<PAGE> 1
As filed with the Securities and Exchange Commission on October 18, 1994
Securities Act File No. 33-48692
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. 3 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 95 /X/
(Check appropriate box or boxes)
----------
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
of Merrill Lynch Multi-State Municipal Series Trust
(Exact name of registrant as specified in charter)
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (609) 282-2800
Arthur Zeikel
Merrill Lynch Multi-State Municipal Series Trust
800 Scudders Mill Road, Plainsboro, New Jersey
Mailing Address: Box 9011, Princeton, New Jersey 08543-9011
----------
Copies to:
Counsel for the Trust: Philip L. Kirstein, Esq.
Brown & Wood Fund Asset Management
One World Trade Center Box 9011
New York, New York 10048-0557 Princeton, New Jersey 08543-9011
Attention: Thomas R. Smith, Jr., Esq.
----------
It is proposed that this filing will become effective (check appropriate
box):
/ / immediately upon filing pursuant to paragraph (b)
/X/ on October 21, 1994 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
----------
The Registrant has registered an indefinite number of its Class A and
Class B shares of beneficial interest under the Securities Act of 1933
pursuant to Rule 24f-2 under the Investment Company Act of 1940. The
notice required by such rule for the Registrant's most recent fiscal year
was filed on August 24, 1994.
==========================================================================
<PAGE> 2
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND OF
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
Registration Statement on Form N-1A
-----------------
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A Item No. Location
-------------- --------
<S> <C> <C>
Part A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... Fee Table
Item 3. Condensed Financial
Information................. Financial Highlights
Item 4. General Description of
Registrant.................. Investment Objective and
Policies; Additional Information
Item 5. Management of the Fund ..... Fee Table; Management of the
Trust; Inside Back Cover Page
Item 5A. Management's Discussion of
Fund Performance............ Not Applicable
Item 6. Capital Stock and Other
Securities.................. Cover Page; Additional
Information
Item 7. Purchase of Securities Being
Offered..................... Cover Page; Fee Table; Merrill Lynch
Select Pricing(SM) System;
Purchase of Shares; Shareholder
Services; Additional
Information; Inside Back Cover
Page
Item 8. Redemption or Repurchase.... Fee Table; Merrill Lynch Select
Pricing(SM) System; Purchase of
Shares; Redemption of Shares
Item 9. Pending Legal Proceedings... Not Applicable
Part B
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Back Cover Page
Item 12. General Information and
History..................... Not Applicable
Item 13. Investment Objective and
Policies................... Investment Objective and
Policies Investment Restrictions
Item 14. Management of the Fund...... Management of the Trust
Item 15. Control Persons and
Principal Holders of
Securities................. Managment of the Trust; Additional Information
Item 16. Investment Advisory and
Other Services............. Management of the Trust; Purchase of Shares;
General Information
Item 17. Brokerage Allocation and
Other Practices............ Portfolio Transactions
Item 18. Capital Stock and Other
Securities................. General Information-Description of Series
and Shares
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered..................... Purchase of Shares; Redemption of Shares;
Determination of Net Asset Value;
Shareholder Services
Item 20. Tax Status.................. Distributions and Taxes
Item 21. Underwriters................ Purchase of Shares
Item 22. Calculation of Performance
Data....................... Performance Data
Item 23. Financial Statements........ Financial Statements
Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
</TABLE>
<PAGE> 3
PROSPECTUS
October 21, 1994
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 * PHONE NO. (609) 282-2800
----------
Merrill Lynch North Carolina Municipal Bond Fund (the "Fund") is a
mutual fund seeking to provide shareholders with as high a level of income
exempt from Federal and North Carolina income taxes as is consistent with
prudent investment management. The Fund invests primarily in a portfolio of
long-term, investment grade obligations of the State of North Carolina, its
political subdivisions, agencies and instrumentalities the interest on which,
in the opinion of bond counsel to the issuer, is exempt from Federal and
North Carolina income taxes ("North Carolina Municipal Bonds"). The Fund may
invest in certain tax-exempt securities classified as "private activity
bonds" that may subject certain investors in the Fund to an alternative
minimum tax. At times, the Fund may seek to hedge its portfolio through the
use of futures transactions and options. There can be no assurance that the
investment objective of the Fund will be realized.
----------
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund
offers four classes of shares each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select Pricing
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 System" on
page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor,
Inc. (the "Distributor"), P.O. Box 9011, Princeton, New Jersey
08543-9011 ((609) 282-2800), and other securities dealers which have
entered into selected dealer agreements with the Distributor, including
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch").
The minimum initial purchase is $1,000 and the minimum subsequent purchase
is $50. Merrill Lynch may charge its customers a processing fee (presently
$4.85) for confirming purchases and repurchases. Purchases and redemptions
directly through the Fund's Transfer Agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares".
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------
This Prospectus is a concise statement of information about the Fund
that is relevant to making an investment in the Fund. This Prospectus
should be retained for future reference. A statement containing additional
information about the Fund, dated October 21, 1994 (the "Statement of
Additional Information"), has been filed with the Securities and Exchange
Commission and is available, without charge, by calling or by writing
Merrill Lynch Multi-State Municipal Series Trust (the "Trust") at the
above telephone number or address. The Statement of Additional Information
is hereby incorporated by reference into this Prospectus. The Fund is a
separate series of the Trust, an open-end management investment company
organized as a Massachusetts business trust.
----------
FUND ASSET MANAGEMENT - MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. - DISTRIBUTOR
<PAGE> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring
and recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
Class A(a) Class B(b) Class C(c) Class D(c)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)..... 4.00%(d) None None 4.00%(d)
Sales Charge Imposed on Dividend
Reinvestments .......................... None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower) .......... None(e) 4.0% during the first 1% for one None(e)
year, decreasing 1% year
annually thereafter to
0.0% after the fourth year
Exchange Fee .................. None None None None
Annual Fund Operating Expenses
(as a percentage of average net
assets)(f):
Management Fees(g) ....................... 0.55% 0.55% 0.55% 0.55%
12b-1 Fees(h):
Account Maintenance Fees................ None 0.25% 0.25% 0.10%
Distribution Fees....................... None 0.25% 0.35% None
(Class B shares convert
to Class D shares
automatically after
ten years, cease being
subject to distribution
fees and become subject to
reduced account maintenance fees)
Other Expenses:
Custodial Fees...................... .02% .02% .02% .02%
Shareholder Servicing Costs(i)...... .05% .05% .05% .05%
Miscellaneous ...................... .34% .34% .34% .34%
---- ---- ---- ----
Total Other Expenses............... .41% .41% .41% .41%
---- ---- ---- ----
Total Fund Operating Expenses........... .96% 1.46% 1.56% 1.06%
==== ==== ==== ====
----------
(a) Class A shares are sold to a limited group of investors including existing Class A shareholders and investment
programs. See "Purchase of Shares-Initial Sales Charge Alternatives-Class A and Class D Shares"-page 22.
(b) Class B shares convert to Class D shares automatically approximately 10 years after initial purchase. See "Purchase
of Shares-Deferred Sales Charge Alternatives-Class B and Class C Shares"-page 23.
(c) Prior to the date of this Prospectus, the Trust has not offered its Class C and Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. Class A or Class D purchases of $1,000,000 or more may not be subject to
an initial sales charge. See "Purchase of Shares-Initial Sales Charge Alternatives-Class A and Class D Shares"-
page 22.
(e) Class A and Class D shares are not subject to a contingent deferred sales charge ("CDSC"), except that purchases
of $1,000,000 or more which may not be subject to an initial sales charge may instead be subject to a CDSC if
redeemed within the first year of purchase.
(f)Information for Class A and Class B shares is stated for the fiscal year ended July 31, 1994. Information under
"Other Expenses" for Class C and Class D shares is estimated for the fiscal year ending July 31, 1995.
(g) See "Management of the Trust-Management and Advisory Arrangements"-page 19.
(h) See "Purchase of Shares-Distribution Plans"-page 26.
(i) See "Management of the Trust-Transfer Agency Services"-page 20.
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
Cumulative Expenses Paid for the Period of:
-------------------------------------------
Example: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000 invest- ment
including, the maximum $40 initial sales charge (Class A and Class D
shares only) and assuming (1) the Total Fund Operating Expenses for
each class set forth above; (2) a 5%
annual return throughout the periods and (3) redemption at the
end of the period:
Class A ............................................................ $49 $69 $91 $153
Class B ............................................................ $55 $66 $80 $175
Class C............................................................. $26 $49 $85 $186
Class D............................................................. $50 $72 $96 $164
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 $69 $91 $153
Class B ............................................................ $15 $46 $80 $175
Class C............................................................. $16 $49 $85 $186
Class D............................................................. $50 $72 $96 $164
</TABLE>
As of July 31, 1994, the Fund Asset Management, L.P. ("FAM" or the
"Manager") was voluntarily waiving a portion of its management fee and
voluntarily reimbursing the Fund for a portion of other expenses (excluding
12b-1 fees). The fee table has been restated to assume the absence of any
waiver or reimbursement because the Manager may discontinue or
reduce such waiver and assumption of expenses at any time without
notice. During the fiscal year ended July 31, 1994, the Manager waived
management fees and reimbursed expenses totaling 0.46% for Class A shares
and 0.45% for Class B shares after which the Fund's total expense ratio was
0.50% for Class A shares and 1.01% for Class B shares.
Class C and Class D shares were not offered during that year.
The foregoing Fee Table is intended to assist investors in
understanding the costs and expenses that a shareholder in the Fund will
bear directly or indirectly. The Example set forth above assumes
reinvestment of all dividends and distributions and utilizes a 5% annual
rate of return as mandated by Securities and Exchange Commission
regulations. The Example should not be considered a representation of past
or future expenses or annual rate of return and actual expenses or annual
rate of return may be more or less than those assumed for purposes of the
Example. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than
the economic equivalent of the maximum front-end sales charge permitted
under the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. ("NASD"). Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions directly through the Fund's Transfer Agent are
not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares".
The Manager has voluntarily agreed to assume a portion of the
operating expenses of the Fund. The Manager may discontinue or reduce such
assumption of expenses at any time without notice.
3
<PAGE> 6
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price
equal to the next determined net asset value per share subject to the
sales charges and ongoing fee arrangements described below. Shares of
Class A and Class D are sold to investors choosing the initial sales
charge alternatives, and shares of Class B and Class C are sold to
investors choosing the deferred sales charge alternatives. The Merrill
Lynch Select Pricing System is used by more than 50 mutual funds advised
by Merrill Lynch Asset Management, L.P. ("MLAM") or its affiliate FAM.
Funds advised by MLAM or FAM are referred to herein as "MLAM-advised
mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents
an identical interest in the investment portfolio of the Fund and has the
same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees and Class B and Class C
shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred
sales charge arrangements. The deferred sales charges and account
maintenance fees that are imposed on Class B and Class C shares, as well
as the account maintenance fees that are imposed on the Class D shares,
will be imposed directly against those classes and not against all assets
of the Fund and, accordingly, such charges will not affect the net asset
value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Each class has different exchange privileges.
See "Shareholder Services-Exchange Privilege".
Investors should understand that the purpose and function of the
initial sales charges with respect to the Class A and Class D shares are
the same as those of the deferred sales charges with respect to the Class
B and Class C shares in that the sales charges applicable to each class
provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes
of shares.
The following table sets forth a summary of the distribution
arrangements for each class of shares under the Merrill Lynch Select
Pricing System, followed by a more detailed description of each class and
a discussion of the factors that investors should consider in determining
the method of purchasing shares under the Merrill Lynch Select Pricing
System that the investor believes is most beneficial under his particular
circumstances. More detailed information as to each class of shares is set
forth under "Purchase of Shares".
4
<PAGE> 7
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Account
Maintenance Distribution Conversion
Class Sales Charge (1) Fee Fee Feature
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum 4.00% initial sales
A charge (2), (3) No No No
- ---------------------------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.25% B shares convert to D
years, at a rate of 4.0% during shares automatically
the first year, decreasing after approximately
1.0% annually to 0.0% ten years (4)
- ---------------------------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.35% No
- ---------------------------------------------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales 0.10% No No
charge (3)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
----------
(1) Initial sales charges are imposed at the time of purchase as a
percentage of the offering price. Contingent deferred
sales charges ("CDSCs") are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares-Initial
Sales Charge Alternatives-Class A and Class D Shares-Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more will not be subject to an initial sales
charge but instead may be subject to a CDSC if redeemed within one year.
See "Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares is modified.
Also, Class B shares of certain other MLAM-advised mutual funds into
which exchanges may be made have an eight year conversion period. If
Class B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the Class
B shares acquired in the exchange will apply, and the holding period for
the shares exchanged will be tacked onto the holding period for the
shares acquired.
Class A: Class A shares incur an initial sales charge when they are
purchased and bear no ongoing distribution or accoun
maintenance fees. Class A shares are offered to a limited
group of investors and also will be issued upon reinvestment
of dividends on outstanding Class A shares. Investors that
currently own Class A shares in a shareholder account are
entitled to purchase additional Class A shares in that account.
In addition, Class A shares will be offered to directors and
employees of Merrill Lynch & Co., Inc. and its subsidiaries
(the term "subsidiaries", when used herein with respect to
Merrill Lynch & Co., Inc., includes MLAM, FAM and certain
other entities directly or indirectly wholly-owned and
controlled by Merrill Lynch & Co., Inc.) and to
members of the Boards of MLAM-advised mutual funds.
The maximum initial sales charge is 4.00%, which is reduced for
purchases of $25,000 and over. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the
initial sales charge is waived such purchases may be subject
to a CDSC if the shares are redeemed within one year after
purchase. Sales charges also are reduced under a right of
accumulation which takes into account the investors's
holdings of all classes of all MLAM-advised mutual funds. See
"Purchase of Shares- Initial Sales Charge Alternatives-Class A
and Class D Shares".
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% and a CDSC if they are redeemed within four years of
purchase. Approximately ten years after issuance, Class B
shares will convert automatically into Class D shares of the
Fund, which are subject to a lower account maintenance fee of
0.10% and no distribution fee; Class B shares of certain other
MLAM-advised mutual
5
<PAGE> 8
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-advis
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, as will the Class D
account maintenance fee of the acquired fund upon the conversion,
and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired. Automatic conversion of
Class B shares into Class D shares will occur at least once a month
on the basis of the relative net asset values of the shares of the
two classes on the conversion date, without the imposition of any
sales load, fee or other charge. Conversion of Class B shares to
Class D shares will not be deemed a purchase or sale of the shares
for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares is modified as described under "Purchase of
Shares-Deferred Sales Charge Alternatives-Class B and Class
C Shares-Conversion of Class B Shares to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
of average net assets and an ongoing distribution fee of 0.35%.
Class C shares are also subject to a CDSC if they are redeemed
within one year of purchase. Although Class C shares are subject to
a 1.0% CDSC for only one year (as compared to four years for Class
B), Class C shares have no conversion feature and, accordingly, an
investor that purchases Class C shares will be subject to
distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board of
Trustees and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are
purchased and are subject to an ongoing account maintenance fee of
0.10% of average net assets. Class D shares are not subject to an
ongoing distribution fee or any CDSC when they are redeemed.
Purchases of $1,000,000 or more may not be subject to an initial
sales charge, but if the initial sales charge is waived such
purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial
sales charges and reductions for Class D shares is the same as the
schedule for Class A shares. Class D shares also will be issue
upon conversion of Class B shares as described above under
"Class B". See "Purchase of Shares-Initial Sales Charge
Alternatives - Class A and Class D Shares".
The following is a discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill
Lynch Select Pricing System that the investor believes is most beneficial
under his particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial
sales charge alternative may elect to purchase Class D shares or, if an
eligible investor, Class A shares. Investors choosing the initial sales
charge alternative who are eligible to purchase Class A shares should
purchase Class A shares rather than Class D shares because of the account
maintenance fee imposed on Class D shares. Investors qualifying for
significantly reduced initial sales charges may find the initial sales
charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges
imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated
ongoing account maintenance and distribution fees on Class B or Class C
shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase
Class A shares of other MLAM-advised mutual funds, those previously
purchased Class A shares, together with Class
6
<PAGE> 9
B, Class C and Class D shares holdings, will count toward a right of
accumulation which may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing
Class B and Class C account maintenance and distribution fees will cause
Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge
shares. The ongoing Class D account maintenance fees will cause Class D
shares to have a higher expense ratio, pay lower dividends and have a
lower total return than Class A Shares.
Deferred Sales Charge Alternatives. Because no initial sales charges
are deducted at the time of purchase, Class B and Class C shares provide
the benefit of putting all of the investor's dollars to work from the time
the investment is made. The deferred sales charge alternatives may be
particularly appealing to investors who do not qualify for a reduction in
initial sales charges. Both Class B and Class C shares are subject to
ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be
offset to the extent any return is realized on the additional funds
initially invested in Class B or Class C shares. In addition, Class B
shares will be converted into Class D shares of the Fund after a
conversion period of approximately ten years, and thereafter investors
will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they
determine it to be most advantageous to have all their funds invested
initially and intend to hold their shares for an extended period of time.
Investors in Class B shares should take into account whether they intend
to redeem their shares within the CDSC period and, if not, whether they
intend to remain invested until the end of the conversion period and
thereby take advantage of the reduction in ongoing fees resulting from the
conversion into Class D shares. Other investors, however, may elect to
purchase Class C shares if they determine that it is advantageous to have
all their assets invested initially and they are uncertain as to the
length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period
at a lower rate, they are subject to higher distribution fees and forego
the Class B conversion feature, making their investment subject to account
maintenance and distribution fees for an indefinite period of time. In
addition, while both Class B and Class C distribution fees are subject to
the limitations on asset-based sales charges imposed by the NASD, the
Class B distribution fees are further limited under a voluntary waiver of
asset-based sales charges. See "Purchase of Shares-Limitations on the
Payment of Deferred Sales Charges".
7
<PAGE> 10
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund
by Deloitte & Touche, LLP independent auditors. Financial statements for
the year ended July 31, 1994 and the independent auditors' report thereon
are included in the Statement of Additional Information. The following per
share data and ratios have been derived from information provided in the
Fund's audited financial statements. Financial information is not
presented for Class C or Class D shares since no shares of those classes
are publicly issued as of the date of this Prospectus. Further information
about the performance of the Fund is contained in the Fund's most recent
annual report to shareholders which may be obtained, without charge, by
calling or by writing the Fund at the telephone number or address on the
front cover of this Prospectus.
<TABLE>
<CAPTION>
For the For the
For the Period For the Period
Year Ended September 25, 1992 + Year Ended September 25, 1992+
July 31, 1994 to July 31, 1993 July 31, 1994 to July 31, 1993
Class A Class B
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net Asset Value, beginning of
period.................................. $ 10.67 $10.00 $ 10.67 $ 10.00
------- ------ ------- -------
Investment income-net..................... .54 .46 .49 .41
Realized and unrealized gain (loss) on
investments-net......................... (.42) .67 (.42) .67
------- ------ ------- -------
Total from investment operations.......... .12 1.13 .07 1.08
------- ------ ------- -------
Less dividends and distributions:
Investment income-net..................... (.54) (.46) (.49) (.41)
In excess of realized gain on investments-
net..................................... (.06) - (.06) -
Total dividends and distributions......... (.60) (.46) (.55) (.41)
------- ------ ------- -------
Net asset value, end of period............ $ 10.19 $10.67 $ 10.19 $ 10.67
======= ======= ====== =======
Total Investment Return + +:
Based on net asset value per share...... 1.11% 11.52%# 0.60% 11.06%#
======= ======= ====== =======
Ratios to Average Net Assets:
Expenses, excluding distribution fees and
net of reimbursement ................... .50% .20%* .51% .20%*
======= ======= ====== =======
Expenses, net of reimbursement............ .50% .20%* 1.01% .70%*
======= ======= ====== =======
Expenses.................................. .96% 1.15%* 1.46% 1.67%*
======= ======= ====== =======
Investment income-net..................... 5.14% 5.26%* 4.64% 4.77%*
======= ======= ====== =======
Supplemental Data:
Net Assets, end of period
(in thousands).......................... $11,071 $9,311 $50,664 $39,970
======= ======= ====== =======
Portfolio Turnover........................ 74.35% 27.98% 74.35% 27.98%
======= ======= ====== =======
</TABLE>
----------
+ Commencement of operations.
++ Total investment returns exclude the effects of sales loads.
* Annualized
# Aggregate total investment return.
8
<PAGE> 11
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal and North Carolina income taxes as
is consistent with prudent investment management. The Fund seeks to achieve
its objective while providing investors with the opportunity to invest in a
portfolio of securities consisting primarily of long-term obligations issued
by or on behalf of the State of North Carolina, its political subdivisions,
agencies and instrumentalities, and obligations of other qualifying issuers,
such as issuers located in Puerto Rico, the Virgin Islands and Guam, which
pay interest exempt, in the opinion of bond counsel to the issuer, from
Federal and North Carolina income taxes. Obligations exempt from Federal
income taxes are referred to herein as "Municipal Bonds" and obligations
exempt from both Federal and North Carolina income taxes are referred to as
"North Carolina Municipal Bonds." Unless otherwise indicated, references to
Municipal Bonds shall be deemed to include North Carolina Municipal Bonds.
The Fund at all times, except during temporary defensive periods, will
maintain at least 65% of its total assets invested in North Carolina
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 will seek to hedge
its portfolio through the use of futures transactions to reduce volatility in
the net asset value of Fund shares.
Municipal Bonds may include several types of bonds. The risks and special
considerations involved in investment in Municipal Bonds, vary with the types
of instruments being acquired. Investments in Non-Municipal Tax-Exempt
Securities, as defined herein, may present similar risks, depending on the
particular product. Certain instruments in which the fund may invest may be
characterized as derivative instruments. See "Description of Municipal Bonds"
and "Financial Futures Transactions and Options". The Fund also may invest in
variable rate demand obligations and participations therein, described below,
and short-term tax-exempt municipal obligations such as tax anticipation
notes. Such variable rate demand obligations, participations therein, and
short term tax-exempt municipal obligations that are exempt from Federal and
North Carolina income tax are herein referred to as "North Carolina Municipal
Obligations". At least 80% of the Municipal Bonds purchased by the Fund
primarily will be what are commonly referred to as "investment grade"
securities, which are obligations rated at the time of purchase within the
four highest quality ratings as determined by either Moody's Investors
Service, Inc. ("Moody's") (currently Aaa, Aa, A and Baa), Standard & Poor's
Corporation ("Standard & Poor's") (currently AAA, AA, A and BBB) or Fitch
Investors Service, Inc. ("Fitch") (currently AAA, AA, A and BBB). If
Municipal Bonds are unrated, such securities will possess creditworthiness
comparable, in the opinion of the Manager to obligations in which the Fund
may invest. Municipal Bonds rated in the fourth highest rating category,
while considered "investment grade", have certain speculative characteristics
and are more likely to be downgraded to non-investment grade than obligations
rated in one of the top three rating categories. See Appendix II - "Ratings
of Municipal Bonds" - in the Statement of Additional Information for more
information regarding ratings of debt securities. An issue of rated Municipal
Bonds may cease to be rated or its rating may be reduced below "investment
grade" subsequent to its purchase by the Fund. If an obligation is downgraded
below investment grade, the Manager will consider factors such as price,
credit risk, market conditions, financial condition of the issuer and
interest rates to determine whether to continue to hold the obligation in the
Fund's portfolio.
The Fund may invest up to 20% of its total assets in Municipal Bonds that
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or
which, in the Manager's judgment, possess similar credit characteristics.
Such securities, sometimes referred to as "high-yield" or "junk" bonds, are
predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. The market
9
<PAGE> 12
prices of high-yielding, lower-rated securities may fluctuate more than
higher-rated securities and may decline significantly in periods of
general economic difficulty, which may follow periods of rising interest
rates. In purchasing such securities, the Fund will rely on the Manager's
judgment, analysis and experience in evaluating the creditworthiness of
the issuer of such securities. The Manager will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the quality of its
management and regulatory matters. See "Investment Objective and
Policies" in the Statement of Additional Information for a more detailed
discussion of the pertinent risk factors involved in investing in "high
yield" or "junk" bonds and Appendix II - "Ratings of Municipal
Bonds"-in the Statement of Additional Information for additional
information regarding ratings of debt securities. The Fund does not intend
to purchase debt securities that are in default or which the Manager
believes will be in default.
Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In
such instances, the Trustees and the Manager will take into account in
assessing the quality of such bonds not only the creditworthiness of the
issuer of such bonds but also the creditworthiness of the financial
institution.
The Fund's investments may also include variable rate demand
obligations ("VRDOs") and VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by
a financial institution. The VRDOs in which the Fund will invest are
tax-exempt obligations which contain a floating or variable interest rate
adjustment formula and an unconditional right of demand on the part of the
holder thereof to receive payment of the unpaid principal balance plus
accrued interest on a short notice period not to exceed seven days.
Participating VRDOs provide the Fund with a specified undivided interest
(up to 100%) of the underlying obligation and the right to demand payment
of the unpaid principal balance plus accrued interest on the Participating
VRDOs from the financial institution on a specified number of days'
notice, not to exceed seven days. There is, however, the possibility that
because of default or insolvency, the demand feature of VRDOs or
Participating VRDOs may not be honored. The Fund has been advised by its
counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment
of the unpaid principal balance plus accrued interest on a notice period
exceeding seven days may be deemed illiquid securities. A VRDO with a
demand notice period exceeding seven days will therefore be subject to the
Fund's restriction on illiquid investments unless, in the judgment of the
Trustees, such VRDO is liquid. The Trustees may adopt guidelines and
delegate to the Manager the daily function of determining and monitoring
liquidity of such VRDOs. The Trustees, however, will retain sufficient
oversight and be ultimately responsible for such determinations.
The Fund ordinarily does not intend to realize investment income not
exempt from Federal and North Carolina income taxes. However, to the
extent that suitable North Carolina Municipal Bonds are not available for
investment by the Fund, the Fund may purchase Municipal Bonds issued by
other states, their agencies and instrumentalities, the interest income on
which is exempt, in the opinion of bond counsel, from Federal, but not
North Carolina, taxation. The Fund also may invest in securities not
issued by or on behalf of a state or territory or by an agency or
instrumentality thereof, if the Fund nevertheless believes such securities
to be exempt from Federal income taxation ("Non-Municipal Tax-Exempt
Securities"). Non-Municipal Tax-Exempt Securities could include trust
certificates or other instruments evidencing interests in one or more
long-term municipal securities. Non-Municipal Tax-Exempt Securities may
also include securities issued by other investment companies that invest
in municipal bonds, to the extent such investments are permitted by the
Investment Company Act of 1940, as amended (the "1940 Act") and North
Carolina law.
10
<PAGE> 13
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 North Carolina Municipal Bonds. For temporary
defensive periods or to provide liquidity, the Fund has the authority to
invest as much as 35% of its total assets in tax-exempt or taxable money
market obligations with a maturity of one year or less (such short-term
obligations being referred to herein as "Temporary Investments"), except
that taxable Temporary Investments shall not exceed 20% of the Fund's net
assets. The Temporary Investments, VRDOs and Participating VRDOs in which
the Fund may invest also will be in the following rating categories at the
time of purchase: MIG-1/VMIG-1 through MIG-4/VMIG-4 for notes and VRDOs
and Prime-1 through Prime-3 for commercial paper (as determined by
Moody's), SP-1 or SP-2 for notes and A-1 through A-3 for VRDOs and
commercial paper (as determined by Standard & Poor's), or F-1 through F-3
for notes, VRDOs and commercial paper (as determined by Fitch) or, if
unrated, of comparable quality in the opinion of the Manager. The Fund at
all times will have at least 80% of its net assets invested in securities
the interest on which is exempt from Federal taxation. However, interest
received on certain otherwise tax-exempt securities which are classified
as "private activity bonds" (in general, bonds that benefit
non-governmental entities) may be subject to Federal alternative minimum
tax. The percentage of the Fund's net assets invested in "private
activity bonds" will vary during the year. See "Distributions and
Taxes". In addition, the Fund reserves the right to invest temporarily a
greater portion of its assets in Temporary Investments for defensive
purposes, when, in the judgment of the Manager, market conditions warrant.
The investment objective of the Fund is a fundamental policy of the Fund
which may not be changed without a vote of a majority of the outstanding
shares of the Fund. The Fund's hedging strategies, which are described in
more detail under "Financial Futures Transactions and Options", are not
fundamental policies and may be modified by the Trustees of the Trust
without the approval of the Fund's shareholders.
Potential Benefits
Investment in shares of the Fund offers several benefits. The Fund
offers investors the opportunity to receive income exempt from Federal and
North Carolina income taxes by investing in a professionally managed
portfolio consisting primarily of long-term North Carolina Municipal
Bonds. The Fund also provides liquidity because of its redemption features
and relieves the investor of the burdensome administrative details
involved in managing a portfolio of tax-exempt securities. The benefits of
investing in the Fund are at least partially offset by the expenses
involved in operating an investment company. Such expenses primarily
consist of the management fee and operational costs, and, in the case of
certain classes of shares, the account maintenance and distribution costs.
Special and Risk Considerations Relating to North Carolina Municipal Bonds
The Fund ordinarily will invest at least 65% of its total assets in
North Carolina Municipal Bonds and, therefore, it is more susceptible to
factors adversely affecting issuers of North Carolina Municipal Bonds than
is a tax-exempt mutual fund that is not concentrated in issuers of North
Carolina Municipal Bonds to this degree. Growth of North Carolina tax
revenues slowed considerably during fiscal 1990-92, requiring tax
increases and budget adjustments, including hiring freezes and
restrictions, spending constraints, changes in timing of certain
collections and payments, and other short-term budget adjustments, that
were needed to comply with the State's constitutional mandate for a
balanced budget. Fiscal years 1993 and 1994, however, ended with a
positive General Fund balance of approximately $500 million each year. By
law, 25% of such positive fund balance was required to be reserved in the
General Fund as part of a "Budget Stabilization Fund" (subject to a
maximum reserve of 5% of the preceding fiscal year's operating
appropriation). An additional portion of such positive fund balance was
reserved in the General Fund as part of a "Reserve for Repair and
Renovation of State Facilities,"
11
<PAGE> 14
leaving the remaining unrestricted fund balance at the end of each such
year available for future appropriations. The Manager does not believe
that the current economic conditions in North Carolina will have a
significant adverse effect on the Fund's ability to invest in high quality
North Carolina Municipal Bonds. See Appendix I, "Economic Conditions in
North Carolina" 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 outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to finance various privately
operated facilities, including pollution control facilities or other
specialized facilities. For purposes of this Prospectus, such obligations
are referred to as Municipal Bonds if the interest paid thereon is
excludable, in the opinion of bond counsel, from gross income for purposes
of Federal income tax and as North Carolina Municipal Bonds if the
interest thereon is excludable, in the opinion of bond counsel, from gross
income for Federal income tax and from taxable net income of individuals,
corporations, estates and trusts for North Carolina income tax purposes,
even though such bonds may be "private activity bonds" as discussed
below.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds which include industrial development
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 the state constitution or laws, and an entity's
creditworthiness will depend on many factors, including potential erosion
of its tax base due to population declines, natural disasters, declines in
the state's industrial or commercial base or inability to attract new
industries, economic limits on the ability to tax without eroding the tax
base, state legislative proposals or voter initiatives to limit ad valorem
real property taxes, and the extent to which the entity relies on Federal
or state aid, access to capital markets or other factors beyond the state
or entity's control. Accordingly, the capacity of the issuer of a general
obligation bond as to the timely payment of interest and the repayment of
principal when due is affected by the issuer's maintenance of its tax
base.
Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as
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
invest in "moral obligation" bonds, which are normally issued by special
purpose public authorities. If an issuer of moral obligation bonds is
unable to meet its obligations, the repayment of such bonds becomes a
moral commitment but not a legal obligation of the state or municipality
in question.
The Fund may purchase industrial development bonds ("IDBs"). IDBs
are tax-exempt securities issued by states, municipalities or public
authorities to provide funds, usually through a loan or lease arrangement,
to a private corporation for the purpose of financing construction or
improvement of a facility to be used by the corporation. Such bonds are
secured primarily by revenues derived from loan repayments or lease
payments due from the entity which may or may not be guaranteed by a
parent company or otherwise secured. In view of this, an investor should
be aware that repayment of such bonds depends on the revenues of a private
corporation and
12
<PAGE> 15
be aware of the risks that such an investment may entail. Continued
ability of a corporation to generate sufficient revenues for the payment
of principal of and interest on such bonds will be affected by many
factors including the size of the corporation, its capital structure,
demand for its products or services, competition, general economic
conditions, government regulation and the corporation's dependence on
revenues from the operation of the particular facility being financed. The
Fund may invest more than 25% of its total assets in IDBs or private
activity bonds.
The Fund may invest in Municipal Bonds the return on which is based on
a particular index of value or interest rates. For example, the Fund may
invest in Municipal Bonds that pay interest based on an index of Municipal
Bond interest rates or based on the value of gold or some other commodity.
The principal amount payable upon maturity of certain Municipal Bonds also
may be based on the value of an index. To the extent the Fund invests in
these types of Municipal Bonds, the Fund's return on such Municipal Bonds
will be subject to the risk with respect to the value of the particular
index. Also, the Fund may invest in so-called "inverse floating
obligations" or "residual interest bonds" on which the interest rates
typically decline as market rates increase and increase as market rates
decline. To the extent the Fund invests in these types of Municipal Bonds,
the Fund's return on such Municipal Bonds will be subject to risk with
respect to the value of the particular index. Such securities have the
effect of providing a degree of investment leverage, since they may
increase or decrease in value in response to changes, as an illustration,
in market interest rates at a rate which is a multiple (typically two) of
the rate at which fixed-rate long term tax exempt securities increase or
decrease in response to such changes. As a result, the market values of
such securities will generally be more volatile than the market values of
fixed-rate tax exempt securities. To seek to limit the volatility of these
securities, the Fund may purchase inverse floating obligations with
shorter term maturities or which contain limitations on the extent to
which the interest rate may vary. The Manager believes that indexed and
inverse floating obligations represent a flexible portfolio management
instrument for the Fund which allows the Manager to vary the degree of
investment leverage relatively efficiently under different market
conditions. Certain investments in such obligations may be illiquid. The
Fund may not invest in such illiquid obligations if such investments,
together with other illiquid investments, would exceed 15% of the Fund's
net assets.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or
facilities. The certificates represent participations in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively called "lease obligations") relating to such equipment,
land or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the issuer's unlimited taxing power is
pledged, a lease obligation is frequently backed by the issuer's covenant
to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations contain
"non-appropriation" clauses which provide that the issuer has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might
prove difficult. These securities represent a relatively new type of
financing that has not yet developed the depth of marketability associated
with more conventional securities. Certain investments in lease
obligations may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's net assets. The Fund may,
however, invest without regard to such limitation in lease obligations
which the Manager, pursuant to guidelines which have been adopted by the
Board of Trustees and subject to the supervision of the Board, determines
to be liquid. The Manager will deem lease obligations to be liquid if they
are publicly offered and have received an investment grade rating of Baa
or better
13
<PAGE> 16
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 state or political subdivisions
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 obligations and the willingness of dealers to make a market
in the obligation.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a
result, this legislation and legislation which may be enacted in the
future may affect the availability of Municipal Bonds for investment by
the Fund.
When-Issued Securities and Delayed Delivery Transactions
The Fund may purchase or sell Municipal Bonds on a delayed delivery
basis or a when-issued basis at fixed purchase terms. These transactions
arise when securities are purchased or sold by the Fund with payment and
delivery taking place in the future. The purchase will be recorded on the
date the Fund enters into the commitment, and the value of the obligation
will thereafter be reflected in the calculation of the Fund's net asset
value. The value of the obligation on the delivery date may be more or
less than its purchase price. A separate account of the Fund will be
established with its custodian consisting of cash, cash equivalents or
high grade, liquid Municipal Bonds having a market value at all times at
least equal to the amount of the forward commitment.
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 holding a Municipal Bond as a non-callable security.
Certain investments in such obligations may be illiquid. The Fund may not
invest in such illiquid obligations if such investments, together with
other illiquid investments, would exceed 15% of the Fund's net assets.
Financial Futures Transactions and Options
The Fund is authorized to purchase and sell certain exchange traded
financial futures contracts ("financial futures contracts") solely for
the purpose of hedging its investments in Municipal Bonds against declines
in value and to hedge against increases in the cost of securities it
intends to purchase. However, any transactions involving financial futures
or options (including puts and calls associated therewith) will be in
accordance with the Fund's investment policies and limitations. A
financial futures contract obligates the seller of a contract to deliver
and the purchaser of a contract to take delivery of the type of financial
instrument covered by the contract or in the case of an index-based
futures contract, to make and accept a cash settlement, at a specific
future time for a specified price. A sale of financial futures contracts
may provide a hedge against a decline in the value of portfolio securities
because such depreciation may be offset, in whole or in part, by an
increase in the value of the position in the financial futures contracts.
A purchase of financial futures contracts may provide a hedge against an
increase in the cost of securities intended to be purchased because such
appreciation may be offset, in whole or in part, by an increase in the
value of the position in the futures contracts. Distributions, if any, of
net
14
<PAGE> 17
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 and the Trustees of the
Trust should determine that there is normally a sufficient correlation
between the prices of such futures contracts and the Municipal Bonds in
which the Fund invests to make such hedging appropriate.
Utilization of futures transactions and options thereon involves the
risk of imperfect correlation in movements in the price of futures
contracts and movements in the price of the security which is the subject
of the hedge. If the price of the futures contract moves more or less than
the price of the security that is the subject of the hedge, the Fund will
experience a gain or loss which will not be completely offset by movements
in the price of such security. There is a risk of imperfect correlation
where the securities underlying futures contracts have different
maturities, ratings or geographic mixes than the security being hedged. In
addition, the correlation may be affected by additions to or deletions
from the index which serves as a basis for a financial futures contract.
Finally, in the case of futures contracts on U.S. Government securities
and options on such futures contracts, the anticipated correlation of
price movements between the U.S. Government securities underlying the
futures or options and Municipal Bonds may be adversely affected by
economic, political, legislative or other developments which have a
disparate impact on the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission
("CFTC"), the futures trading activities described herein will not
result in the Fund being deemed to be a "commodity pool", as defined
under such regulations, provided that the Fund adheres to certain
restrictions. In particular, the Fund may purchase and sell futures
contracts and options thereon (i) only for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margins and
premiums required to establish positions in such contracts and options
does not exceed 5% of the liquidation value of the Fund's portfolio assets
after taking into account unrealized profits and unrealized losses on any
such contracts and options. (However, as stated above, the Fund intends to
engage in options and futures transactions only for hedging purposes.)
Margin deposits may consist of cash or securities acceptable to the broker
and the relevant contract market.
15
<PAGE> 18
When the Fund purchases a futures contract or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or short-term, high-grade, fixed-income securities in a segregated
account with the Fund's custodian so that the amount so segregated plus
the amount of initial and variation margin held in the account of its
broker equals the market value of the futures contracts, thereby ensuring
that the use of such futures contract is unleveraged. It is not
anticipated that transactions in futures contracts will have the effect of
increasing portfolio turnover.
Although certain risks are involved in options and futures
transactions, the Manager believes that, because the Fund will engage in
futures transactions only for hedging purposes, the futures portfolio
strategies of the Fund will not subject the Fund to certain risks
frequently associated with speculation in futures transactions. The Fund
must meet certain Federal income tax requirements under the Internal
Revenue Code of 1986, as amended (the "Code"), in order to qualify for
the special tax treatment afforded regulated investment companies,
including a requirement that less than 30% of its gross income be derived
from the sale or other disposition of securities held for less than three
months. Additionally, the Fund is required to meet certain diversification
requirements under the Code.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges which limit the amount of fluctuation in a futures
contract price during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Prices have in the past moved beyond the daily limit on a number of
consecutive trading days.
