979; Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC
Industries, Inc. in 1994; Trustee, Northland College since 1992.
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JOSEPH L. MAY (69) -- TRUSTEE(2) -- 424 Church Street, Suite 2000,
Nashville, Tennessee 37219. Attorney in private practice since 1984; President,
May and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to
1983; Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman,
The May Corporation (personal holding company) from 1972 to 1983; Director,
Signal Apparel Co. from 1972 to 1989.
ANDRE F. PEROLD (46) -- TRUSTEE(2) -- Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund since 1989;
Director, Quantec Limited since 1991 and TIBCO from 1994 to 1996.
TERRY K. GLENN (58) -- EXECUTIVE VICE PRESIDENT(1)(2) -- Executive Vice
President of the Manager and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Princeton Funds
Distributor, Inc. ("PFD") since 1986 and Director thereof since 1991; President
of Princeton Administrators, L.P. ("Princeton Administrators") since 1988.
VINCENT R. GIORDANO (54) -- SENIOR VICE PRESIDENT(1)(2) -- Senior Vice
President of the Manager and MLAM since 1984; Senior Vice President of Princeton
Services since 1993.
KENNETH A. JACOB (47) -- VICE PRESIDENT(1)(2) -- First Vice President of
MLAM since 1997; Vice President of MLAM from 1984 to 1997; Vice President of
the Manager since 1984.
WILLIAM R. BOCK (62) -- PORTFOLIO MANAGER AND VICE PRESIDENT OF THE FUND
(1)(2) -- Vice President of MLAM since 1989.
DONALD C. BURKE (38) -- VICE PRESIDENT(1)(2) -- First Vice President of
MLAM since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation
of MLAM since 1990.
GERALD M. RICHARD (49) -- TREASURER(1)(2) -- Senior Vice President and
Treasurer of the Manager and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Treasurer of PFD since 1984 and
Vice President thereof since 1981.
ROBERT E. PUTNEY, III (38) -- SECRETARY(1)(2) -- Director (Legal Advisory)
of MLAM and Princeton Administrators since 1997; Vice President of MLAM from
1994 to 1997; Vice President of Princeton Administrators from 1996 to 1997;
Attorney with MLAM from 1991 to 1994.
- -------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At November 1, 1998, the Trustees, officers of the Trust and officers of
the Fund as a group (13 persons) owned an aggregate of less than 1.0% of the
outstanding shares of the Fund. At such date, Mr. Zeikel, a Trustee and officer
of the Trust, other officers of the Trust and officers of the Fund owned less
than 1.0% of common stock of ML & Co.
COMPENSATION OF TRUSTEES
The Trust pays each Trustee not affiliated with the Manager (each a
"non-affiliated Trustee") a fee of $10,000 per year plus $1,000 per meeting
attended, together with such Trustee's actual out-of-pocket expenses relating
to attendance at meetings. The Trust also compensates members of its Audit and
Nominating Committee (the "Committee"), which consists of all the
non-affiliated Trustees, a fee of $2,000 per year plus $500 per meeting
attended. The Trust reimburses each non-affiliated Trustee for his
out-of-pocket expenses relating to attendance at Board and Committee meetings.
The fees and expenses of the Trustees are allocated to the respective series of
the Trust on the basis of asset size. For the fiscal year ended July 31, 1998,
fees and expenses paid to non-affiliated Trustees that were allocated to the
Fund aggregated $2,966.
The following table sets forth the compensation paid by the Fund to the
non-affiliated Trustees for the fiscal year ended July 31, 1998 and the
aggregate compensation paid by all registered investment companies (including
the Trust) advised by the Manager and its affiliate, MLAM ("FAM/MLAM Advised
Funds") to the non-affiliated Trustees for the calendar year ended December 31,
1997:
12
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
PENSION OR FROM TRUST AND
RETIREMENT BENEFITS OTHER FAM/MLAM
COMPENSATION ACCRUED AS PART OF ADVISED FUNDS
NAME OF TRUSTEE FROM FUND TRUST'S EXPENSES PAID TO TRUSTEE(1)
- --------------------------- -------------- --------------------- -------------------
<S> <C> <C> <C>
James H. Bodurtha ......... $ 599.40 None $148,500
Herbert I. London ......... $ 599.40 None $148,500
Robert R. Martin .......... $ 599.40 None $148,500
Joseph L. May ............. $ 599.40 None $148,500
Andre F. Perold ........... $ 599.40 None $148,500
</TABLE>
- -------
(1) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (25 registered investment companies consisting of 43 portfolios);
Mr. London (25 registered investment companies consisting of 43
portfolios); Mr. Martin (25 registered investment companies consisting of
43 portfolios); Mr. May (25 registered investment companies consisting of
43 portfolios); and Mr. Perold (25 registered investment companies
consisting of 43 portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Manager or its
affiliates. Because of different objectives or other factors, a particular
security may be bought for one or more clients when one or more clients are
selling the same security. If the Manager or its affiliates purchase or sell
securities for the Fund or other funds for which they act as manager or for
their advisory clients and such sales or purchases arise for consideration at
or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of
the Manager or its affiliates during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there
may be an adverse effect on price.
Pursuant to a management agreement between the Trust on behalf of the Fund
and the Manager (the "Management Agreement"), the Manager receives for its
services to the Fund monthly compensation based upon the average daily net
assets of the Fund at the following annual rates: 0.55% of the average daily
net assets not exceeding $500 million; 0.525% of the average daily net assets
exceeding $500 million but not exceeding $1.0 billion; and 0.50% of the average
daily net assets exceeding $1.0 billion. For the fiscal year ended July 31,
1996, the total advisory fee payable by the Fund to the Manager was $220,672,
all of which were voluntarily waived. For the fiscal year ended July 31, 1997,
the total advisory fee payable by the Fund to the Manager was $255,318, of
which $188,926 was voluntarily waived. For the fiscal year ended July 31, 1998,
the total advisory fee payable by the Fund to the Manager was $310,622, of which
$70,737 was voluntarily waived.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Trust connected with investment and economic
research, trading and investment management of the Trust, as well as the fees
of all Trustees of the Trust who are affiliated persons of ML & Co. or any of
its affiliates. The Fund pays all other expenses incurred in its operation and
a portion of the Trust's general administrative expenses allocated on the basis
of the asset size of the respective Series of the Trust ("Series"). Expenses
that will be borne directly by the Series include, among other things,
redemption expenses, expenses of portfolio transactions, expenses of
registering the shares under Federal and state securities laws, pricing costs
(including the daily calculation of net asset value), expenses of printing
shareholder reports, prospectuses and statements of additional information
except to the extent paid by Merrill Lynch Funds Distributor, a division of PFD
(the "Distributor") as described below, fees for legal and auditing services,
Commission fees, interest, certain taxes and other expenses attributable to a
particular Series. Expenses that will be allocated on the basis of asset size
of the respective Series include fees and expenses of unaffiliated Trustees,
state franchise taxes, costs of printing proxies and other expenses related to
shareholder meetings and other expenses properly payable by the Trust. The
organizational expenses of the Trust were paid by the Trust, and as additional
Series are added to the Trust, the organizational expenses are allocated among
the Series (including the Fund) in a manner deemed equitable by the Trustees.
Depending upon the nature of a lawsuit, litigation costs may be assessed to the
specific Series to which the lawsuit relates or allocated on the basis of the
asset size of the respective Series. The Trustees have determined that this is
an appropriate method of allocation of expenses. Accounting services are
provided to the Fund by the Manager and the Fund reimburses the Manager for its
costs in connection with such services. For the fiscal years ended July 31,
1996, 1997 and 1998, the Fund reimbursed the Manager $35,067, $39,772 and
$38,764, respectively, for such services. As required by the Fund's
distribution agreements, the Distributor will pay the promotional expenses of
the Fund incurred in connection with
13
<PAGE>
the offering of shares of the Fund. Certain expenses in connection with account
maintenance and the distribution of Class B and Class C shares will be financed
by the Fund pursuant to the Distribution Plans in compliance with Rule 12b-1
under the 1940 Act. See "Purchase of Shares -- Distribution Plans."
The Manager is a limited partnership, the partners of which are ML & Co.
and Princeton Services. ML & Co. and Princeton Services are "controlling
persons" of the Manager as defined under the 1940 Act because of their
ownership of its voting securities or their power to exercise a controlling
influence over its management or policies.
DURATION AND TERMINATION. Unless earlier terminated as described 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(SM) System; shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C and Class D share of the Fund represents identical
interests in the investment portfolio of the Fund and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid (except
that Class B shareholders may vote upon any material changes to expenses
charged under the Class D Distribution Plan). Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLAM or its affiliate, the Manager.
Funds advised by MLAM or the Manager that utilize the Merrill Lynch Select
Pricing(SM) System are referred to herein as "Select Pricing Funds."