The successful use of transactions in futures also depends on the
ability of the Manager to forecast correctly the direction and extent of
interest rate movements within a given time frame. To the extent these
rates remain stable during the period in which a futures contract is held
by the Fund or moves in a direction opposite to that anticipated, the Fund
may realize a loss on the hedging transaction which is not fully or
partially offset by an increase in the value of portfolio securities. As a
result, the Fund's total return for such period may be less than if it had
not engaged in the hedging transaction. Furthermore, the Fund will only
engage in hedging transactions from time to time and may not necessarily
be engaging in hedging transactions when movements in interest rates
occur.
Reference is made to the Statement of Additional Information for
further information on financial futures contracts and certain options
thereon.
Repurchase Agreements
As Temporary Investments, the Fund may invest in securities pursuant
to repurchase agreements. Repurchase agreements may be entered into only
with a member bank of the Federal Reserve System or a primary dealer or an
affiliate thereof in U.S. Government securities. Under such agreements,
the seller agrees, upon entering into the contract, to repurchase the
security at a mutually agreed upon time and price, thereby determining the
yield during the term of the agreement. This results in a fixed rate of
return insulated from market fluctuations during such period. 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 net assets. In the event of default by the
seller under a repurchase agreement, the Fund may suffer time delays and
incur costs or possible losses in connection with the disposition of the
underlying securities.
16
<PAGE> 19
Investment Restrictions
Current Investment Restrictions. The Fund has adopted a number of
restrictions and policies relating to the investment of the Fund's assets
and its activities which are fundamental policies of the Fund and may not
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act. Among the more
significant restrictions, the Fund may not: (i) purchase any securities
other than securities referred to under "Investment Objective and
Policies" herein; (ii) purchase securities of other investment companies,
except in connection with certain specified transactions and with respect
to investments of up to 10% of the Fund's total assets in securities of
closed-end investment companies; (iii) borrow amounts in excess of 20% of
its total assets taken at market value (including the amount borrowed) and
then only from banks as a temporary measure for extraordinary or emergency
purposes (The Fund will not purchase securities while borrowings are
outstanding.); (iv) mortgage, pledge, hypothecate or in any manner
transfer as security for indebtedness any securities owned or held by the
Fund except in connection with certain specified transactions; (v) invest
in securities which cannot be readily resold because of legal or
contractual restrictions or which are not readily marketable, including
individually negotiated loans that constitute illiquid investments and
illiquid lease obligations, and in repurchase agreements and purchase and
sale contracts maturing in more than seven days, if, regarding all such
securities taken together, more than 15% of its net assets (taken at
market value at the time of each investment) would be invested in such
securities; (vi) invest more than 5% of its total assets (taken at market
value at the time of each investment) in industrial revenue bonds where
the entity supplying the revenues from which the issue is to be paid, and
the guarantor of the obligation, including predecessors, each have a
record of less than three years' continuous business operation; and (vii)
invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in any particular
industry (other than United States Government securities or Government
agency securities, Municipal Bonds and Non-Municipal Tax-Exempt
Securities).
The Board of Trustees of the Trust, at a meeting held on August 3,
1994, approved certain changes to the fundamental and non-fundamental
investment restrictions of the Fund. These changes were proposed in
connection with the creation of a set of standard fundamental and
non-fundamental investment restrictions that would be adopted, subject to
shareholder approval, by all of the non-money market mutual funds advised
by MLAM or FAM. The proposed uniform investment restrictions are designed
to provide each of these funds, including the Fund, with as much
investment flexibility as possible under the 1940 Act and applicable state
securities regulations, help promote operational efficiencies and
facilitate monitoring of compliance. The investment objective and policies
of the Fund will be unaffected by the adoption of the proposed investment
restrictions.
The full text of the proposed investment restrictions is set forth
under "Investment Objective and Policies - Proposed Uniform Investment
Restrictions" in the Statement of Additional Information. Shareholders of
the Fund are currently considering whether to approve the proposed revised
investment restrictions. If such shareholder approval is obtained, the
Fund's current investment restrictions will be replaced by the proposed
restrictions, and the Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change.
The Fund is classified as non-diversified within the meaning of the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that it may invest in obligations of a single
issuer. However, the Fund's investments will be limited so as to qualify
as a "regulated investment company" for purposes of the Internal Revenue
Code of 1986, as amended (the "Code"). See "Taxes". To qualify, among
other requirements, the Trust will limit the Fund's investments so that,
at the close of each quarter of the taxable year, (i) not more than 25% of
the market value of the Fund's total assets will be invested in the
securities of a
17
<PAGE> 20
single issuer, and (ii) with respect to 50% of the market value of its
total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer, and the Fund will
not own more than 10% of the outstanding voting securities of a single
issuer. For purposes of this restriction, the Fund will regard each state
and each political subdivision, agency or instrumentality of such state
and each multi-state agency of which such state is a member and each
public authority which issues securities on behalf of a private entity, as
a separate issuer, except that if the security is backed only by the
assets and revenues of a non-government entity, then the entity with the
ultimate responsibility for the payment of interest and principal may be
regarded as the sole issuer. These tax-related limitations may be changed
by the Trustees of the Trust to the extent necessary to comply with
changes to the Federal tax requirements. A fund which elects to be
classified as "diversified" under the 1940 Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets.
To the extent that the Fund assumes large positions in the obligations of
a small number of issuers, the Fund's total return may fluctuate to a
greater extent than that of a diversified company as a result of changes
in the financial condition or in the market's assessment of the issuers.
Investors are referred to the Statement of Additional Information for
a complete description of the Fund's investment restrictions.
MANAGEMENT OF THE TRUST
Trustees
The Trustees of the Trust consist of six individuals, five of whom are
not "interested persons" of the Trust as defined in the 1940 Act. The
Trustees are responsible for the overall supervision of the operations of
the Trust and the Fund and perform the various duties imposed on the
directors or trustees of investment companies by the 1940 Act.
The Trustees are:
ARTHUR ZEIKEL*-President, and Chief Investment Officer of the Manager
and MLAM; President and Director of Princeton Services, Inc.;
Executive Vice President of ML&Co.; Executive Vice Presidentof Merrill
Lynch; Director of the Distributor.
KENNETH S. AXELSON - Former Executive Vice President and Director,
J.C. Penney Company, Inc.
HERBERT I. LONDON - John M. Olin Professor of Humanities, New York
University.
ROBERT R. MARTIN - Chairman, WTC Industries, Inc. and former Chairman
and Chief Executive Officer, 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
Fund Asset Management, L.P. (the "Manager"), which is an affiliate
of MLAM and is owned and controlled by ML&Co., a financial services
holding company, acts as the manager for the Fund and provides the Fund
with management services. The Manager or MLAM acts as the investment
adviser for more than 100 other
18
<PAGE> 21
registered investment companies. MLAM also
provides investment advisory services to individuals and institutions. As
of August 31, 1994, the Manager and MLAM had a total of approximately
$165.7 billion in investment company and other portfolio assets under
management, including accounts of certain affiliates of the Manager.
Subject to the direction of the Trustees, the Manager is responsible
for the actual management of the Fund's portfolio and constantly reviews
the Fund's holdings in light of its own research analysis and that from
other relevant sources. The responsibility for making decisions to buy,
sell or hold a particular security rests with the Manager. The Manager
performs certain of the other administrative services and provides all the
office space, facilities, equipment and necessary personnel for management
of the Fund.
Vincent R. Giordano and Kenneth A. Jacob are the Portfolio Managers
for the Fund. Vincent R. Giordano has been a Portfolio Manager of the
Manager and MLAM since 1977 and a Senior Vice President of the Manager and
MLAM since 1984. Kenneth A. Jacob has been a Vice President of the Manager
and MLAM since 1984.
Pursuant to the management agreement between the Manager and the Trust
on behalf of the Fund (the "Management Agreement"), the Manager is
entitled to receive from the Fund a monthly fee based upon the average
daily net assets of the Fund at the following annual rates: 0.55% of the
average daily net assets not exceeding $500 million; 0.525% of the average
daily net assets exceeding $500 million but not exceeding $1.0 billion; and
0.50% of the average daily net assets exceeding $1.0 billion. For the year
ended July 31, 1994, the total fee paid by the Fund to the Manager was
$323,712 (based on average net assets of approximately $59.0 million) of
which $264,567 was voluntarily waived.
The Management Agreement obligates the Trust 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. The Manager may waive all or a portion of its management fee and
may voluntarily assume all or a portion of the Fund's expenses during the
initial period of the Fund's operations. For the year ended July 31, 1994,
the Fund reimbursed the Manager $36,512 for accounting services. For the
year ended July 31, 1994, the ratio of total expenses, excluding
distribution fees and net of reimbursement, to average net assets was .50%
for the Class A shares and .51% for the Class B shares; no Class C or
Class D shares had been issued during that year.
Transfer Agency Services
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of ML&Co., acts as the Trust's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant
to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Fund pays the Transfer Agent an annual fee of $11.00 per
Class A or Class D shareholder account and $14.00 per Class B or Class C
shareholder account, and the Transfer Agent is entitled to reimbursement
from the Fund for out-of-pocket expenses incurred by the Transfer Agent
under the Transfer Agency Agreement. For the year ended July 31, 1994, the
Fund paid the Transfer Agent a total fee of $30,345 pursuant to the
Transfer Agency Agreement for providing transfer agency services.
19
<PAGE> 22
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an
affiliate of both MLAM and Merrill Lynch, acts as the distributor of the
shares of the Fund. Shares of the Fund are offered continuously for sale
by the Distributor and other eligible securities dealers (including
Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000, and the minimum subsequent purchase is
$50.
The Fund is offering its shares in four classes at a public offering
price equal to the next determined net asset value per share plus sales
charges imposed either at the time of purchase or on a deferred basis
depending upon the class of shares selected by the investor under the
Merrill Lynch Select Pricing System, as described below. The applicable
offering price for purchase orders is based upon the net asset value of
the Fund next determined after receipt of the purchase orders by the
Distributor. As to purchase orders received by securities dealers prior to
4:15 P.M., New York time, which includes orders received after the
determination of net asset value on the previous day, the applicable
offering price will be based on the net asset value as of 4:15 P.M. on the
day the orders are placed with the Distributor, provided the orders are
received by the Distributor prior to 4:30 P.M., New York time, on that day.
If the purchase orders are not received prior to 4:30 P.M., New York time,
such orders shall be deemed received on the next business day. The Trust or
the Distributor may suspend the continuous offering of the Fund's shares of
any class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any
order may be rejected by the Distributor or the Trust. Neither the
Distributor nor the dealers are permitted to withhold placing orders to
benefit themselves by a price change. Merrill Lynch may charge its customers
a processing fee (presently $4.85) to confirm a sale of shares to such
customers. Purchases directly through the Fund's Transfer Agent are not
subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold
the shares and other relevant circumstances. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge or to have the entire initial purchase price invested in the Fund
with the investment thereafter being subject to a contingent deferred
sales charge and ongoing distribution fees. A discussion of the factors
that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing System is set forth under
"Merrill Lynch Select Pricing System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund
represents an identical interest in the investment portfolio of the Fund
and has the same rights, except that Class B, Class C and Class D shares
bear the expenses of the ongoing account maintenance fees, and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred
sales charge arrangements. The deferred sales charges and account
maintenance fees that are imposed on Class B and Class C shares, as well
as the account maintenance fees that are imposed on Class D shares, will
be imposed directly against those classes and not against all assets of
the Fund and, accordingly, such charges will not affect the net asset
value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares each
20
<PAGE> 23
have exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid. See "Distribution Plans" below. Each
class has different exchange privileges. See "Shareholder Services-
Exchange Privilege".
Investors should understand that the purpose and function of the
initial sales charges with respect to Class A and Class D shares are the
same as those of the deferred sales charges with respect to Class B and
Class C shares in that the sales charges applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes
of shares. Investors are advised that only Class A and Class D shares may
be available for purchase through securities dealers, other than Merrill
Lynch, which are eligible to sell shares.
The following table sets forth a summary of the distribution
arrangements for each class of shares under the Merrill Lynch Select
Pricing System.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Account
Maintenance Distribution Conversion
Class Sales Charge(1) Fee Fee Feature
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge (2)(3)
- -------------------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, at 0.25% 0.25% B shares convert to
a rate of 4.0% during the first year, shares automatically after
decreasing 1.0% annually to 0.0% approximately ten years (4)
- --------------------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.35% No
- --------------------------------------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales charge (3) 0.10% No No
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
----------
(1) Initial sales charges are imposed at the time of purchase as a
percentage of the offering price. CDSCs may be imposed if the
redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternative-Class A and Class D Shares- Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a CDSC if redeemed within one
year.
(4) The conversion period for dividend reinvestment shares is modified.
Also, Class B shares of certain other MLAM-advised mutual funds into
which exchanges may be made have an eight year conversion period. If
Class B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period
for the shares acquired.
Initial Sales Charge Alternatives-Class A and Class D Shares
Investors choosing the initial sales charge alternatives who are
eligible to purchase Class A shares should purchase Class A shares rather
than Class D shares because there is an account maintenance fee imposed on
Class D shares.
21
<PAGE> 24
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
Sales Charge Sales Charge Discount to
and Percentage as Percentage* Selected Dealers
of Offering of the Net as Percentage of the
Amount of Purchase Price Amount Invested Offering Price
------------------ -------------- --------------- ---------------------
<S> <C> <C> <C>
Less than $25,000................................................. 4.00% 4.17% 3.75%
$25,000 but less than $50,000..................................... 3.75 3.90 3.50
$50,000 but less than $100,000.................................... 3.25 3.36 3.00
$100,000 but less than $250,000................................... 2.50 2.56 2.25
$250,000 but less than $1,000,000 ................................ 1.50 1.52 1.25
$1,000,000 and over**............................................. 0.00 0.00 0.00
</TABLE>
----------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases
of $1,000,000 or more made on or after October 21, 1994. If the sales
charge is waived, such purchases will be subject to a CDSC of 1% if the
shares are redeemed within one year after purchase. Class A purchases
made prior to October 21, 1994 may be subject to a CDSC if the shares
are redeemed within one year of purchase at the following rates: 0.75%
on purchases of $1,000,000 to $2,500,000; 0.40% on purchases of
$2,500,001 to $3,500,000; 0.25% on purchases of $3,500,001 to
$5,000,000; and 0.20% on purchases of more than $5,000,000. The charge
will be assessed on an amount equal to the lesser of the proceeds of
the redemption or the cost of the shares being redeemed.
The Distributor may reallow discounts to selected dealers and retain
the balance over such discounts. At times the Distributor may reallow the
entire sales charge to such dealers. Since securities dealers selling
Class A and Class D shares of the Fund will receive a concession equal to
most of the sales charge, they may be deemed to be underwriters under the
Securities Act of 1933, as amended. During the fiscal year ended July 31,
1994, the Fund sold 461,410 Class A shares for aggregate net proceeds of
$4,928,197. The gross sales charges for the sale of Class A shares of the
Fund for that year were $56,194, of which $6,609 and $49,585 were received
by the Distributor and Merrill Lynch, respectively. For the fiscal year
ended July 31, 1994, the Distributor received no CDSCs with respect to
redemption within one year after purchase of Class A shares purchased
subject to front-end sales charge waivers.
Eligible Class A Investors. Class A shares are offered to a limited
group of investors and also will be issued upon reinvestment of dividends
on outstanding Class A shares. Investors that currently own Class A shares
in a shareholder account are entitled to purchase additional Class A
shares in that account. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs provided that the
program has $3 million or more initially invested in MLAM-advised mutual
funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA SM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services and certain purchases made in connection with the Merrill Lynch
Mutual Fund Adviser program. In addition, Class A shares will be offered
at net asset value to ML&Co. and its subsidiaries and their directors and
employees and to members of the Boards of MLAM-advised investment
companies, including the Fund. Certain persons who acquire shares of
MLAM-advised closed-end funds who wish to reinvest the net proceeds from a
sale of their closed-end fund shares of common stock in shares of the Fund
also may purchase Class A shares of the Fund if certain conditions set
forth in the Statement of Additional Information are met. For example,
Class A shares of the Fund and certain other MLAM-advised mutual funds are
offered at net asset value to shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. who wish to reinvest the net proceeds from a sale
of certain of their shares of common stock of Merrill Lynch Senior
Floating Rate Fund, Inc. in shares of such funds.
22
<PAGE> 25
Reduced Initial Sales Charges. No initial sales charges are imposed
upon Class A and Class D shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions. Class A and
Class D sales charges also may be reduced under a Right of Accumulation
and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible
Class A investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value without sales charge to
an investor who has a business relationship with a financial consultant,
if certain conditions set forth in the Statement of Additional Information
are met. Class D shares may be offered at net asset value in connection
with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges
is set forth in the Statement of Additional Information.
Deferred Sales Charge Alternatives-Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should
consider Class B shares if they intend to hold their shares for an
extended period of time and Class C shares if they are uncertain as to the
length of time they intend to hold their assets in MLAM-advised mutual
funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time
of purchase. As discussed below, Class B shares are subject to a four year
CDSC, while Class C shares are subject only to a one year 1.0% CDSC. On
the other hand, approximately ten years after Class B shares are issued,
such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted
into Class D shares of the Fund and thereafter will be subject to lower
continuing fees. See "Conversion of Class B Shares to Class D Shares"
below. Both Class B and Class C shares are subject to an account
maintenance fee of 0.25% of net assets and Class B and Class C shares are
subject to distribution fees of 0.25% and 0.35%, respectively, of net
assets as discussed below under "Distribution Plans". The proceeds from
the account maintenance fees are used to compensate Merrill Lynch for
providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so
that the Fund will receive the full amount of the investor's purchase
payment. Merrill Lynch compensates its financial consultants for selling
Class B and Class C shares at the time of purchase from its own funds. See
"Distribution Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the
Distributor and are used in whole or in part by the Distributor to defray
the expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of
the Class B and Class C shares, such as the payment of compensation to
financial consultants for selling Class B and Class C shares, from the
dealers' own funds. The combination of the CDSC and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B
and Class C shares without a sales charge being deducted at the time of
purchase. Approximately ten years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are subject
to a lower account maintenance fee and no distribution fee; Class B shares
of certain other MLAM-advised mutual funds into which exchanges may be
made convert into Class D shares automatically after approximately eight
years. If Class B shares of the Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the
shares acquired.
23
<PAGE> 26
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See
"Limitations on the Payment of Deferred Sales Charges" below. The
proceeds from the ongoing account maintenance fee are used to compensate
Merrill Lynch for providing continuing account maintenance activities.
Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services-Exchange Privilege" will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than
the CDSC schedule relating to the Class B shares acquired as a result of
the exchange.
Contingent Deferred Sales Charge-Class B Shares
Class B shares which are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of
the dollar amount subject thereto. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. Accordingly, no CDSC will be imposed on
increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC as a
Percentage of
Year Since Purchase Dollar Amount
Payment Made Subject to Charge
------------ -----------------
<S> <C>
0-1............................................................... 4.0%
1-2............................................................... 3.0%
2-3............................................................... 2.0%
3-4............................................................... 1.0%
4 and thereafter.................................................. None
</TABLE>
For the fiscal year ended July 31, 1994, the Distributor received
CDSCs of $58,588 with respect to redemptions of Class B shares, all of
which were paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
applicable rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares
held longest during the four-year period. The charge will not be applied
to dollar amounts representing an increase in the net asset value since
the time of purchase. A transfer of shares from a shareholder's account to
another account will be assumed to be made in the same order as a
redemption.
To provide an example, assume an investor purchased 100 shares at $10
per share (at a cost of $1,000) and in the third year after purchase, the
net asset value per share is $12 and, during such time, the investor has
acquired 10 additional shares upon dividend reinvestment. If at such time
the investor makes his first redemption of 50 shares (proceeds of $600),
10 shares will not be subject to charge because of dividend reinvestment.
With respect to the remaining 40 shares, the charge is applied only to the
original cost of $10 per share and not to the increase in net asset value
of $2 per share. Therefore, $400 of the $600 redemption proceeds will be
charged at a rate of 2.0% (the applicable 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 Internal Revenue Code of 1986, as
amended) of a shareholder. Additional information concerning the waiver of
the Class B CDSC is set forth in the Statement of Additional Information.
24
<PAGE> 27
Contingent Deferred Sales Charges-Class C Shares. Class C shares which
are redeemed within one year of purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge
will be assessed on an equal to the lesser of the proceeds of redemption
or the cost of the shares being redeemed. Accordingly, no Class C CDSC
will be imposed on increases in net asset value above the initial purchase
price. In addition, no Class C CDSC will be assessed on shares derived
from reinvestment of dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption,
the calculation will be determined in the manner that results in the
lowest possible rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over one year or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares
held longest during the one-year period. The charge will not be applicable
to dollar amounts representing an increase in the net asset value since
the time of purchase. At transfer of shares from a shareholder's account
to another account will be assumed to be made in the same order as a
redemption.
Conversion of Class B Shares to Class D Shares. After approximately
ten years (the "Conversion Period"), Class B shares will be converted
automatically into Class D shares of the Fund. Class D shares are subject
to an ongoing account maintenance fee of 0.10% of net assets but are not
subject to the distribution fee that is borne by Class B shares. Automatic
conversion of Class B shares into Class D shares will occur at least once
each month (on the "Conversion Date") on the basis of the relative net
asset values of the shares of the two classes on the Conversion Date,
without the imposition of any sales load, fee or other charge. Conversion
of Class B shares to Class D shares will not be deemed a purchaser or sale
of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on
Class B shares also will convert automatically to Class D shares. The
Conversion Date for dividend reinvestment shares will be calculated taking
into account the length of time the shares underlying such dividend
reinvestment shares were outstanding. If at a Conversion Date the
conversion of Class B shares to Class D shares of the Fund in a single
account will result in less than $50 worth of Class B shares being left in
the account, all of the Class B shares of the Fund held in the account on
the Conversion Date will be converted to Class D shares of the Fund.
Share certificates for Class B shares of the Fund to be converted must
be delivered to the Transfer Agent at least one week prior to the
Conversion Date applicable to those shares. In the event such certificates
are not received by the Transfer Agent at least one week prior to the
Conversion Date, the related Class B shares will convert to Class D shares
on the next scheduled Conversion Date after such certificates are
delivered.
In general, Class B shares of equity MLAM-advised mutual funds will
convert approximately eight years after initial purchase, and Class B
shares of taxable and tax-exempt fixed income MLAM-advised mutual funds
will convert approximately ten years after initial purchase. If, during
the Conversion Period, a shareholder exchanges Class B shares with an
eight-year Conversion Period for Class B shares with a ten-year Conversion
Period, or vice versa, the Conversion Period applicable to the Class B
shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired.
Distribution Plans
The Fund has adopted separate distribution plans for Class B, Class C
and Class D shares pursuant to Rule 12b-1 under the Investment Company Act
(each a "Distribution Plan") with respect to the account maintenance
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<PAGE> 28
and/or distribution fees paid by the Fund to the Distributor with respect
to such classes. The Class B and Class C Distribution Plans provide for
the payment of account maintenance fees and distribution fees, and the
Class D Distribution Plan provides for the payment of account maintenance
fees.
The Distribution Plans for Class B, Class C and Class D shares each
provide that the Fund pays the Distributor an account maintenance fee
relating to the shares of the relevant class, accrued daily and paid
monthly, at the annual rates of 0.25%, 0.25% and 0.10%, respectively, of
the average daily net assets of the Fund attributable to shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide
that the Fund also pays the Distributor a distribution fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the
annual rate of 0.25% and 0.35%, respectively, of the average daily net
assets of the Fund attributable to the shares of the relevant class in
order to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing shareholder and distribution services, and
bearing certain distribution-related expenses of the Fund, including
payments to financial consultants for selling Class B and Class C shares
of the Fund. The Distribution Plans relating to Class B and Class C shares
are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this
regard, the purpose and function of the ongoing distribution fees and the
CDSC are the same as those of the initial sales charge with respect to the
Class A and Class D shares of the Fund in that the deferred sales charges
provide for the financing of the distribution of the Fund's Class B and
Class C shares.
For the year ended July 31, 1994, the Fund paid the Distributor
account maintenance fees of $119,691 and distribution fees of $119,691
under the Class B Distribution Plan. The Fund did not begin to offer
shares of Class C or Class D publicly until the date of this Prospectus.
Accordingly, no payments have been made pursuant to the Class C or Class D
Distribution Plans prior to the date of this Prospectus.
The payments under the Distribution Plan 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 Plan. This information
is presented annually as of December 31 of each year on a "fully
allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues
consist of the account maintenance fees, distribution fees, the CDSC and
certain other related revenues, and expenses consist of financial
consultant compensation, branch office and regional operation center
selling and transaction processing expenses, advertising, sales promotion
and marketing expenses, corporate overhead and interest expense. On the
direct expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and CDSCs, and the expenses consist of
financial consultant compensation. As of December 31, 1993, the last date
for which fully allocated accrual data is available, the fully allocated
accrual expenses incurred by the Distributor and Merrill Lynch exceeded
fully allocated accrual revenues for such period by approximately
$1,012,000 (2.1% of Class B net assets at that date). As of December 31,
1993, direct cash expenses for the period since the commencement of
operations exceeded direct cash revenues by $344,621 (.70% of Class B net
assets at that date). As of July 31, 1994, direct cash expenses for the
period since the commencement of operations exceeded direct cash revenues
by $269,159 (.53% of Class B net assets at that date).
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<PAGE> 29
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch
in connection with Class B, Class C and Class D shares, and there is no
assurance that the Trustees of the Trust will approve the continuance of
the Distribution Plans from year to year. However, the Distributor intends
to seek annual continuation of the Distribution Plans. In their review of
the Distribution Plans, the Trustees will be asked to take into
consideration expenses incurred in connection with the account maintenance
and/or distribution of each class of shares separately. The initial sales
charges, the account maintenance fee, the distribution fee and/or the
CDSCs received with respect to one class will not be used to subsidize the
sale of shares of another class. Payments of the distribution fee on Class
B shares will terminate upon conversion of those Class B shares into Class D
shares as set forth under "Deferred Sales Charge Alternatives-Class B and
Class C Shares-Conversion of Class B Shares to Class D Shares".
Limitations on the Payment of Deferred Sales Charges. The maximum
sales charge rule in the Rules of Fair Practice of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution
fee and the CDSC borne by the Class B and Class C shares but not the
account maintenance fee. The maximum sales charge rule is applied
separately to each class. As applicable to the Fund, the maximum sales
charge rule limits the aggregate of distribution fee payments and CDSCs
payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares
and Class C shares computed separately (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges) plus (2) interest on the
unpaid balance for the respective class, computed separately, at the prime
rate plus 1% (the unpaid balance being the maximum amount payable minus
amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily
agreed to waive interest charges on the unpaid balance in excess of 0.50%
of eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") in connection with
the Class B shares is 6.75% of eligible gross sales. The Distributor
retains the right to stop waiving the interest charges at any time. To the
extent payments would exceed the voluntary maximum, the Fund will not make
further payments of the distribution fee with respect to 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 to the voluntary maximum may exceed the amount payable under the
NASD formula. In such circumstances payments in excess of the amount
payable under the NASD formula will not be made.
REDEMPTION OF SHARES
The Trust is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the
net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any CDSC which may be applicable,
there will be no charge for redemption if the redemption request is sent
directly to the Transfer Agent. Shareholders liquidating their holdings
will receive upon redemption all dividends reinvested through the date of
redemption. The value of shares at the time of redemption may be more or
less than the shareholder's cost, depending on the market value of the
securities held by the Fund at such time.
Redemption
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Financial Data
Services, Inc., Transfer Agency Mutual Fund Operations, P.O. Box 45289,
Jacksonville, Florida 32232-5289. Redemption requests delivered other than
by mail should be delivered to
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<PAGE> 30
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of
redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may
be accomplished by a written letter as noted above accompanied by
certificates for the shares to be redeemed. Redemption requests should not
be sent to the Trust. The notice in either event requires the signature(s)
of all persons in whose name(s) the shares are registered, signed exactly as
such name(s) appear(s) on the Transfer Agent's register. The signature(s) on
the redemption request must be guaranteed by an "eligible guarantor
institution" as such term is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents such as,
but not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payments will be
mailed within seven days of receipt of a proper notice of redemption.
At various times the Trust may be requested to redeem Fund shares for
which it has not yet received good payment (e.g., cash, Federal funds or
certified check drawn on a United States bank). The Trust may delay or
cause to be delayed the mailing of a redemption check until such time as
it has assured itself that good payment has been collected for the
purchase of such Fund shares, which will not exceed 10 days.
Repurchase
The Trust also will repurchase Fund shares through a shareholder's
listed securities dealer. The Trust normally will accept orders to
repurchase Fund shares by wire or telephone from dealers for their
customers at the net asset value next computed after receipt of the order
by the dealer, provided that the request for repurchase is received by the
dealer prior to the close of business on the New York Stock Exchange on
the day received and such request is received by the Fund from such dealer
not later than 4:30 P.M., New York time, on the same day. Dealers have the
responsibility to submit such repurchase requests to the Fund not later
than 4:30 P.M., New York time, in order to obtain that day's closing
price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than any
applicable CDSC); Securities firms which do not have selected dealer
agreements with the Distributor, however, may impose a transaction charge
on the shareholder for transmitting the notice of repurchase to the Trust.
Merrill Lynch may charge its customers a processing fee (presently $4.85)
to confirm a repurchase of shares of such customers. Redemptions directly
through the Fund's Transfer Agent are not subject to the processing fee.
The Trust reserves the right to reject any order for repurchase, which
right of rejection might adversely affect shareholders seeking redemption
through the repurchase procedure. However, a shareholder whose order for
repurchase is rejected by the Trust may redeem Fund shares as set forth
above.
Reinstatement Privilege-Class A and Class D Shares
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or
Class D shares, as the case may be, of the Fund at net asset value without
a sales charge up to the dollar amount redeemed. The reinstatement
privilege may be exercised by sending a notice of exercise along with a
check for the amount to be reinstated to the Transfer Agent within 30 days
after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset
value per share next determined after the notice of reinstatement is
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<PAGE> 31
received and cannot exceed the amount of the redemption proceeds. The
reinstatement privilege is a one-time privilege and may be exercised by
the Class A or Class D shareholder only the first time such shareholder
makes a redemption.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as
to each of such services, copies of the various plans described below and
instructions as to how to participate in the various services or plans, or
to change options with respect thereto, can be obtained from the Trust by
calling the telephone number on the cover page hereof or from the
Distributor or Merrill Lynch.
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements from the
Transfer Agent at least quarterly. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary dividends and long-term capital gains distributions. These
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 reinvestments of ordinary
income dividends and long-term capital gains distributions. A shareholder may
make additions to his Investment Account at any time by mailing a check
directly to the Transfer Agent. Shareholders may also maintain their accounts
through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch
brokerage account, an Investment Account in the transferring shareholder's
name will be opened automatically at the Transfer Agent. (Shareholders
considering transferring their Class A or Class D shares (paying any
applicable CDSC) 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.
Exchange Privilege. Shareholders of each class of shares of the Fund have
an exchange privilege with certain other MLAM-advised mutual funds. There is
currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated at
any time in accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing System, Class A shareholders
may exchange Class A shares of the Fund for Class A shares of a second
MLAM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in his account in which the exchange is made at the time
of the exchange or is otherwise eligible to purchase Class A shares of the
second fund. If the Class A shareholder wants to exchange Class A shares
for shares of a second MLAM-advised mutual fund, and the shareholder does
not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of
the second fund, the shareholder will receive Class D shares of the second
fund as a result of the exchange. Class D 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.
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<PAGE> 32
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus
an amount equal to the difference, if any, between the sales charge
previously paid on the Class A or Class D shares being exchanged and the
sales charge payable at the time of the exchange on the shares being
acquired.
Class B, Class C and Class D shares will be exchangeable with shares
of the same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be exchangeable on
the basis of relative net asset value per share without the payment of any
CDSC that might otherwise be due upon redemption of the shares of the
Fund. For purposes of computing the CDSC that may be payable upon a
disposition of the shares acquired in the exchange, the holding period for
the previously owned shares of the Fund is "tacked" to the holding
period of the newly acquired shares of the other Fund.
Class A, Class B, Class C and Class D shares also will be exchangeable
for shares of certain MLAM-advised money market funds specifically
designated as available for exchange by holders of Class A, Class B, Class
C or Class D shares. The period of time that Class A, Class B, Class C or
Class D shares are held in a money market fund, however, will not count
toward satisfaction of the holding period requirement for reduction of any
CDSC imposed on such shares, if any, and, with respect to Class B shares,
toward satisfaction of the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege
will continue to be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the new Class B shares. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of the
MLAM-advised mutual fund from which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes. For further information, see "Shareholder Services-
Exchange Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser
("MFA") program. First, the initial allocation of assets is made under
the 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 or by telephone (1-800-MER-FUND)
to the Transfer Agent, elect to have subsequent dividends or both
dividends and capital gains distributions paid in cash, rather than
reinvested, in which event payment will be mailed monthly. Cash payments
can also be directly deposited to the shareholders bank account. No CDSC
will be imposed upon redemption of shares issued as a result of the
automatic reinvestment of dividends or capital gains distributions.
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Systematic Withdrawal Plans
A Class A or Class D shareholder may elect to receive systematic
withdrawal payments from his Investment Account through automatic payment
by check or through automatic payment by direct deposit to his bank
account on either a monthly or quarterly basis. A Class A or Class D
shareholder whose shares are held within a CMA(Reg) or CBA(Reg) account
may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the Systematic Redemption Program,
subject to certain conditions.
Automatic Investment Plans
Regular additions of both Class A and Class B shares may be made to an
investor's Investment Account by prearranged charges of $50 or more to his
regular bank account. The Fund's Automatic Investment Program is not
available to shareholders whose shares are held in a brokerage account with
Merrill Lynch. Alternatively, investors who maintain CMA(Reg) accounts may
arrange to have periodic investments made in the Fund in their CMA(Reg)
account or in certain related accounts in amounts of $100 or more through
the CMA(Reg) Automatic Investment Program.
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities of the
Fund. Municipal Bonds and other securities in which the Fund invests are
traded primarily in the over-the-counter market. Where possible, the Trust
deals directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution
are available elsewhere. It is the policy of the Trust to obtain the best
net results in conducting portfolio transactions for the Fund, taking into
account such factors as price (including the applicable dealer spread),
the size, type and difficulty of the transactions involved, the firm's
general execution and operations facilities, and the firm's risk in
positioning the securities involved and the provision of supplemental
investment research by the firm. While reasonably competitive spreads or
commissions are sought, the Fund will not necessarily be paying the lowest
spread or commission available. The sale of shares of the Fund may be
taken into consideration as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Fund. The portfolio
securities of the Fund generally are traded on a net basis and normally do
not involve either brokerage commissions or transfer taxes. The cost of
portfolio securities transactions of the Fund primarily consists of dealer
or underwriter spreads. Under the 1940 Act, persons affiliated with the
Trust, including Merrill Lynch, are prohibited from dealing with the Trust
as a principal in the purchase and sale of securities unless such trading
is permitted by an exemptive order issued by the Commission. The Trust has
obtained an exemptive order permitting it to engage in certain principal
transactions with Merrill Lynch involving high quality short-term
municipal bonds subject to certain conditions. In addition, the Trust may
not purchase securities, including Municipal Bonds, for the Fund during
the existence of any underwriting syndicate of which Merrill Lynch is a
member except pursuant to procedures approved by the Trustees of the Trust
which comply with rules adopted by the Commission. Affiliated persons of
the Trust may serve as its broker in over-the-counter transactions
conducted for the Fund on an agency basis only.
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DISTRIBUTIONS AND TAXES
Distributions
The net investment income of the Fund is declared as dividends daily
following the normal close of trading on the New York Stock Exchange
(currently 4:00 P.M.) prior to the determination of the net asset value on
that day. The net investment income of the Fund for dividend purposes
consists of interest earned on portfolio securities, less expenses, in
each case computed since the most recent determination of the net asset
value. Expenses of the Fund, including the management fees and the account
maintenance and distribution fees, are accrued daily. Dividends of net
investment income are declared daily and reinvested monthly in the form of
additional full and fractional shares of the Fund at net asset value as of
the close of business on the "payment date" unless the shareholder
elects to receive such dividends in cash. Shares will accrue dividends as
long as they are issued and outstanding. Shares are issued and outstanding
from the settlement date of a purchase order to the day prior to
settlement date of a redemption order.
All net realized long- or short-term capital gains, if any, are
declared and distributed to the Fund's shareholders at least annually.
Capital gains distributions will be reinvested automatically in shares
unless the shareholder elects to receive such distributions in cash.
The per share dividends and distributions on each class of shares will
be reduced as a result of any account maintenance, distribution and
transfer agency fees applicable to that class.
See "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 will continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the
Internal Revenue Code of 1986, as amended (the "Code"). If it so
qualifies, in any taxable year in which it distributes at least 90% of its
taxable net income and 90% of its tax-exempt net income, the Fund (but not
its shareholders) will not be subject to Federal income tax to the extent
that it distributes its net investment income and net realized capital
gains. The Trust intends to cause the Fund to distribute substantially all
of such income.
To the extent that the dividends distributed to the Fund's Class A,
Class B, Class C and Class D shareholders (together, the "shareholders")
are derived from interest income exempt from Federal tax under Code
Section 103(a) and are properly designated as "exempt-interest
dividends" by the Trust, they will be excludable from a shareholder's
gross income for Federal income tax purposes. Exempt-interest dividends
are included, however, in determining the portion, if any, of a person's
social security and railroad retirement benefits subject to Federal income
taxes. The portion of exempt-interest dividends paid from interest
received by the Fund from North Carolina Municipal Bonds or from direct
obligations of the U.S. Government is excluded from the North Carolina
taxable net income of individuals, corporations, estates and trusts.
Shareholders subject to income taxation by states other than North
Carolina will realize a lower after-tax rate of return than North Carolina
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 North Carolina income
taxes. Interest on indebtedness incurred or continued to purchase or carry
Fund shares is not
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<PAGE> 35
deductible for Federal or North Carolina income tax purposes. Persons who
may be "substantial users" (or "related persons" of substantial users)
of facilities financed by industrial development bonds or private activity
bonds held by the Fund should consult their tax advisers before purchasing
Fund shares.
Generally, the shares of the Fund that are owned by shareholders who
are residents of North Carolina or that have a business, commercial or
taxable situs in North Carolina on December 31 of each year will be
subject to the North Carolina intangible personal property tax; however,
the value of shares of the Fund will be exempt from the North Carolina
intangible personal property tax to the extent the Fund's assets as of
December 31 of each year consist of North Carolina Municipal Bonds and
direct obligations of the U.S. The Trust will inform shareholders annually
of the portion of the Fund's assets as of December 31 that consists of
such obligations.
Shareholders should note that the future of the North Carolina
intangible personal property tax is uncertain. A challenge to the
constitutionality of such tax presently is on appeal to the North Carolina
Supreme Court. In addition, several bills were introduced in recent State
legislative sessions that would have either repealed the North Carolina
intangible personal property tax in total or significantly amended its
provisions. Although no such legislation has yet been enacted, further
attempts may be made to repeal or modify this tax in the future.
Accordingly, no assurance can be given that an investment in the Fund
while it owns direct obligations of the United States or North Carolina
Municipal Bonds will in future years provide shareholders with any
reductions from the North Carolina intangible personal property tax that
they otherwise might owe.
An investment in the Fund by a corporate shareholder would be included
in the capital stock, surplus and undivided profits base in computing the
North Carolina franchise tax.
To the extent that the Fund's distributions are derived from interest
on its taxable investments (including, for North Carolina income tax
purposes, interest on Municipal Bonds of other states) or from an excess
of net short-term capital gains over net long-term capital losses
("ordinary income dividends"), such distributions are considered
ordinary income for Federal and North Carolina income tax purposes,
except, in the case of North Carolina income tax, for dividends that are
directly attributable to interest on obligations of the U.S. Government or
to gains from certain obligations of the State of North Carolina and its
political subdivisions. The Fund's distributions are not eligible for the
dividends-received deduction for corporations. Distributions, if any, of
net long-term capital gains from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are
taxable as long-term capital gains for Federal income tax purposes,
regardless of the length of time the shareholder has owned Fund shares.