The Fund has entered into four separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and prospective investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Management Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal year
ended July 31, 1996, were $7,610, of which the Distributor received $639 and
Merrill Lynch received $6,971. The gross sales charges for the sale of Class A
shares for the fiscal year ended July 31, 1997, were $9,834, of which the
Distributor received $1,019 and Merrill Lynch received $8,815. The gross sales
charges for the sale of Class A shares for the fiscal year ended July 31, 1998,
were $2,473, of which the Distributor received $311 and Merrill Lynch received
$2,162. For the fiscal years ended July 31, 1996, 1997 and 1998, the
Distributor received no CDSCs with respect to redemptions within one year after
purchase of Class A shares purchased subject to a front-end sales charge
waiver. The gross sales charges for the sale of Class D shares for the fiscal
year ended July 31, 1996, were $37,016, of which the Distributor received
$3,237 and Merrill Lynch received $33,779. The gross sales charges for the sale
of Class D shares for fiscal year ended July 31, 1997, were $10,879, of which
the Distributor received $757 and Merrill Lynch received $10,122. The gross
sales charges for the sale of Class D shares for the fiscal year ended July 31,
1998 were $14,436, of which the Distributor received $1,450 and Merrill Lynch
received $12,986. For the fiscal years ended July 31, 1996, 1997 and 1998, the
Distributor received no CDSCs with respect to redemptions within one year after
purchase of Class D shares purchased subject to a front-end sales charge
waiver.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases,
14
<PAGE>
which in the aggregate are at least equal to the prescribed amounts, by an
individual, his or her spouse and their children under the age of 21 years
purchasing shares for his or her or their own account and to single purchases
by a trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account although more than one beneficiary is involved. The
term "purchase" also includes purchases by any "company," as that term is
defined in the 1940 Act, but does not include purchases by any such company
that has not been in existence for at least six months or which has no purpose
other than the purchase of shares of the Fund or shares of other registered
investment companies at a discount; provided, however, that it shall not
include purchases by any group of individuals whose sole organizational nexus
is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
CLOSED-END FUND INVESTMENT OPTION. Class A shares of the Fund and other
Select Pricing 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, the date
the Merrill Lynch Select Pricing(SM) System commenced operations, and who wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and 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 Select Pricing Funds
("Eligible Class D Shares"), if the following conditions are met. First, the
sale of closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or Class D
shares. Second, the closed-end fund shares must either have been acquired in the
initial public offering or be shares representing dividends from shares of
common stock acquired in such offering. Third, the closed-end fund shares must
have been continuously maintained in a Merrill Lynch securities account. Fourth,
there must be a minimum purchase of $250 to be eligible for the investment
option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A shares and the
other requirements pertaining to the reinvestment privilege are met. In order
to exercise this investment option, a shareholder of one of the
above-referenced continuously offered closed-end funds (an "eligible fund")
must sell his or her shares of common stock of the eligible fund (the "eligible
shares") back to the eligible fund in connection with a tender offer conducted
by the eligible fund and reinvest the proceeds immediately in the designated
class of shares of the Fund. This investment option is available only with
respect to eligible shares as to which no Early Withdrawal Charge or CDSC (each
as defined in the eligible fund's prospectus) is applicable. Purchase orders
from eligible fund shareholders wishing to exercise this investment option will
be accepted only on the day that the related tender offer terminates and will
be effected at the net asset value of the designated class of the Fund on such
day.
REDUCED INITIAL SALES CHARGES
RIGHT OF ACCUMULATION. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other Select Pricing Funds. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit sharing or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
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 Select Pricing Fund made within a 13-month period starting with the first
purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's Transfer Agent. The Letter of Intention
is not available to employee benefit plans for which Merrill Lynch provides
plan participant, 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
15
<PAGE>
a lower sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intention may be included under a
subsequent Letter of Intention executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period.
The value of Class A and Class D shares of the Fund and of other Select Pricing
Funds presently held, at cost or maximum offering price (whichever is higher),
on the date of the first purchase under the Letter of Intention, may be
included as a credit toward the completion of such Letter, but the reduced
sales charge applicable to the amount covered by such Letter will be applied
only to new purchases. If the total amount of shares does not equal the amount
stated in the Letter of Intention (minimum of $25,000), the investor will be
notified and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the Class A 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 that
would be applicable to a single purchase equal to the total dollar value of the
shares then being purchased under such Letter, but there will be no retroactive
reduction of the sales charges on any previous purchase. The value of any
shares redeemed or otherwise disposed of by the purchaser prior to termination
or completion of the Letter of Intention will be deducted from the total
purchases made under such Letter. An exchange from the Summit Cash Reserves
Fund into the Fund that creates a sales charge will count toward completing a
new or existing Letter of Intention from the Fund.
EMPLOYEE ACCESS(SM) ACCOUNTS. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. The initial
minimum investment for such accounts is $500, except that the initial minimum
investment for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
TMA(SM) MANAGED TRUSTS. Class A shares are offered 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, ML & Co. and its subsidiaries
(the term "subsidiaries," when used herein with respect to ML & Co., includes
MLAM, the Manager and certain other entities directly or indirectly wholly
owned and controlled by ML & Co.) and their directors and employees, and any
trust, pension, profit-sharing or other benefit plan for such persons, may
purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the Financial Consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish that such redemption had
been made within 60 days prior to the investment in the Fund and the proceeds
from the redemption had been maintained in the interim in cash or a money
market fund.
Class D shares of the Fund are also offered at the net asset value,
without a sales charge, to an investor who has a business relationship with a
Merrill Lynch Financial Consultant and who has invested in a mutual fund
sponsored by a non-Merrill Lynch company for which Merrill Lynch has served as
a selected dealer and where Merrill Lynch has either received or given notice
that such arrangement will be terminated ("notice"), if the following
conditions are satisfied: first, the investor must purchase Class D shares of
the Fund with proceeds from a redemption of shares of such other mutual fund
and the shares of such other fund were subject to a sales charge either at the
time of purchase or on a deferred basis; and second, such purchase of Class D
shares must be made within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of shares of such
other mutual fund and that such shares have been outstanding for a period of no
less than six months; and second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must
be maintained in the interim in cash or a money market fund.
16
<PAGE>
ACQUISITION OF CERTAIN INVESTMENT COMPANIES. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund that might result from an acquisition of assets having net unrealized
appreciation that is disproportionately higher at the time of acquisition than
the realized or unrealized appreciation of the Fund. The issuance of Class D
shares for consideration other than cash is limited to bona fide
reorganizations, statutory mergers or other acquisitions of portfolio
securities that (i) meet the investment objectives and policies of the Fund;
(ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, that are not restricted as to transfer
either by law or liquidity of market (except that the Fund may acquire through
such transactions restricted or illiquid securities to the extent the Fund does
not exceed the applicable limits on acquisition of such securities set forth
under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
1940 Act (each a "Distribution Plan") with respect to the account maintenance
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 Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts 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 the 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
17
<PAGE>
to the voluntary maximum may exceed the amount payable under the NASD formula.
In such circumstances payment in excess of the amount payable under the NASD
formula will not be made.
The following table sets forth comparative information as of July 31, 1998
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to the Class B shares, the Distributor's voluntary
maximum.
DATA CALCULATED AS OF JULY 31, 1998
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- ----------- ------------ --------- ---------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD
JULY 1, 1994
(COMMENCEMENT OF OPERATIONS)
TO JULY 31, 1998:
Under NASD Rule as Adopted ............ $41,481 $2,593 $597 $3,190 $573 $2,617 $105
Under Distributor's Voluntary Waiver .. $41,481 $2,593 $207 $2,800 $573 $2,227 $105
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994
(COMMENCEMENT OF OPERATIONS)
TO JULY 31, 1998:
Under NASD Rule as Adopted ............ $ 5,760 $ 360 $ 50 $ 410 $ 29 $ 381 $ 15
</TABLE>
- -------
(1) Purchase price of all eligible Class B or Class C shares sold during
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in THE WALL STREET JOURNAL, plus 1%, as permitted under the NASD
Rule.
(3) Consist of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares -- Distribution Plans" in the Prospectus. This figure
may include CDSCs that were deferred when a shareholder redeemed shares
prior to the expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFA(SM)) Program (the "MFA Program"). The
CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum (with respect to Class B and Class C shares) or the voluntary
maximum (with respect to Class B shares).
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the NYSE is restricted as determined by the Commission or the
NYSE is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
The value of shares at the time of the redemption may be more or less than
the shareholder's cost, depending on the market value of the securities held by
the Fund at any such time.
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in certain
circumstances including following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies are any partial or
complete redemption following the death or disability (as defined in the
Internal Revenue Code of 1986 as amended (the "Code")) of a Class B shareholder
(including one who owns the Class B shares as joint tenant with his or her
spouse), provided the redemption is requested within one year of the death or
initial determination of disability. For the fiscal years ended July 31, 1996,
1997 and 1998, the Distributor received CDSCs of $105,576, $57,859 and $39,760,
respectively, with respect to redemptions of Class B
18
<PAGE>
shares, all of which were paid to Merrill Lynch. For the fiscal years ended
July 31, 1997 and 1998, with respect to redemption of Class B shares,
additional CDSCs payable to the Distributor may have been waived or converted
to a contingent obligation in connection with a shareholder's participation in
certain fee-based programs. For the fiscal years ended July 31, 1996, 1997 and
1998, the Distributor received CDSCs of $328, $1,791 and $758, respectively,
with respect to redemptions of Class C shares, all of which were paid to
Merrill Lynch.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies" and "Portfolio
Transactions" in the Prospectus.
Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Fund as a principal in the purchase and sale of securities
unless such trading is permitted by an exemptive order issued by the Commission.
Since over-the-counter ("OTC") transactions are usually principal transactions,
affiliated persons of the Trust, including Merrill Lynch, may not serve as
dealer in connection with transactions with the Fund. The Trust has obtained an
exemptive order permitting it to engage in certain principal transactions with
Merrill Lynch involving high quality short-term municipal bonds subject to
certain conditions. For the fiscal year ended July 31, 1996, the Fund engaged in
three transactions pursuant to such order for an aggregate market value of
$1,800,000. For the fiscal year ended July 31, 1997, the Fund engaged in eight
transactions pursuant to such an order for an aggregate market value of
$4,900,000. For the fiscal year ended July 31, 1998, the Fund engaged in two
transactions pursuant to such order for an aggregate market value of $1,300,000.
The Trust has applied for an exemptive order permitting it to, among other
things, (i) purchase high quality tax-exempt securities from Merrill Lynch when
Merrill Lynch is a member of an underwriting syndicate and (ii) purchase
tax-exempt securities from and sell tax-exempt securities to Merrill Lynch in
secondary market transactions. Affiliated persons of the Trust may serve as
broker for the Fund in OTC transactions conducted on an agency basis. Certain
court decisions have raised questions as to the extent to which investment
companies should seek exemptions under the 1940 Act in order to seek to
recapture underwriting and dealer spreads from affiliated entities. The Trustees
have considered all factors deemed relevant, and have made a determination not
to seek such recapture at this time. The Trustees will reconsider this matter
from time to time.
The Fund may not purchase securities, including Municipal Bonds, during
the existence of any underwriting syndicate of which Merrill Lynch is a member
or in a private placement in which Merrill Lynch serves as placement agent
except pursuant to procedures approved by the Trustees of the Trust which
either comply with rules adopted by the Commission or with interpretations of
the Commission staff. Rule 10f-3 under the 1940 Act sets forth conditions under
which the Fund may purchase municipal bonds from an underwriting syndicate of
which Merrill Lynch is a member. The rule sets forth requirements relating to,
among other things, the terms of an issue of municipal bonds purchased by the
Fund, the amount of municipal bonds which may be purchased in any one issue and
the assets of the Fund which may be invested in a particular issue.
The Fund does not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who
provide supplemental investment research (such as information concerning
tax-exempt securities, economic data and market forecasts) to the Manager may
receive orders for transactions by the Fund. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Manager under its Management Agreement and the expenses of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information.
The Trust has no obligation to deal with any broker in the execution of
transactions for the Fund's portfolio securities. In addition, consistent with
the Conduct Rules of the NASD and policies established by the Trustees of the
Trust, the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to its Manager. As a result of the investment policies described in
the Prospectus, the Fund's annual portfolio turnover rate may be higher than
that of other investment companies; however, it is extremely difficult to
predict portfolio turnover rates with any degree of accuracy. Higher portfolio
turnover may contribute to higher transaction costs in the form of dealer
spreads and brokerage commissions which are borne directly by the Fund. High
portfolio turnover may also result in negative tax consequences, such as an
increase in capital gains dividends or in ordinary income dividends of accrued
market discount. See "Distributions and Taxes." The portfolio turnover
rate is calculated by dividing the lesser of purchases or sales of portfolio
securities for the particular fiscal year by the monthly average of the value
of the portfolio securities owned by the Fund during the particular fiscal
year. For purposes of determining this rate, all securities whose maturities at
the time of acquisition
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are one year or less are excluded. The portfolio turnover rates for the fiscal
years ended July 31, 1997 and 1998 were 32.46% and 53.99%, respectively.
Section 11(a) of the Securities Exchange Act of 1934, as amended,
generally prohibits members of the U.S. national securities exchanges from
executing exchange transactions for their affiliates and institutional accounts
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
Reference is made to "Additional Information -- Determination of Net Asset
Value" in the Prospectus for information concerning the determination of net
asset value.
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily, Monday through Friday, as of 15 minutes after the
close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern
time) on each day during which the NYSE is open for trading. The NYSE is not
open on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Net asset value per share is computed by dividing the sum of the
value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
fees payable to the Manager and Distributor, are accrued daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance and
distribution fees and higher transfer agency costs applicable with respect to
Class B and Class C shares and the daily expense accruals of the account
maintenance fees applicable with respect to Class D shares; moreover, the per
share net asset value of Class B and Class C shares generally will be lower
than the per share net asset value of Class D shares, reflecting the daily
expense accruals of the distribution fees, higher account maintenance fees and
higher transfer agency fees applicable with respect to Class B and Class C
shares of the Fund. It is expected, however, that the per share net asset value
of the four classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends, which will differ by approximately
the amount of the expense accrual differentials between the classes.
The Municipal Bonds and other portfolio securities in which the Fund
invests are traded primarily in OTC municipal bond and money markets and are
valued at the last available bid price in the OTC market or on the basis of
yield equivalents as obtained from one or more dealers that make markets in the
securities. One bond is the "yield equivalent" of another bond when, taking
into account market price, maturity, coupon rate, credit rating and ultimate
return of principal, both bonds will theoretically produce an equivalent return
to the bondholder. Financial futures contracts and options thereon, which are
traded on exchanges, are valued at their settlement prices as of the close of
such exchanges. Short-term investments with a remaining maturity of 60 days or
less are valued on an amortized cost basis, which approximates market value.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Trustees of the Trust, including valuations furnished by a pricing service
retained by the Trust, which may utilize a matrix system for valuations. The
procedures of the pricing service and its valuations are reviewed by the
officers of the Trust under the general supervision of the Trustees.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services described below which
are designed to facilitate investment in shares of the Fund. Full details as to
each of such services and copies of the various plans described below and
instructions as to how to participate in the various services or plans, or how
to change options with respect thereto, can be obtained from the Trust, the
Distributor or Merrill Lynch.
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INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders also will receive separate confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gains distributions. A
shareholder may make additions to his or her Investment Account at any time by
mailing a check directly to the Transfer Agent.
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.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or continue
to maintain an Investment Account at the Transfer Agent for those Class A or
Class D shares. Shareholders interested in transferring their Class B or Class
C shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent. If
the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he or she be issued certificates for
his or her shares, and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence.
AUTOMATIC INVESTMENT PLANS
A U.S. 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. An
investor whose shares of the Fund are held within a CMA(R) or CBA(R) account
may arrange to make periodic investments of $100 or more in Fund shares in
their CMA(R) or CBA(R) account or in certain related accounts.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
automatically reinvested in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of
business on the monthly payment date for such dividends and distributions.
Shareholders may elect in writing to receive either their income dividends or
capital gains distributions, or both, in cash, in which event payment will be
mailed on or about the payment date (provided that, in the event that a payment
on an account maintained at the Transfer Agent would amount to $10.00 or less,
a shareholder will not receive such payment in cash and such payment will
automatically be reinvested in additional shares). The Fund is not responsible
for any failure of delivery to the shareholder's address of record and no
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
Shareholders may, at any time, notify Merrill Lynch in writing if their
account is maintained with Merrill Lynch, or notify the Transfer Agent in
writing or by telephone (1-800-MER-FUND) if the shareholder's account is
maintained with the Transfer Agent, that they no longer wish to have their
dividends and/or capital gains distributions reinvested in shares of the Fund
or vice versa and, commencing ten days after the receipt by the Transfer Agent
of such notice, such instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders
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who have acquired shares of the Fund having a value, based on cost or the
current offering price, of $5,000 or more, and monthly withdrawals are
available for shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed
from those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and the class of shares to be redeemed. Redemptions will be made at net
asset value as determined as of 15 minutes after the close of business on the
NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) on the 24th day of
each month or the 24th day of the last month of each quarter, whichever is
applicable. If the NYSE is not open for business on such date, the shares will
be redeemed at the close of business on the following business day. The check
for the withdrawal payment will be mailed, or the direct deposit for the
withdrawal payment will be made, on the next business day following redemption.
When a shareholder is making systematic withdrawals, dividends and
distributions on all shares in the Investment Account are reinvested
automatically in Fund shares. A shareholder's Systematic Withdrawal Plan may be
terminated at any time, without charge or penalty, by the shareholder, the
Trust, the Transfer Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or
income. Each withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder's original investment
may be reduced correspondingly. Purchases of additional shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Trust will not knowingly accept purchase
orders for shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the value
of shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Contingent
Deferred Sales Charges -- Class B Shares" and " -- Contingent Deferred Sales
Charges -- Class C Shares" in the Prospectus. Where the systematic withdrawal
plan is applied to Class B shares, upon conversion of the last Class B shares
in an account to Class D shares, the systematic withdrawal plan will be applied
thereafter to Class D shares if the shareholder so elects. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares --
Conversion of Class B Shares to Class D Shares" in the Prospectus. If an
investor wishes to change the amount being withdrawn in a systematic withdrawal
plan the investor should contact his or her Financial Consultant.
Alternatively, a shareholder whose shares are held within a CMA(R) or
CBA(R) Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
three business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the
case of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Financial Consultant.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market mutual fund specifically designated as available
for exchange by holders of Class A, Class B, Class C and Class D shares of
Select Pricing Funds. Shares with a net asset value of at least $100 are
required to qualify for the exchange privilege and any shares utilized in an
exchange must have been held by the shareholder for at least 15 days. Before
effecting an exchange, shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made. Exercise of the
exchange privilege is treated as a sale of the exchanged shares and a purchase
of the acquired shares for Federal income tax purposes.
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EXCHANGES OF CLASS A AND CLASS D SHARES. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund
if the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second Select
Pricing Fund, but does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second Select Pricing Fund at any time as
long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class D shares are
exchangeable with shares of the same class of other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A
or Class D shares") for Class A or Class D shares of other Select Pricing Funds
or Class A shares of Summit ("new Class A or Class D shares") are transacted on
the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class D shares and the
sales charge payable at the time of the exchange on the new Class A or Class D
shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A or Class D shares generally
may be exchanged into the Class A or Class D shares, respectively, of the other
funds with a reduced sales charge or without a sales charge.
EXCHANGES OF CLASS B OR CLASS C SHARES. Each Select Pricing Fund with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offers to exchange its Class B or Class C shares for Class B or Class C shares,
respectively, of another Select Pricing Fund or for Class B shares of Summit
("new Class B or Class C shares") on the basis of relative net asset value per
Class B or Class C share, without the payment of any CDSC that might otherwise
be due on redemption of the outstanding shares. Class B shareholders of the
Fund exercising the exchange privilege will continue to be subject to the
Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating
to the new Class B shares acquired through use of the exchange privilege. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the CDSC that may
be payable on a disposition of the new Class B or Class C shares, the holding
period for the outstanding Class B or Class C shares is "tacked" to the holding
period of the new Class B or Class C shares. For example, an investor may
exchange Class B or Class C shares of the Fund for those of Merrill Lynch
Special Value Fund, Inc. ("Special Value Fund") after having held the Fund's
Class B shares for two and a half years. The 2% CDSC that generally would apply
to a redemption would not apply to the exchange. Three years later the investor
may decide to redeem the Class B shares of Special Value Fund and receive cash.
There will be no CDSC due on this redemption, since by "tacking" the two and a
half year holding period of Fund Class B shares to the three-year holding
period for the Special Value Fund Class B shares, the investor will be deemed
to have held the Special Value Fund Class B shares for more than five years.
EXCHANGES FOR SHARES OF A MONEY MARKET FUND. Class A and Class D shares
are exchangeable for Class A shares of Summit and Class B and Class C shares
are exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class
C shares of Select Pricing Funds and, in the event of such an exchange, the
period of time that Class B shares of Summit are held will count toward
satisfaction of the holding period requirement for purposes of reducing any
CDSC and toward satisfaction of any conversion period with respect to Class B
shares. Class B shares of Summit will be subject to a distribution fee at an
annual rate of 0.75% of average daily net assets of such Class B shares. This
exchange privilege does not apply with respect to certain Merrill Lynch
fee-based programs for which alternative exchange arrangements may exist.