Such capital gain dividends are also subject to North Carolina income
taxes, except to the extent attributable to gains from certain obligations
of the State of North Carolina and its political subdivisions. Under the
Revenue Reconciliation Act of 1993, all or a portion of the Fund's gain
from the sale or redemption of tax-exempt obligations purchased at a
market discount will be treated as ordinary income rather than capital
gain. This rule may increase the amount of ordinary income dividends
received by shareholders. Distributions in excess of the Fund's earnings
and profits will first reduce the adjusted tax basis of a holder's shares
and, after such adjusted tax basis is reduced to zero, will constitute
capital gains (assuming such shares are held as a capital asset). Any loss
upon the sale or exchange of Fund shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholder. In addition, such loss will be
disallowed for both Federal and North Carolina income tax purposes to the
extent of any exempt-interest dividends received by the shareholder, even,
in the case of North Carolina, where all or a portion of such dividends is
not excluded from North Carolina taxable income. If the Fund pays a
dividend in January which was declared in the previous October, November
or December to
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shareholders of record on a specified date in one of such months, then
such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This alternative minimum tax
applies to interest received on certain "private activity bonds" issued
after August 7, 1986. Private activity bonds are bonds which, although
tax-exempt, are used for purposes other than those generally performed by
governmental units and which benefit non-governmental entities (e.g.,
bonds used for industrial development or housing purposes). Income
received on such bonds is classified as an item of "tax preference,"
which could subject investors in such bonds, including shareholders of the
Fund, to an alternative minimum tax. The Fund will purchase such "private
activity bonds," and the Trust will report to shareholders within 60 days
after the Fund's taxable year-end the portion of the Fund's dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that
corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings" (which
more closely reflect a corporation's economic income). Because an
exempt-interest dividend paid by the Fund will be included in adjusted
current earnings, a corporate shareholder may be required to pay
alternative minimum tax on exempt-interest dividends paid by the Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax
brackets of 36% and 39.6% for individuals and has created a graduated
structure of 26% and 28% for the alternative minimum tax applicable to
individual taxpayers. These rate increases may affect an individual
investor's after-tax return from an investment in the Fund as compared
with such investor's return from taxable investments.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's
basis in the Class D shares acquired will be the same as such
shareholder's basis in the Class B shares converted, and the holding
period of the acquired Class D shares will include the holding period for
the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales
charge paid to the Fund reduces any sales charge such shareholder would
have owed upon purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid
for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
Under certain provisions of the Code, some shareholders may be subject
to a 31% withholding tax on certain ordinary income dividends and on
capital gain dividends and redemption payments ("backup withholding").
Generally, shareholders subject to backup withholding will be those for
whom no certified taxpayer identification number is on file with the Trust
or who, to the Trust's knowledge, have furnished an incorrect number. When
establishing an account, an investor must certify under penalty of perjury
that such number is correct and that such investor is not otherwise
subject to backup withholding.
34
<PAGE> 37
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 North Carolina 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 North Carolina income tax laws. The Code and
the Treasury regulations, as well as the North Carolina income tax laws,
are subject to change by legislative, judicial or administrative action
either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes (other than those
imposed by North Carolina) and with specific questions as to Federal,
foreign, state or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return
and yield and tax equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective
shareholders. Average annual total return, yield and tax equivalent yield
are computed separately for Class A, Class B, Class C and Class D shares
in accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods will
be computed by finding the average annual compounded rates of return
(based on net investment income and any realized and unrealized capital
gains or losses on portfolio investments over such periods) that would
equate the initial amount invested to the redeemable value of such
investment at the end of each period. Average annual total return will be
computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of
the investment at the end of the specified period such as in the case of
Class B and Class C shares and the maximum sales charge in the case of
Class A and Class D shares. Dividends paid by the Fund with respect to all
shares, to the extent any dividends are paid, will be calculated in the
same manner at the same time on the same day and will be in the same
amount, except that account maintenance fees and distribution charges and
any incremental transfer agency costs relating to each class of shares
will be borne exclusively by that class. The Fund will include performance
data for all classes of shares of the Fund in any advertisement or
information including performance data of the Fund.
The Fund also may quote total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return, and (2) the maximum
applicable sales charges will not be included with respect to annual or
annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the
average annual rates of return reflect compounding; aggregate total return
data generally 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
35
<PAGE> 38
or may not take into account the CDSC and therefore may reflect greater
total return since, due to the reduced sales charges or waiver of the
CDSC, a lower amount of expenses is deducted. See "Purchase of Shares".
The Fund's total return may be expressed either as a percentage or as a
dollar amount in order to illustrate such total return on a hypothetical
$1,000 investment in the Fund at the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing
(a) the net income based on the yield of each security earned during the
period by (b) the average daily number of shares outstanding during the
period that were entitled to receive dividends multiplied by the maximum
offering price per share on the last day of the period. Tax equivalent
yield quotations will be computed by dividing (a) the part of the Fund's
yield that is tax-exempt by (b) one minus a stated tax rate and (c) adding
the result to that part, if any, of the Fund's yield that is not
tax-exempt. The yield for the 30-day period ended July 31, 1994 was 5.25%
for Class A shares and 4.97% for Class B shares and the tax equivalent
yield for the same period (based on a Federal income tax rate of 28%) was
7.29% for Class A shares and 6.90% for Class B shares. The yield without
voluntary reimbursement for the 30-day period would have been 4.92% for
Class A shares and 4.62% for Class B shares with a tax equivalent yield of
6.83% for Class A shares and 6.42% for Class B shares.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The
Fund's total return and yield will vary depending on market conditions,
the securities comprising the Fund's portfolio, the Fund's operating
expenses and the amount of realized and unrealized net capital gain or
losses during the period. The value of an investment in the Fund will
fluctuate and an investor's shares, when redeemed, may be worth more or
less than their original cost.
On occasion, the Fund may compare its performance to performance data
prepared by Lipper Analytical Services, Inc., Morningstar Publications,
Inc. ("Morningstar"), and CDA Investment Technology, Inc. or to data
contained in publications such as Money Magazine, U.S. News & World
Report, Business Week, Forbes Magazine and Fortune Magazine. From time to
time, the Fund may include the Fund's Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales literature. As
with other performance data, performance comparisons should not be
considered representative of the Fund's relative performance for any
future period.
ADDITIONAL INFORMATION
Determination of Net Asset Value
The net asset value of the shares of all classes of the Fund is
determined by the Manager once daily as of 4:15 P.M., New York time, on
each day during which the New York Stock Exchange is open for trading. The
net asset value per share is computed by dividing the sum of the value of
the securities held by the Fund plus any cash or other assets minus all
liabilities by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the
Manager and the Distributor, are accrued daily.
The per share net asset value of the Class A shares generally will be
higher than the per share net asset value of shares of the other classes,
reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to
Class B and Class C shares and the daily expense accruals of the account
maintenance fees applicable with respect to Class D shares; moreover, the
per share net asset value of Class D shares generally will be higher than
the per share net asset value of Class B and Class C shares, reflecting the
daily expense accruals of the distribution and higher transfer agency fees
applicable with
36
<PAGE> 39
respect to Class B and Class C shares. It is expected, however, that the per
share net asset value of the classes will tend to converge immediately after
the payment of dividends or distributions which will differ by approximately
the amount of the expense accrual differentials between the classes.
Organization of the Trust
The Trust is an unincorporated business trust organized on August 2,
1985 under the laws of Massachusetts. On October 1, 1987, the Trust
changed its name from "Merrill Lynch Multi-State Tax-Exempt Series
Trust" to "Merrill Lynch Multi-State Municipal Bond Series Trust", and
on December 22, 1987, the Trust changed its name to "Merrill Lynch
Multi-State Municipal Series Trust". The Trust is an open-end management
investment company comprised of separate series ("Series"), each of
which is a separate portfolio offering shares to selected groups of
purchasers. Each of the Series is to be managed independently in order to
provide to shareholders who are residents of the state to which such
Series relates as high a level of income exempt from Federal, state and
local income taxes as is consistent with prudent investment management.
The Trustees are authorized to create an unlimited number of Series and,
with respect to each Series, to issue an unlimited number of full and
fractional shares of beneficial interest of $.10 par value of different
classes. Shareholder approval is not required for the authorization of
additional Series or classes of a Series of the Trust. At the date of this
Prospectus, the shares of the Fund are divided into Class A, Class B,
Class C and Class D shares. Class A, Class B, Class C and Class D shares
represent an interest in the same assets of the Fund and are identical in
all respects except that Class B, Class C and Class D shares bear certain
expenses related to the account maintenance associated with such shares,
and Class B and Class C shares bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to account maintenance and distribution
expenditures as applicable. See "Purchase of Shares". The Trust has
received an order from the Commission permitting the issuance and sale of
multiple classes of beneficial interest. The Trustees of the Trust may
classify and reclassify the shares of the Trust into additional classes of
beneficial interest 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, objective or restrictions of a Series. Except as set forth
above, the Trustees shall continue to hold office and appoint successor
Trustees. Each issued and outstanding share is entitled to participate
equally in dividends and distributions declared by the respective Series
and in net assets of such Series upon liquidation or dissolution remaining
after satisfaction of outstanding liabilities except that, as noted above,
the 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.
37
<PAGE> 40
Shareholder Reports
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of
the number of accounts such shareholder has. If a shareholder wishes to
receive separate copies of each report and communication for each of the
shareholder's related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and/or mutual fund account numbers. If you have any questions
regarding this matter, please call your Merrill Lynch financial consultant
or Financial Data Services, Inc. at 800-637-3863.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Trust at the address or
telephone number set forth on the cover page of this Prospectus.
----------
The Declaration of Trust establishing the Trust, dated August 2, 1985,
a copy of which together with all amendments thereto (the
"Declaration"), is on file in the office of the Secretary of the
Commonwealth of Massachusetts, provides that the name "Merrill Lynch
Multi-State Municipal Series Trust" refers to the Trustees under the
Declaration collectively as Trustees, but not as individuals or
personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to
such person's private property for the satisfaction of any obligation or
claim of the Trust, but the "Trust Property" only shall be liable.
38
<PAGE> 41
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND-AUTHORIZATION FORM (PART 1)
1. Share Purchase Application
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares |B) Class D shares
of Merrill Lynch North Carolina Municipal Bond Fund and establish an
Investment Account as described in the Prospectus. In the event that I
am not eligible to purchase Class A shares, I understand that Class D
shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Financial Data Services,
Inc. as an initial investment (minimum $1,000). I understand that this purchase
will be executed at the applicable offering price next to be determined after
this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual
funds that would qualify for the right of accumulation as outlined
in the Statement of Additional Information: (Please list all funds.
Use a separate sheet of paper if necessary.)
(Please Print)
1. ................................... 4. ................................
2. ................................... 5. ................................
3. ................................... 6. ................................
(Please Print)
Name.......................................................................
First Name Initial Last Name
Name of Co-Owner (if any)..................................................
First Name Initial Last Name
Address................................................Date........., 19....
............................................................................
........................................................
(Zip Code)
Occupation........................ Name and Address
of Employer.............................
.............................
.............................
....................................... .............................
Signature of Owner Signature of Co-Owner (if any)
2. Dividend and Capital Gain Distribution Options
Ordinary Income Dividends Long-Term Capital Gains
Select / / Reinvest Select / / Reinvest
One: / / Cash One: / / Cash
If no election is made, dividends and capital gains will be
automatically reinvested at net asset value without a sales charge. If
cash, specify how you would like your distributions paid to you:
/ / Check or / / Direct Deposit to bank account
If direct deposit to bank account is selected, please complete below:
I hereby authorize payment of dividend and capital gain distributions
by direct deposit to my bank account and, if necessary, debit entries
and adjustments for any credit entries made to my account in
accordance with the terms I have selected on the Merrill Lynch North
Carolina Municipal Bond Fund Authorization Form.
Specify type of account (check one) / / checking / / savings
Name on your account.........................................................
Bank Name.................. Bank Number................. Account Number......
Bank Address.................................................................
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Signature of Depositor .......................................................
Signature of Depositor............................ Date.......................
(if joint account, both must sign)
Note: If direct deposit to bank account is selected, your blank, unsigned
check marked "VOID" or a deposit slip from your savings account should
accompany this application.
39
<PAGE> 42
3. Social Security Number or Taxpayer Identification Number
---------------------------------------------------------
---------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that
I am not subject to backup withholding (as discussed in the Prospectus under
"Distributions and Taxes - Taxes") either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am no
longer subject thereto.
Instruction: You must strike out the language in (2) above if you have been
notified that you are subject to backup withholding due to underreporting and
if you have not received a notice from the IRS that backup withholding has been
terminated. The undersigned authorizes the furnishing of this certification to
other Merrill Lynch sponsored mutual funds.
Signature of Owner ............ Signature of Co-Owner (if any)...............
4. Letter of Intention - Class A and D shares only (See terms and conditions
in the Statement of Additional Information)
Dear Sir/Madam: ..............................., 19....
Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares
of Merrill Lynch North Carolina Municipal Bond Fund or any other
investment company with an initial sales charge or deferred sales
charge for which the Merrill Lynch Funds Distributor, Inc. acts as
distributor over the next 13-month period which will equal or exceed:
/ / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price
applicable to the amount checked above, as described in the Merrill
Lynch North Carolina Municipal Bond Fund Prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc.,
my attorney, with full power of substitution, to surrender for redemption any
or all shares of Merrill Lynch North Carolina Municipal Bond Fund held as
security.
By................................. ......................................
Signature of Owner Signature of Co-Owner (If registered
in joint names, both must sign)
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
(1) Name............................. (2) Name.................................
Account Number ...................... Account Number ..........................
5. For Dealer Only We hereby authorize Merrill Lynch Funds
Distributor, Inc. to act as our
Branch Office, Address, Stamp agent in connection with transactions under
this authorization form and agree to notify
the Distributor of any purchases made under a
Letter of Intention or Systematic Withdrawal
Plan. We guarantee the shareholder's
signature.
..............................................
Dealer Name and Address
By:...........................................
Authorized Signature of Dealer
This form, when completed, should be mailed to:
Merrill Lynch North Carolina
Municipal Bond Fund
c/o Financial Data Services, Branch Code F/C No. ................
Inc. F/C Last Name
Transfer Agency Mutual Fund
Operations
P.O. Box 45289
Jacksonville, FL 32232-5289 Dealer's Customer A/C No.
40
<PAGE> 43
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND-AUTHORIZATION FORM (PART 2)
1. Account Registration
Name of Owner .......................
Name of Co-Owner (if any) ........... Social Security Number
or Taxpayer Identification Number
Address ............................. Account Number ........................
..................................... (if existing account)
2. Systematic Withdrawal Plan-Class A and D Shares Only
(See terms and conditions in the Statement of Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch North Carolina
Municipal Bond Fund at cost or current offering price. Withdrawals to be made
either (check one) / / Monthly on the 24th day of each month, or
/ / Quarterly on the 24th day of March, June, September and December.
If the 24th falls on a weekend or holiday, the next succeeding
business day will be utilized.
Begin systematic withdrawal on........... or as soon as possible thereafter.
(month)
Specify how you would like your withdrawal paid to you (check one):
/ / $....... or / /.......% of the current value of / / Class A or / / Class D
shares in the account. Specify withdrawal method: / / check or / /
direct deposit to bank account (check one and complete part (a) or (b)
below):
Draw checks payable (check one)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of...........................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print)......................................................
Address .......................................................................
...............................................................................
Signature of Owner.................................. Date......................
Signature of Co-Owner (if any).................................................
(b) I hereby authorize payment by direct deposit to my bank account
and, if necessary, debit entries and adjustments for any credit
entries made to my account. I agree that this authorization will
remain in effect until I provide written notification to Financial
Data Services, Inc. amending or terminating this service.
Specify type of account (check one) / / checking / / savings
Name on your account ..........................................................
Bank Name .....................................................................
Bank Number............................... Account Number......................
Bank Address...................................................................
...............................................................................
Signature of Depositor............................... Date.....................
Signature of Depositor.........................................................
(If joint account, both must sign)
Note: If direct deposit is elected, your blank, unsigned check marked
"VOID" or a deposit slip from your savings account should accompany
this application.
41
<PAGE> 44
3. Application for Automatic Investment Plan
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D
shares
of Merrill Lynch North Carolina Municipal Bond Fund subject to the terms
set forth below. In the event that I am not eligible to purchase Class A
shares, I understand that Class D shares will be purchased.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account
for investment in Merrill Lynch North Carolina Municipal Bond Fund as
indicated below:
Amount of each ACH debit $.................................................
Account number.............................................................
Please date and invest ACH debits on the 20th of each month beginning
............................................................................
............................................................... (Month)
or as soon thereafter as possible.
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in
preparing or failure to prepare any such debit. If I change banks or desire
to terminate or suspend this program, I agree to notify you promptly in
writing. I hereby authorize you to take any action to correct erroneous ACH
debits of my bank account or purchases of fund shares including liquidating
shares of the Fund and credit my bank account. I further agree that if a
check or debit is not honored upon presentation, Financial Data Services,
Inc. is authorized to discontinue immediately the Automatic Investment Plan
and to liquidate sufficient shares held in my account to offset the purchase
made with the dishonored debit.
............ ........................
Date Signature of Depositor
........................
Signature of Depositor
(If joint account, both
must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To......................................................................Bank
(Investor's Bank)
Bank Address ...............................................................
City................... State................... Zip Code...................
As a convenience to me, I hereby request and authorize you to pay and charge
to my account ACH debits drawn on my account by and payable to Financial
Data Services, Inc. I agree that your rights in respect to each such debit
shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me
in writing. Until you receive such notice, you shall be fully protected in
honoring any such debit. I further agree that if any such debit be
dishonored, whether with or without cause and whether intentionally or
inadvertently, you shall be under no liability.
. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . .
Date Signature of Depositor
. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . .
Bank Account Number Signature of Depositor
(If joint account, both must sign)
Note: If Automatic Investment Plan is elected, your blank, unsigned check
marked "VOID" should accompany this Application.
42
<PAGE> 45
Manager
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Custodian
State Street Bank and Trust Company,
P.O. Box 351
Boston, Massachusetts 02101
Transfer Agent
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Independent Auditors
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE> 46
----------
<TABLE>
<CAPTION>
<S> <C>
NO PERSON HAS BEEN AUTHORIZED LOGO
TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS, OTHER THAN Prospectus
THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS Merrill Lynch
PROSPECTUS, AND, IF GIVEN OR MADE, North Carolina
SUCH OTHER INFORMATION OR Municipal Bond Fund
REPRESENTATIONS MUST NOT BE RELIED Merrill Lynch Multi-State
UPON AS HAVING BEEN AUTHORIZED BY Municipal Series Trust
THE TRUST, THE MANAGER OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY
STATE IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
----------
TABLE OF CONTENTS
Page
----
Fee Table ..................... 2
Merrill Lynch Select Pricing(SM)
System........................ 4
Financial Highlights........... 8
Investment Objective and
Policies...................... 9
Potential Benefits........... 11
Special and Risk Considertions
Relating to North Carolina
Municipal Bonds............. 11 (Paste-up Art)
Description of Municipal
Bonds....................... 12
When-Issued Securities and
Delayed Delivery
Transactions................ 14
Call Rights.................. 14
Financial Futures Transactions
and Options................. 14
Repurchase Agreements.......... 16
Investment Restrictions...... 17
Management of the Trust........ 18
Trustees..................... 18
Management and Advisory
Arrangements................ 18
Transfer Agency Services.... 19
Purchase of Shares............. 20
Initial Sales Charge
Alternatives - Class A and
Class D Shares.............. 21
Deferred Sales Charge
Alternatives - Class B and
Class C Shares.............. 23
Redemption of Shares............ 27
Redemption................... 27
Repurchase................... 28
Reinstatement Privilege -
Class A and Class D Shares.. 28
Shareholder Services............ 29
Automatic Reinvestment of
Dividend and Capital Gains
Distributions............... 30
Systematic Withdrawal Plans. 31
Automatic Investment Plans.. 31
Portfolio Transactions.......... 31
Distributions and Taxes......... 32
Distributions................ 32 October 21, 1994
Taxes......................... 32
Performance Data................ 35 Distributor:
Additional Information.......... 36 Merrill Lynch
Determination of Net Asset Funds Distributor, Inc.
Value......................... 36
Organization of the Trust...... 37 This prospectus should be
Shareholder Reports............ 38 retained for future refernce.
Shareholder Inquiries.......... 38
Authorization Form.............. 39
Code #16400-1094
</TABLE>
<PAGE> 47
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 * PHONE NO. (609) 282-2800
----------
Merrill Lynch North Carolina Municipal Bond Fund (the "Fund") is a
series of Merrill Lynch Multi-State Municipal Series Trust (the "Trust"), an
open-end management investment company organized as a Massachusetts business
trust. The investment objective of the Fund is to provide shareholders with
as high a level of income exempt from Federal and North Carolina income taxes
as is consistent with prudent investment management. The Fund invests
primarily in a portfolio of long-term investment grade obligations the
interest on which is exempt from Federal and North Carolina income taxes in
the opinion of bond counsel to the issuer ("North Carolina Municipal Bonds").
There can be no assurance that the investment objective of the Fund will be
realized.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers
four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select Pricing
System permits an investor to choose the method of purchasing shares that
the investor believes is most beneficial given the amount of the purchase,
the length of time the investor expects to hold the shares and other
relevant circumstances.
----------
The Statement of Additional Information of the Fund is not a
prospectus and should be read in conjunction with the prospectus of the
Fund, dated October 21, 1994 (the "Prospectus"), which has been filed
with the Securities and Exchange Commission and can be obtained, without
charge, by calling or by writing the Fund at the above telephone number or
address. This Statement of Additional Information has been incorporated by
reference into the Prospectus.
----------
FUND ASSET MANAGEMENT-MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR
----------
The date of this Statement of Additional Information is October 21, 1994.
<PAGE> 48
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with
as high a level of income exempt from Federal and North Carolina income
taxes as is consistent with prudent investment management. The Fund seeks
to achieve its objective by investing primarily in a portfolio of
long-term obligations issued by or on behalf of the State of North
Carolina, its political subdivisions, agencies and instrumentalities and
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the Virgin Islands and Guam, which pay interest exempt, in the
opinion of bond counsel to the issuer, from Federal and North Carolina
income taxes. Obligations exempt from Federal income taxes are referred to
herein as "Municipal Bonds" and obligations exempt from both Federal and
North Carolina income taxes are referred to as "North Carolina Municipal
Bonds." Unless otherwise indicated, references to Municipal Bonds shall
be deemed to include North Carolina 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 North Carolina
Municipal Bonds. 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. Reference is made to "Investment Objective
and Policies" in the Prospectus for a discussion of the investment
objective and policies of the Fund.
Municipal Bonds may include general obligation bonds of the state and
its political subdivisions, revenue bonds of utility systems, highways,
bridges, port and airport facilities, colleges, hospitals, housing
facilities, etc., and industrial development bonds or private activity
bonds. The interest on such obligations may bear a fixed rate or be
payable at a variable or floating rate. The Municipal Bonds purchased by
the Fund will be primarily what are commonly referred to as "investment
grade" securities, which are obligations rated at the time of purchase
within the four highest quality ratings as determined by either Moody's
Investors Service, Inc. ("Moody's") (currently Aaa, Aa, A and Baa),
Standard & Poor's Corporation ("Standard & Poor's") (currently AAA, AA,
A and BBB) or Fitch Investors Service, Inc. ("Fitch") (currently AAA,
AA, A and BBB). If unrated, such securities will possess creditworthiness
comparable, in the opinion of the manager of the Fund, Fund Asset
Management, L.P. (the "Manager"), to other obligations in which the Fund
may invest.
The Fund ordinarily does not intend to realize investment income not
exempt from Federal and North Carolina income taxes. However, to the
extent that suitable North Carolina Municipal Bonds are not available for
investment by the Fund, the Fund may purchase Municipal Bonds issued by
other states, their agencies and instrumentalities, the interest income on
which is exempt, in the opinion of bond counsel, from Federal but not
North Carolina taxation. The Fund also may invest in securities not issued
by or on behalf of a state or territory or by an agency or instrumentality
thereof if the Fund nevertheless believes such securities to be exempt
from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in municipal bonds to the extent
permitted by the Investment Company Act of 1940, as amended (the "1940
Act"). 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 North Carolina 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
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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 may actually be higher than those
obtained in the transaction itself; if yields so increase, the value of
the when-issued obligations generally will decrease. The Fund will
maintain a separate account at its custodian bank consisting of cash, cash
equivalents or high-grade, liquid Municipal Bonds or Temporary Investments
(valued on a daily basis) equal at all times to the amount of the
when-issued commitment.
The Fund may invest in Municipal Bonds the return on which is based on
a particular index of value or interest rates. For example, the Fund may
invest in Municipal Bonds that pay interest based on an index of Municipal
Bond interest rates or based on the value of gold or some other commodity.
The principal amount payable upon maturity of certain Municipal Bonds also
may be based on the value of an index. Also, the Fund may invest in
so-called "inverse floating obligations" or "residual interest bonds"
on which the interest rates typically decline as market rates increase and
increase as market rates decline. For example, to the extent the Fund
invests in these types of Municipal Bonds, the Fund's return on such
Municipal Bonds will be subject to risk with respect to the value of the
particular index. Such securities have the effect of providing a degree of
investment leverage, since they may increase or decrease in value in
response to changes, as an illustration, in market interest rates at a
rate which is a multiple (typically two) of the rate of at which
fixed-rate long-term tax exempt securities increase or decrease in
response to such changes. As a result, the market values of such
securities will generally be more volatile than the market values of
fixed-rate tax exempt securities. To seek to limit the volatility of these
securities, the Fund may purchase inverse floating obligations with
shorter term maturities or which contain limitations on the extent to
which the interest rate may vary. The Manager believes that indexed and
inverse floating obligations represent a flexible portfolio management
instrument for the Fund which allows the Manager to vary the degree of
investment leverage relatively efficiently under different market
conditions. Certain investments in such obligations may be illiquid. The
Fund may not invest in such illiquid obligations if such investments,
together with other illiquid investments, would exceed 15% of the Fund's
net assets.
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the
maturity of the related Municipal Bond will expire without value. The
economic effect to holding both the Call Right and the related Municipal
Bond is identical to holding a Municipal Bond as a
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non-callable security. Certain investments in such obligations may be
illiquid. The Fund may not invest in such illiquid obligations if such
investments, together with other illiquid investments, would exceed 15% of
the Fund's net assets.
The Fund may invest up to 20% of its total assets in Municipal Bonds
which are rated below Baa by Moody's or below BBB by Standard & Poor's or
Fitch or which, in the Manager's judgment, possess similar credit
characteristics ("high yield securities"). See Appendix II - "Ratings
of Municipal Bonds" - for additional information regarding ratings of
debt securities. The Manager considers the ratings assigned by Standard &
Poor's, Moody's or Fitch as one of several factors in its independent
credit analysis of issuers.
High yield securities are considered by Standard & Poor's, Moody's and
Fitch to have varying degrees of speculative characteristics.
Consequently, although high yield securities can be expected to provide
higher yields, such securities may be subject to greater market price
fluctuations and risk of loss of principal than lower yielding, higher
rated debt securities. Investments in high yield securities will be made
only when, in the judgment of the Manager, such securities provide
attractive total return potential relative to the risk of such securities,
as compared to higher quality debt securities. The Fund will not invest in
debt securities in the lowest rating categories (those rated CC or lower
by Standard & Poor's or Fitch or Ca or lower by Moody's) unless the
Manager believes that the financial condition of the issuer or the
protection afforded the particular securities is stronger than would
otherwise be indicated by such low ratings. The Fund does not intend to
purchase debt securities that are in default or which the Manager believes
will be in default.
Issuers of high yield securities may be highly leveraged and may not
have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers
generally are greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising
interest rates, issuers of high yield securities may be more likely to
experience financial stress, especially if such issuers or obligors are
highly leveraged. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The
issuer's ability to service its debt obligations also may be adversely
affected by specific issuer developments or the issuer's inability to meet
specific projected business forecasts or the unavailability of additional
financing. The risk of loss due to default by the issuer is significantly
greater for the holders of high yield securities because such securities
may be unsecured and may be subordinated to other creditors of the issuer.
High yield securities frequently have call or redemption features that
would permit an issuer to repurchase the security from the Fund. If a call
were exercised by the issuer during a period of declining interest rates,
the Fund would likely have to replace such called security with a lower
yielding security, thus decreasing the net investment income to the Fund
and dividends to shareholders.
The Fund may have difficulty disposing of certain high yield
securities because there may be a thin trading market for such securities.
Because not all dealers maintain markets in all high yield securities,
there is no established secondary market for many of these securities, and
the Fund anticipates that such securities could be sold only to a limited
number of dealers or institutional investors. To the extent that a
secondary trading market for high yield securities does exist, it
generally is not as liquid as the secondary market for higher rated
securities. Reduced secondary market liquidity may have an adverse impact
on market price and the Fund's ability to dispose of particular issues
when necessary to meet the Fund's liquidity needs or in response to a
specific economic event such as a deterioration in the creditworthiness of
the issuer. Reduced secondary market liquidity for certain securities also
may make it more difficult for the Fund to obtain accurate market
quotations
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<PAGE> 51
for purposes of valuing the Fund's portfolio. Market quotations are
generally available on many high yield securities only from a limited
number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by the Fund will be purchased upon issuance, which may involve
special risks because the securities so acquired are new issues. In such
instances, the Fund may be a substantial purchaser of the issue and
therefore have the opportunity to participate in structuring the terms of
the offering. Although this may enable the Fund to seek to protect itself
against certain of such risks, the considerations discussed herein would
nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield securities are likely
to adversely affect the Fund's net asset value. In addition, the Fund may
incur additional expenses to the extent that it is required to seek
recovery upon a default on a portfolio holding or participate in the
restructuring of the obligation.
DESCRIPTION OF MUNICIPAL BONDS AND TEMPORARY INVESTMENTS
Set forth below is a description of the Municipal Bonds and Temporary
Investments in which the Fund may invest. 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 outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development bonds or
private activity bonds are issued by or on behalf of public authorities to
finance or refinance various privately owned or operated facilities,
including pollution control facilities. Such obligations are included
within the term Municipal Bonds if the interest paid thereon is, in the
opinion of bond counsel, excluded from gross income for Federal income tax
purposes and, in the case of North Carolina Municipal Bonds, exempt from
taxable net income of individuals, corporations, estates and trusts for
North Carolina income tax purposes. Other types of industrial development
bonds or private activity bonds, the proceeds of which are used for the
construction, equipment or improvement of privately operated industrial
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" and "revenue" 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. Revenue bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special or limited tax or other
specific revenue source such as payments from the user of the facility
being financed. Industrial development bonds 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 industrial development bonds depends solely on the
ability of the user of the facility financed by the bonds to meet its
financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment, unless a letter of
credit,
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<PAGE> 52
bond insurance or other security is furnished. The Fund also may invest in
"moral obligation" bonds, which are normally issued by special purpose
public authorities. If an issuer of moral obligation bonds is unable to
meet its obligations, the repayment of 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. However, certain lease obligations contain
"non-appropriation" clauses, which provide that the issuer has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might
prove difficult. These securities represent a relatively new type of
financing that has not yet developed the depth of marketability associated
with more conventional securities. Certain investments in lease
obligations may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's net assets. The Fund may,
however, invest without regard to such limitation in lease obligations
which the Manager, pursuant to the guidelines which have been adopted by
the Board of Trustees and subject to the supervision of the Board of
Trustees, determines to be liquid. The Manager will deem lease obligations
liquid if they are publicly offered and have received an investment grade
rating of Baa or better by Moody's, or BBB or better by Standard & Poor's,
or Fitch. Unrated lease obligations, or those rated below investment
grade, will be considered liquid if the obligations come to the market
through an underwritten public offering and at least two dealers are
willing to give competitive bids. In reference to the latter, the Manager
must, among other things, also review the creditworthiness of the
municipality obligated to make payment under the lease obligation and make
certain specified determinations based on such factors as the existence of
a rating or credit enhancement (such as insurance), the frequency of
trades or quotes for the obligations and the willingness of dealers to
make a market in the obligations.
Yields on Municipal Bonds are dependent on a variety of factors,
including the general condition of the money market and of the municipal
bond market, the size of a particular offering, the financial condition of
the issuer, the general conditions of the Municipal Bond market, the
maturity of the obligation and the rating of the issue. The ability of the
Fund to achieve its investment objective is also dependent on the
continuing ability of the issuers of the bonds in which the Fund invests
to meet their obligations for the payment of interest and principal when
due. There are variations in the risks involved in holding Municipal
Bonds, both within a particular classification and between
classifications, depending on numerous factors. Furthermore, the rights of
owners of Municipal Bonds and the obligations of the issuer of such
Municipal Bonds may be subject to applicable bankruptcy, insolvency and
similar laws and court decisions affecting the rights of creditors
generally.
Description of Temporary Investments
The Fund may invest in short-term tax-free and taxable securities
subject to the limitations set forth under "Investment Objective and
Policies". The tax-exempt money market securities may include municipal
notes, municipal commercial paper, municipal bonds with a remaining
maturity of less than one year, variable rate
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demand notes and participations therein. Municipal notes include tax
anticipation notes, bond anticipation notes and grant anticipation notes.
Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales, government grants or revenue receipts. Municipal
commercial paper refers to short-term unsecured promissory notes generally
issued to finance short-term credit needs. The taxable money market
securities in which the Fund may invest as Temporary Investments consist
of U.S. Government securities, U.S. Government agency securities, domestic
bank or savings institution certificates of deposit and bankers'
acceptances, short-term corporate debt securities such as commercial
paper, and repurchase agreements. These Temporary Investments must have a
stated maturity not in excess of one year from the date of purchase.
Variable rate demand obligations ("VRDOs") are tax-exempt
obligations which contain a floating or variable interest rate adjustment
formula and an unconditional right of demand on the part of the holder
thereof to receive payment of the unpaid principal balance plus accrued
interest upon a short notice period not to exceed seven days. There is,
however, the possibility that because of default or insolvency the demand
feature of VRDOs and Participating VRDOs, described below, may not be
honored. The interest rates are adjustable at intervals (ranging from
daily to up to one year) to some prevailing market rate for similar
investments, such adjustment formula being calculated to maintain the
market value of the VRDO at approximately the par value of the VRDOs on
the adjustment date. The adjustments typically are based upon the prime
rate of a bank or some other appropriate interest rate adjustment index.
The Fund may invest in all types of tax-exempt instruments currently
outstanding or to be issued in the future which satisfy the short-term
maturity and quality standards of the Fund.
The Fund also may invest in VRDOs in the form of participation
interests ("Participating VRDOs") in variable rate tax-exempt
obligations held by a financial institution, typically a commercial bank.
Participating VRDOs provide the Fund with a specified undivided interest
(up to 100%) of the underlying obligation and the right to demand payment
of the unpaid principal balance plus accrued interest on the Participating
VRDOs from the financial institution upon a specified number of days'
notice, not to exceed seven days. In addition, a Participating VRDO is
backed by an irrevocable letter of credit or guaranty of the financial
institution. The Fund would have an undivided interest in the underlying
obligation and thus participate on the same basis as the financial
institution in such obligation except that the financial institution
typically retains fees out of the interest paid on the obligation for
servicing the obligation, providing the letter of credit and issuing the
repurchase commitment. The Fund has been advised by its counsel that the
Fund should be entitled to treat the income received on Participating
VRDOs as interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment
of the unpaid principal balance plus accrued interest on a notice period
exceeding seven days may be deemed to be illiquid securities. A VRDO with
a demand notice period exceeding seven days will therefore be subject to
the Fund's restriction on illiquid investments unless, in the judgment of
the Trustees, such VRDO is liquid. The 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
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<PAGE> 54
through MIG-4/VMIG-4 by Moody's or F-1 through F-3 by Fitch. Temporary
Investments, if not rated, must be of comparable quality to securities
rated in the above rating categories in the opinion of the Manager. The
Fund may not invest in any security issued by a commercial bank or a
savings institution unless the bank or institution is organized and
operating in the United States, has total assets of at least one billion
dollars and is a member of the Federal Deposit Insurance Corporation
("FDIC"), except that up to 10% of total assets may be invested in
certificates of deposit of small institutions if such certificates are
fully insured by the FDIC.
Repurchase Agreements
The Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or a primary dealer in U.S. Government securities or
an affiliate thereof. Under such agreements, the seller agrees, upon entering
into the contract, to repurchase the security at a mutually agreed upon time
and price, thereby determining the yield during the term of the agreement.
This results in a fixed rate of return insulated from market fluctuations
during such period. In the case of repurchase agreements, the prices at which
the trades are conducted do not reflect accrued interest on the underlying
obligations. Such agreements usually cover short periods, such as under one
week. Repurchase agreements may be construed to be collateralized loans by
the purchaser to the seller secured by the securities transferred to the
purchaser. In the case of a repurchase agreement, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the
repurchase agreement. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a
repurchase agreememnt, instead of the contractual fixed rate of return, the
rate of return to the Fund will depend on intervening fluctuations of the
market value of such security and the accrued interest on the security. In
such event, the Fund would have rights against the seller for breach of
contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform. The Fund may not invest more
than 15% of its net assets in repurchase agreements maturing in more than
seven days.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold".
Therefore, amounts earned under such agreements will not be considered
tax-exempt interest. However, it is likely that income from such
arrangements also will not be considered tax-exempt interest.
Financial Futures Transactions and Options
Reference is made to the discussion concerning futures transactions
under "Investment Objective and Policies" in the Prospectus. Set forth
below is additional information concerning these transactions.
As described in the Prospectus, the Fund may purchase and sell
exchange traded financial futures contracts ("financial futures
contracts") to hedge its portfolio of Municipal Bonds against declines in
the value of such securities and to hedge against increases in the cost of
securities the Fund intends to purchase. However, any transactions
involving financial futures or options (or puts and calls associated
therewith) will be in accordance with the Fund's investment policies and
limitations. See "Investment Objective and Policies - Investment
Restrictions" in the Prospectus. To hedge its portfolio, the Fund may
take an investment position in a futures
8
<PAGE> 55
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 is also responsible for handling daily
accounting of deposits or withdrawals of margin.
As described in the Prospectus, the Fund may purchase and sell
financial futures contracts on U.S. Government securities as a hedge
against adverse changes in interest rates as described below. With respect
to U.S. Government securities, currently there are financial futures
contracts based on long-term U.S. Treasury bonds, Treasury notes,
Government National Mortgage Association ("GNMA") Certificates and
three-month U.S. Treasury bills. The Fund may purchase and write call and
put options on futures contracts on U.S. Government securities in
connection with its hedging strategies.
Subject to policies adopted by the Trustees, the Fund also may engage
in other futures contracts transactions such as futures contracts on other
municipal bond indices which may become available if the Manager and
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<PAGE> 56
the Trustees should determine that there is normally a sufficient
correlation between the prices of such futures contracts and the Municipal
Bonds in which the Fund invests to make such hedging appropriate.
Futures Strategies. The Fund may sell a financial futures contract
(i.e., assume a short position) in anticipation of a decline in the value
of its investments in Municipal Bonds resulting from an increase in
interest rates or otherwise. The risk of decline could be reduced without
employing futures as a hedge by selling such Municipal Bonds and either
reinvesting the proceeds in securities with shorter maturities or by
holding assets in cash. This strategy, however, entails increased
transaction costs in the form of dealer spreads and typically would reduce
the average yield of the Fund's portfolio securities as a result of the
shortening of maturities. The sale of futures contracts provides an
alternative means of hedging against declines in the value of its
investments in Municipal Bonds. As such values decline, the value of the
Fund's positions in the futures contracts will tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Fund's Municipal Bond investments which are being hedged. While the Fund
will incur commission expenses in selling and closing out futures
positions, commissions on futures transactions are lower than transaction
costs incurred in the purchase and sale of Municipal Bonds. In addition,
the ability of the Fund to trade in the standardized contracts available
in the futures markets may offer a more effective defensive position than
a program to reduce the average maturity of the portfolio securities due
to the unique and varied credit and technical characteristics of the
municipal debt instruments available to the Fund. Employing futures as a
hedge also may permit the Fund to assume a defensive posture without
reducing the yield on its investments beyond any amounts required to
engage in futures trading.