Please see your Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-sponsored
money market funds other than Summit. Shareholders who have exchanged shares of
a Select Pricing Fund for shares of such other money market funds and
subsequently wish to exchange those money market fund shares for shares of the
Fund will be subject to the CDSC schedule applicable to such Fund shares, if
any. The holding period for those money market fund shares will not count toward
satisfaction of the holding period requirement for
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reduction of the CDSC imposed on such shares, if any, and, with respect to Class
B shares, toward satisfaction of the Conversion Period. However, the holding
period for Class B or Class C shares received in exchange for such money market
fund shares will be aggregated with the holding period for the original shares
for purposes of reducing the CDSC or satisfying the Conversion Period.
EXCHANGES BY PARTICIPANTS IN THE MFA PROGRAM. The Fund's exchange
privilege is modified with respect to purchases of Class A and Class D shares
by non-retirement plan investors under the MFA program. First, the initial
allocation of assets is made under the MFA program. Then, any subsequent
exchange under the MFA program of Class A or Class D shares of a Select Pricing
Fund for Class A or Class D shares of the Fund will be made solely on
the basis of the relative net asset values of the shares being exchanged.
Therefore, there will not be a charge for any difference between the sales
charge previously paid on the shares of the other Select Pricing Fund and
the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
EXERCISE OF THE EXCHANGE PRIVILEGE. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and
shareholders of the other Select Pricing Funds with shares for which
certificates have not been issued, may exercise the exchange privilege by wire
through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be modified
or terminated in accordance with the rules of the Commission. The Fund reserves
the right to limit the number of times an investor may exercise the exchange
privilege. Certain funds may suspend the continuous offering of their shares to
the general public at any time and may thereafter resume such offering from
time to time. The exchange privilege is available only to U.S. shareholders in
states where the exchange legally may be made. It is contemplated that the
exchange privilege may be applicable to other new mutual funds whose shares may
be distributed by the Distributor.
DISTRIBUTIONS AND TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Code. As
long as it so qualifies, the Fund (but not its shareholders) will not be
subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Trust intends to cause
the Fund to distribute substantially all of such income.
As discussed in the Fund's Prospectus, the Trust has established other
series in addition to the Fund (together with the Fund, the "Series"). Each
Series of the Trust is treated as a separate corporation for Federal income tax
purposes. Each Series, therefore, is considered to be a separate entity in
determining its treatment under the rules for RICs described in the Prospectus.
Losses in one Series do not offset gains in another Series, and the
requirements (other than certain organizational requirements) for qualifying
for RIC status are determined at the Series level rather than at the Trust
level.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Trust intends to qualify the Fund to pay "exempt-interest dividends,"
as defined in Section 852(b)(5) of the Code. Under such section if, at the close
of each quarter of the Fund's taxable year, at least 50% of the value of the
Fund's total assets consists of obligations exempt from Federal income tax
("tax-exempt obligations") under Section 103(a) of the Code (relating generally
to obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its Class A, Class B, Class C and
Class D shareholders (together, the "shareholders"). Exempt-interest dividends
are dividends or any part thereof paid by the Fund that are attributable to
interest on tax-exempt obligations and designated by the Trust as
exempt-interest dividends in a written notice mailed to the Fund's shareholders
within 60 days after the close of the Fund's taxable year. For this purpose, the
Fund will allocate interest from tax-exempt obligations (as well as ordinary
income, capital gains, and tax preference items, discussed below) among the
Class A, Class B, Class C and Class D shareholders according to a method (which
it believes is consistent with the Commission rule permitting the issuance and
sale of multiple classes of shares) that is based on the gross income allocable
to Class A, Class B, Class C and Class D shareholders during the taxable year,
or such other method as the Internal Revenue Service may prescribe. To the
extent that the dividends distributed to the Fund's shareholders are derived
from interest income exempt from Federal income tax under Code Section 103(a)
and are properly designated as exempt-interest dividends, they will be
excludable from a shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends are included,
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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 personal income tax on individuals, estates and
trusts (the "Connecticut income tax") except to the extent it reduces the
shareholder's Federal adjusted gross income. Shareholders are advised to consult
their tax advisors with respect to whether exempt-interest dividends retain the
exclusion under Code Section 103(a) if a shareholder would be treated as a
"substantial user" or "related person" under Code Section 147(a) with respect to
property financed with the proceeds of an issue of "industrial development
bonds" or "private activity bonds," if any, held by the Fund.
Dividends paid by the Fund that qualify as exempt-interest dividends for
Federal income tax purposes are not subject to the Connecticut income tax (to
the extent that they are derived from Connecticut Municipal Bonds). Other Fund
dividends, whether received in cash or additional shares, are subject to this
tax, except that capital gain dividends that are derived from obligations
issued by or on behalf of the State of Connecticut, any political subdivision
thereof, or public instrumentality, state or local authority, district, or
similar public entity created under Connecticut law are not subject to the tax.
Dividends paid by the Fund that constitute items of tax preference for purposes
of the Federal alternative minimum tax, other than exempt-interest dividends
derived from Connecticut Municipal Bonds, could cause liability for the net
Connecticut minimum tax applicable to investors subject to the Connecticut
income tax who are required to pay the Federal alternative minimum tax.
Dividends paid by the Fund, including those that qualify as exempt-interest
dividends for Federal income tax purposes, are taxable for purposes of the
Connecticut corporation business tax. However, 70% (100% if the investor owns
at least 20% of the total voting power and value of the Fund's shares) of
amounts that are treated as dividends and not as exempt-interest dividends or
capital gain dividends for Federal income tax purposes are deductible for
purposes of the corporation business tax, but no deduction is allowed for
expenses related thereto. Shareholders other than those subject to the
corporation business tax who are 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 the Connecticut income tax and the net Connecticut minimum tax.
The Fund 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.
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, from an excess of net long-term capital
gains over net short-term capital losses derived from the sale of securities or
from certain transactions in futures or options ("capital gain dividends") are
taxable as long-term capital gains for Federal income tax purposes, regardless
of the length of time the shareholder has owned Fund shares. Certain categories
of capital gains are taxable at different Federal tax rates. Generally not later
than 60 days after the close of the Fund's taxable year, the Trust will provide
shareholders with a written notice designating the amounts of any
exempt-interest dividends, ordinary income dividends or capital gain dividends
as well as any amounts of capital gain dividends in the different categories of
capital gain referred to above. Neither the Connecticut income tax nor the
Connecticut corporation business tax makes a distinction in the treatment of
amounts taxable thereunder that are treated as capital gains or as ordinary
income for Federal income tax purposes. Capital gain dividends are not subject
to the Connecticut income tax, in the case of shareholders holding shares of the
Fund as capital assets, to the extent they are derived from obligations issued
by or on behalf of the state of Connecticut, any political subdivision thereof,
or public instrumentality, state or local authority, district, or similar public
entity created under Connecticut law, but other capital gain dividends are
subject to that tax. Distributions by the Fund, whether from exempt-interest
income, ordinary income or capital gains, will not be eligible for the dividends
received deduction allowed to corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital
loss to the extent of any capital gain dividends
[/R]
25
<PAGE>
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 certain "private activity bonds," issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (E.G., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference," which could subject certain investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. Dividends paid by the
Fund that constitute items of tax preference for Federal alternative minimum tax
purposes, other than exempt-interest dividends derived from Connecticut
Municipal Bonds, could cause liability for the net Connecticut minimum tax,
applicable to shareholders subject to the Connecticut income tax who are
required to pay the Federal alternative minimum tax. The Fund will purchase such
"private activity bonds," and the Trust will report to shareholders within 60
days after the calendar year-end the portion of the Fund's dividends declared
during the year which constitutes an item of tax preference for alternative
minimum tax purposes and the portion thereof derived from Connecticut Municipal
Bonds and not subject to the net Connecticut minimum tax. The Code further
provides that corporations are subject to an alternative minimum tax based, in
part, on certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay alternative minimum tax on
exempt-interest dividends paid by the Fund.
The Fund may invest in high yield bonds as described in the Prospectus.
Furthermore, the Fund may also invest in instruments the return on which
includes nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special tax
rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such high yield securities
and/or nontraditional instruments could be recharacterized as taxable ordinary
income.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis
in the Class D shares acquired will be the same as such shareholder's basis in
the Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge such
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisors concerning the applicability of the U.S. withholding
tax.
Amounts required to be treated as gain or loss by a shareholder for
Federal income tax purposes as a result of transactions by the shareholder in
shares of the Fund are taken into account in computing the Connecticut tax
liability of a shareholder subject to the Connecticut income tax or the
Connecticut corporation business tax.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
26
<PAGE>
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
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 or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. Application of these rules to Section 1256 contracts held
by the Fund may alter the timing and character of distributions to
shareholders. The mark-to-market rules outlined above, however, will not apply
to certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in financial futures
contracts or the related options.
---------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and 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 and regulations. 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 own tax advisors regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, and Connecticut or other state or local
taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective shareholders.
From time to time, the Fund may include the Fund's Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales literature. Total
return and yield and tax-equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return, yield and tax-equivalent yield are determined
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
the Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
27
<PAGE>
Set forth below is the total return, yield and tax-equivalent yield
information for Class A, Class B, Class C and Class D shares of the Fund for
the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES
-----------------------------------------
EXPRESSED REDEEMABLE
AS A PERCENTAGE VALUE OF A
BASED ON A HYPOTHETICAL
HYPOTHETICAL $1,000 INVESTMENT
$1,000 AT THE END
PERIOD INVESTMENT OF THE PERIOD
------ ---------------- -----------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
<S> <C> <C>
Year ended July 31, 1998 .......................... 1.76% $ 1,017.60
Inception (July 1, 1994) to July 31, 1998 ......... 6.51% $ 1,293.80
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
Year Ended July 31,
1998 .............................................. 6.00% $ 1,060.00
1997 .............................................. 9.51% $ 1,095.10
1996 .............................................. 6.37% $ 1,063.70
1995 .............................................. 6.30% $ 1,063.00
Inception (July 1, 1994) to July 31, 1994 ......... 2.68% $ 1,026.80
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
Inception (July 1, 1994) to July 31, 1998 ......... 29.38% $ 1,293.80
YIELD
30 days ended July 31, 1998 ....................... 3.96% --
TAX EQUIVALENT YIELD*
30 days ended July 31, 1998 ....................... 5.50% --
CLASS C SHARES
-----------------------------------------
EXPRESSED REDEEMABLE
AS A PERCENTAGE VALUE OF A
BASED ON A HYPOTHETICAL $1,000
HYPOTHETICAL INVESTMENT
$1,000 AT THE END
PERIOD INVESTMENT OF THE PERIOD
------ ------------ -----------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
Year ended July 31, 1998 .......................... 4.36% $ 1,043.60
Inception (October 21, 1994) to July 31, 1998 ..... 7.61% $ 1,318.80
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
Year Ended July 31,
1998 .............................................. 5.36% $ 1,053.60
1997 .............................................. 8.84% $ 1,088.40
1996 .............................................. 5.72% $ 1,057.20
Inception (October 21, 1994) to July 31, 1995 ..... 8.79% $ 1,087.90
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
Inception (October 21, 1994) to July 31, 1998 ..... 31.88% $ 1,318.80
YIELD
30 days ended July 31, 1998 ....................... 3.52% --
TAX EQUIVALENT YIELD*
30 days ended July 31, 1998 ....................... 4.89% --
<CAPTION>
CLASS B SHARES
---------------------------------------
EXPRESSED REDEEMABLE
AS A PERCENTAGE VALUE OF A
BASED ON A HYPOTHETICAL
HYPOTHETICAL $1,000 INVESTMENT
$1,000 AT THE END
PERIOD INVESTMENT OF THE PERIOD
------ ----------------- ---------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
<S> <C> <C>
Year ended July 31, 1998 .......................... 1.47% $ 1,014.70
Inception (July 1, 1994) to July 31, 1998 ......... 7.04% 1,320.20
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
Year Ended July 31,
1998 .............................................. 5.47% $ 1,054.70
1997 .............................................. 8.96% $ 1,089.60
1996 .............................................. 5.82% $ 1,058.20
1995 .............................................. 5.77% $ 1,057.70
Inception (July 1, 1994) to July 31, 1994 ......... 2.64% $ 1,026.40
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
Inception (July 1, 1994) to July 31, 1998 ......... 32.02% $ 1,320.20
YIELD
30 days ended July 31, 1998 ....................... 3.62% --
TAX EQUIVALENT YIELD*
30 days ended July 31, 1998 ....................... 5.03% --
CLASS D SHARES
----------------------------------------
EXPRESSED REDEEMABLE
AS A PERCENTAGE VALUE OF A
BASED ON A HYPOTHETICAL
HYPOTHETICAL $1,000 INVESTMENT
$1,000 AT THE END
PERIOD INVESTMENT OF THE PERIOD
------ ------------ ---------------------
Year ended July 31, 1998 .......................... 1.66% $ 1,016.60
Inception (October 21, 1994) to July 31, 1998 ..... 6.96% $ 1,289.40
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
Year Ended July 31,
1998 .............................................. 5.90% $ 1,059.00
1997 .............................................. 9.40% $ 1,094.00
1996 .............................................. 6.26% $ 1,062.60
Inception (October 21, 1994) to July 31, 1995 ..... 9.10% $ 1,091.00
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
Inception (October 21, 1994) to July 31, 1998 ..... 28.94% $ 1,289.40
YIELD
30 days ended July 31, 1998 ....................... 3.87% --
TAX EQUIVALENT YIELD*
30 days ended July 31, 1998 ....................... 5.38% --
</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
28
<PAGE>
account the reduced, and not the maximum, sales charge or may not take into
account the CDSC and therefore, may reflect greater total return since, due to
the reduced sales charges or the waiver of CDSC, a lower amount of expenses may
be deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust provides that the Trust shall be comprised of
separate Series each of which will consist of a separate portfolio which will
issue separate shares. The Trust is presently comprised of the Fund, Merrill
Lynch Arizona Municipal Bond Fund, Merrill Lynch Arkansas Municipal Bond Fund,
Merrill Lynch Colorado Municipal Bond Fund, Merrill Lynch Florida Municipal
Bond Fund, Merrill Lynch Maryland Municipal Bond Fund, Merrill Lynch
Massachusetts Municipal Bond Fund, Merrill Lynch Michigan Municipal Bond Fund,
Merrill Lynch Minnesota Municipal Bond Fund, Merrill Lynch New Jersey Municipal
Bond Fund, Merrill Lynch New Mexico Municipal Bond Fund, Merrill Lynch New York
Municipal Bond Fund, Merrill Lynch North Carolina Municipal Bond Fund, Merrill
Lynch Ohio Municipal Bond Fund, Merrill Lynch Oregon Municipal Bond Fund,
Merrill Lynch Pennsylvania Municipal Bond Fund and Merrill Lynch Texas
Municipal Bond Fund. The Trustees are authorized to create an unlimited number
of Series and, with respect to each Series, to issue an unlimited number of
full and fractional shares of beneficial interest, par value $.10 per share, of
different classes and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial
interests in the Series. Shareholder approval is not necessary for the
authorization of additional Series or classes of a Series of the Trust. At the
date of this Statement of Additional Information, the shares of the Fund are
divided into Class A, Class B, Class C and Class D shares. Class A, Class B,
Class C and Class D shares represent interests in the same assets of the Fund
and are identical in all respects except that the Class B, Class C and Class D
shares bear certain expenses related to the account maintenance and/or
distribution expenditures. The Board of Trustees may classify and reclassify
the shares of any Series into additional or other classes at a future date.
All shares of the Trust have equal voting rights, except that only shares
of the respective Series are entitled to vote on matters concerning only that
Series and, as noted above, Class B, Class C and Class D shares have exclusive
voting rights with respect to matters relating to the account maintenance
and/or distribution expenses, as appropriate, being borne solely by such class.
Each issued and outstanding share of a Series is entitled to one vote and to
participate equally in dividends and distributions declared with respect to
that Series and, upon liquidation or dissolution of the Series, in the net
assets of such Series remaining after satisfaction of outstanding liabilities,
except that, as noted above, expenses relating to distribution and/or account
maintenance of the Class B, Class C and Class D shares are borne solely by the
respective class. There normally will be no 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 will be freely transferable. Holders of shares of any Series are
entitled to redeem their shares as set forth elsewhere herein and in the
Prospectus. Shares do not have cumulative voting rights and the holders of more
than 50% of the shares of the Trust voting for the election of Trustees can
elect all of the Trustees if they choose to do so, and in such event the
holders of the remaining shares would not be able to elect any Trustees. No
amendments may be made to the Declaration of Trust, other than amendments
necessary to conform the Declaration to certain laws or regulations, to change
the name of the Trust, or to make certain non-material changes, without the
affirmative vote of a majority of the outstanding shares of the Trust or of the
affected Series or class, as applicable.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of the Fund for $100,000. Such shares were acquired for investment and
can only be disposed of by redemption. The organizational expenses of the Fund
29
<PAGE>
were paid by the Fund and are being amortized over a period not exceeding five
years. The proceeds realized by the Manager (or any subsequent holder) upon the
redemption of any of the shares initially purchased by it will be reduced by the
proportionate amount of unamortized organizational expenses which the number of
shares redeemed bears to the number of shares initially purchased. Such
organizational expenses include certain of the initial organizational expenses
of the Trust which have been allocated to the Fund by the Trustees. If
additional Series are added to the Trust, the organizational expenses will be
allocated among the Series in a manner deemed equitable by the Trustees.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A,
Class B, Class C and Class D shares of the Fund based on the Fund's net assets
and number of shares outstanding on July 31, 1998, is calculated as set forth
below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Assets ..................................................... $ 8,855,002 $ 41,963,614 $ 4,398,795 $ 4,634,416
=========== ============ =========== ===========
Number of Shares Outstanding ................................... 820,370 3,887,934 407,276 429,316
=========== ============ =========== ===========
Net Asset Value Per Share (net assets divided by number of
shares outstanding) ........................................... $ 10.79 $ 10.79 $ 10.80 $ 10.79
Sales Charge (for Class A and Class D shares: 4.00% of offering
price; 4.17% of net asset value per share*) ................... .45 ** ** .45
----------- ------------ ----------- -----------
Offering Price ................................................. $ 11.24 $ 10.79 $ 10.80 $ 11.24
=========== ============ =========== ===========
</TABLE>
- -------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares
-- Deferred Sales Charge Alternatives -- Class B and Class C Shares" in the
Prospectus and "Redemption of Shares -- Deferred Sales Charges -- Class B
and Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Trust. The selection of
independent auditors is subject to approval by the independent Trustees of the
Trust. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101, acts as the custodian of the Fund's assets. The custodian is responsible
for safeguarding and controlling the Fund's cash and securities, handling the
delivery of securities and collecting interest on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Trust's transfer agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "Management of
the Trust -- Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557,
is counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on July 31 of each year. The Trust sends
to shareholders of the Fund at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the 1940 Act, to
which reference is hereby made.
30
<PAGE>
The Declaration of Trust establishing the Trust dated August 2, 1985, a
copy of which, together with all amendments thereto (the "Declaration") is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch Multi-State Municipal Series Trust" refers
to the Trustees under the Declaration collectively as Trustees, but not as
individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Trust shall be held to any personal liability; nor shall resort be
had to any such person's private property for the satisfaction of any obligation
or claim of the Trust but the "Trust Property" only shall be liable.
To the knowledge of the Trust, no person or entity owned beneficially 5%
or more of the Fund's shares on November 1, 1998.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated by reference in
this Statement of Additional Information to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling 1-800-456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
31
<PAGE>
APPENDIX I
ECONOMIC AND FINANCIAL INFORMATION CONCERNING CONNECTICUT
THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE AND DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF SUCH
FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS BASED PRIMARILY UPON
ONE OR MORE PUBLICLY AVAILABLE OFFERING STATEMENTS RELATING TO DEBT OFFERINGS
OF STATE ISSUERS; HOWEVER, IT HAS NOT BEEN UPDATED NOR WILL IT BE UPDATED
DURING THE YEAR. THE TRUST HAS NOT INDEPENDENTLY VERIFIED THE INFORMATION.
Manufacturing has historically been of prime economic importance to
Connecticut (sometimes referred to as the "State"). The State's manufacturing
industry is diversified, with transportation equipment (primarily aircraft
engines, helicopters and submarines) the dominant industry, followed by
non-electrical machinery, fabricated metal products and electrical equipment.