When the Fund intends to purchase Municipal Bonds, the Fund may
purchase futures contracts as a hedge against any increase in the cost of
such North Carolina Municipal Bonds or 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.
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The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the securities which are
deliverable upon exercise of the futures contract. If the futures price at
expiration is higher than the exercise price, the Fund will retain the
full amount of the option premium which provides a partial hedge against
any increase in the price of Municipal Bonds which the Fund intends to
purchase.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option will be included in initial margin. The writing of an option on a
futures contract involves risks similar to those relating to futures
contracts.
----------
The Trust has received an order from the Securities and Exchange
Commission (the "Commission") exempting it from the provisions of
Section 17(f) and Section 18(f) of the 1940 Act in connection with its
strategy of investing in futures contracts. Section 17(f) relates to the
custody of securities and other assets of an investment company and may be
deemed to prohibit certain arrangements between the Trust and commodities
brokers with respect to initial and variation margin. Section 18(f) of the
1940 Act prohibits an open-end investment company such as the Trust from
issuing a "senior security" other than a borrowing from a bank. The
staff of the Commission has in the past indicated that a futures contract
may be a "senior security" under the 1940 Act.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and
sell futures contracts and options thereon (i) for bona fide hedging
purposes, and (ii) for non-hedging purposes, if the aggregate initial
margin and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Fund's
portfolio assets after taking into account unrealized profits and
unrealized losses on any such contracts and options. (However, the Fund
intends to engage in options and futures transactions only for hedging
purposes). Margin deposits may consist of cash or securities acceptable to
the broker and the relevant contract market.
When the Fund purchases futures contracts or a call option with
respect thereto or writes a put option on a futures contract, an amount of
cash, cash equivalents or short-term, high-grade, fixed income securities
will be deposited in a segregated account with the Fund's custodian so
that the amount so segregated, plus the amount of initial and variation
margin held in the account of its broker, equals the market value of the
futures contract, thereby ensuring that the use of such futures is
unleveraged.
Risk Factors in Futures Transactions and Options. Investment in
futures contracts involves the risk of imperfect correlation between
movements in the price of the futures contract and the price of the
security being hedged. The hedge will not be fully effective when there is
imperfect correlation between the movements in the prices of two financial
instruments. For example, if the price of the futures contract moves more
than the price of the hedged security, the Fund will experience either a
loss or gain on the futures contract which is not completely offset by
movements in the price of the hedged securities. To compensate for
imperfect correlations, the Fund may purchase or sell futures contracts in
a greater dollar amount than the hedged securities if the volatility of
the hedged securities is historically greater than the volatility of the
futures contracts. Conversely, the Fund may purchase or sell fewer futures
contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts.
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The particular municipal bonds comprising the index underlying the
Municipal Bond Index financial futures contracts may vary from the 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 fully
reflected in the value of the option purchased.
Municipal Bond Index futures contracts have only recently been
approved for trading and therefore have little trading history. It is
possible that trading in such futures contracts will be less liquid than
that in other futures contracts. The trading of futures contracts also is
subject to certain market risks, such as inadequate trading activity,
which could at times make it difficult or impossible to liquidate existing
positions.
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INVESTMENT RESTRICTIONS
Current Investment Restrictions. In addition to the investment
restrictions set forth in the Prospectus, the Trust has adopted a number
of restrictions and policies relating to the investment of its assets and
its activities which are fundamental policies and may not be changed
without the approval of the holders of a majority of the Fund's
outstanding voting securities (which for this purpose and under the 1940
Act means the lesser of (i) 67% of the Fund's shares present at a meeting
at which more than 50% of the outstanding shares of the Fund are
represented or (ii) more than 50% of the Fund's outstanding shares). The
Fund may not (1) purchase any securities other than securities referred to
under "Investment Objective and Policies" herein and in the Prospectus;
(2) invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in any particular
industry (other than U.S. Government securities or Government agency
securities, Municipal Bonds or Non-Municipal Tax-Exempt Securities); (3)
invest more than 5% of its total assets (taken at market value at the time
of each investment) in industrial revenue bonds where the entity supplying
the revenues from which the issuer is to be paid, and the guarantor of the
obligation, including predecessors, each have a record of less than three
years of continuous business operation; (4) make investments for the
purpose of exercising control or management; (5) purchase securities of
other investment companies, except in connection with a merger,
consolidation, acquisition or reorganization, and provided further that
the Fund may purchase securities of closed-end investment companies if
immediately thereafter not more than (i) 3% of the total outstanding
voting stock of such company is owned by the Fund, (ii) 5% of the Fund's
total assets, taken at market value, would be invested in any one such
company, or (iii) 10% of the Fund's total assets, taken at market value,
would be invested in such securities; (6) purchase or sell real estate
(provided that such restriction shall not apply to securities secured by
real estate or interests therein or issued by companies which invest in
real estate or interests therein), commodities or commodity contracts
(except that the Fund may purchase and sell financial futures contracts),
interests in oil, gas or other mineral exploration or development
programs; (7) purchase any securities on margin, except for use of
short-term credit necessary for clearance of purchases and sales of
portfolio securities (the deposit or payment by the Fund of initial or
variation margin in connection with financial futures contracts is not
considered the purchase of a security on margin); (8) make short sales of
securities or maintain a short position or invest in put, call, straddle
or spread options (this restriction does not apply to options on financial
futures contracts); (9) make loans to other persons, provided that the
Fund may purchase a portion of an issue of tax-exempt securities (the
acquisition of a portion of an issue of tax-exempt securities or bonds,
debentures or other debt securities which are not publicly distributed is
considered to be the making of a loan under the 1940 Act) and provided
further that investments in repurchase agreements and purchase and sale
contracts shall not be deemed to be the making of a loan; (10) borrow
amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes (Usually only
"leveraged" investment companies may borrow in excess of 5% of their
assets; however, the Fund will not borrow to increase income but only to
meet redemption requests which might otherwise require untimely
disposition of portfolio securities. The Fund will not purchase securities
while borrowings are outstanding. Interest paid on such borrowings will
reduce net income.); (11) mortgage, pledge, hypothecate or in any manner
transfer as security for indebtedness any securities owned or held by the
Fund except as may be necessary in connection with borrowings mentioned in
(10) above, and then such mortgaging, pledging or hypothecating may not
exceed 10% of its total assets, taken at market value, or except as may be
necessary in connection with transactions in financial futures contracts;
(12) invest in securities with legal or contractual restrictions on resale
or for which no readily available market exists, or in individually
negotiated loans that constitute illiquid investments and illiquid lease
obligations, or in repurchase agreements or purchase and sale contracts
maturing in more than seven
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<PAGE> 60
days, if, regarding all such securities, more than 15% of its net assets
(taken at market value) would be invested in such securities; and (13) act
as an underwriter of securities, except to the extent that the Fund may
technically be deemed an underwriter when engaged in the activities
described in (12) above or insofar as the Fund may be deemed an
underwriter under the Securities Act of 1933, as amended, in selling
portfolio securities.
In addition, to comply with tax requirements for qualification as a
"regulated investment company", the Fund's investments will be limited
in a manner such that at the close of each quarter of each fiscal year (a)
no more than 25% of the Fund's total assets are invested in the securities
of a single issuer, and (b) with regard to at least 50% of the Fund's
total assets, no more than 5% of its total assets are invested in the
securities of a single issuer. (For purposes of this restriction, the Fund
will regard each state and each political subdivision, agency or
instrumentality of such state and each multi-state agency of which such
state is a member and each public authority which issues securities on
behalf of a private entity as a separate issuer, except that if the
security is backed only by the assets and revenues of a non-government
entity, then the entity with the ultimate responsibility for the payment
of interest and principal may be regarded as the sole issuer.) These
tax-related limitations may be changed by the Trustees of the Trust to the
extent necessary to comply with changes to the Federal tax requirements.
Proposed Uniform Investment Restrictions. As discussed in the
Prospectus under "Investment Objective and Policies-Investment
Restrictions", the Board of Trustees of the Trust has approved the
replacement of the Fund's existing investment restrictions with the
fundamental and non-fundamental investment restrictions set forth below.
These uniform investment restrictions have been proposed for adoption by
all of the non-money market mutual funds advised by the Manager or its
affiliate, Merrill Lynch Asset Management, L.P. ("MLAM"). The investment
objective and policies of the Fund will be unaffected by the adoption of
the proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve
the proposed revised investment restrictions. If such shareholder approval
is obtained, the Fund's current investment restrictions will be replaced
by the proposed restrictions, and the Fund's Prospectus and Statement of
Additional Information will be supplemented to reflect such change.
Under the proposed fundamental investment restrictions, the Fund may
not:
1. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that to the extent permitted
by applicable law, the Fund may invest in securities directly or
indirectly secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
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6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the 1940 Act) in amounts up to 331/3% of its total assets
(including the amount borrowed), (ii) the Fund may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) the Fund
may obtain 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. Nothwithstanding fundamental
investment restriction (6) above, the Fund currently does not intend to
borrow amounts in excess of 331/3% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary
or emergency purposes such as the redemption of Fund shares. In addition,
the Fund will not purchase securities while borrowings are outstanding.
Under the proposed non-fundamental investment restrictions, the Fund may
not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Trustees of the Fund
has otherwise determined to be liquid pursuant to applicable law.
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange or American Stock Exchange or a major foreign
exchange. For purposes of this restriction, warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Investment Adviser, the directors of such general partner
or the officers and directors of any subsidiary thereof each owning
beneficially more than one-half of one percent of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
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g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
(i) Notwithstanding non-fundamental investment restriction (6) above,
borrow amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes. In addition, the Fund
will not purchase securities while borrowings are outstanding.
----------
Because of the affiliation of Merrill Lynch with the Fund, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch
except pursuant to a permissive order or otherwise in compliance with the
provisions of the Investment Company Act and the rules and regulations
thereunder. Included among such restricted transactions are purchases from
or sales to Merrill Lynch of securities in transactions in which it acts
as principal and purchases of securities from underwriting syndicates of
which Merrill Lynch is a member.
MANAGEMENT OF THE TRUST
Trustees and Officers
The Trustees and executive officers of the Trust and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each Trustee and executive officer is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel - President and Trustee(1)(2) - President and Chief
Investment Officer of the Manager (which term as used herein includes the
Manager's corporate predecessors) since 1977; President of MLAM (which
term as used herein includes MLAM's corporate predecessors) since 1977 and
Chief Investment Officer thereof since 1976; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive
Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990;
Executive Vice President of Merrill Lynch since 1990 and a Senior Vice
President thereof from 1985 to 1990; Director of Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor").
Kenneth S. Axelson - Trustee(2) - 75 Jameson Point Road, Rockland, Maine
04841. Executive Vice President and Director, J.C. Penney Company, Inc.
until 1982; Director, UNUM Corporation, Protection Mutual Insurance
Company, Zurn Industries, Inc. and formerly of Central Maine Power Company
("until 1992") and Key Trust Company of Maine (until 1992) and Grumman
Corporation (until 1994); Trustee, The Chicago Dock and Canal Trust.
Herbert I. London - Trustee(2) - New York University-Gallatin Division,
113-115 University Place, New York, New York 10003; John M. Olin Professor
of Humanities New York University, since 1993, and Professor thereof since
1973; Dean, Gallatin Division of New York University from 1978 to 1993 and
Director from 1975 to 1976; Distinguished Fellow, Herman Kahn Chair,
Hudson Institute from 1984 to 1985; Trustee, Hudson Institute, since 1980;
Director, Damon Corporation since 1991; Overseer, Center for Naval
Analyses.
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<PAGE> 63
Robert R. Martin - Trustee(2) - 513 Grand Hill, St. Paul, Minnesota
55102. Chairman, WTC Industries, Inc., since 1994; Chairman and Chief
Executive Officer, Kinnard Investments, Inc. from 1990 to 1993; Executive
Vice President, Dain Bosworth from 1974 to 1989; Director, Carnegie
Capital Management from 1977 to 1985 and Chairman thereof in 1979;
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Trustee, Northland College since
1992.
Joseph L. May - Trustee(2) - 424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May
and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to
1983; Vice President, Wayne-Gossard Corporation from 1972 to 1983;
Chairman, The May Corporation (personal holding company) from 1972 to
1983; Director, Signal Apparel Co. from 1972 to 1989.
Andre F. Perold - Trustee(2) - Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School and Associate
Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Limited since 1991 and Tenekron Software Systems since
1994.
Terry K. Glenn - Executive Vice President(1)(2) - Executive Vice
President of the Manager and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of MLFD since 1986
and Director thereof since 1991.
Vincent R. Giordano - Vice President and Portfolio Manager(1)(2) -
Portfolio Manager of the Manager and MLAM since 1977 and Senior Vice
President of the Manager and MLAM since 1984; Vice President of MLAM from
1980 to 1984; Senior Vice President of Princeton Services since 1993.
Kenneth A. Jacob - Vice President and Portfolio Manager(1)(2) - Vice
President of the Manager and MLAM since 1984.
Donald C. Burke - Vice President(1)(2) - Vice President and Director of
Taxation of MLAM since 1990; Employee of Deloitte & Touche LLP from 1982
to 1990.
Gerald M. Richard - Treasurer(1)(2) - Senior Vice President and Treasurer
of the Manager and MLAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Treasurer of MLFD since 1984 and Vice
President since 1981.
Jerry Weiss - Secretary(1)(2) - Vice President of MLAM since 1990;
Attorney in private practice from 1982 to 1990.
----------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At August 31, 1994, the Trustees and officers of the Trust as a group
(12 persons) owned an aggregate of less than 1/4 of 1% of the outstanding
shares of Common Stock of ML & Co. and owned an aggregate of less than 1%
of the outstanding shares of the Fund.
The Trust pays each Trustee not affiliated with the Manager a fee of
$10,000 per year plus $1,000 per meeting attended, together with such
Trustee's actual out-of-pocket expenses relating to attendance at
meetings. The Trust also pays members of its Audit Committee, which
consists of all the non-affiliated Trustees a fee of $2,000 per year plus
$500 per meeting attended. Fees and expenses paid to the unaffiliated
Trustees aggregated $2,496 for the year ended July 31, 1994.
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<PAGE> 64
Management and Advisory Arrangements
Reference is made to "Management of the Trust - Management and
Advisory Arrangements" in the Prospectus for certain information
concerning the management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, the Fund
as well as other funds or investment advisory clients of the Manager or
its affiliates. Because of different objectives or other factors, a
particular security may be bought for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Fund or other funds for which they act as manager or for their
advisory clients 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
year ended July 31, 1994, the total advisory fees payable by the Fund to
the Manager aggregated $323,712, of which $264,567 was voluntarily waived.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space
for officers and employees of the Trust connected with investment and
economic research, trading and investment management of the Trust, as well
as the fees of all Trustees of the Trust who are affiliated persons of the
Manager of its subsidiaries. The Fund pays all other expenses incurred in
its operation and, if other Series shall be added ("Series"), a portion
of the Trust's general administrative expenses will be allocated on the
basis of the asset size of the respective Series. Expenses that will be
borne directly by the Series include, among other things, redemption
expenses, expenses of portfolio transactions, expenses of registering the
shares under Federal and state securities laws, pricing costs (including
the daily calculation of net asset value), expenses of printing
shareholder reports, prospectuses and statements of additional information
(except to the extent paid by the Distributor as described below), fees
for legal and auditing services, Commission fees, interest, certain taxes
and other expenses attributable to a particular Series. Expenses which
will be allocated on the basis of asset size of the respective Series
include fees and expenses of unaffiliated Trustees, state franchise taxes,
costs of printing proxies and other expenses related to shareholder
meetings and other expenses properly payable by the Trust. The
organizational expenses of the Trust were paid by the Trust, and if
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 year ended July
31, 1994, the Fund reimbursed the Manager $36,512 for accounting services.
As required by the Fund's distribution agreements, the Distributor will
pay the promotional expenses of the Fund incurred in connection with the
offering of shares of the Fund. Certain expenses in connection with the
account maintenance and distribution of Class B shares
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<PAGE> 65
will be financed by the Fund pursuant to the Distribution Plan in
compliance with Rule 12b-1 under the 1940 Act. See "Purchase of Shares -
Deferred Sales Charge Alternative - Class B Shares - Distribution Plan".
The Manager is a limited partnership, the partners of which are ML &
Co., Fund Asset Management, Inc. and Princeton Services Inc.
Duration and Termination. Unless earlier terminated as described
herein, the Management Agreement will remain in effect from year to year
if approved annually (a) by the Trustees of the Trust or by a majority of
the outstanding shares of the Fund and (b) by a majority of the Trustees
who are not parties to such contract or interested persons (as defined in
the 1940 Act) of any such party. Such contracts are not assignable and may
be terminated without penalty on 60 days' written notice at the option of
either party thereto or by vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for
certain information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing System: shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives, and shares of Class B and
Class C are sold to investors choosing the deferred sales charge
alternatives. Each Class A, Class B, Class C and Class D share of the Fund
represents identical interests in the investment portfolio of the Fund and
has the same rights, except that Class B, Class C and Class D shares bear
the expenses of the ongoing account maintenance fees, and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred
sales charge arrangements. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid. Each class has different exchange
privileges. See "Shareholder Services-Exchange Privilege".
The Merrill Lynch Select Pricing System is used by more than 50 mutual
funds advised by MLAM or its affiliate, the Manager. Funds advised by MLAM
or the Manager are referred to herein as "MLAM-advised mutual funds".
The Fund has entered into four separate distribution agreements with
the Distributor in connection with the continuous offering of each class
of shares of the Fund (the "Distribution Agreements"). The Distribution
Agreements obligate the Distributor to pay certain expenses in connection
with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports
have been prepared, set in type and mailed to shareholders, the
Distributor pays for the printing and distribution of copies thereof used
in connection with the offering to dealers and prospective investors. The
Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same
renewal requirements and termination provisions as the Management
Agreement described above.
Initial Sales Charge Alternatives-Class A and Class D Shares
The Fund commenced the public offering of its Class A shares on
September 25, 1992. The gross sales charges for the sale of Class A shares
for the period September 25, 1992, the Fund's commencement of operations,
to July 31, 1993, the Fund's fiscal year end, were $189,726, of which the
Distributor received $9,954 and Merrill Lynch received $179,772. The gross
sales charges for the sale of Class A shares for the year ended July 31,
1994 were $56,194 of which the Distributor received $6,609 and Merrill
Lynch received $49,585.
19
<PAGE> 66
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and
Class D shares of the Fund, refers to a single purchase by an individual,
or to concurrent purchases, which in the aggregate are at least equal to
the prescribed amounts, by an individual, his spouse and their children
under the age of 21 years purchasing shares for his or their own account
and to single purchases by a trustee or other fiduciary purchasing shares
for a single trust estate or single fiduciary account although more than
one beneficiary is involved. The term "purchase" also includes purchases
by any "company", as that term is defined in the 1940 Act, but does not
include purchases by any such company which has not been in existence for
at least six months or which has no purpose other than the purchase of
shares of the Fund or shares of other registered investment companies at a
discount; provided, however, that it shall not include purchases by any
group of individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or
clients of an investment adviser.
Closed-End Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A shares") are offered at net
asset value to shareholders of certain closed-end funds advised by the
Manager or MLAM who purchased such closed-end fund shares prior to October
21, 1994 and wish to reinvest the net proceeds of a sale of their
closed-end fund shares in Eligible Class A shares, if the conditions set
forth below are satisfied. Alternatively, closed-end fund shareholders who
purchased such shares on or after October 21, 1994 and wish to reinvest
the net proceeds from a sale of their closed-end fund shares are offered
Class A shares (if eligible to purchase Class A shares) or Class D shares
of the Fund and other MLAM-advised mutual funds ("Eligible Class D
Shares"), if the following conditions are met. First, the sale of
closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or
Class D shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing
dividends from shares acquired in such offering. Third, the closed-end
fund shares must have been continuously maintained in a Merrill Lynch
securities account. Fourth, there must be a minimum purchase of $250 to be
eligible for the investment option. Class A shares of the Fund are offered
at net asset value to shareholders of Merrill Lynch Senior Floating Rate
Fund, Inc. ("Senior Floating Rate Fund") who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock of Senior
Floating Rate Fund in shares of the Fund. In order to exercise this
investment option, Senior Floating Rate Fund shareholders must sell their
Senior Floating Rate Fund shares to the Senior Floating Rate Fund in
connection with a tender offer conducted by the Senior Floating Rate Fund
and reinvest the proceeds immediately in the Fund. This investment option
is available only with respect to the proceeds of Senior Floating Rate
Fund shares as to which no Early Withdrawal Charge (as defined in the
Senior Floating Rate Fund prospectus) is applicable. Purchase orders from
Senior Floating Rate Fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related Senior Floating
Rate Fund tender offer terminates and will be effected at the net asset
value of the Fund at such day.
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 any other
MLAM-advised mutual fund. 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
20
<PAGE> 67
purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a
nominee or custodian under pension, profit-sharing or other employee
benefit plans may not be combined with other shares to qualify for the
right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund
or any other MLAM-advised mutual funds made within a 13-month period
starting with the first purchase pursuant to a Letter of Intention in the
form provided in the Prospectus. The Letter of Intention is available only
to investors whose accounts are maintained at the Fund's transfer agent.
The Letter of Intention is not available to employee benefit plans for
which Merrill Lynch provides plan participant record-keeping services. The
Letter of Intention is not a binding obligation to purchase any amount of
Class A or Class D shares; however, its execution will result in the
purchaser paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to a Letter of Intention
may be included under a subsequent Letter of Intention executed within 90
days of such purchase if the Distributor is informed in writing of this
intent within such 90-day period. The value of Class A and Class D shares
of the Fund and of other MLAM-advised mutual funds presently held, at cost
or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
the completion of such Letter, but the reduced sales charge applicable to
the amount covered by such Letter will be applied only to new purchases.
If the total amount of shares does not equal the amount stated in the
Letter of Intention (minimum of $25,000), the investor will be notified
and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the Class A or Class D shares
purchased at the reduced rate and the sales charge applicable to the
shares actually purchased through the Letter. Class A or Class D shares
equal to at least five percent of the intended amount will be held in
escrow during the 13-month period (while remaining registered in the name
of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least five percent of the dollar amount of such
Letter. If a purchase during the term of such Letter would otherwise be
subject to a further reduced sales charge based on the right for
accumulation, the purchaser will be entitled on that purchase and
subsequent purchases to that further reduced percentage sales charge but
there will be no retroactive reduction of the sales charges on any
previous purchase. The value of any shares redeemed or otherwise disposed
of by the purchaser prior to termination or completion of the Letter of
Intention will be deducted from the total purchases made under such
Letter. An exchange from a MLAM-advised money market fund into the Fund
that creates a sales charge will count toward completing a new or existing
Letter of Intention from the Fund.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Purchase Privilege of Certain Persons. Trustees of the Trust, members
of the Boards of other MLAM-advised investment companies, directors and
employees of ML & Co. and its subsidiaries 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. Under such programs, the Fund
realizes economies of scale and reduction of sales related expenses by
virtue of familiarity with the Fund.
Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a
financial consultant who joined Merrill Lynch from another investment firm
within six months prior to the date of purchase by such investor, if the
following conditions are satisfied. First, the investor must advise
Merrill Lynch that it will purchase Class D shares of the Fund with
proceeds from a redemption of a mutual fund that was sponsored by the
financial consultant's previous firm and was subject to a
21
<PAGE> 68
sales charge either at the time of purchase or on a deferred basis.
Second, the investor also must establish that such redemption had been
made within 60 days prior to the investment in the Fund, and the proceeds
from the redemption had been maintained in the interim in cash or a money
market fund.
Class D shares of the Fund will be offered at net asset value, without
a sales charge, to an investor who has a business relationship with a
Merrill Lynch financial consultant and who has invested in a mutual fund
for which Merrill Lynch has not served as a selected dealer if the
following conditions are satisfied: First, the investor must advise
Merrill Lynch that it will purchase Class D shares of the Fund with
proceeds from the redemption of such shares of other mutual funds and that
such shares have been outstanding for a period of no less than six months.
Second, such purchase of Class D shares must be made within 60 days after
the redemption and the proceeds from the redemption must be maintained in
the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price
of Class D shares may be reduced to the net asset value per Class D share
in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private
investment company. The value of the assets or company acquired in a
tax-free transaction may be adjusted in appropriate cases to reduce
possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations,
statutory mergers or other acquisitions of portfolio securities which (i)
meet the investment objectives and policies of the Fund; (ii) are acquired
for investment and not for resale (subject to the understanding that the
disposition of the Fund's portfolio securities shall at all times remain
within its control); and (iii) are liquid securities, the value of which
is readily ascertainable, which are not restricted as to transfer either
by law or liquidity of market (except that the Fund may acquire through
such transactions restricted or illiquid securities to the extent the Fund
does not exceed the applicable limits on acquisition of such securities
set forth under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are
due to the nature of the investors and/or the reduced sales efforts that
will be needed in obtaining such investments.
Distribution Plans
Reference is made to "Purchase of Shares - Distribution Plans" in
the Prospectus for certain information with respect to the separate
distribution plans for Class B, Class C and Class D shares pursuant to
Rule 12b-1 under the 1940 Act (each a "Distribution Plan") with respect
to the account maintenance and/or distribution fees paid by the Fund to
the Distributor with respect to such classes.
The 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 each Distribution Plan
will benefit the
22
<PAGE> 69
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 approval of the related class of shareholders, and all
material amendments are required to be approved by the vote of Trustees,
including a majority of the Independent Trustees who have no direct or
indirect financial interest in such Distribution Plan, cast in person at a
meeting called for that purpose. Rule 12b-1 further requires that the
Trust preserve copies of each Distribution Plan and any report made
pursuant to such plan for a period of not less than six years from the
date of such Distribution Plan or such report, the first two years in an
easily accessible place.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD") imposes a
limitation on certain asset-based sales charges such as the distribution
fee and the contingent deferred sales charge ("CDSC") borne by the Class
B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges), plus (2) interest on the unpaid balance for
the respective class, computed separately, at the prime rate plus 1% (the
unpaid balance being the maximum amount payable minus amounts received
from the payment of the distribution fee and the CDSC). In connection with
the Class B shares, the Distributor has voluntarily agreed to waive
interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B
shares is 6.75% of eligible gross sales. The Distributor retains the right
to stop waiving the interest charges at any time. To the extent payments
would exceed the voluntary maximum, the Fund will not make further
payments of the distribution fee with respect to Class B shares, and any
CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum
may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD
formula will not be made.
The following table sets forth comparative information as of July 31,
1994, with respect to the Class B shares of the Fund, indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule and the Distributor's voluntary maximum for the fiscal year
ended July 31, 1994. Since Class C shares of the Fund had not been
publicly issued prior to the date of this Statement of Additional
Information, information concerning Class C shares is not yet provided
below.
<TABLE>
<CAPTION>
Data Calculated as of July 31, 1994
------------------------------------------------------------------------------------------------
(In Thousands)
Annual
Distribution
Allowable 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)
----------- ---------- ----------- ------- --------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted.... $48,459 $3,029 $279 $3,308 $269 $3,039 $127
Under Distributor's Voluntary
Waiver...................... $48,459 $3,029 $242 $3,271 $269 $3,002 $127
</TABLE>
----------
(1) Purchase price of all eligible Class B shares sold since September 25,
1992 (commencement of public offering of Class B shares) other than
shares acquired through dividend reinvestment and the exchange
privilege.
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<PAGE> 70
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the
NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of
the distribution fee payments made prior to July 6, 1993 under the
Prior Plan at the .50% rate, .25% of average daily net assets has been
treated as a distribution fee and .25% of average daily net assets has
been deemed to have been a service fee and not subject to the NASD
maximum sales charge rule.
(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.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for
certain information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any
such redemption may be suspended only for any period during which trading
on the New York Stock Exchange is restricted as determined by the
Commission or such Exchange is closed (other than customary weekend and
holiday closings), for any period during which an emergency exists as
defined by the Commission as a result of which disposal of portfolio
securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Commission may
by order permit for the protection of shareholders of the Fund.
Deferred Sales Charge-Class B Shares
As discussed in the Prospectus under "Purchase of Shares -Deferred Sales
Charge Alternatives - Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares
following the death or disability of a Class B shareholder. Redemptions for
which the waiver applies are any partial or complete redemptions following
the death or disability (as defined in the Code) of a Class B shareholder
(including one who owns the Class B shares as joint tenant with his or her
spouse), provided the redemption is requested within one year of the death or
initial determination of disability. For the period September 25, 1992, the
Fund's commencement of operations, to July 31, 1993, the Fund's fiscal year
end, the Distributor received CDSCs of $34,243, all of which was paid to
Merrill Lynch. For the year ended July 31, 1994, the Distributor received
contingent deferred sales charges of $58,588 all of which was paid to Merrill
Lynch.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies" and
"Portfolio Transactions" in the Prospectus.
Under the 1940 Act, persons affiliated with the Trust are prohibited
from dealing with the Fund as a principal in the purchase and sale of
securities unless such trading is permitted by an exemptive order issued
by the Commission. Since over-the-counter transactions are usually
principal transactions, affiliated persons of the Trust, including Merrill
Lynch, may not serve as dealer in connection with transactions with the
Fund. The Trust has obtained an exemptive order permitting it to engage in
certain principal transactions with Merrill Lynch involving high quality
short-term municipal bonds subject to certain conditions. For the period
September 25, 1992 (commencement of operations) through July 31, 1993, the
Fund engaged in 19 transactions pursuant to such order for an aggregate
market value of $9,100,885. For the year ended July 31, 1994, the Fund
engaged in no transactions pursuant to such order. Affiliated persons of
the Trust may serve as broker for the Fund in over-the-counter
transactions conducted on an agency basis. Certain court decisions have
raised questions as to the extent to which investment companies should
seek exemptions under the 1940 Act in order to seek to
24
<PAGE> 71
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.
Under the 1940 Act, the Fund may not purchase securities from any
underwriting syndicate of which Merrill Lynch is a member except pursuant
to an exemptive order or rules adopted by the Commission. Rule 10f-3 under
the 1940 Act sets forth conditions under which the Fund may purchase
municipal bonds in such transactions. The rule sets forth requirements
relating to, among other things, the terms of an issue of municipal bonds
purchased by the Fund, the amount of municipal bonds which may be
purchased in any one issue and the assets of the Fund which may be
invested in a particular issue.
The Fund does not expect to use any particular dealer in the execution
of transactions but, subject to obtaining the best net results, dealers
who provide supplemental investment research (such as information
concerning tax-exempt securities, economic data and market forecasts) to
the Manager may receive orders for transactions by the Fund. Information
so received will be in addition to and not in lieu of the services
required to be performed by the Manager under its Management Agreement,
and the expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information.
The Trust has no obligation to deal with any broker in the execution
of transactions for the Fund's portfolio securities. In addition,
consistent with the Rules of Fair Practice of the NASD and policies
established by the Trustees of the Trust, the Manager may consider sales
of shares of the Fund as a factor in the selection of brokers or dealers
to execute portfolio transactions for the Fund.
Generally, the Fund does not purchase securities for short-term
trading profits. However, the Fund may dispose of securities without
regard to the time they have been held when such action, for defensive or
other reasons, appears advisable to its Manager. While it is not possible
to predict turnover rates with any certainty, at present it is anticipated
that the Fund's annual portfolio turnover rate, under normal circumstances
after the Fund's portfolio is invested in accordance with its investment
objective, will be less than 100%. (The portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the particular fiscal year by the monthly average of the
value of the portfolio securities owned by the Fund during the particular
fiscal year. For purposes of determining this rate, all securities whose
maturities at the time of acquisition are one year or less are excluded.)
The portfolio turnover for the period September 25, 1992 (commencement of
operations) through July 31, 1993 was 27.98%. The portfolio turnover for
the fiscal year ended July 31, 1994 was 74.35%.
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.
25
<PAGE> 72
DETERMINATION OF NET ASSET VALUE
The net asset value of all the shares of the Fund is determined by the
Manager once daily, Monday through Friday, as of 4:15 P.M., New York City
time, on each day during which the New York Stock Exchange is open for
trading. The New York Stock Exchange is not open on New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Net asset value per share is computed
by dividing the sum of the value of the securities held by the Fund plus
any cash or other assets minus all liabilities by the total number of
shares outstanding at such time, rounded to the nearest cent. Expenses,
including the fees payable to the Manager and any account maintenance
and/or distribution fees are accrued daily. The per share net asset value
of Class B, Class C and Class D shares generally will be lower than the
per share net asset value of the Class A shares reflecting the daily
expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares
and the daily expense accruals of the account maintenance fees applicable
with respect to Class D shares; moreover the per share net asset value of
Class B and Class C shares generally will be lower than the per share net
asset value of Class D shares reflecting the daily expense accruals of the
distribution fees and higher transfer agency fees applicable with respect
to Class B and Class C shares of the Fund. Even under those circumstances,
the per share net asset value of the four classes eventually will tend to
converge immediately after the payment of dividends, which will differ by
approximately the amount of the expense accrual differential between the
classes.
The Municipal Bonds and other portfolio securities in which the Fund
invests are traded primarily in over-the-counter municipal bond and money
markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained
from one or more dealers that make markets in the securities. One bond is
the "yield equivalent" of another bond when, taking into account market
price, maturity, coupon rate, credit rating and ultimate return of
principal, both bonds will theoretically produce an equivalent return to
the bondholder. Financial futures contracts and options thereon, which are
traded on exchanges, are valued at their settlement prices as of the close
of such exchanges. Short-term investments with a remaining maturity of 60
days or less are valued on an amortized cost basis, which approximates
market value. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith by
or under the direction of the Trustees of the Trust, including valuations
furnished by a pricing service retained by the Trust, which may utilize a
matrix system for valuations. The procedures of the pricing service and
its valuations are reviewed by the officers of the Trust under the general
supervision of the Trustees.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services described below
which are designed to facilitate investment in shares of the Fund. Full
details as to each of such services and copies of the various plans
described below can be obtained from the Trust, the Distributor or Merrill
Lynch.
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has
an Investment Account and will receive statements, at least quarterly from
the Transfer Agent showing any reinvestment of ordinary income dividends
and long-term capital gains distributions activity in the account since
the previous statement. Shareholders also will receive separate
confirmations for each purchase or sale transaction other than
reinvestment of ordinary income dividends and long-term capital gain
distributions. Shareholders considering transferring their Class A or
Class D shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the Class A or
Class D shares are to be transferred will not take delivery of shares of
26
<PAGE> 73
the Fund, a shareholder either must redeem the Class A or Class D shares
so that the cash proceeds can be transferred to the account at the new
firm, or such shareholder must continue to maintain an Investment Account
at the Transfer Agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill
Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage
firm for the benefit of the shareholder. If the new brokerage firm is
willing to accommodate the shareholder in this manner, the shareholder
must request that he be issued certificates for his shares and then must
turn the certificates over to the new firm for re-registration as
described in the preceding sentence. A shareholder may make additions to
his Investment Account at any time by mailing a check directly to the
Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance
of certificates representing all or only part of the full shares in an
Investment Account may be requested by a shareholder directly from the
Transfer Agent.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time
by purchasing Class A (if he or she is an eligible Class A investor as
described in the Prospectus), Class C or Class D shares at the applicable
public offering price either through the shareholder's securities dealer
or by mail directly to the Transfer Agent, acting as agent for such
securities dealers. Voluntary accumulation also can be made through a
service known as the Automatic Investment Plan whereby the Fund is
authorized through pre-authorized checks or automated house clearing
debits of $50 or more to charge the regular bank account of the
shareholder on a regular basis to provide systematic additions to the
Investment Account of such shareholder. Alternatively, investors who
maintain CMA(Reg) accounts may arrange to have periodic investments made
in the Fund, in their CMA(Reg) accounts or in certain related accounts in
amounts of $100 or more through the CMA(Reg) Automated Investment Program.
Automatic Reinvestment of Dividends and Capital Gains Distributions
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions
will be reinvested automatically in additional shares of the Fund. Such
reinvestment will be at the net asset value of shares of the Fund as of
the close of business on the monthly payment date for such dividends and
distributions. Shareholders may elect in writing to receive either their
income dividends or capital gains distributions, or both, in cash, in
which event payment will be mailed or direct deposited on or about the
payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or
by telephone (1-800-MER-FUND) that they no longer wish to have their
dividends and/or capital gains distributions reinvested in shares of the
Fund or vice versa and, commencing ten days after the receipt by the
Transfer Agent of such notice, such instructions will be effected.
Systematic Withdrawal Plans-Class A and Class D Shares
A Class A or Class D shareholder may elect to make systematic
withdrawals from an Investment Account on either a monthly or quarterly
basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired Class A of Class D shares of the Fund
having a value, based on cost or the current offering price, of $5,000 or
more and monthly withdrawals are available for shareholders with Class A
or Class D shares with such a value of $10,000 or more.
27
<PAGE> 74
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The
shareholder may specify either a dollar amount or a percentage of the
value of his Class A or Class D shares. Redemptions will be made at net
asset value as determined at the normal close of business on the New York
Stock Exchange (currently 4:00 P.M., New York City time) on the 24th day
of each month or the 24th day of the last month of each quarter, whichever
is applicable. If the Exchange is not open for business on such date, the
Class A or Class D shares will be redeemed at the close of business on the
following business day. The check for the withdrawal payment will be
mailed, or the direct deposit for the withdrawal payment will be made, on
the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all Class A or
Class D shares in the Investment Account are reinvested automatically in
the Fund's Class A or Class D shares, respectively. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge
or penalty, by the shareholder, the Trust, the Transfer Agent or the
Distributor. Withdrawal payments should not be considered as dividends,
yield or income. Each withdrawal is a taxable event. If periodic
withdrawals continuously exceed reinvested dividends, the shareholder's
original investment may be reduced correspondingly. Purchases of
additional Class A or Class D shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and
tax liabilities. The Trust will not knowingly accept purchase orders for
Class A or Class D shares of the Fund from investors who maintain a
Systematic Withdrawal Plan unless such purchase is equal to at least one
year's scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account in which the
shareholder has elected to make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a
CMA(Reg) or CBA(Reg) account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the
Systematic Redemption Program. The minimum fixed dollar amount redeemable
is $25. The proceeds of systematic redemptions will be posted to the
shareholder's account five business days after the date the shares are
redeemed. Monthly systematic redemptions will be made at net asset value
on the first Monday of each month, bimonthly systematic redemptions will
be made at net asset value on the first Monday of every other month, and
quarterly, semiannual or annual redemptions are made at net asset value on
the first Monday of months selected at the shareholder's option. If the
first Monday of the month is a holiday, the redemption will be processed
at net asset value on the next business day. The Systematic Redemption
Program is not available if Company shares are being purchased within the
account pursuant to the Automatic Investment Program. For more information
on the Systematic Redemption Program, eligible shareholders should contact
their Financial Consultant.
Exchange Privilege
Shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds listed below. Under
the Merrill Lynch Select Pricing System, Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual funds if the shareholder holds any Class A shares of the second
fund in his account in which the exchange is made at the time of the
exchange or is otherwise eligible to
28
<PAGE> 75
purchase Class A shares of the second fund. If the Class A shareholder
wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the
second fund in his account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of
the exchange. Class D shares also may be exchanged for Class A shares of a
second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund. Class B, Class C and Class D shares
will be exchangeable with shares of the same class of other MLAM-advised
mutual funds. For purposes of computing the CDSC that may be payable upon
a disposition of the shares acquired in the exchange, the holding period
for the previously owned shares of the Fund is "tacked" to the holding
period of the newly acquired shares of the other Fund as more fully
described below. Class A, Class B, Class C and Class D shares also will be
exchangeable for shares of certain MLAM-advised money market funds
specifically designated below as available for exchange by holders of
Class A, Class B, Class C or Class D shares. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege, and
any shares utilized in an exchange must have been held by the shareholder
for 15 days. It is contemplated that the exchange privilege may be
applicable to other new mutual funds whose shares may be distributed by
the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding
Class A or Class D shares") for Class A or Class D shares of other
MLAM-advised mutual fund ("new Class A or Class D shares") are
transacted on the basis of relative net asset value per Class A or Class D
share, respectively, plus an amount equal to the difference, if any,
between the sales charge previously paid on the outstanding Class A or
Class D shares and the sales charge payable at the time of the exchange on
the new Class A or Class D shares. With respect to outstanding Class A or
Class D shares as to which previous exchanges have taken place, the
"sales charge previously paid" shall include the aggregate of the sales
charges paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of
the funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A and Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal
to the sales charge previously paid on the Class A or Class D shares on
which the dividend was paid. Based on this formula, Class A and Class D
shares generally may be exchanged into the Class A or Class D shares of
the other funds or into shares of the Class A and Class D money market
funds without a sales charge.
In addition, each of the funds with Class B and Class C shares
outstanding ("outstanding Class B and Class C shares") offers to
exchange its Class B or Class C shares for Class B or Class C shares,
respectively, of another MLAM-advised mutual fund ("new Class B or Class
C shares") on the basis of relative net asset value per Class B or Class
C share, without the payment of any CDSC that might otherwise be due on
redemption of the outstanding shares. Class B shareholders of the Fund
exercising the exchange privilege will continue to be subject to the
Fund's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of
the exchange privilege will be subject to the Fund's schedule if such
schedule is higher than the CDSC schedule relating to the Class B shares
of the fund from which the exchange has been made. For purposes of
computing the sales load that may be payable on a disposition of the new
Class B or Class C shares, the holding period for the outstanding Class B
or Class C shares is "tacked" to the holding period of the new Class B
or Class C shares. For example, an investor may exchange Class B shares of
the Fund for those of Merrill Lynch Special Value Fund ("Special Value
Fund") after having held the Fund's Class B shares for two and a half
years. The 2% sales load that generally would apply to a redemption would
not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of Special Value Fund and receive cash. There
will be no CDSC due on this redemption, since by "tacking" the two and a
half year holding period of the Fund's Class B shares to the three year
holding period for the Special Value Fund Class B shares, the investor
will be deemed to have held the new Class B shares for more than five
years.
29
<PAGE> 76
Shareholders also may exchange shares of the fund into shares of the
money market funds advised by the Manager of its affiliates and Class B
money market funds, respectively, but the period of time that Class B or
Class C shares are held in a Class B money market fund will not count
towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or, with respect to Class B shares, toward satisfaction
of the conversion period. However, shares of a money market fund which
were acquired as a result of an exchange for Class B or Class C shares of
a fund may, in turn, be exchanged back into Class B or Class C shares,
respectively, of any fund offering such shares, in which event the holding
period for Class B or Class C shares of the fund will be aggregated with
previous holding periods for purposes of reducing the CDSC or, with
respect to Class B shares, towards satisfaction of the conversion period.
However, shares of a money market fund which were acquired as a result of
an exchange for Class B or Class C shares of a fund may, in turn be
exchanged back into Class B or Class C shares, respectively, of any fund
offering such shares, in which event the holding period for Class B or
Class C shares of the Fund will be aggregated with previous holding period
for purposes of reducing the CDSC. Thus, for example, an investor may
exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") after having held the Fund
Class B shares for two and a half years and three years later decide to
redeem the shares of Merrill Lynch Institutional Fund for cash. At the
time of this redemption, the 2% CDSC that would have been due had the
Class B shares of the Fund been redeemed for cash rather than exchanged
for shares of Institutional Fund will be payable. If, instead of such
redemption, the shareholder exchanged such shares for Class B shares of a
fund which the shareholder continues to hold for an additional two and a
half years, any subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the
other funds into which exchanges can be made:
Funds Issuing Class A, Class B, Class C and Class D shares:
<TABLE>
<CAPTION>
<S> <C>
Merrill Lynch Adjustable Rate Securities Fund, Inc........ High current income consistent with a policy of
limiting the degree of fluctuation in net asset
value of fund shares resulting from movements in
interest rates through investment primarily in a
portfolio of adjustable rate securities.
Merrill Lynch Americas Income Fund, Inc................... A high level of current income, consistent with
prudent investment risk, by investing primarily in
debt securities denominated in a currency of a
country located in the Western Hemisphere (i.e.,
North and South America and the surrounding waters).
Merrill Lynch Arizona Limited Maturity Municipal
Bond Fund................................................ A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Arizona income taxes
as is consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade Arizona Municipal
Bonds.
</TABLE>
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<PAGE> 77
<TABLE>
<CAPTION>
<S> <C>
Merrill Lynch Arizona Municipal Bond Fund ............... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Arizona income taxes as is consistent
with prudent investment management.
Merrill Lynch Arkansas Municipal Bond Fund................ A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Arkansas income taxes as is consistent
with prudent investment management.
Merrill Lynch Asset Growth Fund, Inc. ...................... High total investment return, consistent with prudent
risk, from investment in United States and foreign
equity, debt and money market securities the
combination of which will be varied both with
respect to types of securities and markets in
response to changing market and economic trends.
Merrill Lynch Asset Income Fund, Inc. ..................... A high level of current income through investment
primarily in United States fixed income securities.
Merrill Lynch Balanced Fund for Investment
and Retirement ....................................... As high a level of total investment return as is
consistent with a relatively low level of risk
through investment in common stocks and other types
of securities, including fixed income securities and
convertible securities.
Merrill Lynch Basic Value Fund, Inc. .......................Capital appreciation and, secondarily, income by
investing in securities, primarily equities, that
are undervalued and therefore represent basic
investment value.
Merrill Lynch California Insured Municipal Bond Fund........A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund whose objective is to
provide as high a level of income exempt from
Federal and California income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of insured
California Municipal Bonds.
</TABLE>
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<PAGE> 78
<TABLE>
<CAPTION>
<S> <C>
Merrill Lynch California Limited Maturity
Municipal Bond Fund .......................................A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and California income
taxes as is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment grade
California Municipal Bonds.
Merrill Lynch California Municipal Bond Fund.................A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and California income taxes as is consistent
with prudent investment management.
Merrill Lynch Capital Fund, Inc.............................The highest total investment return consistent with
prudent risk through a fully managed investment
policy utilizing equity, debt, and convertible
securities.
Merrill Lynch Colorado Municipal Bond Fund..................A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Colorado income taxes as is consistent
with prudent investment management.
Merrill Lynch Connecticut Municipal Bond Fund...............A portfolio of Merrill Lynch Multi-State Limited
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income
exempt from Federal and Connecticut income taxes as
is consistent with prudent investment management.
Merrill Lynch Corporate Bond Fund, Inc. ....................Current income from three separate diversified
portfolios of fixed income securities.
Merrill Lynch Developing Capital Markets Fund, Inc..........Long-term appreciation through investment in
securities, principally equities, of issuers in
countries having smaller capital markets.
Merrill Lynch Dragon Fund, Inc. ............................Capital appreciation by investing primarily in equity
and debt securities of issuers domiciled in
developing countries located in Asia and the Pacific
Basin.
</TABLE>
32
<PAGE> 79
<TABLE>
<CAPTION>
<S> <C>
Merrill Lynch Eurofund .....................................Capital appreciation primarily through investment in
equity securities of corporations domiciled in
Europe.
Merrill Lynch Federal Securities Trust ....................High current return through investments in U.S.
Government and Government agency securities,
including GNMA mortgage-backed certificates and
other mortgage-backed Government securities.
Merrill Lynch Florida Limited Maturity Municipal
Bond Fund...................................................A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal income taxes as is
consistent with prudent investment management while
serving to offer shareholders the opportunity to own
securities exempt from Florida intangible personal
property taxes through investment in a portfolio
primarily of intermediate-term investment grade
Florida Municipal Bonds.
Merrill Lynch Florida Municipal Bond Fund...................A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal income taxes as is consistent with prudent
investment management while seeking to offer
shareholders the opportunity to own securities
exempt from Florida intangible personal property
taxes.
Merrill Lynch Fund For Tomorrow, Inc........................Long-term growth through investment in a portfolio of
good quality securities, primarily common stock,
potentially positioned to benefit from demographic
and cultural changes as they affect consumer
markets.
Merrill Lynch Fundamental Growth Fund, Inc..................Long-term growth through investment in a diversified
portfolio of equity securities placing particular
emphasis on companies that have exhibited an
above-average growth rate in earnings.
</TABLE>
33
<PAGE> 80
<TABLE>
<CAPTION>
<CAPTION>
<S> <C>
Merrill Lynch Global Allocation Fund, Inc. .................High total investment return, consistent with prudent
risk, through a fully managed investment policy
utilizing United States and foreign equity, debt and
money market securities, the combination of which
will be varied from time to time both with respect
to the types of securities and markets in response
to changing market and economic trends.
Merrill Lynch Global Bond Fund for Investment and Retirement...........
High total investment return from investment in
government and corporate bonds denominated in
various currencies and multi-national currency
units.
Merrill Lynch Global Convertible Fund, Inc..................High total return from investment primarily in an
international diversified portfolio of convertible
debt securities, convertible preferred stock and
"synthetic" convertible securities consisting of a
combination of debt securities or preferred stock
and warrants or options.
Merrill Lynch Global Holdings, Inc.
(residents of Arizona must meet investor
suitability standards)................................ The highest total investment return consistent with
prudent risk through worldwide investment in an
internationally diversified portfolio of securities.
Merrill Lynch Global Resources Trust.......................Long-term growth and protection of capital from
investment in securities of domestic and foreign
companies that possess substantial natural resource
assets.
Merrill Lynch Global SmallCap Fund, Inc. ..................Long-term growth of capital by investing primarily in
equity securities of companies with relatively small
market capitalizations located in various foreign
countries and in the United States.
Merrill Lynch Global Utility Fund, Inc. ....................Capital appreciation and current income through
investment of at least 65% of its total assets in
equity and debt securities issued by domestic and
foreign companies which are primarily engaged in the
ownership or operation of facilities used to
generate, transmit or distribute electricity,
telecommunications, gas or water.
</TABLE>
34
<PAGE> 81
<TABLE>
<CAPTION>
<S> <C>
Merrill Lynch Growth Fund for Investment and
Retirement............................................... Growth of capital and, secondarily, income from
investment in a diversified portfolio of equity
securities placing principal emphasis on those
securities which management of the fund believes to
be undervalued.
Merrill Lynch Healthcare Fund, Inc.
(residents of Wisconsin must meet investor
suitability standards)................................ Capital appreciation from worldwide investment in
equity securities of companies that derive or are
expected to derive a substantial portion of their
sales from products and services in healthcare.
Merrill Lynch International Equity Fund.....................Capital appreciation and, secondarily, income by
investing in a diversified portfolio of equity
securities of issuers located in countries other
than the United States.
Merrill Lynch Latin America Fund, Inc.......................Capital appreciation by investing primarily in Latin
American equity and debt securities.
Merrill Lynch Maryland Municipal Bond Fund...................A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Maryland income taxes as is consistent
with prudent investment management.
Merrill Lynch Massachusetts Limited Maturity
Municipal Bond Fund ......................................A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Massachusetts income
taxes as is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment grade
Massachusetts Municipal Bonds.
Merrill Lynch Massachusetts Municipal Bond Fund ............A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Massachusetts income taxes as is
consistent with prudent investment management.
</TABLE>
35
<PAGE> 82
<TABLE>
<CAPTION>
<S> <C>
Merrill Lynch Michigan Limited Maturity
Municipal Bond Fund .......................................A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Michigan income taxes
as is consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade Michigan
Municipal Bonds.
Merrill Lynch Michigan Municipal Bond Fund..................A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Michigan income taxes as is consistent
with prudent investment management.
Merrill Lynch Minnesota Municipal Bond Fund .................A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide a high level of income exempt from Federal
and Minnesota personal income taxes as is consistent
with prudent investment management.
Merrill Lynch Municipal Bond Fund, Inc. ...................Tax-exempt income from three separate diversified
portfolios of municipal bonds.
Merrill Lynch Municipal Intermediate Term Fund .............Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level as possible
of income exempt from Federal income taxes by
investing in investment grade obligations with a
dollar weighted average maturity of five to twelve
years.
Merrill Lynch New Jersey Limited Maturity
Municipal Bond Fund .......................................A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and New Jersey income
taxes as is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment grade New
Jersey Municipal Bonds.
Merrill Lynch New Jersey Municipal Bond Fund................A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and New Jersey income taxes as is consistent
with prudent investment management.
</TABLE>
36
<PAGE> 83
<TABLE>
<CAPTION>
<S> <C>
Merrill Lynch New Mexico Municipal Bond Fund................A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and New Mexico income taxes as is consistent
with prudent investment management.
Merrill Lynch New York Limited Maturity Municipal
Bond Fund..................................................A portfolio of Merrill Lynch Multi-State Linited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal, New York State and New
York City income taxes as is consistent with prudent
investment management through investment in a
portfolio primarily of intermediate-term investment
grade New York Municipal Bonds .
Merrill Lynch New York Municipal Bond Fund .................A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal, New York State and New York City income
taxes as is consistent with prudent investment
management.
Merrill Lynch Ohio Municipal Bond Fund......................A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Ohio income taxes as is consistent with
prudent investment management.
Merrill Lynch Oregon Municipal Bond Fund ...................A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Oregon income taxes as is consistent
with prudent investment management.
Merrill Lynch Pacific Fund, Inc.............................Capital appreciation by investing in equity securities
of corporations domiciled in Far Eastern and Western
Pacific countries, including Japan, Australia, Hong
Kong and Singapore.
</TABLE>
37
<PAGE> 84
<TABLE>
<CAPTION>
<S> <C>
Merrill Lynch Pennsylvania Limited Maturity
Municipal Bond Fund .......................................A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Pennsylvania income
taxes as is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment grade
Pennsylvania Municipal Bonds.
Merrill Lynch Pennsylvania Municipal Bond Fund .............A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Pennsylvania personal income taxes as is
consistent with prudent investment management.
Merrill Lynch Phoenix Fund, Inc.............................Long-term growth of capital by investing in equity and
fixed income securities, including tax-exempt
securities, of issuers in weak financial condition
or experiencing poor operating results believed to
be undervalued relative to the current or
prospective condition of such issuer.
Merrill Lynch Short-Term Global Income Fund, Inc. ..........As high a level of current income as is consistent
with prudent investment management from a global
portfolio of high quality debt securities
denominated in various currencies and multinational
currency units and having remaining maturities not
exceeding three years.
Merrill Lynch Special Value Fund, Inc.......................Long-term growth of capital from investments in
securities, primarily common stocks, of relatively
small companies believed to have special investment
value and emerging growth companies regardless of
size.
Merrill Lynch Strategic Dividend Fund.......................Long-term total return from investment in dividend
paying common stocks which yield more than Standard
& Poor's 500 Composite Stock Price Index.
Merrill Lynch Technology Fund, Inc..........................Capital appreciation through worldwide investment in
equity securities of companies that derive or are
expected to derive a substantial portion of their
sales from products and services in technology.
</TABLE>
38
<PAGE> 85
<TABLE>
<CAPTION>
<S> <C>
Merrill Lynch Texas Municipal Bond Fund.....................A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal income taxes as is consistent with prudent
investment management by investing primarily in a
portfolio of long-term, investment grade municipal
obligations issued by the State of Texas, its
political subdivisions, agencies and
instrumentalities.
Merrill Lynch Utility Income Fund, Inc. ....................High current income through investment in equity and
debt securities issued by companies which are
primarily engaged in the ownership or operation of
facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
Merrill Lynch World Income Fund, Inc........................High current income by investing in a global portfolio
of fixed income securities denominated in various
currencies, including multinational currency units.
Class A Share Money Market Funds:
Merrill Lynch Ready Assets Trust ..........................Preservation of capital, liquidity and the highest
possible current income consistent with the
foregoing objectives from the short-term money
market securities in which the Fund invests.
Merrill Lynch Retirement Reserves Money Fund
(available only if the exchange occurs within
certain retirement plans) ..................................Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund, whose
objectives are to provide current income,
preservation of capital and liquidity available from
investing in a diversified portfolio of short-term
money market securities.
Merrill Lynch U.S.A. Government Reserves ..................Preservation of capital, current income and liquidity
available from investing in direct obligations of
the U.S. Government and repurchase agreements
relating to such securities.
</TABLE>
39
<PAGE> 86
<TABLE>
<CAPTION>
<S> <C>
Merrill Lynch U.S. Treasury Money Fund ....................Preservation of capital, liquidity and current income
through investment exclusively in a diversified
portfolio of short-term marketable securities which
are direct obligations of the U.S. Treasury.
Class B, Class C and Class D Share Money Market Funds:
Merrill Lynch Government Fund ..............................A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
current income consistent with liquidity and
security of principal from investment in securities
issued or guaranteed by the U.S. Government, its
agencies and instrumentalities and in repurchase
agreements secured by such obligations.
Merrill Lynch Institutional Fund ...........................A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
maximum current income consistent with liquidity and
the maintenance of a high-quality portfolio of money
market securities.
Merrill Lynch Institutional Tax-Exempt Fund ...............A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
current income exempt from Federal income taxes,
preservation of capital and liquidity available from
investing in a diversified portfolio of short-term,
high quality municipal bonds.
Merrill Lynch Treasury Fund ...............................A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
current income consistent with liquidity and
security of principal from investment in direct
obligations of the U.S. Treasury and up to 10% of
its total assets in repurchase agreements secured by
such obligations.
</TABLE>
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to
be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the
exchange, or if the exchange does not involve a money market fund, the
shareholder may write to the Transfer Agent requesting that the exchange
be effected. Such letter must be signed exactly as the account is
registered with signatures guaranteed by an "eligible guarantor
institution" as such term is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, the existence and validity of which may
be verified by the Transfer Agent through the use of industry
publications. Shareholders of the Fund, and shareholders of the other
funds described above with shares for which certificates have not been
40
<PAGE> 87
issued, may exercise the exchange privilege by wire through their
securities dealers. The Fund reserves the right to require a properly
completed Exchange Application. This exchange privilege may be modified or
terminated at any time in accordance with the rules of the Commission. The
Fund reserves the right to limit the number of times an investor may
exercise the exchange privilege. Certain funds may suspend the continuous
offering of their shares to the general public at any time and may
thereafter resume such offering from time to time. The exchange privilege
is available only to U.S. shareholders in states where the exchange
legally may be made.
DISTRIBUTIONS AND TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the
Internal Revenue Code of 1986, as amended (the "Code"). If it so
qualifies, in any taxable year in which it distributes at least 90% of its
taxable net income and 90% of its tax-exempt net income (see below), the
Fund (but not its shareholders) will not be subject to Federal income tax
to the extent that it distributes its net investment income and net
realized capital gains. The Trust intends to cause the Fund to distribute
substantially all of such income.
As discussed in the Fund's Prospectus, the Trust has established other
series in addition to the Fund (together with the Fund, the "Series").
Each Series of the Trust is treated as a separate corporation for Federal
income tax purposes. Each Series, therefore, is considered to be a
separate entity in determining its treatment under the rules for RICs
described in the Prospectus. Losses in one Series do not offset gains in
another Series, and the requirements (other than certain organizational
requirements) for qualifying for RIC status will be determined at the
Series level rather than at the Trust level.
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute, during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its
capital gains, determined, in general, on an October 31 year end, plus
certain undistributed amounts from previous years. The required
distributions, however, are based only on the taxable income of a RIC. The
excise tax, therefore, generally will not apply to the tax-exempt income
of a RIC, such as the Fund, that pays exempt-interest dividends.
The Trust intends to qualify the Fund to pay "exempt-interest
dividends" as defined in Section 852(b)(5) of the Code. Under such
section if, at the close of each quarter of the Fund's taxable year, at
least 50% of the value of the Fund's total assets consists of obligations
exempt from Federal income tax ("tax-exempt obligations") under Section
103(a) of the Code (relating generally to obligations of a state or local
governmental unit), the Fund shall be qualified to pay exempt-interest
dividends to its Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). Exempt-interest dividends are dividends
or any part thereof paid by the Fund which are attributable to interest on
tax-exempt obligations and designated by the Trust as exempt-interest
dividends in a written notice mailed to the Fund's shareholders within 60
days after the close of the Fund's taxable year. For this purpose, the
Trust will allocate interest from tax-exempt obligations (as well as
ordinary income, capital gains and tax preference items discussed below)
among the Class A, Class B, Class C and Class D shareholders according to
a method (which it believes is consistent with the Commission's exemptive
order permitting the issuance and sale of multiple classes of shares) that
is based on the gross income allocable to Class A, Class B, Class C and
Class D shareholders during the taxable year, or such other method as the
Internal Revenue Service may prescribe. To the extent that the dividends
distributed to the Fund's shareholders are derived from interest income
exempt from Federal income tax under Code Section 103(a), and are properly
designated as exempt-interest dividends, they will be excludable from a
shareholder's gross income for Federal
41
<PAGE> 88
income tax purposes. Exempt-interest dividends are included, however, in
determining the portion, if any, of a person's social security benefits
and railroad retirement benefits subject to Federal income taxes. Interest
on indebtedness incurred or continued to purchase or carry shares of a RIC
paying exempt-interest dividends, such as the Fund, will not be deductible
by the investor for Federal and North Carolina income tax purposes.
Shareholders are advised to consult their tax advisers with respect to
whether exempt-interest dividends retain the exclusion under Code Section
103(a) if a shareholder would be treated as a "substantial user" or
"related person" under Code Section 147(a) with respect to property
financed with the proceeds of an issue of "industrial development bonds"
or "private activity bonds," if any, held by the Fund.
The portion of the Fund's exempt-interest dividends paid from interest
received by the Fund from North Carolina Municipal Bonds is not subject to
North Carolina individual and corporate income taxes. Additionally, the
Fund's dividends attributable to interest from direct obligations of the
U.S. Government are not subject to North Carolina individual or corporate
income tax. Distributions of gains attributable to the disposition of
certain obligations of the State of North Carolina and its political
subdivisions also are not subject to North Carolina individual or
corporate income tax. Shareholders subject to income taxation by states
other than North Carolina will realize a lower after-tax rate of return
than North Carolina 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 North
Carolina income taxes. The Fund will allocate exempt-interest dividends
among Class A., Class B, Class C and Class D shareholders for North
Carolina income tax purposes based on a method similar to that described
above for Federal income tax purposes.
Generally, the shares of the Fund that are owned by shareholders who
are residents of North Carolina or that have a business, commercial or
taxable situs in North Carolina on December 31 of each year will be
subject to the North Carolina intangible personal property tax. The value
of shares of the Fund will be exempt from the North Carolina intangible
personal property tax to the extent the Fund's assets as of December 31 of
each year consist of North Carolina Municipal Bonds and direct obligations
of the United States. The Trust will inform shareholders annually of the
portion of the Fund's assets as of December 31 that consists of such
obligations.
Shareholders should note that the future of the North Carolina
intangible personal property tax is uncertain. A challenge to the
constitutionality of such tax presently is on appeal to the North Carolina
Supreme Court. In addition, several bills were introduced in recent State
legislative sessions that would have either repealed the North Carolina
intangible personal property tax in total or significantly amended its
provisions. Although no such legislation has yet been enacted, further
attempts may be made to repeal or modify this tax in the future.
Accordingly, no assurance can be given that an investment in the Fund
while it owns direct obligations of the United States or North Carolina
Municipal Bonds will in future years provide shareholders with any
reductions from the North Carolina intangible personal property tax that
they otherwise might owe.
Distributions from investment income and capital gains of the Fund,
including exempt-interest dividends, will be included in the North
Carolina capital stock, surplus and undivided profits base in computing
the North Carolina franchise tax and may also be subject to state taxes in
states other than North Carolina and local taxes by municipalities in
states other than North Carolina. Accordingly, investors in the Fund,
including, in particular, corporate investors which may be subject to the
North Carolina franchise tax, should consult their tax advisers with
respect to the application of such taxes to an investment in the Fund and
to the receipt of Fund dividends and as to their North Carolina tax
situation in general.
42
<PAGE> 89
To the extent that the Fund's distributions are derived from interest
on its taxable investments (including for North Carolina income tax
purposes, interest on Municipal Bonds of other states) or from an excess
of net short-term capital gains over net long-term capital losses
("ordinary income dividends"), such distributions are considered
ordinary income for Federal and North Carolina income tax purposes,
except, in the case of North Carolina income tax, for dividends that are
directly attributable to interest on obligations of the U.S. Government or
to gains from certain obligations of the State of North Carolina and its
political subdivisions. Such distributions are not eligible for the
dividends received deduction for corporations. Distributions, if any, of
net long-term capital gains from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are
taxable as long-term capital gains for Federal income tax purposes,
regardless of the length of time the shareholder has owned Fund shares.
Under the Revenue Reconciliation Act of 1993, all or a portion of the
Fund's gain from the sale or redemption of tax-exempt obligations
purchased at a market discount will be treated as ordinary income rather
than capital gain. This rule may increase the amount of ordinary income
dividends received by shareholders. Capital gain dividends and
distributions of market discount gain treated as ordinary income dividends
also are subject to North Carolina income taxes, except to the extent
attributable to gains from certain obligations of the State of North
Carolina and its political subdivisions. Any loss upon the sale or
exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends
received by the shareholder. In addition, such loss will be disallowed for
both Federal and North Carolina income tax purposes to the extent of any
exempt-interest dividends received by the shareholder, even, in the case
of North Carolina, where all or a portion of such dividends is not
excluded from North Carolina taxable income. 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 (assuming such shares are held as a
capital asset). If the Fund pays a dividend in January which was declared
in the previous October, November or December to shareholders of record on
a specified date in one of such months, then such dividend will be treated
for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was
declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax
applies to interest received on certain "private activity bonds" issued
after August 7, 1986. Private activity bonds are bonds which, although
tax-exempt, are used for purposes other than those generally performed by
governmental units and which benefit non-governmental entities (e.g.,
bonds used for industrial development or housing purposes). Income
received on such bonds is classified as an item of "tax preference,"
which could subject investors in such bonds, including shareholders of the
Fund, to an alternative minimum tax. The Fund will purchase such "private
activity bonds," and the Trust will report to shareholders within 60 days
after the Fund's taxable year-end the portion of the Fund's dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that
corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings" (which
more closely reflect a corporation's economic income). Because an
exempt-interest dividend paid by the Fund will be included in adjusted
current earnings, a corporate shareholder may be required to pay
alternative minimum tax on exempt-interest dividends paid by the Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax
brackets of 36% and 39.6% for individuals and has created a graduated
structure of 26% and 28% for the alternative minimum tax applicable to
individual taxpayers. These rate increases may affect an individual
investor's after-tax return from an investment in the Fund as compared
with such investor's return from taxable investments.
43
<PAGE> 90
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's
basis in the Class D shares acquired will be the same as such
shareholder's basis in the Class B shares converted, and the holding
period of the acquired Class D shares will include the holding period for
the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales
charge paid to the Fund reduces any sales charge such shareholder would
have owed upon purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid
for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
Under certain provisions of the Code, some shareholders may be subject
to a 31% withholding tax on certain ordinary income dividends and on
capital gain dividends and redemption payments ("backup withholding").
Generally, shareholders subject to backup withholding will be those for
whom no certified taxpayer identification number is on file with the Trust
or who, to the Trust's knowledge, have furnished an incorrect number. When
establishing an account, an investor must certify under penalty of perjury
that such number is correct and that such investor is not otherwise
subject to backup withholding.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% United
States withholding tax under existing provisions of the Code applicable to
foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the U.S. withholding tax.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of
exempt-interest dividends received from all sources (including the Fund)
during the taxable year.
Environmental Tax
The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed
without regard to the alternative tax net operating loss deduction and the
deduction for the Environmental Tax) at a rate of $12 per $10,000 (0.12%)
of alternative minimum taxable income in excess of $2,000,000. The
Environmental Tax is imposed for taxable years beginning after December
31, 1986, and before January 1, 1996. The Environmental Tax is imposed
even if the corporation is not required to pay an alternative minimum tax
because the corporation's regular income tax liability exceeds its minimum
tax liability. The Code provides, however, that a RIC, such as the Fund,
is not subject to the Environmental Tax. However, exempt-interest
dividends paid by the Fund that create alternative minimum taxable income
for corporate shareholders under the Code (as described above) may subject
corporate shareholders of the Fund to the Environmental Tax.
Tax Treatment of Option and Futures Transactions
The Fund may write, 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
44
<PAGE> 91
call and put options on such financial futures contracts. In general,
unless an election is available to the Fund or an exception applies, such
options and financial futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes
at the end of each taxable year, i.e., each such option or financial
futures contract will be treated as sold for its fair market value on the
last day of the taxable year, and any gain or loss attributable to Section
1256 contracts will be 60% long-term and 40% short-term capital gain or
loss. Application of these rules to Section 1256 contracts held by the
Fund may alter the timing and character of distributions to shareholders.
Code Section 1092, which applies to certain "straddles," may affect
the taxation of the Fund's transactions in financial futures contracts and
related options. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing
transactions in options and financial futures contracts or the related
options.
One of the requirements for qualification as a RIC is that less than
30% of the Fund's gross income be derived from gains from the sale or
other disposition of securities held for less than three months.
Accordingly, the Fund may be restricted in effecting closing transactions
within three months after entering into an option or financial futures
contract.
North Carolina Income and Franchise Taxes
Provided the Fund does not have a tax nexus to North Carolina, such as
through the location of the Fund's activities or those of its advisors
within the state, under present North Carolina law the Fund is not subject
to any North Carolina income taxation or other North Carolina taxation
measured by the capital assets of the Fund. In the event of a tax nexus to
North Carolina, the Fund, if it qualifies as a RIC and files the necessary
election with the North Carolina Department of Revenue, would be subject
to North Carolina income tax only to the extent that its net income is not
distributed or declared for distribution to shareholders, and the Fund
would be subject to the North Carolina franchise tax. If the Fund
qualifies as a RIC and files the necessary election with the North
Carolina Department of Revenue, it would be allowed to deduct the
aggregate market value of certain of its investments in stocks, bonds,
debentures, other securities and other evidences of indebtedness in
determining its North Carolina franchise tax base.
----------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and North Carolina 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 North Carolina income tax laws. The Code and
the Treasury regulations, as well as the North Carolina tax laws, are
subject to change by legislative, judicial or administrative action either
prospectively or retroactively.
Shareholders are urged to consult their own tax advisers regarding the
availability of any exemptions from state or local taxes (other than those
imposed by North Carolina) and with specific questions as to Federal,
foreign, state or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return
and other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective
shareholders. Total return and yield and tax-equivalent yield figures are
based on the Fund's historical performance and are not intended to
indicate future performance. Average annual total return and yield are
determined separately for Class A, Class B, Class C and Class D shares in
accordance with formulas specified by the Commission.
45
<PAGE> 92
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.
Set forth below is the total return, yield and tax equivalent yield
information for Class A and Class B shares of the Fund for the period
indicated. Since Class B and Class C shares have not been issued prior to
the date of this Statement of Additional Information, performance
information concerning Class C and Class D shares is not yet provided.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
---------------------------------------- -------------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
$1,000 investment the period $1,000 investment the period
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Average Annual Total Return (including maximum applicable sales charge)
One year ended July 31, 1994.... -2.93% $ 970.70 -3.21% $ 967.90
September 25, 1992 (Inception)
to July 31, 1994.............. 4.39% $1,082.50 4.64% $1,087.30
Annual Total Return (excluding maximum applicable sales charge)
One year ended July 31, 1994.... 1.11% $1,011.10 0.60% $1,006.00
September 25, 1992 (Inception)
to July 31, 1993.............. 11.52% $1,115.20 11.06% $1,110.60
Aggregate Total Return (including maximum applicable sales charge)
One year ended July 31, 1994.... 8.25% $1,082.50 8.73% $1,087.30
Yield
30 days ended on July 31, 1994.. 5.25% 4.97%
Tax Equivalent Yield*
30 days ended on July 31, 1994.. 7.29% 6.90%
</TABLE>
----------
* Based on a Federal income tax rate of 28%.
In order to reflect the reduced sales charges in the case of Class A
shares or the waiver of the contingent deferred sales charges in the case
of Class B 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 advertise-
46
<PAGE> 93
ments directed to such investors may take into account the reduced, and
not the maximum, sales charge or may take into account the contingent
deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales charges, a
lower amount of expenses is deducted.
GENERAL INFORMATION
Description of Shares
The Declaration of Trust provides that the Trust shall be comprised of
separate Series each of which will consist of a separate portfolio which
will issue separate shares. The Trust is presently comprised of the Fund,
Merrill Lynch Arizona Municipal Bond Fund, Merrill Lynch Arkansas
Municipal Bond Fund, Merrill Lynch Colorado Municipal Bond Fund, Merrill
Lynch Connecticut Municipal Bond Fund, Merrill Lynch Florida Municipal
Bond Fund, Merrill Lynch Maryland Municipal Bond Fund, Merrill Lynch
Massachusetts Municipal Bond Fund, Merrill Lynch Michigan Municipal Bond
Fund, Merrill Lynch Minnesota Municipal Bond Fund, Merrill Lynch New
Jersey Municipal Bond Fund, Merrill Lynch New Mexico Municipal Bond Fund,
Merrill Lynch New York Municipal Bond Fund, Merrill Lynch Ohio Municipal
Bond Fund, Merrill Lynch Oregon Municipal Bond Fund, Merrill Lynch
Pennsylvania Municipal Bond Fund and Merrill Lynch Texas Municipal Bond
Fund. The Trustees are authorized to create an unlimited number of Series
and, with respect to each Series, to issue an unlimited number of full and
fractional shares of beneficial interest, par value $.10 per share, of
different classes and to divide or combine the shares into a greater or
lesser number of shares without thereby changing the proportionate
beneficial interests in the Series. Shareholder approval is not necessary
for the authorization of additional Series or classes of a Series of the
Trust. At the date of this Statement of Additional Information, the shares
of the Fund are divided into Class A, Class B, Class C and Class D shares.
Class A, Class B, Class C and Class D shares represent an interest in the
same assets of the Fund and are identical in all respects except that the
Class B, Class C and Class D shares bear certain expenses related to the
account maintenance and/or distribution of such shares and have exclusive
voting rights with respect to matters relating to such account maintenance
and/or distribution expenditures. The Trust has received an order (the
"Order") from the Commission permitting the issuance and sale of
multiple classes of shares. The Order permits the Trust to issue
additional classes of shares of any series if the Board of Trustees deems
such issuance to be in the best interests of the Trust.
All shares of the Trust have equal voting rights, except that only
shares of the respective Series are entitled to vote on matters concerning
only that Series and, as noted above, Class B, Class C and Class D shares
will have exclusive voting rights with respect to matters relating to the
account maintenance and/or distribution expenses being borne solely by
such class. Each issued and outstanding share is entitled to one vote and
to participate equally in dividends and distributions declared by the Fund
and in the net assets of such Series upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities, except that, as
noted above, expenses related to the account maintenance and/or
distribution of the Class B, Class C and Class D shares will be borne
solely by such class. There normally will be no meetings of shareholders
for the purposes of electing Trustees unless and until such time as less
than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders may, in
accordance with the terms of the Declaration of Trust, cause a meeting of
shareholders to be held for the purpose of voting on the removal of
Trustees. Also, the Trust will be required to call a special meeting of
shareholders in accordance with the requirements of the 1940 Act to seek
approval of new management and advisory arrangements, of a material
increase in distribution fees or of a change in the fundamental policies,
objective or restrictions of a Series.
47
<PAGE> 94
The obligations and liabilities of a particular Series are restricted
to the assets of that Series and do not extend to the assets of the Trust
generally. The shares of each Series, when issued, will be fully paid and
nonassessable, have no preference, preemptive, conversion, exchange or
similar rights and are freely transferable. Holders of shares of any
Series are entitled to redeem their shares as set forth elsewhere herein
and in the Prospectus. Shares do not have cumulative voting rights, and
the holders of more than 50% of the shares of the Trust voting for the
election of Trustees can elect all of the Trustees if they choose to do so
and in such event the holders of the remaining shares would not be able to
elect any Trustees. No amendments may be made to the Declaration of Trust
without the affirmative vote of a majority of the outstanding shares of
the Trust.
The Manager provided the initial capital for the Fund by purchasing
10,000 shares of the Fund for $100,000. Such shares were acquired for
investment and can only be disposed of by redemption. The organizational
expenses of the Fund (estimated at approximately $29,050) were paid by the
Fund and are amortized over a period not exceeding five years. The
proceeds realized by the Manager 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
and Class B shares of the Fund based on the Fund's net assets and number
of shares outstanding on July 31, 1994, is calculated as set forth below.
Information is not provided for Class C and Class D shares since no Class
C or Class D shares were publicly offered prior to the date of this
Statement of Additional Information. The offering price for Class B and
Class C shares of the Fund is the net asset value of Class B and Class C
shares, respectively.
TABLE
Class A Class B
---------------------------
Net Assets.............................. $11,071,374 $50,664,403
=========== ===========
Number of Shares Outstanding............ 1,086,922 4,973,211
=========== ===========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding).......................... $ 10.19 $ 10.19
Sales Charge (for Class A shares: 4.00%
of offering price (4.17% of amount
invested))*........................... 0.42 **
----------- ----------
Offering Price.......................... $ 10.61 $ 10.19
=========== ===========
----------
* 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" and in the Prospectus. As of July 31, 1994 no Class C or Class
D shares of the Fund had been publicly offered.
48
<PAGE> 95
Independent Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey
08540-6400, has been selected as the independent auditors of the Fund. The
selection of independent auditors is subject to ratification by the
shareholders of the Fund. 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, 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
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act of 1940, to which reference is hereby made.
The Declaration of Trust establishing the Trust dated August 2, 1985,
a copy of which, together with all amendments thereto (the
"Declaration") is on file in the office of the Secretary of The
Commonwealth of Massachusetts, provides that the name "Merrill Lynch
Multi-State Municipal Series Trust" refers to the Trustees under the
Declaration collectively as Trustees, but not as individuals or
personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability; nor shall resort be had to
any such person's private property for the satisfaction of any obligation
or claim of the Trust but the "Trust Property" only shall be liable.
To the knowledge of the Trust, no person or entity owned beneficially
5% or more of the Fund's shares on September 30, 1994.
49
<PAGE> 96
APPENDIX I
ECONOMIC CONDITIONS IN NORTH CAROLINA
The information set forth below is derived from official statements
prepared in connection with the issuance of North Carolina municipal bonds
and other sources that are generally available to investors. The Trust has
not independently verified this information.
The State of North Carolina (the "State") has two major operating
funds: the General Fund and the Highway Fund. In addition, the 1989
General Assembly created the Highway Trust Fund to provide funding for a
major highway construction program. The State derives most of its revenue
from taxes, including individual income tax, corporation income tax, sales
and use taxes, corporation franchise tax, alcoholic beverage tax,
insurance tax, inheritance tax, tobacco products tax, soft drink tax and
intangible personal property tax. The State receives other non-tax
revenues which are also deposited in the General Fund. The most important
are federal funds collected by State agencies, university fees and
tuitions, interest earned by the State Treasurer on investments of General
Fund moneys and revenues from the judicial branch. The proceeds from the
motor fuel tax, highway use tax and motor vehicle license tax are
deposited in the Highway Fund and the Highway Trust Fund.
During 1989-92 budget years, growth of North Carolina tax revenues
slowed considerably, requiring tax increases and budget adjustments,
including hiring freezes and restrictions, spending constraints, changes
in timing of certain collections and payments, and other short-term budget
adjustments necessary to comply with the State's constitutional mandate
for a balanced budget. Many areas of State government were affected.