As a result of a rise in employment in service-related industries and a decline
in manufacturing employment, however, manufacturing accounted for only 17.39%
of total non-agricultural employment in Connecticut in 1996. Defense-related
business represents a relatively high proportion of the manufacturing sector.
On a per capita basis, defense awards to Connecticut have traditionally been
among the highest in the nation, and reductions in defense spending have had a
substantial adverse impact on Connecticut's economy.
The average annual unemployment rate in Connecticut increased from a low
of 3.0% in 1988 to a high of 7.6% in 1992 and, after a number of important
changes in the method of calculation, was reported to be 5.8% in 1996. Average
per capita personal income of Connecticut residents increased in every year
from 1987 to 1996, rising from $21,592 to $33,875. However, pockets of
significant unemployment and poverty exist in several Connecticut cities and
towns.
At the end of the 1990-1991 fiscal year, the General Fund had an
accumulated unappropriated deficit of $965,712,000. For the six fiscal years
ended June 30, 1997, the General Fund ran operating surpluses, based on the
State's budgetary method of accounting, of approximately $110,200,000,
$113,500,000, $19,700,000, $80,500,000, $250,000,000, and $262,600,000,
respectively. General Fund budgets for the biennium ending June 30, 1999, were
adopted in 1997. General Fund expenditures and revenues are budgeted to be
approximately $9,550,000,000 and $9,700,000,000 for the 1997-1998 and 1998-1999
fiscal years, respectively. A surplus for each year is expected even though it
is currently estimated that expenses for each year will exceed budgeted amounts
by approximately $300,000,000.
During 1991 the State issued a total of $965,710,000 Economic Recovery
Notes. The notes were to be payable no later than June 30, 1996, but as part of
the budget adopted for the biennium ending June 30, 1997, payment of the notes
scheduled to be paid during the 1995-1996 fiscal year was rescheduled to be
made over the four fiscal years ending June 30, 1999. The outstanding notes
were $78,055,000 as of October 1, 1998.
The State's primary method for financing capital projects is through the
sale of general obligation bonds. These bonds are backed by the full faith and
credit of the State. As of October 1, 1998, the State had authorized direct
general obligation bond indebtedness totaling $12,397,960,000, of which
$10,947,625,000 had been approved for issuance by the State Bond Commission and
$9,584,857,000 had been issued. As of October 1, 1998, net State direct general
obligation indebtedness outstanding was $6,717,837,000.
In 1995, the State established the University of Connecticut as a separate
corporate entity to issue bonds and construct certain infrastructure
improvements. The University is authorized to issue bonds totaling $962,000,000
to finance the improvements. The University's bonds will be secured by a State
debt service commitment, the aggregate amount of which is limited to
$382,000,000 for bonds issued in the four fiscal years ending June 30, 1999,
and $580,000,000 for bonds issued in the six fiscal years ending June 30, 2005.
In addition, the State has limited or contingent liability on a
significant amount of other bonds. Such bonds have been issued by the following
quasi-public agencies: the Connecticut Housing Finance Authority, the
Connecticut Development Authority, the Connecticut Higher Education
Supplemental Loan Authority, the Connecticut Resources Recovery Authority and
the Connecticut Health and Educational Facilities Authority. Such bonds have
also been issued by the cities of Bridgeport and West Haven and the
Southeastern Connecticut Water Authority. As of December 1, 1997, the amount of
bonds outstanding on which the State has limited or contingent liability
totaled $4,000,900,000.
In 1984, the State established a program to plan, construct and improve
the State's transportation system (other than Bradley International Airport).
The total cost of the program through June 30, 2002, is currently estimated to
be $12.3 billion, to be met from federal, state, and local funds. The State
expects to finance most of its $5.1 billion share of such cost by issuing $4.6
billion of special tax obligation ("STO") bonds. The STO bonds are payable
solely from specified motor fuel
32
<PAGE>
taxes, motor vehicle receipts, and license, permit and fee revenues pledged
therefor and credited to the Special Transportation Fund, which was established
to budget and account for such revenues.
The State's general obligation bonds are rated Aa3 by Moody's and AA by
Fitch. On October 8, 1998, Standard & Poor's upgraded its ratings of the
State's general obligation bonds from AA- to AA.
The State, its officers and its employees are defendants in numerous
lawsuits. Although it is not possible to determine the outcome of these
lawsuits, the Attorney General has opined that an adverse decision in any of
the following cases might have a significant impact on the State's financial
position: (i) a class action by the Connecticut Criminal Defense Lawyers
Association claiming a campaign of illegal surveillance activity and seeking
damages and injunctive relief; (ii) an action on behalf of all persons with
traumatic brain injury who have been placed in certain State hospitals and
other persons with acquired brain injury who are in the custody of the
Department of Mental Health and Addiction Services, claiming that their
constitutional rights are violated by placement in State hospitals alleged not
to provide adequate treatment and training, and seeking placement in community
residential settings with appropriate support services; (iii) litigation
involving claims by Indian tribes to a portion of the State's land area; and
(iv) an action by certain students and municipalities claiming that the State's
formula for financing public education violates the State's Constitution and
seeking a declaratory judgment and injunctive relief.
As a result of litigation on behalf of black and Hispanic school children
in the City of Hartford seeking "integrated education" within the Greater
Hartford metropolitan area, on July 9, 1996, the State Supreme Court directed
the legislature to develop appropriate measures to remedy the racial and ethnic
segregation in the Hartford public schools. The Superior Court recently ordered
the State to show cause as to whether there has been compliance with the
Supreme Court's ruling. The fiscal impact of this decision might be significant
but it is not determinable at this time.
The State's Department of Information Technology is reviewing the State's
Year 2000 exposure and developing plans for modification or replacement of
existing software that it believes will prevent significant operations
problems. There is a risk that the plan will not be completed on time, that
planned testing will not reveal all problems, or that systems of others on whom
the State relies will not be timely updated. If the necessary remediations are
not completed in a timely fashion, the Year 2000 problem may have a material
impact on the operations of the State.
General obligation bonds issued by municipalities are payable primarily
from ad valorem taxes on property located in the municipality. A municipality's
property tax base is subject to many factors outside the control of the
municipality, including the decline in Connecticut's manufacturing industry.
Certain Connecticut municipalities have experienced severe fiscal difficulties
and have reported operating and accumulated deficits. The most notable of these
is the City of Bridgeport, which filed a bankruptcy petition on June 7, 1991.
The State opposed the petition. The United States Bankruptcy Court for the
District of Connecticut has held that Bridgeport has authority to file such a
petition but that its petition should be dismissed on the grounds that
Bridgeport was not insolvent when the petition was filed. State legislation
enacted in 1993 prohibits municipal bankruptcy filings without the prior
written consent of the Governor.
In addition to general obligation bonds backed by the full faith and
credit of the municipality, certain municipal authorities may finance projects
by issuing bonds that are not considered to be debts of the municipality. Such
bonds may be repaid only from the revenues of the financed project, the
revenues from which may be insufficient to service the related debt
obligations.
Regional economic difficulties, reductions in revenues and increases in
expenses could lead to further fiscal problems for the State and its political
subdivisions, authorities and agencies. Difficulties in payment of debt service
on borrowings could result in declines, possibly severe, in the value of their
outstanding obligations, increases in their future borrowing costs, and
impairment of their ability to pay debt service on their obligations.
33
<PAGE>
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.
SHORT-TERM NOTES: The three ratings of Moody's for short-term notes are
MIG1/VMIG1, MIG2/VMIG2 and MIG3/VMIG3; MIG1/VMIG1 denotes "best quality . . .
strong protection by established cash flows;" MIG2/VMIG2 denotes "high quality"
with ample margins of protection; MIG3/VMIG3 notes are of "favorable quality .
. . but . . . lacking the undeniable strength of the preceding grades."
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by the many following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
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<PAGE>
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect 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 may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S ("STANDARD & POOR'S") ISSUE CREDIT RATING
DEFINITIONS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers or
other forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated.
The issue credit rating is not a recommendation to purchase, sell or hold
a financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of payment capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms of
the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditor's rights.
LONG-TERM ISSUE CREDIT RATINGS
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to AAA meet its financial commitment on
the obligation is extremely strong.
AA An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
BB, B, An obligation rated "BB," "B," "CCC," "CC" and "C" is regarded as
CCC, having significant speculative characteristics. "BB" indicates the
CC, C least degree of speculation and "C" the highest degree of speculation.
While such bonds will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
D An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The "D" rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
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<PAGE>
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
SHORT-TERM ISSUE CREDIT RATINGS
A-1 A short-term obligation rated "A-1" is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated "A-2" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is
satisfactory.
A-3 A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation: however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
C A short-term obligation rated "C" is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
DESCRIPTION OF FITCH IBCA, INC. ("FITCH") RATINGS
Fitch credit ratings are an opinion on the ability of an entity or of a
securities issue to meet financial commitments, such as interest, preferred
dividends, or repayment of principal, on a timely basis.
Credit ratings are used by investors as indications of the likelihood of
getting their money back in accordance with the terms on which they invested.
Thus, the use of credit ratings defines their function: "investment-grade"
ratings (international long-term, "AAA" -- "BBB" categories: short-term, "F1,"
- -- "F3,") indicate a relatively low probability of default, while those in the
"speculative" or "non-investment grade" categories (international long-term,
"BB," -- "D") either signal a higher probability of default or that a default
has already occured. Ratings imply no specific prediction of default
probability.
Entities or issues carrying the same rating are of similar but not
necessarily identical credit quality since the rating categories do not fully
reflect small differences in the degrees of credit risk.
Fitch credit and other ratings are not recommendations to buy, sell, or
hold any security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of any payments of any security. The ratings are based on
information obtained from issuers, other obligors, underwriters, their experts,
and other sources Fitch believes to be reliable. Fitch does not audit or verify
the truth or accuracy of such information. Ratings may be changed or withdrawn
as a result of changes in, or the unavailability of, information or for other
reasons.
INTERNATIONAL CREDIT RATINGS
Fitch's international credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other corporate
entities and the securities they issue, as well as municipal and other public
finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these long- and
short-term ratings, assess its general creditworthiness on a senior basis. When
applied to specific issues and programs, these ratings take into account the
relative preferential position of the holder of the security and reflect the
terms, conditions, and covenants attaching to that security.