Reductions in capital spending, local government aid, and the use of the
budget stabilization reserve, combined with other budget adjustments,
brought the budget into balance. Tax increases in the fiscal 1992 budget
included a $.01 increase in the State sales tax and increases in the
personal and corporate income tax rates, as well as increases in the tax
on cigarettes and alcohol, among other items.
Fiscal year 1992 ended with a positive fund balance of approximately
$164.8 million. By law, $41.2 million of such positive fund balance was
required to be reserved in the General Fund as part of a "Budget
Stabilization Fund," leaving an unrestricted General Fund balance at June
30, 1992 of $123.6 million. Fiscal year 1993 ended with a positive General
Fund balance of approximately $537.3 million. Of this amount, $134.3
million was reserved in the Budget Stabilization Fund and $57.0 million
was reserved in a Reserve for Repair and Renovation of State Facilities,
leaving an unrestricted General Fund balance at June 30, 1993 of $346.0
million. Fiscal year 1994 ended with a positive General Fund balance of
approximately $444.7 million. An additional $178 million was available
from a reserved fund balance. Of this aggregate amount, $155.7 million was
reserved in the Budget Stabilization Fund and $60 million was reserved in
a Reserve for Repair and Renovation of State Facilities, leaving an
unrestricted General Fund balance at June 30, 1994 of $407 million. The
foregoing results for fiscal year 1994 are based upon unaudited figures
provided by the Office of the State Controller.
The 1993 Sessions of the General Assembly reduced departmental
operating requirements by $357.6 million for fiscal 1995 and authorized
continuation funding of $8,603.4 million. The savings reductions were
based on recommendations from the Governor, a Governmental Performance
Audit Committee, and selective savings identified by the General Assembly.
After review of the continuation budget, the General Assembly authorized
funding for planned expansion to existing programs and funded new
initiatives for children, economic development, education, human services,
and environmental programs. Expansion funds of $1,650.4 million for fiscal
1995 were approved during the 1993 and 1994 Sessions of the General
Assembly. In addition to the transfers to
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the Budget Stabilization Fund (also known as the "Savings Reserve
Account") from the fiscal year-end credit balance, the General Assembly
in 1993 appropriated $66.7 million for the Savings Reserve Account. The
General Assembly authorized $189.4 million for capital improvements
spending and $60 million for the Reserve for Repair and Renovation of
State Facilities for fiscal 1995.
The State budget is based upon a number of existing and assumed State
and non-State factors, including State and national economic conditions,
international activity, Federal government policies and legislation and
the activities of the State's General Assembly. Such factors are subject
to change which may be material and affect the budget.
During recent years the State has moved from an agricultural to a
service and goods producing economy. According to the North Carolina
Employment Security Commission (the "Commission"), in May, 1994, the
State ranked tenth among the states in non-agricultural employment and
eighth in manufacturing employment. The Commission estimated the State's
seasonally adjusted unemployment rate in June, 1994 to be 3.7% of the
labor force, as compared with an unemployment rate of 6.0% nationwide. As
part of its 1993-95 budget, the General Assembly provided major funding
for economic initiatives in an effort to create additional jobs.
The following are certain cases pending in which the State faces the
risk of either a loss of revenue or an unanticipated expenditure which, in
the opinion of the Department of State Treasurer, would not materially
adversely affect the State's ability to meet its financial obligations:
1. Swanson Case-State Tax Refunds-Federal Retirees. In Davis v.
Michigan (1989), the United States Supreme Court ruled that a Michigan
income tax statute which taxed federal retirement benefits while
exempting those paid by state and local governments violated the
constitutional doctrine of intergovernmental tax immunity. At the time
of the Davis decision, North Carolina law contained similar exemptions
in favor of state and local retirees. Those exemptions were repealed
prospectively, beginning with the 1989 tax year. All public pension
and retirement benefits are now entitled to a $4,000 annual exclusion.
Following Davis, federal retirees filed a class action suit in
federal court in 1989 seeking damages equal to the North Carolina
income tax paid on federal retirement income by the class members. A
companion suit was filed in state court in 1990. The complaints
alleged that the amount in controversy exceeded $140 million. The
North Carolina Department of Revenue estimate of refunds and interest
liability is $280.89 million as of June 30, 1994. In 1991, the North
Carolina Supreme Court ruled in favor of the State in the state court
action, concluding that Davis could only be applied prospectively and
that the taxes collected from the federal retirees were thus not
improperly collected. In 1993, the United State Supreme Court vacated
that decision and remanded the case back to the North Carolina Supreme
Court. The North Carolina Supreme Court then ruled in favor of the
State on the grounds that the federal retirees had failed to comply
with state procedures for challenging unconstitutional taxes.
Plaintiffs have petitioned the United States Supreme Court for review
of that decision. The United States District Court has ruled in favor
of the defendants in the companion federal case, and a petition for
reconsideration was denied. Plaintiffs have appealed to the United
States Court of Appeals. No date for oral argument has been set. The
North Carolina Attorney General's Office believes that sound legal
arguments support the State's position.
2. Bailey Case-State Tax Refunds-State Retirees. State and local
governmental retirees filed a class action suit in 1990 as a result of
the repeal of the income tax exemptions for state and local government
retirement benefits. The original suit was dismissed after the North
Carolina Supreme Court ruled in 1991 that the plaintiffs had failed to
comply with state law requirements for challenging unconstitutional
taxes and the United States Supreme Court denied review. In 1992, many
of the same plaintiffs filed a new
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lawsuit alleging essentially the same claims, including breach of
contract, unconstitutional impairment of contract rights by the State
in taxing benefits that were allegedly promised to be tax-exempt and
violation of several state constitutional provisions. The North
Carolina Attorney General's Office estimates that the amount in
controversy is approximately $40-$45 million annually for the tax
years 1989 through 1992. The case is now pending in Superior Court.
Defendants' motion to dismiss as a matter of law has been briefed, but
no hearing has been held. The North Carolina Attorney General's Office
believes that sound legal arguments support the State's position.
3. Fulton Case. The State's intangible personal property tax
levied on certain shares of stock has been challenged by the plaintiff
on grounds that it violates the United States Constitution Commerce
Clause by discriminating against stock issued by corporations that do
all or part of their business outside the State. The plaintiff in the
action is a North Carolina corporation that does all or part of its
business outside the State. The plaintiff seeks to invalidate the tax
in its entirety and to recover tax paid on the value of its shares in
other corporations. The North Carolina Court of Appeals invalidated
the taxable percentage deduction and excised it from the statute
beginning with the 1994 tax year. The effect of this ruling is to
increase collections by rendering all stock taxable on 100% of its
value. The State and the plaintiff have sought further appellate
review, and the case is now pending before the North Carolina Supreme
Court. Net collections from the tax for the fiscal year ended June 30,
1993 amounted to $120.6 million. The North Carolina Attorney General's
Office believes that sound legal arguments support the State's
position.
In October, 1993, the State issued a total of $194.7 million general
obligation bonds (consisting of $87.5 million Prison and Youth Services
Facilities, $61 million Public Improvement Refunding, $30.2 million
Highway Refunding, and $16 million Clean Water Refunding). An additional
$67.5 million general obligation bonds (Prison and Youth Services
Facilities) were issued in November, 1993. On November 2, 1993, a total of
$740 million general obligation bonds (consisting of $310 million
University Improvement, $250 million Community College, $145 million Clean
Water, and $35 million State Parks) were approved by the voters of the
State. Pursuant to this authorization, the State issued $400 million
general obligation bonds (Capital Improvement Bonds) in January, 1994. The
proceeds of these Capital Improvement Bonds may be used for any purpose
for which the proceeds of the University Improvement Bonds, Community
College Bonds, and State Parks Bonds may be used (none of such proceeds
may be used for Clean Water purposes). An additional $60 million general
obligation bonds (Clean Water Bonds) are expected to be issued in the fall
of 1994. The offering of the remaining $280 million of these authorized
bonds is anticipated to occur over the next two years.
Currently, Moody's Investors Service, Inc., Standard & Poor's
Corporation, and Fitch Investors Service, Inc. rate North Carolina general
obligation bonds Aaa, AAA, and AAA, respectively.
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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.
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Short-term Notes: The four ratings of Moody's for short-term notes are
MIG 1/VMIG1, MIG 2/VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes
"best quality . . . strong protection by established cash flows"; MIG
2/VMIG2 denotes "high quality" with ample margins of protection; MIG
3/VMIG3 notes are of "favorable quality. . .but. . . lacking the
undeniable strength of the preceding grades"; MIG 4/VMIG4 notes are of
"adequate quality. . . (p)rotection commonly regarded as required of an
investment security is present . . . there is specific risk."
Description of Moody's Corporate Bond Ratings
Excerpts from Moody's description of its corporate bond ratings: Aaa-
judged to be the best quality, carry the smallest degree of investment
risk; Aa-judged to be of high quality by all standards; A-possess many
favorable investment attributes and are to be considered as upper medium
grade obligations; Baa-considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured.
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection;
broad margins in earning coverage of fixed financial charges and high
internal cash generation; and well established access to a range of
financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
The effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement
for relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's Corporation's ("Standard & Poor's")
Municipal Debt Ratings
A Standard & Poor's municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
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The ratings are based on current information furnished by the issuer
or obtained by Standard & Poor's from other sources Standard & Poor's
considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn
as a result of changes in, or unavailability of, such information, or for
other reasons.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default-capacity and willingness of the
obligor as to the timely payment of interest and repayment
of principal in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned
by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to
pay interest and repay principal and differs from
the highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay
interest and repay principal although it is
somewhat more susceptible to the adverse effects
of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an
adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions
or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay
principal for debt in this category than for debt
in higher rated categories.
BB Debt rated "BB", "B", "CCC", "CC" and
B "C" is regarded, on balance, as predominately
CCC speculative with respect to capacity to pay
CC interest and repay principal in accordance with
C the terms of the obligations. "BB" indicates the
lowest degree of speculation and "C" the highest
degree of speculation. While such bonds will
likely have some quality and protective
characteristics, these are outweighed by large
uncertainties or major exposures to adverse
conditions.
CI The rating "CI" is reserved for income bonds on
which no interest is being paid.
D Debt rated "D" is in payment default. The "D"
rating category is used when interest payments of
principal payments are not made on the date due
even if the applicable grace period has not
expired, unless Standard & Poor's believes that
such payments will be made during such grace
period. The "D" rating also will be used upon
the filing of a bankruptcy petition if debt
service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within
the major rating categories.
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Description of Standard & Poor's Corporate Bond Ratings
A Standard & Poor's corporate debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong. Debt
rated "AA" has a very strong capacity to pay interest and to repay
principal and differs from the highest rated issues only in small degree.
Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt of a higher rated
category. Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
The ratings from "AA" to "BBB" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's Commercial Paper Rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into four categories, ranging from
"A" for the highest quality obligations to "D" for the lowest. These
categories are as follows:
A-1 This highest category indicates that the degree of
safety regarding timely payment is strong. Those
issues determined to possess extremely strong
safety characteristics are denoted with a plus
sign (+) designation.
A-2 Capacity for timely payment on issues with this
designation is satisfactory. However, the relative
degree of safety is not as high as for issues
designated "A-1".
A-3 Issues carrying this designation have adequate
capacity for timely payment. They are, however,
somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying
the higher designations.
B Issues rated "B" are regarded as having only
speculative capacity for timely payment.
C This rating is assigned to short-term debt
obligations with a doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D"
rating category is used when interest payments or
principal payments are not made on the date due,
even if the applicable grace period has not
expired, unless S&P believes that such payments
will be made during such grace period.
A Commercial Paper Rating is not a recommendation to purchase or sell
a security. The ratings are based on current information furnished to
Standard & Poor's by the issuer and obtained by Standard & Poor's from
other sources it considers reliable. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of,
such information.
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A Standard & Poor's municipal note rating reflects the liquidity
concerns and market access risks unique to such notes. Notes due in three
years or less will likely receive a note rating. Notes maturing beyond
three years will most likely receive a long-term debt rating. The
following criteria will be used in making that assessment.
- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 A very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics will be given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuers belongs to a group of securities that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date information to permit a judgment to
be formed; if a bond is called for redemption; or for other reasons.
Description of Fitch Investors Service, Inc.'s ("Fitch") Investment
Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The
ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and
prospective financial condition and operating performance of the issuer
and of any guarantor, as well as the economic and political environment
that might affect the issuer's future financial strength and credit
quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless otherwise
indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect
small differences in the degrees of credit risk.
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Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt
nature or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to
be reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result
of changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal,
which is unlikely to be affected by reasonably
foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest
and repay principal is very strong, although not quite
as strong as bonds rated "AAA". Because bonds rated in
the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated
"F-1+".
A Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest
and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse
impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for
bonds with higher ratings.
Plus (+) or Minus (|m-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
Improving|aa
Stable|ac
Declining|ag
Uncertain|az
Credit trend indicators are not predictions that any rating change will
occur, and have a longer-term time frame than issues placed on FitchAlert.
NR indicates that Fitch does not rate the specific issue.
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Conditional: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for rating
purposes.
Withdrawn: A rating will be withdrawn when an issue matures or is called
or refinanced and, at Fitch's discretion, when an issuer fails to furnish
proper and timely information.
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely
direction of such change. These are designated as "Positive," indicating
a potential upgrade, "Negative," for potential downgrade, or
"Evolving," where ratings may be raised or lowered. FitchAlert is
relatively short-term, and should be resolved within 12 months.
Description of Fitch Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of
obligation for bond issues not in default. For defaulted bonds, the rating
("DDD" to "D") is an assessment of the ultimate recovery value through
reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and
prospective financial condition and operating performance of the issuer
and any guarantor, as well as the economic and political environment that
might affect the issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability
to pay interest and repay principal may be affected over
time by adverse economic changes. However, business and
financial alternatives can be identified which could
assist the obligor in satisfying its debt service
requirements.
B Bonds are considered highly speculative. While bonds in
this class are currently meeting debt service
requirements, the probability of continued timely
payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable
business and economic activity throughout the life of
the issue.
CCC Bonds have certain identifiable characteristics which,
if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC Bonds are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
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DDD, DD and
D Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and
should be valued on the basis of their ultimate recovery
value in liquidation or reorganization of the obligor.
"DDD" represents the highest potential for recovery on
these bonds, and "D" represents the lowest potential
for recovery.
Plus (+) or Minus (|m-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the "DDD", "DD", or
"D" categories.
Description of Fitch Investment Grade Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term notes,
and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations
in a timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned
this rating are regarded as having the strongest
degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this
rating reflect an assurance of timely payment only
slightly less in degree than issues rated "F-1+".
F-2 Good Credit Quality. Issues assigned this rating have
a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues
assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of
assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities
to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to
near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or
imminent payment default.
LOC The symbol "LOC" indicates that the rating is based
on a letter of credit issued by a commercial bank.
60
<PAGE> 107
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch North Carolina Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch North Carolina
Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust as
of July 31, 1994, the related statements of operations for the year then
ended and changes in net assets for the year then ended and for the period
September 25, 1992 (commencement of operations) to July 31, 1993 and the
financial highlights for the year then ended and for the period September
25, 1992 (commencement of operations) to July 31, 1993. These financial
statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at July 31, 1994 by correspondence with
the custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
North Carolina Municipal Bond Fund of Merrill Lynch Multi-State Municipal
Series Trust as of July 31, 1994, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 29, 1994
61
<PAGE> 108
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch North Carolina
Municipal Bond Fund's portfolio holdings in the Schedule
of Investments, we have abbreviated the names of many of
the securities according to the list below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DATES Daily Adjustable Tax-Exempt Securities
GO General Obligation Bonds
HFA Housing Finance Agency
LEVRRS Leverage Reverse Rate Securities
RIB Residual Interest Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<PAGE> 109
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
North Carolina--88.1%
<S> <C> <C> <C> <C>
AAA Aaa $1,500 Buncombe County, North Carolina, Metropolitan Sewer District
Sewer Systems, Revenue Refunding Bonds, Series A, 5.50%
due 7/01/2022(f) $ 1,378
AAA Aaa 600 Catawba County, North Carolina, Hospital Revenue Refunding
Bonds (Catawba Memorial Hospital Project), 6.20% due 10/01/2009 (b) 613
AAA VMIG1 1,300 Charlotte, North Carolina, Airport Revenue Refunding Bonds,
Series A, VRDN, 1.80% due 7/01/2016 (a) (c) 1,300
Charlotte, North Carolina, COP (Convention Facility Project) (b):
AAA Aaa 2,500 6.75% due 12/01/2001 (g) 2,784
AAA Aaa 1,490 Refunding, Series C, 5.25% due 12/01/2020 1,313
AA Aa 3,000 Charlotte, North Carolina, Health Care System, Revenue Refunding Bonds
(Charlotte-Mecklenberg Hospital Authority), 6.25% due 1/01/2020 3,010
A A2 500 Chatham County, North Carolina, Industrial Facilities and
Pollution Control Financing Authority, Pollution Revenue Bonds
(Carolina Power and Light Company),6.30% due 6/15/2014 505
AAA Aaa 1,000 Concord, North Carolina, Utilities System Revenue Bonds, 5.75%
due 12/01/2017 (c) 958
Craven County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority, Resources Revenue Bonds (Craven
Wood Energy), VRDN, AMT (a):
NR Aa1 1,900 Series B, 3% due 5/01/2011 1,900
NR Aa1 500 Series C, 3% due 5/01/2011 500
AAA Aaa 1,000 Durham County, North Carolina, GO, UT, 5.75% due 2/01/2011 1,003
AAA Aaa 500 Fayetteville, North Carolina, Public Works Commission Revenue
Bonds, Series A, 6% due 3/01/2016 (d) 501
AAA Aaa 1,000 Gastonia, North Carolina, Combined Utilities System Revenue
Bonds, 6% due 5/01/2014 (c) 1,002
AAA Aa1 1,000 Greensboro, North Carolina, Public Improvement Bonds, UT, 6.30%
due 3/01/2010 1,054
<PAGE> 110
NR Aa2 100 Halifax County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority, Exempt Facilities Revenue Bonds, VRDN,
AMT, 2.90% due 12/01/2019 (a) 100
BBB Baa1 2,500 Haywood County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority, Solid Waste Disposal Revenue Bonds
(Champion International Corporation Project), AMT, 5.50%
due 10/01/2018 2,140
A A2 3,500 Martin County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority Revenue Bonds (Solid Waste Weyerhaeuser
Company), AMT, 6.80% due 5/01/2024 3,602
AAA Aaa 1,500 Mecklenburg County, North Carolina, Public Improvement Refunding
Bonds, GO, UT, 6.25% due 1/01/2002 (g) 1,621
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
North Carolina (concluded)
<S> <C> <C> <C> <C>
A A $1,000 Monroe, North Carolina, Combined Enterprise Systems Revenue Bonds,
6% due 3/01/2019 (k) $ 977
A A2 300 New Hanover County, North Carolina, Industrial Facilities and
Pollution Control Financing Authority Revenue Bonds (Carolina Power
and Light Company), 6.30% due 6/15/2014 306
North Carolina Eastern Municipal Power Agency, Power System Revenue
Refunding Bonds, Series A:
A- A 1,000 6.50% due 1/01/2017 1,001
A- Aaa 3,055 6.50% due 1/01/2018 (i) 3,258
North Carolina Educational Facilities, Finance Agency
Revenue Bonds:
NR VMIG1 200 (Bowman Grey School of Medicine Project), VRDN, 2.85%
due 9/01/2020 (a) 200
AA NR 1,000 Refunding (Davidson College Project), 6% due 12/01/2012 1,007
AAA NR 900 Refunding (Elon College Project), 6.375% due 1/01/2007 (e) 943
AA Aa 1,340 North Carolina HFA, Refunding Bonds, Series F, 6.60%
due 7/01/2017 (h) 1,357
<PAGE> 111
North Carolina HFA, S/F Revenue Bonds, GO:
A+ Aa 665 Series U, 6.70% due 3/01/2018 677
A+ Aa 2,755 Series V, AMT, 6.80% due 9/01/2025 2,813
A+ AA 2,000 Series W, 6.50% due 9/01/2018 2,034
A+ Aa 1,805 Series X, AMT, 6.70% due 9/01/2026 1,827
North Carolina Medical Care Community, Hospital Revenue Bonds:
NR Baa1 800 (Halifax Memorial Hospital Project), 6.75% due 8/15/2024 790
A+ A 2,000 (Moore Regional Hospital Project), 5% due 10/01/2018 1,662
A+ A1 1,500 (Rex Hospital Project), 6.25% due 6/01/2017 1,498
AAA Aaa 1,000 (Wilson Memorial Hospital Project), 6.50% due 11/01/2020 (b) 1,023
A A 4,350 North Carolina Municipal Power Agency, Number 1, Catawba Electric
Revenue Refunding Bonds (Catawba Electric Project Number 1), 6.25%
due 1/01/2017 4,339
NR VMIG1 200 Person County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority, Solid Waste Disposal Revenue Bonds
(Carolina Power and Light Company), AMT, DATES, 2.60% due
11/01/2016 (a) 200
AAA Aaa 1,000 Piedmont Triad Airport Authority, North Carolina, Airport Revenue
Refunding Bonds,5% due 7/01/2016 (c) 858
A+ A 800 Rocky Mountain, North Carolina, Water and Sewer Bonds, GO, UT,
6.30% due 5/01/2009 822
A- A 700 Shelby, North Carolina, Combined Producing Facilities System
Revenue Bonds (Capital Improvement), 6.625% due 6/01/2017 (k) 717
AA- A1 800 University of North Carolina, Chapel Hill, Hospital Revenue
Bonds (Board of Governors),6.375% due 2/15/2017 801
</TABLE>
<PAGE> 112
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Puerto Rico--10.8%
<S> <C> <C> <C> <C>
Puerto Rico Commonwealth, Highway and Transportation Authority,
Highway Revenue Bonds, Series T:
AAA NR $1,000 6.50% due 7/01/2002 (g) $ 1,102
A NR 200 6.625% due 7/01/2002 (g) 222
A Baa1 800 6.625% due 7/01/2018 832
A Baa1 700 Puerto Rico Commonwealth, Public Improvement Bonds, GO, UT,
6.45% due 7/01/2017 719
AAA NR 700 Puerto Rico Commonwealth, Public Improvement Refunding Bonds,
GO, UT, Series A, 6.50% due 7/01/l999 (g) 752
AAA Aaa 1,250 Puerto Rico Commonwealth, RIB, 8.393% due 7/01/2020 (d)(j) 1,178
A- Baa1 1,500 Puerto Rico Electric Power Authority, Power Revenue Refunding
Bonds, Series O, 6% due 7/01/2010 1,501
AAA Aaa 400 Puerto Rico Electric Power Authority Revenue Bonds, RIB,
8.578% due 7/01/2023 (d)(j) 387
Total Investments (Cost--$61,124)--98.9% 61,087
Other Assets Less Liabilities--1.1% 649
-------
Net Assets--100.0% $61,736
=======
<FN>
(a)The interest rate is subject to change periodically based upon
the prevailing market rate. The interest rates shown are those in
effect at July 31, 1994.
(b)AMBAC Insured.
(c)MBIA Insured.
(d)FSA Insured.
(e)Insured by Connie Lee.
(f)FGIC Insured.
(g)Prerefunded.
(h)FHA Insured.
(i)Escrowed to maturity.
(j)The interest rate is subject to change periodically and inversely
based on the prevailing market rates. The interest rates shown are
those in effect at July 31, 1994.
(k)Bank Qualified.
NR--Not Rated.
Ratings shown have not been audited by Deloitte & Touche LLP.
</FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 113
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of July 31, 1994
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$61,124,314) (Note 1a) $61,086,463
Cash 14,124
Receivables:
Interest $701,437
Beneficial interest sold 222,742 924,179
--------
Deferred organization expenses (Note 1e) 32,434
Prepaid expenses and other assets (Note 1e) 11,081
-----------
Total assets 62,068,281
===========
Liabilities: Payables:
Beneficial interest redeemed 173,536
Dividends to shareholders (Note 1f) 51,007
Distributor (Note 2) 21,177
Investment adviser (Note 2) 10,325 256,045
--------
Accrued expenses and other liabilities 76,459
-----------
Total liabilities 332,504
-----------
Net Assets: Net assets $61,735,777
===========
Net Assets Class A Shares of beneficial interest, $.10 par value,
Consist of: unlimited number of shares authorized $ 108,692
Class B Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 497,321
Paid-in capital in excess of par 62,192,845
Accumulated realized capital losses--net (667,785)
Accumulated distributions in excess of realized capital
gains--net (357,445)
Unrealized depreciation on investments--net (37,851)
-----------
Net assets $61,735,777
===========
Net Asset Value: Class A--Based on net assets of $11,071,374 and 1,086,922 shares of
beneficial interest outstanding $ 10.19
===========
Class B--Based on net assets of $50,664,403 and 4,973,211 shares of
beneficial interest outstanding $ 10.19
===========
See Notes to Financial Statements.
</TABLE>
<PAGE> 114
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended July 31, 1994
<S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 3,319,821
Income
(Note 1d):
Expenses: Investment advisory fees (Note 2) 323,712
Distribution fees--Class B (Note 2) 239,381
Professional fees 74,205
Printing and shareholder reports 58,979
Accounting services (Note 2) 36,512
Transfer agent fees--Class B (Note 2) 25,328
Custodian fees 13,157
Amortization of organization expenses (Note 1e) 10,257
Registration fees (Note 1e) 7,822
Pricing fees 6,564
Transfer agent fees--Class A (Note 2) 5,017
Trustees' fees and expenses 2,496
Other 1,344
-----------
Total expenses before reimbursement 804,774
Reimbursement of expenses (Note 2) (268,326)
-----------
Total expenses after reimbursement 536,448
-----------
Investment income--net 2,783,373
-----------
Realized & Realized loss on investments--net (685,668)
Unrealized Change in unrealized depreciation on investments--net (2,097,393)
Losses on -----------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 312
(Notes 1d & 3): ===========
</TABLE>
<PAGE> 115
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the For the Period
Year Ended Sept. 25, 1992++
Increase (Decrease) in Net Assets: July 31, 1994 to July 31, 1993
<S> <C> <C> <C>
Operations: Investment income--net $ 2,783,373 $ 1,334,089
Realized gain (loss) on investments--net (685,668) 17,883
Change in unrealized appreciation/depreciation
on investments--net (2,097,393) 2,059,542
----------- -----------
Net increase in net assets resulting from operations 312 3,411,514
----------- -----------
Dividends & Investment income--net:
Distributions to Class A (564,183) (263,852)
Shareholders Class B (2,219,190) (1,070,237)
(Note 1f): In excess of realized gain on investments--net:
Class A (70,229) --
Class B (287,216) --
----------- -----------
Net decrease in net assets resulting from dividends
and distributions to shareholders (3,140,818) (1,334,089)
----------- -----------
Beneficial Net increase in net assets derived from beneficial
Interest interest transactions 15,594,348 47,104,510
Transactions ----------- -----------
(Note 4):
Net Assets: Total increase in net assets 12,453,842 49,181,935
Beginning of period 49,281,935 100,000
----------- -----------
End of period $61,735,777 $49,281,935
=========== ===========
<FN>
++Commencement of Operations.
</FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 116
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A
For the
Period
The following per share data and ratios have been derived For the September 25,
from information provided in the financial statements. Year Ended 1992++
July 31, to July 31,
Increase (Decrease) in Net Asset Value: 1994 1993
<S> <C> <C>
Per Share Net asset value, beginning of period $ 10.67 $ 10.00
Operating --------- ---------
Performance: Investment income--net .54 .46
Realized and unrealized gain (loss) on
investments--net (.42) .67
--------- ---------
Total from investment operations .12 1.13
--------- ---------
Less dividends and distributions:
Investment income--net (.54) (.46)
In excess of realized gain on
investments--net (.06) --
--------- ---------
Total dividends and distributions (.60) (.46)
--------- ---------
Net asset value, end of period $ 10.19 $ 10.67
========= =========
Total Based on net asset value per share 1.11% 11.52%+++
Investment ========= =========
Return**
Ratios to Expenses, excluding distribution fees and
Average net of reimbursement .50% .20%*
Net Assets: ========= =========
Expenses, net of reimbursement .50% .20%*
========= =========
Expenses .96% 1.15%*
========= =========
Investment income--net 5.14% 5.26%*
========= =========
<PAGE> 117
Supplemental Net assets, end of period (in thousands) $ 11,071 $ 9,311
Data: ========= =========
Portfolio turnover 74.35% 27.98%
========= =========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 118
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class B
For the
Period
The following per share data and ratios have been derived For the September 25,
from information provided in the financial statements. Year Ended 1992++
July 31, to July 31,
Increase (Decrease) in Net Asset Value: 1994 1993
<S> <C> <C>
Per Share Net asset value, beginning of period $ 10.67 $ 10.00
Operating --------- ---------
Performance: Investment income--net .49 .41
Realized and unrealized gain (loss) on investments--net (.42) .67
--------- ---------
Total from investment operations .07 1.08
--------- ---------
Less dividends and distributions:
Investment income--net (.49) (.41)
In excess of realized gain on investments--net (.06) --
--------- ---------
Total dividends and distributions (.55) (.41)
--------- ---------
Net asset value, end of period $ 10.19 $ 10.67
========= =========
Total Based on net asset value per share 0.60% 11.06%+++
Investment ========= =========
Return:**
Ratios to Expenses, excluding distribution fees and net of reimbursement .51% .20%*
Average ========= =========
Net Assets: Expenses, net of reimbursement 1.01% .70%*
========= =========
Expenses 1.46% 1.67%*
========= =========
Investment income--net 4.64% 4.77%*
========= =========
Supplemental Net assets, end of period (in thousands) $ 50,664 $ 39,970
Data: ========= =========
Portfolio turnover 74.35% 27.98%
========= =========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 119
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch North Carolina Municipal Bond Fund (the "Fund") is
part of Merrill Lynch Multi-State Municipal Series Trust (the
"Trust"). The Fund is registered under the Investment Company Act of
1940 as a non-diversified, open-end management investment company.
The Fund offers both Class A and Class B Shares. Class A Shares are
sold with a front-end sales charge. Class B Shares may be subject to
a contingent deferred sales charge. Both classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B Shares bear certain
expenses related to the distribution of such shares and have
exclusive voting rights with respect to matters relating to such
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds and other portfolio
securities in which the Fund invests are traded primarily in the
over-the-counter municipal bond and money markets and are valued at
the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers
that make markets in the securities. Financial futures contracts and
options thereon, which are traded on exchanges, are valued at their
settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are
valued at amortized cost, which approximates market value. Options,
which are traded on exchanges, are valued at their last sale price
as of the close of such exchanges or, lacking any sales, at the last
available bid price. Securities and assets for which market
quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of
Trustees of the Trust, including valuations furnished by a pricing
service retained by the Trust, which may utilize a matrix system for
valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Trust under the general
supervision of the Trustees.
<PAGE> 120
(b) Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(f) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates. Distributions in excess
of realized capital gains are due primarily to differing tax
treatments for futures transactions and post October losses.
<PAGE> 121
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). Effective January 1, 1994, the
investment advisory business of FAM was reorganized from a
corporation to a limited partnership. Both prior to and after the
reorganization, ultimate control of FAM was vested with Merrill
Lynch & Co., Inc. ("ML & Co."). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of ML & Co. The limited partners are ML & Co. and Fund
Asset Management, Inc. ("FAMI"), which is also an indirect wholly-
owned subsidiary of ML & Co. The Fund has also entered into
Distribution Agreements and a Distribution Plan with Merrill Lynch
Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Investment Management, Inc. ("MLIM"),
which is also an indirect wholly-owned subsidiary of ML & Co.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets at the following annual rates: 0.55%
of the Fund's average daily net assets not exceeding $500 million;
0.525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and 0.50% of average daily net assets in
excess of $1 billion. For the year ended July 31, 1994, FAM earned
fees of $323,712, of which $264,567 was voluntarily waived. FAM also
reimbursed the Fund $3,759 of additional expenses.
The Fund has adopted a Plan of Distribution (the "Plan") in
accordance with Rule 12b-1 under the Investment Company Act of 1940,
pursuant to which the Fund pays the Distributor ongoing account
maintenance and distribution fees relating to Class B Shares, which
are accrued daily and paid monthly at the annual rates of 0.25% and
0.25%, respectively, of the average daily net assets of the Class B
Shares of the Fund. Pursuant to a sub-agreement with the
Distributor, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"),
an affiliate of ML & Co., also provides account maintenance and
distribution services to the Fund. The ongoing account maintenance
fee compensates the Distributor and MLPF&S for providing
distribution and account maintenance services to Class B
shareholders. As authorized by the Plan, the Distributor has entered
into an agreement with MLPF&S which provides for the compensation of
MLPF&S for providing distribution-related services to the Fund.
For the year ended July 31, 1994, MLFD earned underwriting discounts
of $6,609, and MLPF&S earned dealer concessions of $49,585 on sales
of the Fund's Class A Shares.
<PAGE> 122
MLPF&S also received contingent deferred sales charges of $58,588
relating to Class B Share transactions during the period.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, FAMI, PSI, MLIM, MLFD, FDS, MLPF&S, and/or ML &
Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended July 31, 1994 were $52,761,692 and $41,321,113,
respectively.
Realized
Gains Unrealized
(Losses) Losses
Long-term investments $(1,110,008) $ (37,851)
Short-term investments 124 --
Financial futures contracts 424,216 --
----------- -----------
Total $ (685,668) $ (37,851)
=========== ===========
As of July 31, 1994, net unrealized depreciation for Federal income
tax purposes aggregated $37,851, of which $1,088,799 related to
appreciated securities and $1,126,650 related to depreciated
securities. The aggregate cost of investments at July 31, 1994 for
Federal income tax purposes was $61,124,314.
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest
transactions was $15,594,348 and $47,104,510 for the year ended July
31, 1994 and the period September 25, 1992 to July 31, 1993,
respectively.
Transactions in shares of beneficial interest for Class A and Class
B Shares were as follows:
<PAGE> 123
Class A Shares for the Year Dollar
Ended July 31, 1994 Shares Amount
Shares sold 461,410 $ 4,928,197
Shares issued to shareholders
in reinvestment of dividends
and distributions 29,035 307,049
---------- -----------
Total issued 490,445 5,235,246
Shares redeemed (276,285) (2,887,349)
---------- -----------
Net increase 214,160 $ 2,347,897
========== ===========
Class A Shares for the Period Dollar
Sept. 25, 1992++ to July 31, 1993 Shares Amount
Shares sold 1,069,200 $11,000,250
Shares issued to shareholders
in reinvestment of dividends
and distributions 8,291 86,876
---------- -----------
Total issued 1,077,491 11,087,126
Shares redeemed (209,729) (2,167,397)
---------- -----------
Net increase 867,762 $ 8,919,729
========== ===========
++Prior to September 25, 1992 (commencement of operations), the
Fund issued 5,000 shares to FAM for $50,000.
Class B Shares for the Dollar
Year Ended July 31, 1994 Shares Amount
Shares sold 1,596,885 $17,101,455
Shares issued to shareholders
in reinvestment of dividends
and distributions 119,538 1,266,444
---------- -----------
Total issued 1,716,423 18,367,899
Shares redeemed (489,131) (5,121,448)
---------- -----------
Net increase 1,227,292 $13,246,451
========== ===========
<PAGE> 124
Class B Shares for the Period
September 25, 1992++ Dollar
to July 31, 1993 Shares Amount
Shares sold 3,868,435 $39,508,786
Shares issued to shareholders
in reinvestment of dividends
and distributions 41,874 437,748
---------- -----------
Total issued 3,910,309 39,946,534
Shares redeemed (169,390) (1,761,753)
---------- -----------
Net increase 3,740,919 $38,184,781
========== ===========
++Prior to September 25, 1992 (commencement of operations),
the Fund issued 5,000 shares to FAM for $50,000.
<PAGE> 125
<TABLE>
<CAPTION>
<S> <C>
Statement of
Additional Information
TABLE OF CONTENTS
Page
---- Art To Come
Investment Objective and Policies........... 2
Description of Municipal Bonds and Temporary
Investments............................... 5
Description of Municipal Bonds............ 5
Description of Temporary Investments...... 6
Repurchase Agreements..................... 8
Financial Futures Transactions and Options 8
Investment Restrictions..................... 13
Management of the Trust..................... 16
Trustees and Officers..................... 16
Management and Advisory Arrangements...... 18
Purchase of Shares.......................... 19
Initial Sales Charge Alternative -Class A
and Class D Shares...................... 19
Reduced Initial Sales Charges ............ 20 MERRILL LYNCH
Redemption of Shares........................ 24 NORTH CAROLINA
Deferred Sales Charge - Class B Shares.... 24 MUNICIPAL BOND
Portfolio Transactions...................... 24 FUND
Determination of Net Asset Value............ 26
Shareholder Services........................ 26 MERRILL LYNCH MULTI-STATE
Investment Account........................ 26 MUNICIPAL SERIES TRUST
Automatic Investment Plans................ 27
Automatic Reinvestment of Dividends and
Capital Gains Distributions............. 27
Systematic Withdrawal Plans-Class A and
Class D Shares.......................... 27
Exchange Privilege........................ 28 October 21, 1994
Distributions and Taxes..................... 41
Environmental Tax......................... 44 Distributor:
Tax Treatment of Option and Futures Merrill Lynch
Transactions............................ 44 Funds Distributor, Inc.
North Carolina Income and Franchise Taxes. 45
Performance Data............................ 45
General Information......................... 47
Description of Shares..................... 47
Computation of Offering Price Per Share... 48
Independent Auditors...................... 49
Custodian................................. 49
Transfer Agent............................ 49
Legal Counsel............................. 49
Reports to Shareholders................... 49
Additional Information.................... 49
Appendix I-Economic Conditions in North
Carolina.................................. 50
Appendix II-Ratings of Municipal Bonds...... 53
Independent Auditors' Report................ 61
Financial Statements........................ 62
Code #16411-1094
====================================================== ======================================================
</TABLE>
<PAGE> 126
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements (unaudited)
Contained in Part A:
Financial Highlights for the year ended July 31, 1994 and for the
period September 25, 1992 (commencement of operations) through July
31, 1993.
Contained in Part B:
Schedule of Investments, as of July 31, 1994.
Statement of Assets and Liabilities as of July 31, 1994.
Statement of Operations for the year ended July 31, 1994.
Statements of Changes in Net Assets for year ended July 31, 1994
and for the period September 25, 1992 (commencement of operations)
to July 31, 1993.
Financial Highlights for the year ended July 31, 1994 and for the
period September 25, 1992 (commencement of operations) through
July 31, 1993.
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number
-------
<S> <C>
1(a) -Declaration of Trust of the Registrant, dated August 2, 1985.(a)
(b) -Amendment to Declaration of Trust, dated October 3, 1988.(b)
(c) -Instrument establishing Merrill Lynch North Carolina Municipal Bond Fund (the
"Fund") as a series of Registrant.(d)
2 -By-Laws of Registrant.(a)
3 -None.
4 -Portions of the Declaration of Trust, Establishment and Designation and
By-Laws of the Registrant defining the rights of holders of the Fund as a
series of the Registrant.(c)
5(a) -Management Agreement between Registrant and Fund Asset Management, L.P.(d)
(b) -Supplement to Management Agreement beteween Registrant and Fund Asset
Management, L.P.
6(a)(1) -Form of Class A Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(d)
(a)(2) -Form of Revised Class A Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc.
(b) -Form of Class B Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(d)
(c) -Form of Class C Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.
(d) -Form of Class D Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.
(e) -Letter Agreement between the Fund and Merrill Lynch Funds Distributor, Inc.,
dated September 15, 1993, in connection with the Merrill Lynch Mutual Fund
Adviser program.(f)
7 -None.
8 -Custody Agreement between Registrant and State Street Bank and Trust
Company.(g)
9 -Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between registrant and Financial Data Services, Inc.(d)
10 -None.(d)
11 -Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
</TABLE>
C-1
<PAGE> 127
<TABLE>
<CAPTION>
Exhibit
Number
-------
<S> <C>
12 -None.