36
<PAGE>
ANALYTICAL CONSIDERATIONS
When assigning ratings, Fitch considers the historical and prospective
financial condition, quality of management, and operating performance of the
issuer and of any guarantor, any special features of a specific issue or
guarantee, the issue's relationship to other obligations of the issuer, as well
as developments in the economic and political environment that might affect the
issuer's financial strength and credit quality.
Investment-grade ratings reflect expectations of timeliness of payment.
However, ratings of different classes of obligations of the same issuer may
vary based on expectations of recoveries in the event of a default or
liquidation. Recovery expectations, which are the amounts expected to be
received by investors after a security defaults, are a relatively minor
consideration in investment-grade ratings, but Fitch does use "notching" of
particular issues to reflect their degree of preference in a winding up,
liquidation, or reorganization as well as other factors. Recoveries do,
however, gain in importance at lower rating levels, because of the greater
likelihood of default, and become the major consideration at the, "DDD,"
category. Factors that affect recovery expectations include collateral and
seniority relative to other obligations in the capital structure
Variable rate demand obligations and other securities which contain a
demand feature will have a dual rating, such as "AAA/F1+." The first rating
denotes ability to make principal and interest payments. The second
rating denotes ability to meet a demand feature in full and on time.
INTERNATIONAL LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
AAA HIGHEST CREDIT QUALITY. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseable events.
AA VERY HIGH CREDIT QUALITY. "AA" ratings denote a very low expectation of
credit risk. They indicate strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A HIGH CREDIT QUALITY. "A" ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB GOOD CREDIT QUALITY. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
SPECULATIVE GRADE
BB SPECULATIVE. "BB" ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B HIGHLY SPECULATIVE. "B" Ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
CCC, HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
CC, financial commitments is solely reliant upon sustained, favorable
C business or economic developments. A "CC" rating indicates that default
of some kind appears probable. "C" ratings signal imminent default.
DDD, DEFAULT. Securities are not meeting current obligations and are
DD, extremely speculative. "DDD" designates the highest potential for
D recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, "DD" indicates expected recovery of 50%-90%
of such outstandings, and "D", the lowest recovery potential, I.E. below
50%.
37
<PAGE>
INTERNATIONAL SHORT-TERM CREDIT RATINGS
A short term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 HIGHEST CREDIT QUALITY. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 GOOD CREDIT QUALITY. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3 FAIR CREDIT QUALITY. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B SPECULATIVE. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D DEFAULT. Denotes actual or imminent payment default.
- -------
Notes:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, to categories below "CCC," or to short-term ratings other than
"F1."
"NR" indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction
of such changes. These are designated as "Positive," indicating a potential
upgrade, "Negative," for a potential downgrade, or "Evolving," if ratings may
be raised, lowered or maintained. RatingAlert is typically resolved over a
relatively short period.
38
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies ...................... 2
Description of Municipal Bonds and Temporary
Investments ......................................... 4
Description of Municipal Bonds ...................... 4
Description of Temporary Investments ................ 5
Repurchase Agreements ............................... 6
Financial Futures Transactions and Options .......... 6
Investment Restrictions ............................. 10
Management of the Trust ................................ 11
Trustees and Officers ............................... 11
Compensation of Trustees ............................ 12
Management and Advisory Arrangements ................ 13
Purchase of Shares ..................................... 14
Initial Sales Charge Alternatives -- Class A and
Class D Shares ................................... 14
Reduced Initial Sales Charges ....................... 15
Distribution Plans .................................. 17
Limitations on the Payment of Deferred Sales
Charges .......................................... 17
Redemption of Shares ................................... 18
Deferred Sales Charges -- Class B and Class C
Shares ........................................... 18
Portfolio Transactions ................................. 19
Determination of Net Asset Value ....................... 20
Shareholder Services ................................... 20
Investment Account .................................. 21
Automatic Investment Plans .......................... 21
Automatic Reinvestment of Dividends and
Capital Gains Distributions ...................... 21
Systematic Withdrawal Plans ......................... 21
Exchange Privilege .................................. 22
Distributions and Taxes ................................ 24
Tax Treatment of Options and Futures
Transactions ..................................... 27
Performance Data ....................................... 27
General Information .................................... 29
Description of Shares ............................... 29
Computation of Offering Price Per Share ............. 30
Independent Auditors ................................ 30
Custodian ........................................... 30
Transfer Agent ...................................... 30
Legal Counsel ....................................... 30
Reports to Shareholders ............................. 30
Additional Information .............................. 30
Financial Statements ................................... 31
Appendix I -- Economic and Financial
Information Concerning Connecticut .................. 32
Appendix II -- Ratings of Municipal Bonds .............. 34
</TABLE>
Code #18111-1198
(LOGO) MERRILL LYNCH
Merrill Lynch
Connecticut Municipal
Bond Fund
of Merrill Lynch Multi-State
Municipal Series Trust
Statement of
Additional
Information
November 6, 1998
Distributor:
Merrill Lynch
Funds Distributor
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
Contained in Part A:
Financial Highlights for each of the years in the four-year period ended
July 31, 1998 and the period
July 1, 1994 (commencement of operations) to July 31, 1994.
Incorporated by reference in Part B:
Financial Statements:
Schedule of Investments as of July 31, 1998.*
Statement of Assets and Liabilities as of July 31, 1998.*
Statement of Operations for the year ended July 31, 1998.*
Statements of Changes in Net Assets for each of the years in the
two-year period ended July 31, 1998.*
Financial Highlights for each of the years in the four-year period
ended July 31, 1998 and the period July 1, 1994 (commencement of
operations) to July 31, 1994.*
- ---------
* Included in Registrant's 1998 Annual Report to shareholders filed with the
Securities and Exchange Commission for the year ended July 31, 1998
pursuant to Rule 30b2-1 under the Investment Company Act of 1940, as
amended ("1940 Act").
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ -----------
<S> <C>
1(a) -- Declaration of Trust of the Registrant, dated August 2, 1985.(a)
(b) -- Amendment to Declaration of Trust, dated September 18, 1987.(a)
(c) -- Amendment to Declaration of Trust, dated December 21, 1987.(a)
(d) -- Amendment to Declaration of Trust, dated October 3, 1988.(a)
(e) -- Amendment to Declaration of Trust, dated October 17, 1994 and instrument establishing Class
C and Class D shares of beneficial interest.(a)
(f) -- Instrument establishing Merrill Lynch Connecticut Municipal Bond Fund (the "Fund") as a series
of Registrant.(c)
(g) -- Instrument establishing Class A and Class B shares of beneficial interest of the Fund.(c)
2 -- By-Laws of Registrant.(a)
3 -- None.
4 -- Portions of the Declaration of Trust, Establishment and Designation and By-Laws of the Registrant
defining the rights of holders of the Fund as a series of the Registrant.(b)
5(a) -- Form of Management Agreement between Registrant and Fund Asset Management, L.P.(a)
(b) -- Supplement to Management Agreement between Registrant and Fund Asset Management, L.P.(e)
6(a) -- Form of Revised Class A Shares Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.(now known as Princeton Funds Distributor, Inc.)(the "Distributor")
(including Form of Selected Dealers Agreement).(e)
(b) -- Form of Class B Shares Distribution Agreement between Registrant and the Distributor.(a)
(c) -- Form of Class C Shares Distribution Agreement between Registrant and the Distributor
(including Form of Selected Dealers Agreement).(e)
(d) -- Form of Class D Shares Distribution Agreement between Registrant and the Distributor
(including Form of Selected Dealers Agreement).(e)
(e) -- Letter Agreement between the Fund and the Distributor, dated September 15, 1993, in connection
with the Merrill Lynch Mutual Fund Adviser Program.(c)
7 -- None.
8 -- Form of Custody Agreement between Registrant and State Street Bank & Trust Company.(d)
9 -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Financial Data Services, Inc. (formerly known as Merrill
Lynch Financial Data Services, Inc.).(f)
10 -- Opinion of Brown & Wood LLP, counsel for the Registrant.(h)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
13 -- Certificate of Fund Asset Management, L.P.(c)
14 -- None.
15(a) -- Class B Distribution Plan of the Registrant and Class B Distribution Plan Sub-Agreement.(c)
(b) -- Form of Class C Distribution Plan and Class C Distribution Plan Sub-Agreement of Registrant.(e)
(c) -- Form of Class D Distribution Plan and Class D Distribution Plan Sub-Agreement of Registrant.(e)
16(a) -- Schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class A shares.(e)
(b) -- Schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class B shares.(e)
(c) -- Schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class C shares.(a)
(d) -- Schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class D shares.(a)
17(a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
18 -- Merrill Lynch Select Pricing(SM) System Plan Pursuant to Rule 18f-3.(g)
</TABLE>
- ---------
(a) Filed on October 31, 1995 as an Exhibit to Post-Effective Amendment No. 2
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended relating to shares of the Fund (File No. 33-48639)
(the "Registration Statement").
(b) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's Declaration of Trust, as amended, filed as
Exhibits 1(a), 1(b), 1(c), 1(d) and 1(e) with Post-Effective Amendment No.
2 to the Registration Statement; to the Certificates of Establishment and
Designation establishing the Fund as a series of the Registrant and
establishing Class A and Class B shares of beneficial interest of the
Fund, filed as Exhibits 1(f) and 1(g), respectively, with Pre-Effective
Amendment No. 2 to the Registration Statement; and to Articles I, V and VI
of the Registrant's By-Laws, filed as Exhibit 2 with Post-Effective
Amendment No. 2 to the Registration Statement.
(c) Filed on May 16, 1994 as an Exhibit to Pre-Effective Amendment No. 2 to the
Registration Statement.
(d) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 3 to
the Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, filed on October 14, 1994, relating to shares of Merrill Lynch
Minnesota Municipal Bond Fund series of the Registrant (File No.
33-44734).
(e) Filed on October 17, 1994 as an Exhibit to Post-Effective Amendment No. 1
to the Registration Statement.
(f) Incorporated by reference to Exhibit 9 to Post-Effective Amendment No. 5 to
the Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, filed on October 20, 1995, relating to shares of Merrill Lynch
Arizona Municipal Bond Fund series of the Registrant (File No. 33-41311).