13 -Certificate of Fund Asset Management, Inc.(d)
14 -None.
15(a) -Class B Distribution Plan of the Registrant and Class B Shares Distribution
Plan Sub-Agreement.(d)
(b) -Form of Class C Shares Distribution Plan and Class C Shares Distribution Plan
Sub-Agreement of the Registrant.
(c) -Form of Class D Shares Distribution Plan and Class D Shares Distribution Plan
Sub-Agreement of the Registrant.
16(a) -Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class A shares.(e)
(b) -Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class B shares.(e)
17(a) -Financial Data Schedule for Class A Shares.
(b) -Financial Data Schedule for Class B Shares.
</TABLE>
----------
(a) Filed on August 6, 1985 as an Exhibit to the Registration Statement on
Form N-1 (File No. 2-99473) under the Securities Act of 1933 of
Merrill Lynch New York Municipal Bond Fund, a series of the
Registrant.
(b) Filed on October 11, 1988 as an Exhibit to Post-Effective Amendment
No. 4 to the Registration Statement on Form N-1A (File No. 2-99473)
under the Securities Act of 1933 of Merrill Lynch New York Municipal
Bond Fund, a series of the Registrant.
(c) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII,
IX, X and XI of the Registrant's Declaration of Trust, previously
filed as Exhibit 1(a) to the Registration Statement referred to in
paragraph (a) above; to the Certificates of Establishment and
Designation establishing the Fund as a series of the Registrant and
establishing Class A and Class B shares of beneficial interest of the
Fund, which will be filed as Exhibits 1(c) and 1(d), respectively, to
the Registration Statement; and to Articles I, V and VI of the
Registrant's By-Laws, previously filed as Exhibit 2 to the
Registration Statement referred to in paragraph (a) above.
(d) Filed on August 20, 1992 as an Exhibit to Pre-Effective Amendment No.
1 to the Registration Statement on Form N-1A under the Securities Act
of 1933.
(e) Filed on February 22, 1993, as an Exhibit to Post-Effective Amendment
No. 1 to Registrant's Registration Statement on Form N-1A under the
Securities Act of 1933.
(f) Filed on November 24, 1993 as an Exhibit to Post-Effective Amendment
No. 2 to the Registrant's Registration Statement on Form N-1A under
the Securities Act of 1933.
(g) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No.
3 to Registrant's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended, relating to shares of the Merrill
Lynch Minnesota Municipal Bond Fund series of the Registrant (File No.
33-44734).
Item 25. Persons Controlled by or under Common Control with Registrant.
Registrant is not controlled by or under common control with any
person.
Item 26. Number of Holders of Securities.
<TABLE>
<CAPTION>
Number of
Record Holders at
Title of Class September 30, 1994
-------------- ------------------
<S> <C>
Class A shares of beneficial interest par value $0.10 per share........................... 13
Class B shares of beneficial interest par value $0.10 per share........................... 66
Class C shares of beneficial interest par value $0.10 per share........................... 0
Class D shares of beneficial interest par value $0.10 per share........................... 0
</TABLE>
C-2
<PAGE> 128
Item 27. Indemnification.
Section 5.3 of the Registrant's Declaration of Trust provides as
follows:
"The Trust shall indemnify each of its Trustees, officers, employees
and agents (including persons who serve at its request as directors,
officers or trustees of another organization in which it has any interest
as a shareholder, creditor or otherwise) against all liabilities and
expenses (including amounts paid in satisfaction of judgments, in
compromise, as fines and penalties and as counsel fees) reasonably
incurred by him in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, in which he
may be involved or with which he may be threatened, while in office or
thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall
have been adjudicated to have acted in bad faith, willful misfeasance,
gross negligence or reckless disregard of his duties; provided, however,
that as to any matter disposed of by a compromise payment by such person,
pursuant to a consent decree or otherwise, no indemnification either for
said payment or for any other expenses shall be provided unless the Trust
shall have received a written opinion from independent legal counsel
approved by the Trustees to the effect that if either the matter of
willful misfeasance, gross negligence or reckless disregard of duty, or
the matter of good faith and reasonable belief as to the best interests of
the Trust, had been adjudicated, it would have been adjudicated in favor
of such person. The rights accruing to any Person under these provisions
shall not exclude any other right to which he may be lawfully entitled;
provided that no person may satisfy any right in indemnity or
reimbursement granted herein or in Section 5.1 or to which he may be
otherwise entitled except out of the property of the Trust, and no
Shareholder shall be personally liable to any Person with respect to any
claim for indemnity or reimbursement or otherwise. The Trustees may make
advance payments in connection with indemnification under this Section
5.3, provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently
determined that he is not entitled to such indemnification."
Insofar as the conditional advancing of indemnification monies for
actions based upon the Investment Company Act of 1940, as amended, may be
concerned, such payments will be made only on the following conditions:
(i) the advances must be limited to amounts used, or to be used, for the
preparation or presentation of a defense to the action, including costs
connected with the preparation of a settlement; (ii) advances may be made
only upon receipt of a written promise by, or on behalf of, the recipient
to repay that amount of the advance which exceeds the amount to which it
is ultimately determined that he is entitled to receive from the
Registrant by reason of indemnification; and (iii) (a) such promise must
be secured by a surety bond, other suitable insurance or an equivalent
form of security which assures that any repayments may be obtained by the
Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient of the advance, or (b)
a majority of quorum of the Registrant's disinterested, non-party
Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts that the
recipient of the advance ultimately will be found entitled to
indemnification.
In Section 9 of the Distribution Agreements relating to the securities
being offered hereby, the Registrant agrees to indemnify the Distributor
and each person, if any, who controls the Distributor within the meaning
of the Securities Act of 1933, as amended (the "1933 Act"), against
certain types of civil liabilities arising in connection with the
Registration Statement or Prospectus and Statement of Additional
Information.
Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to Trustees, officers and controlling persons of the
Registrant and the principal underwriter pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant and the principal
underwriter in connection with the successful defense of any action, suit
or proceeding) is asserted by such Director, officer or controlling person
or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the 1933 Act and will be governed
by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
Fund Asset Management, L.P. (the "Manager") acts as the investment
adviser for the following registered investment companies: Apex Municipal
Fund, Inc., CBA Money Fund, CMA Government Securities Fund,
C-3
<PAGE> 129
CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Emerging Tigers Fund, Inc., Financial Institutions Series Trust, Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc.,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal
Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Federal Securities Trust, Merrill Lynch Funds for Institutions Series,
Merrill Lynch Limited Maturity Municipal Series Trust, Merrill Lynch
Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond Fund,
Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund,
Inc., Merrill Lynch World Income Fund, Inc., MuniAssets Fund, Inc.,
MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc.,
MuniVest Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey
Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II,
Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund,
Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured
Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund,
Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured
Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield New York
Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc., Senior High Income Portfolio II, Inc., Senior Strategic Income Fund,
Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings,
Inc. and WorldWide DollarVest Fund, Inc. Merrill Lynch Asset Management,
L.P. ("MLAM"), an affiliate of the Manager, acts as the investment
adviser for the following companies: Convertible Holdings, Inc., Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset
Income Fund, Inc., Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing
Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Fundamental
Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Holdings Inc., Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Growth Fund for Investment
and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch High
Income Municipal Bond Fund, Inc., Merrill Lynch Institutional Intermediate
Fund, Merrill Lynch International Equity Fund, Merrill Lynch International
Holdings, Inc., Merrill Lynch Latin America Fund, Inc., Merrill Lynch
Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch
Senior Floating Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury
Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
Utility Income Fund, Inc., and Merrill Lynch Variable Series Funds, Inc.
The address of each of these investment companies is Box 9011, Princeton,
New Jersey 08543-9011, except that the address of Merrill Lynch Funds for
Institutions Series and Merrill Lynch Institutional Intermediate Fund is
One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The
address of the Manager, MLAM, Merrill Lynch Funds Distributor, Inc.,
Princeton Services, Inc. ("Princeton Services") and Princeton
Administrators, L.P. is also Box 9011, Princeton, New Jersey 08543-9011.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World
Financial Center, North Tower, 250 Vesey Street, New York, New York 10281.
The address of Financial Data Services, Inc. is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since August
1, 1991 for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr.
Richard is Treasurer and Mr. Glenn is Executive Vice President of
substantially all of the investment companies described in the preceding
paragraph and also hold the same positions with all or substantially all
of the investment companies advised by MLAM as they do with those advised
by the Manager, and Messrs. Durnin, Giordano, Harvey, Kirstein, Monagle and
Ms. Griffin are directors or officers of one or more of such companies.
C-4
<PAGE> 130
Officers and Partners of FAM are set forth as follows:
<TABLE>
<CAPTION>
Positions with Other Substantial Business, Profession,
Name Manager Vocation or Employment
----- ---------------- -----------------------------------------
<S> <C> <C>
Merrill Lynch & Co., Inc.. Limited Partner Financial Services Holding Company
Fund Asset Management, Limited Partner Investment Advisory Services
Inc.....................
Princeton Services, Inc. General Partner General Partner of MLAM
("Princeton Services")
Arthur Zeikel............. President President of MLAM; President and Director of
Princeton Services; Director of Merrill Lynch
Funds Distributor, Inc. ("MLFD"); Executive
Vice President of ML & Co.; and Executive Vice
President of Merrill Lynch
Terry K. Glenn............ Executive Vice President Executive Vice President of MLAM; Executive
Vice President and Director of Princeton
Services; President and Director of MLFD;
President of Princeton Administrators, L.P.
Bernard J. Durnin......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Vincent R. Giordano....... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Elizabeth Griffin......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Norman R. Harvey.......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
N. John Hewitt............ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Philip L. Kirstein........ Senior Vice President, Senior Vice President, General Counsel and
General Counsel and Secretary of MLAM; Senior Vice President,
Secretary General Counsel and Director of Princeton
Services; Director of MLFD
Ronald M. Kloss........... Senior Vice President and Senior Vice President and Controller of MLAM;
Controller Senior Vice President and Controller of
Princeton Services
Joseph T. Monagle......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Gerald M. Richard......... Senior Vice President and Senior Vice President and Treasurer of MLAM;
Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of MLFD
Richard L. Rufener........ Senior Vice President Senior Vice President of MLAM; Vice President
of MLFD; Senior Vice President of Princeton
Services
Ronald L. Welburn......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
C-5
</TABLE>
<PAGE> 131
<TABLE>
<CAPTION>
Positions with Other Substantial Business, Profession,
Name Manager Vocation or Employment
---- --------------- ---------------------------------------
<S> <C> <C>
Anthony Wiseman........... Senior Vice President of MLAM; Senior Vice
Senior Vice President President of Princeton Services
</TABLE>
Item 29. Principal Underwriters.
(a) MLFD acts as the principal underwriter for the Registrant and for
each of the open-end investment companies referred to in the first
paragraph of Item 28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, Convertible
Holdings, Inc., The Corporate Fund Accumulation Program, Inc., Corporate
High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers
Fund, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest
Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New
York Insured Fund, Inc., MuniVest Pennsylvania Fund, MuniYield Arizona
Fund, Inc., MuniYield Arizona Fund, II, Inc., MuniYield California Fund,
Inc., MuniYield California Insured Fund, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured
Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund,
Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured
Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield New York
Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc., Senior High Income Portfolio II, Inc., Senior Strategic Income Fund,
Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings,
Inc. and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and
officer of MLFD. The principal business address of each such person is Box
9011, Princeton, New Jersey 08543-9011, except that the address of Messrs.
Aldrich, Breen, Crook, Fatseas, Graczyk and Wasel is One Financial Center,
15th floor, Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(1) (2) (3)
Positions and Offices Positions and Offices
Name with MLFD with Registrant
---- ---------------------- ---------------------
<S> <C> <C>
Terry K. Glenn...................... President and Director Executive Vice President
Arthur Zeikel....................... Director President and Trustee
Philip L. Kirstein.................. Director None
William E. Aldrich.................. Senior Vice President None
Robert W. Crook..................... Senior Vice President None
Michael J. Brady.................... Vice President None
Kevin P. Boman...................... Vice President None
William M. Breen.................... Vice President None
Sharon Creveling.................... Vice President and Assistant None
Treasurer
Mark A. DeSario..................... Vice President None
James T. Fatseas.................... Vice President None
Stanley Graczyk..................... Vice President None
Michelle T. Lau..................... Vice President None
Gerald M. Richard................... Vice President and Treasurer Treasurer
Richard L. Rufener.................. Vice President None
Sal Venezia......................... Vice President None
William Wasel....................... Vice President None
Robert Harris....................... Secretary None
</TABLE>
(c) Not applicable.
C6
<PAGE> 132
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the
Rules thereunder are maintained at the offices of the Registrant and
Financial Data Services, Inc.
Item 31. Management Services.
Other than as set forth under the caption "Management of the Trust-
Management and Advisory Arrangements" in the Prospectus constituting Part
A of the Registration Statement and under "Management of the Trust-
Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, Registrant
is not a party to any management-related service contract.
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
(c) 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.
C7
<PAGE> 133
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Plainsboro, and
State of New Jersey, on the 17th day of October, 1994.
Merrill Lynch Multi-State Municipal Series
Trust
(Registrant)
/s/ Arthur Zeikel
By:--------------------------
(Arthur Zeikel, President)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Arthur Zeikel
-------------------------------------- President and Trustee
(Arthur Zeikel) (Principal Executive Officer) October 17, 1994
/s/ Gerald M. Richard Treasurer (Principal October 17, 1994
-------------------------------------- Financial and Accounting Officer)
(Gerald M. Richard)
Kenneth S. Axelson* Trustee
--------------------------------------
(Kenneth S. Axelson)
Herbert I. London* Trustee
--------------------------------------
(Herbert I. London)
Robert R. Martin Trustee
--------------------------------------
(Robert R. Martin)
Joseph L. May* Trustee
--------------------------------------
(Joseph L. May)
Andre F. Perold* Trustee
--------------------------------------
(Andre F. Perold)
/s/ Arthur Zeikel October 17, 1994
*By:----------------------------------
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>
C-8
<PAGE> 134
EXHIBIT INDEX
Exhibit
Number
--------------------------------------------------------------------
5(b) -Supplement to the Management Agreement between the
Registrant and Fund Asset Management, L.P
6(a)(2) -Form of Revised Class A Shares Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc.
6(c) -Class C Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of
Selected Dealers Agreement)
6(d) -Class D Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of
Selected Dealers Agreement)
11 -Consent of Deloitte & Touche LLP, independent auditors for
Registrant
15(b) -Class C Distribution Plan and Class C Distribution Plan
Sub-Agreement of the Registrant
15(c) -Class D Distribution Plan and Class D Distribution Plan
Sub-Agreement of the Registrant
17(a) -Financial Data Schedule for Class A Shares
17(b) -Financial Data Schedule for Class B Shares
<PAGE> 135
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR submission file due to ASCII-incompatibility and cross-references
this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
CLASS A SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____ day of October, 1994, between
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST, a Massachusetts
business trust (the "Trust"), and MERRILL LYNCH FUNDS
DISTRIBUTOR, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Trust is registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"),
as an open-end investment company, and it is affirmatively in the
interest of the Trust to offer its shares for sale continuously;
and
WHEREAS, the Trustees of the Trust (the "Trustees") are
authorized to establish separate series (the "Series") relating
to separate portfolios of securities, each of which will offer
separate classes of shares of beneficial interest, par value
$0.10 per share (collectively referred to as "shares") to
selected groups of purchasers; and
WHEREAS, the Trustees have established and designated the
Merrill Lynch [State] Municipal Bond Fund (the "Fund") as a
series of the Trust; and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either
directly to purchasers or through other securities dealers; and
<PAGE>
WHEREAS, the Trust and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Class A shares of beneficial interest in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Trust
hereby appoints the Distributor as the principal underwriter and
distributor of the Trust to sell Class A shares of beneficial
interest in the Fund (sometimes herein referred to as "Class A
shares") to eligible investors (as defined below) and hereby
agrees during the term of this Agreement to sell Class A shares
of the Fund to the Distributor upon the terms and conditions
herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Trust to act as
principal underwriter and distributor, except that:
(a) The Trust may, upon written notice to the Distributor,
from time to time designate other principal underwriters and dis-
tributors of Class A shares with respect to areas other than the
United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
Agreement to sell Class A shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full
effect until terminated in accordance with the other provisions
hereof.
2
<PAGE>
(b) The exclusive right granted to the Distributor to pur-
chase Class A shares from the Trust shall not apply to Class A
shares issued in connection with the merger or consolidation of
any other investment company or personal holding company with the
Trust or the acquisition by purchase or otherwise of all (or sub-
stantially all) the assets or the outstanding Class A shares of
any such company by the Trust.
(c) Such exclusive right also shall not apply to Class A
shares issued pursuant to reinvestment of dividends or capital
gains distributions.
(d) Such exclusive right also shall not apply to Class A
shares issued pursuant to any conversion, exchange or
reinstatement privilege afforded redeeming shareholders or to any
other Class A shares as shall be agreed between the Trust and the
Distributor from time to time.
Section 3. Purchase of Class A shares from the Trust.
(a) The Distributor shall have the right to buy from the
Trust the Class A shares needed, but not more than the Class A
shares needed (except for clerical errors in transmission) to
fill unconditional orders for Class A shares of the Fund placed
with the Distributor by eligible investors or securities dealers.
Investors eligible to purchase Class A shares shall be those
persons so identified in the currently effective prospectus and
statement of additional information of the Fund (the "prospectus"
and "statement of additional information", respectively) under
the Securities Act of 1933, as amended (the "Securities Act"),
3
<PAGE>
relating to such Class A shares ("eligible investors"). The
price which the Distributor shall pay for the Class A shares so
purchased from the Trust shall be the net asset value, determined
as set forth in Section 3(d) hereof, used in determining the
public offering price on which such orders were based.
(b) The Class A shares are to be resold by the Distributor
to eligible investors at the public offering price, as set forth
in Section 3(c) hereof, or to securities dealers having
agreements with the Distributor upon the terms and conditions set
forth in Section 7 hereof.
(c) The public offering price(s) of the Class A shares,
i.e., the price per share at which the Distributor or selected
dealers may sell Class A shares to eligible investors, shall be
the public offering price as set forth in the prospectus and
statement of additional information relating to such Class A
shares, but not to exceed the net asset value at which the
Distributor is to purchase the Class A shares, plus a sales
charge not to exceed 4.00% of the public offering price (4.17% of
the net amount invested), subject to reductions for volume
purchases. Class A shares may be sold to certain Trustees,
officers and employees of the Trust, directors and employees of
Merrill Lynch & Co., Inc. and its subsidiaries, and to certain
other persons described in the prospectus and statement of
additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the
prospectus and statement of additional information. If the
4
<PAGE>
public offering price does not equal an even cent, the public
offering price may be adjusted to the nearest cent. All payments
to the Trust hereunder shall be made in the manner set forth in
Section 3(f).
(d) The net asset value of Class A shares shall be deter-
mined by the Trust or any agent of the Trust in accordance with
the method set forth in the prospectus and statement of
additional information of the Fund and guidelines established by
the Trustees.
(e) The Trust shall have the right to suspend the sale of
its Class A shares at times when redemption is suspended pursuant
to the conditions set forth in Section 4(b) hereof. The Trust
shall also have the right to suspend the sale of its Class A
shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some
other event, which, in the judgment of the Trust, makes it
impracticable or inadvisable to sell the Class A shares.
(f) The Trust, or any agent of the Trust designated in
writing by the Trust, shall be promptly advised of all purchase
orders for Class A shares received by the Distributor. Any order
may be rejected by the Trust; provided, however, that the Trust
will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Class A shares from
eligible investors. The Trust (or its agent) will confirm orders
upon their receipt, will make appropriate book entries and, upon
5
<PAGE>
receipt by the Trust (or its agent) of payment therefor, will
deliver deposit receipts or certificates for such Class A shares
pursuant to the instructions of the Distributor. Payment shall
be made to the Trust in New York Clearing House funds. The
Distributor agrees to cause such payment and such instructions to
be delivered promptly to the Trust (or its agent).
Section 4. Repurchase or Redemption of Class A shares by
the Trust.
(a) Any of the outstanding Class A shares may be tendered
for redemption at any time, and the Trust agrees to repurchase or
redeem the Class A shares so tendered in accordance with its
obligations as set forth in Article VIII of its Declaration of
Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement
of additional information. The price to be paid to redeem or
repurchase the Class A shares shall be equal to the net asset
value calculated in accordance with the provisions of Section
3(d) hereof, less any contingent deferred sales charge ("CDSC"),
redemption fee or other charge(s), if any, set forth in the
prospectus and statement of additional information of the Fund.
All payments by the Trust hereunder shall be made in the manner
set forth below. The redemption or repurchase by the Trust of
any of the Class A shares purchased by or through the Distributor
will not affect the sales charge secured by the Distributor or
any selected dealer in the course of the original sale, except
that if any Class A shares are tendered for redemption or repur-
6
<PAGE>
chase within seven business days after the date of the confirma-
tion of the original purchase, the right to the sales charge
shall be forfeited by the Distributor and the selected dealer
which sold such Class A shares.
The Trust shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
the Distributor in New York Clearing House funds on or before the
seventh business day subsequent to its having received the notice
of redemption in proper form. The proceeds of any redemption of
shares shall be paid by the Trust as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall
be paid to or for the account of the shareholder, in each case in
accordance with the applicable provisions of the prospectus and
statement of additional information.
(b) Redemption of Class A shares or payment may be
suspended at times when the New York Stock Exchange is closed,
when trading on said Exchange is suspended, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Trust fairly to determine the value of the net assets of the
Fund, or during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Trust.
(a) The Trust shall furnish to the Distributor copies of
all information, financial statements and other papers which the
7
<PAGE>
Distributor may reasonably request for use in connection with the
distribution of Class A shares of the Fund, and this shall in-
clude, upon request by the Distributor, one certified copy of all
financial statements prepared for the Trust by independent public
accountants. The Trust shall make available to the Distributor
such number of copies of the prospectus and statement of addi-
tional information relating to the Fund as the Distributor shall
reasonably request.
(b) The Trust shall take, from time to time, but subject to
any necessary approval of the Class A shareholders, all necessary
action to fix the number of authorized Class A shares and such
steps as may be necessary to register the same under the Securi-
ties Act, to the end that there will be available for sale such
number of Class A shares as the Distributor may reasonably be
expected to sell.
(c) The Trust shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its Class
A shares for sale under the securities laws of such states as the
Distributor and the Trust may approve. Any such qualification
may be withheld, terminated or withdrawn by the Trust at any time
in its discretion. As provided in Section 8(c) hereof, the
expense of qualification and maintenance of qualification shall
be borne by the Trust. The Distributor shall furnish such
information and other material relating to its affairs and
activities as may be required by the Trust in connection with
such qualification.
8
<PAGE>
(d) The Trust will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of Class A shares of the Fund but shall not be
obligated to sell any specific number of Class A shares. The
services of the Distributor to the Trust hereunder are not to be
deemed exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other in-
vestment companies so long as the performance of its obligations
hereunder is not impaired thereby.
(b) In selling the Class A shares of the Fund, the Distri-
butor shall use its best efforts in all respects duly to conform
with the requirements of all Federal and state laws relating to
the sale of such securities. Neither the Distributor nor any
selected dealer, as defined in Section 7 hereof, nor any other
person is authorized by the Trust to give any information or to
make any representations, other than those contained in the
registration statement or related prospectus and statement of
additional information and any sales literature specifically
approved by the Trust.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Trust, for the confirmation of
sales to eligible investors and selected dealers, the collection
of amounts payable by eligible investors and selected dealers on
9
<PAGE>
such sales, and the cancellation of unsettled transactions, as
may be necessary to comply with the requirements of the National
Association of Securities Dealers, Inc. (the "NASD"), as such
requirements may from time to time exist.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into
selected dealers agreements with securities dealers of its choice
("selected dealers") for the sale of Class A shares and fix
therein the portion of the sales charge which may be allocated to
the selected dealers; provided that the Trust shall approve the
forms of agreements with dealers and the dealer compensation set
forth therein. Class A shares sold to selected dealers shall be
for resale by such dealers only at the public offering price(s)
set forth in the prospectus and statement of additional
information. The form of agreement with selected dealers to be
used during the continuous offering of the Class A shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer
and sell Class A shares only to such selected dealers as are mem-
bers in good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Trust shall bear all costs and expenses of the
Fund, including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any
required registration statements and/or prospectuses and
statements of additional information under the Investment Company
10
<PAGE>
Act, the Securities Act, and all amendments and supplements
thereto, and preparing and mailing annual and interim reports and
proxy materials to Class A shareholders (including but not
limited to the expense of setting in type any such registration
statements, prospectuses, statements of additional information,
annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial con-
sultants. In addition, after the prospectuses, statements of
additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of Class A
shares to selected dealers or eligible investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class A shares for sale to
eligible investors and any expenses of advertising incurred by
the Distributor in connection with such offering.
(c) The Trust shall bear the cost and expenses of qualifi-
cation of the Class A shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
fying the Trust as a broker or dealer in such states of the
United States or other jurisdictions as shall be selected by the
11
<PAGE>
Trust and the Distributor pursuant to Section 5(c) hereof and the
cost and expenses payable to each such state for continuing
qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Trust shall indemnify and hold harmless the Distri-
butor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any Class A shares, which may be
based upon the Securities Act, or on any other statute or at com-
mon law, on the ground that the registration statement or related
prospectus and statement of additional information relating to
the Fund, as from time to time amended and supplemented, or an
annual or interim report to shareholders of the Fund, includes an
untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make
the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with,
information furnished to the Trust in connection therewith by or
on behalf of the Distributor; provided, however, that in no case
(i) is the indemnity of the Trust in favor of the Distributor and
any such controlling persons to be deemed to protect such
Distributor or any such controlling persons thereof against any
12
<PAGE>
liability to the Trust or its security holders to which the
Distributor or any such controlling persons would otherwise be
subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of their duties or by reason of the
reckless disregard of their obligations and duties under this
Agreement; or (ii) is the Trust to be liable under its indemnity
agreement contained in this paragraph with respect to any claim
made against the Distributor or any such controlling persons,
unless the Distributor or such controlling persons, as the case
may be, shall have notified the Trust in writing within a
reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been
served upon the Distributor or such controlling persons (or after
the Distributor or such controlling persons shall have received
notice of such service on any designated agent), but failure to
notify the Trust of any such claim shall not relieve it from any
liability which it may have to the person against whom such
action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Trust will be
entitled to participate at its own expense in the defense or, if
it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Trust elects to assume the
defense, such defense shall be conducted by counsel chosen by it
and satisfactory to the Distributor or such controlling person or
persons, defendant or defendants in the suit. In the event the
Trust elects to assume the defense of any such suit and retain
13
<PAGE>
such counsel, the Distributor or such controlling person or
persons, defendant or defendants in the suit shall bear the fees
and expenses of any additional counsel retained by them, but in
case the Trust does not elect to assume the defense of any such
suit, it will reimburse the Distributor or such controlling
person or persons, defendant or defendants in the suit, for the
reasonable fees and expenses of any counsel retained by them.
The Trust shall promptly notify the Distributor of the
commencement of any litigation or proceedings against it or any
of its officers or Trustees in connection with the issuance or
sale of any of the Class A shares.
(b) The Distributor shall indemnify and hold harmless the
Trust and each of its Trustees and officers and each person, if
any, who controls the Trust against any loss, liability, claim,
damage or expense described in the foregoing indemnity contained
in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity
with, information furnished to the Trust in writing by or on
behalf of the Distributor for use in connection with the
registration statement or related prospectus and statement of
additional information, as from time to time amended, or the
annual or interim reports to Class A shareholders. In case any
action shall be brought against the Trust or any person so
indemnified, in respect of which indemnity may be sought against
the Distributor, the Distributor shall have the rights and duties
given to the Trust, and the Trust and each person so indemnified
14
<PAGE>
shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Adviser Program. In
connection with the Merrill Lynch Mutual Fund Adviser Program,
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, are authorized to offer and sell shares of
the Fund, as agent for the Fund, to participants in such program.
The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid
to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the
Distributor.
Section 11. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until October __, 1996 and
thereafter, but only for so long as such continuance is
specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding Class A voting
securities of the Fund and (ii) by the vote of a majority of
those Trustees who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Trustees or by vote of a majority
of the outstanding Class A voting securities of the Fund, or by
the Distributor, on sixty days' written notice to the other
15
<PAGE>
party. This Agreement shall automatically terminate in the event
of its assignment.
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 12. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifi-
cally approved by (i) the Trustees or by the vote of a majority
of outstanding Class A voting securities of the Fund and (ii) by
the vote of a majority of those Trustees of the Trust who are not
parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on
such approval.
Section 13. Governing Law. The provisions of this
Agreement shall be construed and interpreted in accordance with
the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
Section 14. This Agreement supersedes the prior
Distribution Agreement entered into by the parties hereto with
respect to the Class A shares of the Fund.
Section 15. Personal Liability. The Declaration of Trust
establishing Merrill Lynch Multi-State Municipal Series Trust,
16
<PAGE>
dated August 2, 1985, a copy of which, together with all
amendments thereto (the "Declaration"), is on file in the office
of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal Series Trust"
refers to the Trustees under the Declaration collectively as
trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of said Trust shall be
held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of said Trust, but
the "Trust Property" only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH MULTI-STATE
MUNICIPAL SERIES TRUST
By
--------------------------------------
Title:
MERRILL LYNCH TRUSTS DISTRIBUTOR, INC.
By
--------------------------------------
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
CLASS A SHARES OF BENEFICIAL INTEREST
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES
TRUST, a Massachusetts business trust (the "Trust"), pursuant to
which it acts as the distributor for the sale of Class A shares
of beneficial interest, par value $0.10 per share (herein
referred to as "Class A shares"), of the Trust relating to
Merrill Lynch [State] Municipal Bond Fund (the "Fund"), and as
such has the right to distribute Class A shares of the Fund for
resale. The Trust is an open-end investment company registered
under the Investment Company Act of 1940, as amended, and the
Fund's Class A shares are registered under the Securities Act of
1933, as amended. You have received a copy of the Class A shares
Distribution Agreement (the "Distribution Agreement") between
ourself and the Trust and reference is made herein to certain
provisions of such Distribution Agreement. The terms
"Prospectus" and "Statement of Additional Information" used
herein refer to the prospectus and statement of additional
information, respectively, on file with the Securities and
Exchange Commission which is part of the most recent effective
registration statement pursuant to the Securities Act of 1933, as
amended. We offer to sell to you, as a member of the Selected
Dealers Group, Class A shares of the Fund for resale to investors
identified in the Prospectus and Statement of Additional
Information as eligible to purchase Class A shares ("eligible
investors") upon the following terms and conditions:
1. In all sales of these Class A shares to eligible
investors, you shall act as dealer for your own account and in no
transaction shall you have any authority to act as agent for the
Trust, for us or for any other member of the Selected Dealers
Group, except in connection with the Merrill Lynch Mutual Fund
Adviser program and such other special programs as we from time
to time agree, in which case you shall have authority to offer
and sell shares, as agent for the Trust, to participants in such
program.
<PAGE>
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. The procedure relating to the handling
of orders shall be subject to Section 5 hereof and instructions
which we or the Trust shall forward from time to time to you.
All orders are subject to acceptance or rejection by the
Distributor or the Trust in the sole discretion of either. The
minimum initial and subsequent purchase requirements are as set
forth in the current Prospectus and Statement of Additional
Information of the Fund.
3. The sales charges for sales to eligible investors,
computed as percentages of the public offering price and the
amount invested, and the related discount to Selected Dealers are
as follows:
<TABLE>
<CAPTION>
Discount to
Sales Charge Selected
Sales Charge as Percentage* Dealers as
as Percentage of the Net Percentage
of the Amount of the
Amount of Purchase Offering Price Invested Offering Price
- ------------------ -------------- -------- --------------
<S> <C> <C> <C>
Less than
$25,000 ....................... 4.00% 4.17% 3.75%
$25,000 but less
than $50,000 ................. 3.75% 3.90% 3.50%
$50,000 but less
than $100,000 ................ 3.25% 3.36% 3.00%
$100,000 but less
than $250,000 ................ 2.50% 2.56% 2.25%
$250,000 but less
than $1,000,000 .............. 1.50% 1.52% 1.25%
$1,000,000 and over** ......... 0.00% 0.00% 0.00%
</TABLE>
- -------------------
* Rounded to the nearest one-hundredth percent.
** Initial sales charges may be waived for certain classes of offerees as
set forth in the current Prospectus and Statement of Additional Information
of the Fund. Such purchase may be subject to a contingent deferred sales
A-2
<PAGE>
charge as set forth in the current Prospectus and Statement of Additional
Information.
The term "purchase" refers to a single purchase by an indi-
vidual, or to concurrent purchases, which in the aggregate are at
least equal to the prescribed amounts, by an individual, his
spouse and their children under the age of 21 years purchasing
Class A shares for his or their own account and to single pur-
chases by a trustee or other fiduciary purchasing Class A shares
for a single trust estate or single fiduciary account although
more than one beneficiary is involved. The term "purchase" also
includes purchases by any "company" as that term is defined in
the Investment Company Act of 1940, as amended, but does not
include purchases by any such company which has not been in
existence for at least six months or which has no purpose other
than the purchase of Class A shares of the Fund or Class A shares
of other registered investment companies at a discount; provided,
however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank
or broker-dealer or clients of an investment adviser.
The reduced sales charges are applicable through a right of
accumulation under which certain eligible investors are permitted
to purchase Class A shares of the Fund at the offering price
applicable to the total of (a) the public offering price of the
shares then being purchased plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of the
purchaser's combined holdings of Class A, Class B, Class C and
Class D shares of the Fund and of any other investment company
with an initial sales charge for which the Distributor acts as
the distributor. For any such right of accumulation to be made
available, the Distributor must be provided at the time of pur-
chase, by the purchaser or you, with sufficient information to
permit confirmation of qualification, and acceptance of the pur-
chase order is subject to such confirmation.
The reduced sales charges are applicable to purchases aggre-
gating $25,000 or more of Class A shares or of Class D shares of
any other investment company with an initial sales charge for
which the Distributor acts as the distributor made through you
within a thirteen-month period starting with the first purchase
pursuant to a Letter of Intention in the form provided in the
Prospectus. A purchase not originally made pursuant to a Letter
of Intention may be included under a subsequent letter executed
within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. If the
A-3
<PAGE>
intended amount of shares is not purchased within the
thirteen-month period, an appropriate price adjustment will be
made pursuant to the terms of the Letter of Intention.
You agree to advise us promptly at our request as to amounts
of any sales made by you to eligible investors qualifying for
reduced sales charges. Further information as to the reduced
sales charges pursuant to the right of accumulation or a Letter
of Intention is set forth in the Prospectus and Statement of
Additional Information.
4. You shall not place orders for any of the Class A
shares unless you have already received purchase orders for such
Class A shares at the applicable public offering prices and
subject to the terms hereof and of the Distribution Agreement.
You agree that you will not offer or sell any of the Class A
shares except under circumstances that will result in compliance
with the applicable Federal and state securities laws and that in
connection with sales and offers to sell Class A shares you will
furnish to each person to whom any such sale or offer is made a
copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will
not furnish to any person any information relating to the Class A
shares of the Fund which is inconsistent in any respect with the
information contained in the Prospectus and Statement of
Additional Information (as then amended or supplemented) or
cause any advertisement to be published in any newspaper or
posted in any public place without our consent and the consent of
the Trust.
5. As a selected dealer, you are hereby authorized (i) to
place orders directly with the Trust for Class A shares of the
Fund to be resold by us to you subject to the applicable terms
and conditions governing the placement of orders by us set forth
in Section 3 of the Distribution Agreement and subject to the
compensation provisions of Section 3 hereof and (ii) to tender
Class A shares directly to the Trust or its agent for redemption
subject to the applicable terms and conditions set forth in
Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from
your customers so as to profit yourself as a result of such with-
holding: e.g., by a change in the "net asset value" from that
used in determining the offering price to your customers.
7. If any Class A shares sold to you under the terms of
this Agreement are repurchased by the Trust or by us for the
account of the Trust or are tendered for redemption within seven
A-4
<PAGE>
business days after the date of the confirmation of the original
purchase by you, it is agreed that you shall forfeit your right
to, and refund to us, any discount received by you on such Class
A shares.
8. No person is authorized to make any representations con-
cerning Class A shares of the Fund except those contained in the
current Prospectus and Statement of Additional Information of the
Fund and in such printed information subsequently issued by us or
the Trust as information supplemental to such Prospectus and
Statement of Additional Information. In purchasing Class A
shares through us you shall rely solely on the representations
contained in the Prospectus and Statement of Additional
Information and supplemental information above mentioned. Any
printed information which we furnish you other than the Fund's
Prospectus, Statement of Additional Information, periodic reports
and proxy solicitation material is our sole responsibility and
not the responsibility of the Trust, and you agree that the Trust
shall have no liability or responsibility to you in these
respects unless expressly assumed in connection therewith.
9. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to
the time of offering or sale and you agree thereafter to deliver
to such purchasers copies of the annual and interim reports and
proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional
copies of the Prospectus and Statement of Additional Information,
annual or interim reports and proxy solicitation materials of the
Fund will be supplied to you in reasonable quantities upon
request.
10. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of Class A shares
entirely or to certain persons or entities in a class or classes
specified by us. Each party hereto has the right to cancel this
agreement upon notice to the other party.
11. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering. We shall be under no liability to you
except for lack of good faith and for obligations expressly
assumed by us herein. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of
compliance with any provision of the Securities Act of 1933, as
A-5
<PAGE>
amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
12. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association.
13. Upon application to us, we will inform you as to the
states in which we believe the Class A shares have been qualified
for sale under, or are exempt from the requirements of, the
respective securities laws of such states, but we assume no
responsibility or obligation as to your right to sell Class A
shares in any jurisdiction. We will file with the Department of
State in New York a Further State Notice with respect to the
Class A shares, if necessary.
14. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or tele-
graphed to you at the address specified by you below.
15. Your first order placed pursuant to this Agreement for
the purchase of Class A shares of the Fund will represent your
acceptance of this Agreement.
MERRILL LYNCH TRUSTS DISTRIBUTOR, INC.
By
-------------------------------------
(Authorized Signature)
A-6
<PAGE>
Please return one signed copy
of this agreement to:
MERRILL LYNCH TRUSTS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
-------------------------------------------
By:
-------------------------------------------------
Address: 800 Scudders Mill Road
---------------------------------------
Plainsboro, New Jersey 08536
---------------------------------------
Date: , 1994
--------------------------------------------------
A-7
CLASS C SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ______ day of October, 1994,
between MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST, a
Massachusetts business trust (the "Trust"), and MERRILL LYNCH
FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").
W I T N E S S E T H :
WHEREAS, the Trust is registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"),
as an open-end investment company, and it is affirmatively in the
interest of the Trust to offer its shares for sale continuously;
and
WHEREAS, the Trustees of the Trust (the "Trustees") are
authorized to establish separate series (the "Series") relating
to separate portfolios of securities, each of which will offer
separate classes of shares of beneficial interest, par value
$0.10 per share (collectively referred to as "shares") to
selected groups of purchasers; and
WHEREAS, the Trustees have established and designated the
Merrill Lynch [State] Municipal Bond Fund (the "Fund") as a
series of the Trust; and
<PAGE>
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either direct-
ly to purchasers or through other securities dealers; and
WHEREAS, the Trust and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Fund's Class C shares in order to promote the growth of
the Fund and facilitate the distribution of its Class C shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Trust here-
by appoints the Distributor as the principal underwriter and
distributor of the Trust to sell Class C shares of beneficial
interest in the Fund (sometimes herein referred to as "Class C
shares") to the public and hereby agrees during the term of this
Agreement to sell shares of the Fund to the Distributor upon the
terms and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Trust to act as
principal underwriter and distributor of the Class C shares of
the Fund, except that:
(a) The Trust may, upon written notice to the Distributor,
from time to time designate other principal underwriters and
distributors of Class C shares with respect to areas other than
the United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
2
<PAGE>
Agreement to sell Class C shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full
effect until terminated in accordance with the other provisions
hereof.