(g) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of
1933, as amended, filed on January 25, 1996, relating to shares of Merrill
Lynch New York Municipal Bond Fund series of the Registrant (File No.
2-99473).
(h) Previously filed as an Exhibit to the Registration Statement.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any other
person.
C-2
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1998*
-------------- --------------------
<S> <C>
Class A Shares of beneficial interest, par value $0.10 per share... 209
Class B Shares of beneficial interest, par value $0.10 per share .. 828
Class C Shares of beneficial interest, par value $0.10 per share... 90
Class D Shares of beneficial interest, par value $0.10 per share... 111
</TABLE>
- ---------
* The number of holders shown above includes holders of record plus beneficial
owners whose shares are held of record by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch").
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 or her 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 moneys for actions
based upon the 1940 Act may be concerned, such payments will be made only on
the following conditions: (i) the advances must be limited to amounts used, or
to be used, for the preparation or presentation of a defense to the action,
including costs connected with the preparation of a settlement; (ii) advances
may be made only upon receipt of a written promise by, or on behalf of, the
recipient to repay that amount of the advance which exceeds the amount which it
is ultimately determined that he or she is entitled to receive from the
Registrant by reason of indemnification; and (iii) (a) such promise must be
secured by a surety bond, other suitable insurance or an equivalent form of
security which assures that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance, or (b) a majority of a quorum
of the Registrant's disinterested, non-party Trustees, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts that the recipient of the advance ultimately will be found
entitled to indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Shares
Distribution Agreements relating to the securities being offered hereby, the
Registrant agrees to indemnify the Distributor and each person, if any, who
controls the Distributor within the meaning of the Securities Act of 1933 (the
"1933 Act"), against certain types of civil liabilities arising in connection
with the Registration Statement or Prospectus and Statement of Additional
Information.
[/R]
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
C-3
<PAGE>
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Manager" or "FAM") acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World
Income Fund, Inc. and The Municipal Fund Accumulation Program, Inc.; and the
following closed-end registered investment companies: Apex Municipal Fund,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt
Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income Opportunities
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal
Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc.,
MuniHoldings California Insured Fund, Inc., MuniHoldings California Insured
Fund II, Inc., MuniHoldings California Insured Fund III, Inc., MuniHoldings
Florida Insured Fund, MuniHoldings Florida Insured Fund II, MuniHoldings
Florida Insured Fund III, MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc.,
MuniHoldings Insured Fund, Inc., MuniHoldings New Jersey Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New York Fund,
Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New York Insured
Fund II, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund,
Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the Manager,
acts as the investment adviser for the following open-end investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund
For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global Growth
Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources
Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Technology
Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value
Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate
Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund,
Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury
Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility
Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and Hotchkis and
Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM); and the
following closed-end registered investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM
also acts as sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill
Lynch Basic Value Equity Portfolio, two investment portfolios of EQ Advisors
Trust.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts
02111-2646. The address of the Manager, MLAM, Princeton
C-4
<PAGE>
Services, Inc. ("Princeton Services") and Princeton Administrators, L.P.
("Princeton Administrators") is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Princeton Funds Distributor, Inc. ("PFD") and of
Merrill Lynch Funds Distributor ("MLFD") is P.O. Box 9081, Princeton, New
Jersey, 08543-9081. The address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281. The address of the Fund's transfer agent, Financial Data Services, Inc.
("FDS"), is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
September 1, 1996 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President, Mr.
Glenn is Executive Vice President and Mr. Richard is Treasurer of substantially
all of the investment companies described in the first two paragraphs of this
Item 28 and Messrs. Giordano, Harvey, Kirstein and Monagle are officers of one
or more of such companies.
Officers and partners of FAM are set forth as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ---- ---------------- ---------------------------------------
<S> <C> <C>
ML & Co. ....................... Limited Partner Financial Services Holding Company;
Limited Partner of MLAM.
Princeton Services ............. General Partner General Partner of MLAM.
Arthur Zeikel .................. Chairman Chairman of MLAM; President of
MLAM and FAM from 1977 to 1997;
Chairman and Director of Princeton
Services; President of Princeton
Services from 1993 to 1997;
Executive Vice President of
ML & Co.
Jeffrey M. Peek ................ President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML &
Co.; Managing Director and Co-Head
of the Investment Banking Division
of Merrill Lynch in 1997; Senior Vice
President and Director of the Global
Securities and Economics Division of
Merrill Lynch from 1995 to 1997.
Terry K. Glenn ................. Executive Vice President Executive Vice President of MLAM;
Executive Vice President and Director
of Princeton Services; President and
Director of PFD; Director of FDS;
President of Princeton Administrators.
Mark Desario.................... Senior Vice President Senior Vice President of MLAM.
Linda L. Federici .............. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Vincent R. Giordano ............ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Elizabeth Griffin .............. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Norman R. Harvey ............... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Michael J. Hennewinkel ......... Senior Vice President, General Senior Vice President, General Counsel
Counsel and Secretary and Secretary of MLAM; Senior Vice
President of Princeton Services.
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ---- --------------------------- ---------------------------------------
<S> <C> <C>
Philip L. Kirstein ............. Senior Vice President Senior Vice President of MLAM; Senior
Vice President, Secretary and Director
of Princeton Services.
Ronald M. Kloss ................. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Debra W. Landsman-Yaros ......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Vice President of PFD.
Stephen M.M. Miller ............. Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President
of Princeton Services.
Joseph T. Monagle, Jr. .......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Brian A. Murdock ................ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Director of PFD.
Michael L. Quinn ................ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Gerald M. Richard ............... Senior Vice President and Senior Vice President and Treasurer of
Treasurer MLAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of PFD.
Gregory Upah .................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Ronald L. Welburn ............... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies
referred to in the first two paragraphs of Item 28 except CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc., and The Municipal Fund Accumulation Program, Inc. MLFD also acts
as the principal underwriter for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
A separate division of PFD acts as the principal underwriter of a number of
other investment companies.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) AND OFFICES POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
- --------------------------------- ------------------------------ -------------------------
<S> <C> <C>
Terry K. Glenn .................. President and Director Executive Vice President
Brian A. Murdock ................ Director None
Thomas J. Verage ................ Director None
Robert W. Crook ................. Senior Vice President None
Michael J. Brady ................ Vice President None
William M. Breen ................ Vice President None
Michael G. Clark ................ Vice President None
James T. Fatseas ................ Vice President None
Debra W. Landsman-Yaros ......... Vice President None
Michelle T. Lau ................. Vice President None
Gerald M. Richard ............... Vice President and Treasurer Treasurer
Salvatore Venezia ............... Vice President None
William Wasel ................... Vice President None
Robert Harris ................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and its transfer agent, Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Trust --
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Trust -- Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) The Registrant undertakes to furnish each person to whom a Prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the Township of
Plainsboro, and the State of New Jersey, on the 6th day of November, 1998.
MERRILL LYNCH MULTI-STATE MUNICIPAL
SERIES TRUST
(Registrant)
By: /S/ Gerald M. Richard
-------------------------------------
(GERALD M. RICHARD, TREASURER)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------- -------------------------------- -----------------
<S> <C> <C>
ARTHUR ZEIKEL* President and Trustee
---------------------------------- (Principal Executive Officer)
(ARTHUR ZEIKEL)
GERALD M. RICHARD* Treasurer (Principal Financial
---------------------------------- and Accounting Officer)
(GERALD M. RICHARD)
JAMES H. BODURTHA* Trustee
----------------------------------
(JAMES H. BODURTHA)
HERBERT I. LONDON* Trustee
----------------------------------
(HERBERT I. LONDON)
ROBERT R. MARTIN* Trustee
----------------------------------
(ROBERT R. MARTIN)
JOSEPH L. MAY* Trustee
----------------------------------
(JOSEPH L. MAY)
ANDRE F. PEROLD* Trustee
----------------------------------
(ANDRE F. PEROLD)
*By: /S/ GERALD M. RICHARD November 6, 1998
-------------------------------------
(GERALD M. RICHARD, ATTORNEY-IN-FACT)
</TABLE>
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- ---------------------------------------------------------------------------
<S> <C> <C>
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
17(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 181
<NAME> MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND--CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 55560720
<INVESTMENTS-AT-VALUE> 59257864
<RECEIVABLES> 1118311
<ASSETS-OTHER> 29786
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 60405961
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 554134
<TOTAL-LIABILITIES> 554134
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 56412361
<SHARES-COMMON-STOCK> 820370
<SHARES-COMMON-PRIOR> 784560
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (257678)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3697144
<NET-ASSETS> 8855002
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3134389
<OTHER-INCOME> 0
<EXPENSES-NET> (661683)
<NET-INVESTMENT-INCOME> 2472706
<REALIZED-GAINS-CURRENT> 619908
<APPREC-INCREASE-CURRENT> (1223)
<NET-CHANGE-FROM-OPS> 3091391
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (412542)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 170255
<NUMBER-OF-SHARES-REDEEMED> (160568)
<SHARES-REINVESTED> 26123
<NET-CHANGE-IN-ASSETS> 10452925
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (877586)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 310622
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 732420
<AVERAGE-NET-ASSETS> 8567051
<PER-SHARE-NAV-BEGIN> 10.68
<PER-SHARE-NII> .52
<PER-SHARE-GAIN-APPREC> .11
<PER-SHARE-DIVIDEND> (.52)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.79
<EXPENSE-RATIO> .89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 182
<NAME> MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND--CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 55560720
<INVESTMENTS-AT-VALUE> 59257864
<RECEIVABLES> 1118311
<ASSETS-OTHER> 29786
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 60405961
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 554134
<TOTAL-LIABILITIES> 554134
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 56412361
<SHARES-COMMON-STOCK> 3887934
<SHARES-COMMON-PRIOR> 3329833
<ACCUMULATED-NII-CURRENT> 0
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<NAME> MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND--CLASS C
<S> <C>
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<NAME> MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND--CLASS D
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EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Connecticut Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We consent to the incorporation by reference in this Post-Effective amendment
No. 5 to Registration Statement No. 33-48693 of our report dated September 8,
1998 appearing in the annual report to shareholders of Merrill Lynch Connecticut
Municipal Bond Fund for the year ended July 31, 1998, and to the reference to us
under the caption "Financial Highlights" in the Prospectus, which is a part of
such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
November 5, 1998