(b) The exclusive right granted to the Distributor to
purchase Class C shares from the Trust shall not apply to Class C
shares of the Fund issued in connection with the merger or conso-
lidation of any other investment company or personal holding
company with the Trust or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the
outstanding Class C shares of any such company by the Trust.
(c) Such exclusive right also shall not apply to Class C
shares issued pursuant to reinvestment of dividends or capital
gains distributions.
(d) Such exclusive right also shall not apply to Class C
shares issued pursuant to any conversion, exchange or
reinstatement privilege afforded redeeming shareholders or to any
other Class C shares as shall be agreed between the Trust and the
Distributor from time to time.
Section 3. Purchase of Class C Shares from the Trust.
(a) The Distributor shall have the right to buy from the
Trust the Class C shares needed, but not more than the Class C
shares needed (except for clerical errors in transmission) to
fill unconditional orders for Class C shares of the Fund placed
with the Distributor by eligible investors or securities dealers.
3
<PAGE>
Investors eligible to purchase Class C shares shall be those
persons so identified in the currently effective prospectus and
statement of additional information of the Fund (the "prospectus"
and "statement of additional information", respectively) under
the Securities Act of 1933, as amended (the "Securities Act"),
relating to such Class C shares. The price which the Distributor
shall pay for the Class C shares so purchased from the Trust
shall be the net asset value, determined as set forth in Section
3(c) hereof.
(b) The Class C shares are to be resold by the Distributor
to investors at net asset value, as set forth in Section 3(c)
hereof, or to securities dealers having agreements with the Dis-
tributor upon the terms and conditions set forth in Section 7
hereof.
(c) The net asset value of Class C shares of the Fund shall
be determined by the Trust or any agent of the Trust in
accordance with the method set forth in the prospectus and
statement of additional information and guidelines established by
the Board of Trustees.
(d) The Trust shall have the right to suspend the sale of
its Class C shares at times when redemption is suspended pursuant
to the conditions set forth in Section 4(b) hereof. The Trust
shall also have the right to suspend the sale of its Class C
shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by
4
<PAGE>
Federal or New York authorities, or if there shall have been some
other event, which, in the judgment of the Trust, makes it
impracticable or inadvisable to sell the Class C shares.
(e) The Trust, or any agent of the Trust designated in
writing by the Trust, shall be promptly advised of all purchase
orders for Class C shares received by the Distributor. Any order
may be rejected by the Trust; provided, however, that the Trust
will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Class C shares. The Trust
(or its agent) will confirm orders upon their receipt, will make
appropriate book entries and, upon receipt by the Trust (or its
agent) of payment therefor, will deliver deposit receipts or
certificates for such Class C shares pursuant to the instructions
of the Distributor. Payment shall be made to the Trust in New
York Clearing House funds. The Distributor agrees to cause such
payment and such instructions to be delivered promptly to the
Trust (or its agent).
Section 4. Repurchase or Redemption of Class C Shares by
the Trust.
(a) Any of the outstanding Class C shares may be tendered
for redemption at any time, and the Trust agrees to repurchase or
redeem the Class C shares so tendered in accordance with its
obligations as set forth in Article VIII of its Declaration of
Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement
5
<PAGE>
of additional information of the Fund. The price to be paid to
redeem or repurchase the Class C shares shall be equal to the net
asset value calculated in accordance with the provisions of
Section 3(c) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in
the prospectus and statement of additional information of the
Fund. All payments by the Trust hereunder shall be made in the
manner set forth below.
The Trust shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
the Distributor on or before the seventh business day subsequent
to its having received the notice of redemption in proper form.
The proceeds of any redemption of shares shall be paid by the
Trust as follows: (i) any applicable CDSC shall be paid to the
Distributor, and (ii) the balance shall be paid to or for the
account of the shareholder, in each case in accordance with the
applicable provisions of the prospectus and statement of
additional information.
(b) Redemption of Class C shares or payment may be sus-
pended at times when the New York Stock Exchange is closed, when
trading on said Exchange is suspended, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Trust fairly to determine the value of the net assets of the
6
<PAGE>
Fund, or during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Trust.
(a) The Trust shall furnish to the Distributor copies of
all information, financial statements and other papers which the
Distributor may reasonably request for use in connection with the
distribution of Class C shares of the Fund, and this shall in-
clude, upon request by the Distributor, one certified copy of all
financial statements prepared for the Trust by independent public
accountants. The Trust shall make available to the Distributor
such number of copies of the prospectus and statement of addi-
tional information relating to the Fund as the Distributor shall
reasonably request.
(b) The Trust shall take, from time to time, but subject to
any necessary approval of the shareholders, all necessary action
to fix the number of authorized shares and such steps as may be
necessary to register the same under the Securities Act to the
end that there will be available for sale such number of Class C
shares as the Distributor reasonably may be expected to sell.
(c) The Trust shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its Class
C shares for sale under the securities laws of such states as the
Distributor and the Trust may approve. Any such qualification
may be withheld, terminated or withdrawn by the Trust at any time
in its discretion. As provided in Section 8(c) hereof, the
7
<PAGE>
expense of qualification and maintenance of qualification shall
be borne by the Trust. The Distributor shall furnish such
information and other material relating to its affairs and
activities as may be required by the Trust in connection with
such qualification.
(d) The Trust will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of Class C shares of the Fund but shall not be
obligated to sell any specific number of shares. The services of
the Distributor to the Trust hereunder are not to be deemed
exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other in-
vestment companies so long as the performance of its obligations
hereunder is not impaired thereby.
(b) In selling the Class C shares of the Fund, the Distri-
butor shall use its best efforts in all respects duly to conform
with the requirements of all Federal and state laws relating to
the sale of such securities. Neither the Distributor nor any se-
lected dealer, as defined in Section 7 hereof, nor any other
person is authorized by the Trust to give any information or to
make any representations, other than those contained in the
registration statement or related prospectus and statement of
8
<PAGE>
additional information and any sales literature specifically
approved by the Trust.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Trust, for the confirmation of
sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales,
and the cancellation of unsettled transactions, as may be neces-
sary to comply with the requirements of the National Association
of Securities Dealers, Inc. (the "NASD"), as such requirements
may from time to time exist.
Section 7. Selected Dealer Agreements.
(a) The Distributor shall have the right to enter into
selected dealer agreements with securities dealers of its choice
("selected dealers") for the sale of Class C shares; provided,
that the Trust shall approve the forms of agreements with
dealers. Class C shares sold to selected dealers shall be for
resale by such dealers only at net asset value determined as set
forth in Section 3(c) hereof. The form of agreement with
selected dealers to be used during the continuous offering of the
shares is attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer
and sell Class C shares only to such selected dealers that are
members in good standing of the NASD.
Section 8. Payment of Expenses.
9
<PAGE>
(a) The Trust shall bear all costs and expenses of the
Fund, including fees and disbursements of its counsel and audi-
tors, in connection with the preparation and filing of any re-
quired registration statements and/or prospectuses and statements
of additional information under the Investment Company Act, the
Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
materials to Class C shareholders (including but not limited to
the expense of setting in type any such registration statements,
prospectuses, statements of additional information, annual or
interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial con-
sultants. In addition, after the prospectuses, statements of
additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of Class C
shares to selected dealers or investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class C shares for sale to
the public and any expenses of advertising incurred by the Dis-
10
<PAGE>
tributor in connection with such offering. It is understood and
agreed that so long as the Fund's Class C Shares Distribution
Plan pursuant to Rule 12b-1 under the Investment Company Act
remains in effect, any expenses incurred by the Distributor here-
under may be paid from amounts recovered by it from the Fund
under such Plan.
(c) The Trust shall bear the cost and expenses of qualifi-
cation of the Class C shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
fying the Trust as a broker or dealer in such states of the
United States or other jurisdictions as shall be selected by the
Trust and the Distributor pursuant to Section 5(c) hereof and the
cost and expenses payable to each such state for continuing
qualification therein until the Trust decides to discontinue such
qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Trust shall indemnify and hold harmless the Distri-
butor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any Class C shares, which may be
based upon the Securities Act, or on any other statute or at
common law, on the ground that the registration statement or
11
<PAGE>
related prospectus and statement of additional information
relating to the Fund, as from time to time amended and
supplemented, or an annual or interim report to Class C
shareholders of the Fund, includes an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements
therein not misleading, unless such statement or omission was
made in reliance upon, and in conformity with, information
furnished to the Trust in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the
indemnity of the Trust in favor of the Distributor and any such
controlling persons to be deemed to protect such Distributor or
any such controlling persons thereof against any liability to the
Trust or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the
performance of their duties or by reason of the reckless
disregard of their obligations and duties under this Agreement;
or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made
against the Distributor or any such controlling persons, unless
the Distributor or such controlling persons, as the case may be,
shall have notified the Trust in writing within a reasonable time
after the summons or other first legal process giving information
of the nature of the claim shall have been served upon the
12
<PAGE>
Distributor or such controlling persons (or after the Distributor
or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Trust
of any such claim shall not relieve it from any liability which
it may have to the person against whom such action is brought
otherwise than on account of its indemnity agreement contained in
this paragraph. The Trust will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but if
the Trust elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or
defendants in the suit. In the event the Trust elects to assume
the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or
defendants in the suit shall bear the fees and expenses, as
incurred, of any additional counsel retained by them, but in case
the Trust does not elect to assume the defense of any such suit,
it will reimburse the Distributor or such controlling person or
persons, defendant or defendants in the suit, for the reasonable
fees and expenses, as incurred, of any counsel retained by them.
The Trust shall promptly notify the Distributor of the commence-
ment of any litigation or proceedings against it or any of its
officers or Trustees in connection with the issuance or sale of
any of the Class C shares.
13
<PAGE>
(b) The Distributor shall indemnify and hold harmless the
Trust and each of its Trustees and officers and each person, if
any, who controls the Trust against any loss, liability, claim,
damage or expense, as incurred, described in the foregoing indem-
nity contained in subsection (a) of this Section, but only with
respect to statements or omissions made in reliance upon, and in
conformity with, information furnished to the Trust in writing by
or on behalf of the Distributor for use in connection with the
registration statement or related prospectus and statement of
additional information, as from time to time amended, or the
annual or interim reports to shareholders. In case any action
shall be brought against the Trust or any person so indemnified,
in respect of which indemnity may be sought against the Distri-
butor, the Distributor shall have the rights and duties given to
the Trust, and the Trust and each person so indemnified shall
have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Adviser Program. In
connection with the Merrill Lynch Mutual Fund Adviser Program,
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, are authorized to offer and sell shares of
the Fund, as agent for the Fund, to participants in such program.
The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid
to the Fund, the duties of the Distributor, the payment of
14
<PAGE>
expenses and indemnification obligations of the Fund and the
Distributor.
Section 11. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until October __, 1996 and
thereafter, but only for so long as such continuance is
specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding Class C voting
securities of the Fund and (ii) by the vote of a majority of
those Trustees who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Trustees or by vote of a majority
of the outstanding Class C voting securities of the Fund, or by
the Distributor, on sixty days' written notice to the other
party. This Agreement shall automatically terminate in the event
of its assignment.
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 12. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifi-
cally approved by (i) the Trustees or by the vote of a majority
15
<PAGE>
of outstanding Class C voting securities of the Fund and (ii) by
the vote of a majority of those Trustees of the Trust who are not
parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on
such approval.
Section 13. Governing Law. The provisions of this Agree-
ment shall be construed and interpreted in accordance with the
laws of the State of New York as at the time in effect and the
applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
Section 14. Personal Liability. The Declaration of Trust
establishing Merrill Lynch Multi-State Municipal Series Trust,
dated August 2, 1985, a copy of which, together with all
amendments thereto (the "Declaration"), is on file in the office
of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal Series Trust"
refers to the Trustees under the Declaration collectively as
trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of said Trust shall be
held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of said Trust, but
the "Trust Property" only shall be liable.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH MULTI-STATE MUNICIPAL
SERIES TRUST
By
----------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
----------------------------------------
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
CLASS C SHARES OF BENEFICIAL INTEREST
SELECTED DEALER AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with Merrill Lynch Multi-State Municipal Series
Trust, a Massachusetts business trust (the "Trust"), pursuant to
which it acts as the distributor for the sale of Class C shares
of beneficial interest, par value $0.10 per share (herein
referred to as the "Class C shares"), of the Trust relating to
Merrill Lynch [State] Municipal Bond Fund (the "Fund") and as
such has the right to distribute Class C shares of the Fund for
resale. The Trust is an open-end investment company registered
under the Investment Company Act of 1940, as amended, and the
Fund's Class C shares being offered to the public are registered
under the Securities Act of 1933, as amended. You have received
a copy of the Class C Shares Distribution Agreement (the
"Distribution Agreement") between ourself and the Trust and
reference is made herein to certain provisions of such
Distribution Agreement. The terms "Prospectus" and "Statement of
Additional Information" as used herein refer to the prospectus
and statement of additional information, respectively, on file
with the Securities and Exchange Commission which is part of the
most recent effective registration statement pursuant to the
Securities Act of 1933, as amended. We offer to sell to you, as
a member of the Selected Dealers Group, Class C shares of the
Fund upon the following terms and conditions:
1. In all sales of these Class C shares to the public, you
shall act as dealer for your own account and in no transaction
shall you have any authority to act as agent for the Trust, for
us or for any other member of the Selected Dealers Group, except
in connection with the Merrill Lynch Mutual Fund Adviser program
and such other special programs as we from time to time agree, in
which case you shall have authority to offer and sell shares, as
agent for the Trust, to participants in such program.
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. The procedure relating to the handling
of orders shall be subject to Section 4 hereof and instructions
<PAGE>
which we or the Trust shall forward from time to time to you.
All orders are subject to acceptance or rejection by the
Distributor or the Trust in the sole discretion of either. The
minimum initial and subsequent purchase requirements are as set
forth in the current Prospectus and Statement of Additional
Information of the Fund.
3. You shall not place orders for any of the Class C shares
unless you have already received purchase orders for such Class C
shares at the applicable public offering prices and subject to
the terms hereof and of the Distribution Agreement. You agree
that you will not offer or sell any of the Class C shares except
under circumstances that will result in compliance with the
applicable Federal and state securities laws and that in
connection with sales and offers to sell Class C shares you will
furnish to each person to whom any such sale or offer is made a
copy of the Prospectus and, if requested, the Statement of Addi-
tional Information (as then amended or supplemented) and will not
furnish to any person any information relating to the Class C
shares of the Fund which is inconsistent in any respect with the
information contained in the Prospectus and Statement of Addi-
tional Information (as then amended or supplemented) or cause any
advertisement to be published in any newspaper or posted in any
public place without our consent and the consent of the Trust.
4. As a selected dealer, you are hereby authorized (i) to
place orders directly with the Trust for Class C shares of the
Fund to be resold by us to you subject to the applicable terms
and conditions governing the placement of orders by us set forth
in Section 3 of the Distribution Agreement and (ii) to tender
Class C shares directly to the Trust or its agent for redemption
subject to the applicable terms and conditions set forth in Sec-
tion 4 of the Distribution Agreement.
5. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such with-
holding: e.g., by a change in the "net asset value" from that
used in determining the offering price to your customers.
6. No person is authorized to make any representations
concerning Class C shares of the Fund except those contained in
the current Prospectus and Statement of Additional Information of
the Fund and in such printed information subsequently issued by
us or the Trust as information supplemental to such Prospectus
and Statement of Additional Information. In purchasing Class C
shares through us you shall rely solely on the representations
contained in the Prospectus and Statement of Additional Informa-
tion and supplemental information above mentioned. Any printed
information which we furnish you other than the Fund's Prospec-
tus, Statement of Additional Information, periodic reports and
A-2
<PAGE>
proxy solicitation material is our sole responsibility and not
the responsibility of the Trust, and you agree that the Trust
shall have no liability or responsibility to you in these
respects unless expressly assumed in connection therewith.
7. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to
the time of offering or sale and you agree thereafter to deliver
to such purchasers copies of the annual and interim reports and
proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional
copies of the Prospectus and Statement of Additional Information,
annual or interim reports and proxy solicitation materials of the
Fund will be supplied to you in reasonable quantities upon re-
quest.
8. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of Class C shares
entirely or to certain persons or entities in a class or classes
specified by us. Each party hereto has the right to cancel this
Agreement upon notice to the other party.
9. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering. We shall be under no liability to you
except for lack of good faith and for obligations expressly
assumed by us herein. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of
compliance with any provision of the Securities Act of 1933, as
amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
10. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association.
11. Upon application to us, we will inform you as to the
states in which we believe the Class C shares have been qualified
for sale under, or are exempt from the requirements of, the
respective securities laws of such states, but we assume no
responsibility or obligation as to your right to sell Class C
shares in any jurisdiction. We will file with the Department of
State in New York a Further State Notice with respect to the
Class C shares, if necessary.
A-3
<PAGE>
12. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or tele-
graphed to you at the address specified by you below.
13. Your first order placed pursuant to this Agreement for
the purchase of Class C shares of the Fund will represent your
acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
----------------------------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
--------------------------------------------
By:
---------------------------------------------------
Address: 800 Scudders Mill Road
----------------------------------------------
Plainsboro, New Jersey 08536
-------------------------------------------------------
Date: , 1994
-------------------------------------------------
A-4
CLASS D SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____ day of October, 1994, between
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST, a Massachusetts
business trust (the "Trust"), and MERRILL LYNCH FUNDS
DISTRIBUTOR, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Trust is registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"),
as an open-end investment company, and it is affirmatively in the
interest of the Trust to offer its shares for sale continuously;
and
WHEREAS, the Trustees of the Trust (the "Trustees") are
authorized to establish separate series (the "Series") relating
to separate portfolios of securities, each of which will offer
separate classes of shares of beneficial interest, par value
$0.10 per share (collectively referred to as "shares") to
selected groups of purchasers; and
WHEREAS, the Trustees have established and designated the
Merrill Lynch [State] Municipal Bond Fund (the "Fund") as a
series of the Trust; and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either
directly to purchasers or through other securities dealers; and
<PAGE>
WHEREAS, the Trust and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Class D shares of beneficial interest in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Trust
hereby appoints the Distributor as the principal underwriter and
distributor of the Trust to sell Class D shares of beneficial
interest in the Fund (sometimes herein referred to as "Class D
shares") to the public and hereby agrees during the term of this
Agreement to sell Class D shares of the Fund to the Distributor
upon the terms and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Trust to act as
principal underwriter and distributor of the Class D shares of
the Fund, except that:
(a) The Trust may, upon written notice to the Distributor,
from time to time designate other principal underwriters and dis-
tributors of Class D shares with respect to areas other than the
United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
Agreement to sell Class D shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full
effect until terminated in accordance with the other provisions
hereof.
2
<PAGE>
(b) The exclusive right granted to the Distributor to pur-
chase Class D shares from the Trust shall not apply to Class D
shares issued in connection with the merger or consolidation of
any other investment company or personal holding company with the
Trust or the acquisition by purchase or otherwise of all (or sub-
stantially all) the assets or the outstanding Class D shares of
any such company by the Trust.
(c) Such exclusive right also shall not apply to Class D
shares issued pursuant to reinvestment of dividends or capital
gains distributions.
(d) Such exclusive right also shall not apply to Class D
shares issued pursuant to any conversion, exchange or
reinstatement privilege afforded redeeming shareholders or to any
other Class D shares as shall be agreed between the Trust and the
Distributor from time to time.
Section 3. Purchase of Class D Shares from the Trust.
(a) The Distributor shall have the right to buy from the
Trust the Class D shares needed, but not more than the Class D
shares needed (except for clerical errors in transmission) to
fill unconditional orders for Class D shares of the Fund placed
with the Distributor by eligible investors or securities dealers.
Investors eligible to purchase Class D shares shall be those
persons so identified in the currently effective prospectus and
statement of additional information of the Fund (the "prospectus"
and "statement of additional information", respectively) under
the Securities Act of 1933, as amended (the "Securities Act"),
3
<PAGE>
relating to such Class D shares. The price which the Distributor
shall pay for the Class D shares so purchased from the Trust
shall be the net asset value, determined as set forth in Section
3(d) hereof, used in determining the public offering price on
which such orders were based.
(b) The Class D shares are to be resold by the Distributor
to investors at the public offering price, as set forth in Sec-
tion 3(c) hereof, or to securities dealers having agreements
with the Distributor upon the terms and conditions set forth in
Section 7 hereof.
(c) The public offering price(s) of the Class D shares,
i.e., the price per share at which the Distributor or selected
dealers may sell Class D shares to the public, shall be the
public offering price as set forth in the prospectus and
statement of additional information relating to such Class D
shares, but not to exceed the net asset value at which the
Distributor is to purchase the Class D shares, plus a sales
charge not to exceed 4.00% of the public offering price (4.17% of
the net amount invested), subject to reductions for volume
purchases. Class D shares may be sold to certain Trustees,
officers and employees of the Trust, directors and employees of
Merrill Lynch & Co., Inc. and its subsidiaries, and to certain
other persons described in the prospectus and statement of
additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the
prospectus and statement of additional information. If the
4
<PAGE>
public offering price does not equal an even cent, the public
offering price may be adjusted to the nearest cent. All payments
to the Trust hereunder shall be made in the manner set forth in
Section 3(f).
(d) The net asset value of Class D shares shall be deter-
mined by the Trust or any agent of the Trust in accordance with
the method set forth in the prospectus and statement of
additional information of the Fund and guidelines established by
the Trustees.
(e) The Trust shall have the right to suspend the sale of
its Class D shares at times when redemption is suspended pursuant
to the conditions set forth in Section 4(b) hereof. The Trust
shall also have the right to suspend the sale of its Class D
shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some
other event, which, in the judgment of the Trust, makes it
impracticable or inadvisable to sell the Class D shares.
(f) The Trust, or any agent of the Trust designated in
writing by the Trust, shall be promptly advised of all purchase
orders for Class D shares received by the Distributor. Any order
may be rejected by the Trust; provided, however, that the Trust
will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Class D shares. The Trust
(or its agent) will confirm orders upon their receipt, will make
appropriate book entries and, upon receipt by the Trust (or its
5
<PAGE>
agent) of payment therefor, will deliver deposit receipts or
certificates for such Class D shares pursuant to the instructions
of the Distributor. Payment shall be made to the Trust in New
York Clearing House funds. The Distributor agrees to cause such
payment and such instructions to be delivered promptly to the
Trust (or its agent).
Section 4. Repurchase or Redemption of Class D Shares by
the Trust.
(a) Any of the outstanding Class D shares may be tendered
for redemption at any time, and the Trust agrees to repurchase or
redeem the Class D shares so tendered in accordance with its
obligations as set forth in Article VIII of its Declaration of
Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement
of additional information. The price to be paid to redeem or
repurchase the Class D shares shall be equal to the net asset
value calculated in accordance with the provisions of Section
3(d) hereof, less any contingent deferred sales charge ("CDSC"),
redemption fee or other charge(s), if any, set forth in the
prospectus and statement of additional information of the Fund.
All payments by the Trust hereunder shall be made in the manner
set forth below. The redemption or repurchase by the Trust of
any of the Class D shares purchased by or through the Distributor
will not affect the sales charge secured by the Distributor or
any selected dealer in the course of the original sale, except
that if any Class D shares are tendered for redemption or repur-
6
<PAGE>
chase within seven business days after the date of the confirma-
tion of the original purchase, the right to the sales charge
shall be forfeited by the Distributor and the selected dealer
which sold such Class D shares.
The Trust shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
the Distributor in New York Clearing House funds on or before the
seventh business day subsequent to its having received the notice
of redemption in proper form. The proceeds of any redemption of
shares shall be paid by the Trust as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall
be paid to or for the account of the shareholder, in each case in
accordance with the applicable provisions of the prospectus and
statement of additional information.
(b) Redemption of Class D shares or payment may be
suspended at times when the New York Stock Exchange is closed,
when trading on said Exchange is suspended, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Trust fairly to determine the value of the net assets of the
Fund, or during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Trust.
(a) The Trust shall furnish to the Distributor copies of
all information, financial statements and other papers which the
7
<PAGE>
Distributor may reasonably request for use in connection with the
distribution of Class D shares of the Fund, and this shall in-
clude, upon request by the Distributor, one certified copy of all
financial statements prepared for the Trust by independent public
accountants. The Trust shall make available to the Distributor
such number of copies of the prospectus and statement of addi-
tional information relating to the Fund as the Distributor shall
reasonably request.
(b) The Trust shall take, from time to time, but subject to
any necessary approval of the Class D shareholders, all necessary
action to fix the number of authorized Class D shares and such
steps as may be necessary to register the same under the Securi-
ties Act, to the end that there will be available for sale such
number of Class D shares as the Distributor may reasonably be
expected to sell.
(c) The Trust shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its Class
D shares for sale under the securities laws of such states as the
Distributor and the Trust may approve. Any such qualification
may be withheld, terminated or withdrawn by the Trust at any time
in its discretion. As provided in Section 8(c) hereof, the
expense of qualification and maintenance of qualification shall
be borne by the Trust. The Distributor shall furnish such
information and other material relating to its affairs and
activities as may be required by the Trust in connection with
such qualification.
8
<PAGE>
(d) The Trust will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of Class D shares of the Fund but shall not be
obligated to sell any specific number of Class D shares. The
services of the Distributor to the Trust hereunder are not to be
deemed exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other in-
vestment companies so long as the performance of its obligations
hereunder is not impaired thereby.
(b) In selling the Class D shares of the Fund, the Distri-
butor shall use its best efforts in all respects duly to conform
with the requirements of all Federal and state laws relating to
the sale of such securities. Neither the Distributor nor any
selected dealer, as defined in Section 7 hereof, nor any other
person is authorized by the Trust to give any information or to
make any representations, other than those contained in the
registration statement or related prospectus and statement of
additional information and any sales literature specifically
approved by the Trust.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Trust, for the confirmation of
sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales,
9
<PAGE>
and the cancellation of unsettled transactions, as may be
necessary to comply with the requirements of the National
Association of Securities Dealers, Inc. (the "NASD"), as such
requirements may from time to time exist.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into
selected dealers agreements with securities dealers of its choice
("selected dealers") for the sale of Class D shares and fix
therein the portion of the sales charge which may be allocated to
the selected dealers; provided that the Trust shall approve the
forms of agreements with dealers and the dealer compensation set
forth therein. Class D shares sold to selected dealers shall be
for resale by such dealers only at the public offering price(s)
set forth in the prospectus and statement of additional
information. The form of agreement with selected dealers to be
used during the continuous offering of the Class D shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer
and sell Class D shares only to such selected dealers as are mem-
bers in good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Trust shall bear all costs and expenses of the
Fund, including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any
required registration statements and/or prospectuses and
statements of additional information under the Investment Company
10
<PAGE>
Act, the Securities Act, and all amendments and supplements
thereto, and preparing and mailing annual and interim reports and
proxy materials to Class D shareholders (including but not
limited to the expense of setting in type any such registration
statements, prospectuses, statements of additional information,
annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial con-
sultants. In addition, after the prospectuses, statements of
additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of Class D
shares to selected dealers or investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class D shares for sale to
the public and any expenses of advertising incurred by the
Distributor in connection with such offering. It is understood
and agreed that so long as the Fund's Class D Shares Distribution
Plan pursuant to Rule 12b-1 under the Investment Company Act
remains in effect, any expenses incurred by the Distributor
hereunder in connection with account maintenance activities may
11
<PAGE>
be paid from amounts recovered by it from the Fund under such
plan.
(c) The Trust shall bear the cost and expenses of qualifi-
cation of the Class D shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
fying the Trust as a broker or dealer in such states of the
United States or other jurisdictions as shall be selected by the
Trust and the Distributor pursuant to Section 5(c) hereof and the
cost and expenses payable to each such state for continuing
qualification therein until the Trust decides to discontinue such
qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Trust shall indemnify and hold harmless the Distri-
butor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any Class D shares, which may be
based upon the Securities Act, or on any other statute or at com-
mon law, on the ground that the registration statement or related
prospectus and statement of additional information relating to
the Fund, as from time to time amended and supplemented, or an
annual or interim report to shareholders of the Fund, includes an
untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make
12
<PAGE>
the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with,
information furnished to the Trust in connection therewith by or
on behalf of the Distributor; provided, however, that in no case
(i) is the indemnity of the Trust in favor of the Distributor and
any such controlling persons to be deemed to protect such
Distributor or any such controlling persons thereof against any
liability to the Trust or its security holders to which the
Distributor or any such controlling persons would otherwise be
subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of their duties or by reason of the
reckless disregard of their obligations and duties under this
Agreement; or (ii) is the Trust to be liable under its indemnity
agreement contained in this paragraph with respect to any claim
made against the Distributor or any such controlling persons,
unless the Distributor or such controlling persons, as the case
may be, shall have notified the Trust in writing within a
reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been
served upon the Distributor or such controlling persons (or after
the Distributor or such controlling persons shall have received
notice of such service on any designated agent), but failure to
notify the Trust of any such claim shall not relieve it from any
liability which it may have to the person against whom such
action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Trust will be
13
<PAGE>
entitled to participate at its own expense in the defense or, if
it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Trust elects to assume the
defense, such defense shall be conducted by counsel chosen by it
and satisfactory to the Distributor or such controlling person or
persons, defendant or defendants in the suit. In the event the
Trust elects to assume the defense of any such suit and retain
such counsel, the Distributor or such controlling person or
persons, defendant or defendants in the suit shall bear the fees
and expenses of any additional counsel retained by them, but in
case the Trust does not elect to assume the defense of any such
suit, it will reimburse the Distributor or such controlling
person or persons, defendant or defendants in the suit, for the
reasonable fees and expenses of any counsel retained by them.
The Trust shall promptly notify the Distributor of the
commencement of any litigation or proceedings against it or any
of its officers or Trustees in connection with the issuance or
sale of any of the Class D shares.
(b) The Distributor shall indemnify and hold harmless the
Trust and each of its Trustees and officers and each person, if
any, who controls the Trust against any loss, liability, claim,
damage or expense described in the foregoing indemnity contained
in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity
with, information furnished to the Trust in writing by or on
behalf of the Distributor for use in connection with the
14
<PAGE>
registration statement or related prospectus and statement of
additional information, as from time to time amended, or the
annual or interim reports to Class D shareholders. In case any
action shall be brought against the Trust or any person so
indemnified, in respect of which indemnity may be sought against
the Distributor, the Distributor shall have the rights and duties
given to the Trust, and the Trust and each person so indemnified
shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Adviser Program. In
connection with the Merrill Lynch Mutual Fund Adviser Program,
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, are authorized to offer and sell shares of
the Fund, as agent for the Fund, to participants in such program.
The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid
to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the
Distributor.
Section 11. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until October __, 1996 and
thereafter, but only for so long as such continuance is
specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding Class D voting
securities of the Fund and (ii) by the vote of a majority of
15
<PAGE>
those Trustees who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Trustees or by vote of a majority
of the outstanding Class D voting securities of the Fund, or by
the Distributor, on sixty days' written notice to the other
party. This Agreement shall automatically terminate in the
event of its assignment.
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 12. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifi-
cally approved by (i) the Trustees or by the vote of a majority
of outstanding Class C voting securities of the Fund and (ii) by
the vote of a majority of those Trustees of the Trust who are not
parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on
such approval.
Section 13. Governing Law. The provisions of this
Agreement shall be construed and interpreted in accordance with
the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
16
<PAGE>
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
Section 14. Personal Liability. The Declaration of Trust
establishing Merrill Lynch Multi-State Municipal Series Trust,
dated August 2, 1985, a copy of which, together with all
amendments thereto (the "Declaration"), is on file in the office
of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal Series Trust"
refers to the Trustees under the Declaration collectively as
trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of said Trust shall be
held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of said Trust, but
the "Trust Property" only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
By
------------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
------------------------------------------
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
CLASS D SHARES OF BENEFICIAL INTEREST
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES
TRUST, a Massachusetts business trust (the "Trust"), pursuant to
which it acts as the distributor for the sale of Class D shares
of beneficial interest, par value $0.10 per share (herein
referred to as "Class D shares"), of the Trust relating to
Merrill Lynch [State] Municipal Bond Fund (the "Fund"), and as
such has the right to distribute Class D shares of the Fund for
resale. The Trust is an open-end investment company registered
under the Investment Company Act of 1940, as amended, and the
Fund's Class D shares being offered to the public are registered
under the Securities Act of 1933, as amended. You have received
a copy of the Class D Shares Distribution Agreement (the
"Distribution Agreement") between ourself and the Trust and
reference is made herein to certain provisions of such
Distribution Agreement. The terms "Prospectus" and "Statement of
Additional Information" used herein refer to the prospectus and
statement of additional information, respectively, on file with
the Securities and Exchange Commission which is part of the most
recent effective registration statement pursuant to the
Securities Act of 1933, as amended. We offer to sell to you, as
a member of the Selected Dealers Group, Class D shares of the
Fund upon the following terms and conditions:
1. In all sales of these Class D shares to the public, you
shall act as dealer for your own account and in no transaction
shall you have any authority to act as agent for the Trust, for
us or for any other member of the Selected Dealers Group, except
in connection with the Merrill Lynch Mutual Fund Adviser program
and such other special programs as we from time to time agree, in
which case you shall have authority to offer and sell shares, as
agent for the Trust, to participants in such program.
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. The procedure relating to the handling
A-1
<PAGE>
of orders shall be subject to Section 5 hereof and instructions
which we or the Trust shall forward from time to time to you.
All orders are subject to acceptance or rejection by the
Distributor or the Trust in the sole discretion of either. The
minimum initial and subsequent purchase requirements are as set
forth in the current Prospectus and Statement of Additional
Information of the Fund.
3. The sales charges for sales to the public, computed as
percentages of the public offering price and the amount invested,
and the related discount to Selected Dealers are as follows:
<TABLE>
<CAPTION>
Discount to
Sales Charge Selected
Sales Charge as Percentage* Dealers as
as Percentage of the Net Percentage
of the Amount of the
Amount of Purchase Offering Price Invested Offering Price
- ------------------ -------------- --------- --------------
<S> <C> <C> <C>
Less than
$25,000 ........................ 4.00% 4.17% 3.75%
$25,000 but less
than $50,000 .................. 3.75% 3.90% 3.50%
$50,000 but less
than $100,000 ................. 3.25% 3.36% 3.00%
$100,000 but less
than $250,000 ................. 2.50% 2.56% 2.25%
$250,000 but less
than $1,000,000 ............... 1.50% 1.52% 1.25%
$1,000,000 and ................. 0.00% 0.00% 0.00%
over**................
</TABLE>
- -------------------
* Rounded to the nearest one-hundredth percent.
** Initial sales charges will be waived for certain classes of
offerees as set forth in the current Prospectus and Statement of
Additional Information of the Fund. Such purchase may be subject
to a contingent deferred sales charge as set forth in the current
Prospectus and Statement of Additional Information.
The term "purchase" refers to a single purchase by an indi-
vidual, or to concurrent purchases, which in the aggregate are at
least equal to the prescribed amounts, by an individual, his
A-2
<PAGE>
spouse and their children under the age of 21 years purchasing
Class D shares for his or their own account and to single pur-
chases by a trustee or other fiduciary purchasing Class D shares
for a single trust estate or single fiduciary account although
more than one beneficiary is involved. The term "purchase" also
includes purchases by any "company" as that term is defined in
the Investment Company Act of 1940, as amended, but does not
include purchases by any such company which has not been in
existence for at least six months or which has no purpose other
than the purchase of Class D shares of the Fund or Class D shares
of other registered investment companies at a discount; provided,
however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank
or broker-dealer or clients of an investment adviser.
The reduced sales charges are applicable through a right of
accumulation under which eligible investors are permitted to pur-
chase Class D shares of the Fund at the offering price applicable
to the total of (a) the dollar amount then being purchased plus
(b) an amount equal to the then current net asset value or cost,
whichever is higher, of the purchaser's combined holdings of
Class A, Class B, Class C and Class D shares of the Fund and of
any other investment company with an initial sales charge for
which the Distributor acts as the distributor. For any such
right of accumulation to be made available, the Distributor must
be provided at the time of purchase, by the purchaser or you,
with sufficient information to permit confirmation of
qualification, and acceptance of the purchase order is subject to
such confirmation.
The reduced sales charges are applicable to purchases aggre-
gating $25,000 or more of Class A shares or of Class D shares of
any other investment company with an initial sales charge for
which the Distributor acts as the distributor made through you
within a thirteen-month period starting with the first purchase
pursuant to a Letter of Intention in the form provided in the
Prospectus. A purchase not originally made pursuant to a Letter
of Intention may be included under a subsequent letter executed
within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. If the
intended amount of shares is not purchased within the
thirteen-month period, an appropriate price adjustment will be
made pursuant to the terms of the Letter of Intention.
You agree to advise us promptly at our request as to amounts
of any sales made by you to the public qualifying for reduced
sales charges. Further information as to the reduced sales
charges pursuant to the right of accumulation or a Letter of
A-3
<PAGE>
Intention is set forth in the Prospectus and Statement of Addi-
tional Information.
4. You shall not place orders for any of the Class D
shares unless you have already received purchase orders for such
Class D shares at the applicable public offering prices and
subject to the terms hereof and of the Distribution Agreement.
You agree that you will not offer or sell any of the Class D
shares except under circumstances that will result in compliance
with the applicable Federal and state securities laws and that in
connection with sales and offers to sell Class D shares you will
furnish to each person to whom any such sale or offer is made a
copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will
not furnish to any person any information relating to the Class D
shares of the Fund which is inconsistent in any respect with the
information contained in the Prospectus and Statement of
Additional Information (as then amended or supplemented) or
cause any advertisement to be published in any newspaper or
posted in any public place without our consent and the consent of
the Trust.
5. As a selected dealer, you are hereby authorized (i) to
place orders directly with the Trust for Class D shares of the
Fund to be resold by us to you subject to the applicable terms
and conditions governing the placement of orders by us set forth
in Section 3 of the Distribution Agreement and subject to the
compensation provisions of Section 3 hereof and (ii) to tender
Class D shares directly to the Trust or its agent for redemption
subject to the applicable terms and conditions set forth in
Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from
your customers so as to profit yourself as a result of such with-
holding: e.g., by a change in the "net asset value" from that
used in determining the offering price to your customers.
7. If any Class D shares sold to you under the terms of
this Agreement are repurchased by the Trust or by us for the
account of the Trust or are tendered for redemption within seven
business days after the date of the confirmation of the original
purchase by you, it is agreed that you shall forfeit your right
to, and refund to us, any discount received by you on such Class
D shares.
8. No person is authorized to make any representations con-
cerning Class D shares of the Fund except those contained in the
current Prospectus and Statement of Additional Information of the
Fund and in such printed information subsequently issued by us or
the Trust as information supplemental to such Prospectus and
A-4
<PAGE>
Statement of Additional Information. In purchasing Class D
shares through us you shall rely solely on the representations
contained in the Prospectus and Statement of Additional
Information and supplemental information above mentioned. Any
printed information which we furnish you other than the Fund's
Prospectus, Statement of Additional Information, periodic reports
and proxy solicitation material is our sole responsibility and
not the responsibility of the Trust, and you agree that the Trust
shall have no liability or responsibility to you in these
respects unless expressly assumed in connection therewith.
9. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to
the time of offering or sale and you agree thereafter to deliver
to such purchasers copies of the annual and interim reports and
proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional
copies of the Prospectus and Statement of Additional Information,
annual or interim reports and proxy solicitation materials of the
Fund will be supplied to you in reasonable quantities upon
request.
10. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of Class D shares
entirely or to certain persons or entities in a class or classes
specified by us. Each party hereto has the right to cancel this
agreement upon notice to the other party.
11. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering. We shall be under no liability to you
except for lack of good faith and for obligations expressly
assumed by us herein. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of
compliance with any provision of the Securities Act of 1933, as
amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
12. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association.
13. Upon application to us, we will inform you as to the
states in which we believe the Class D shares have been qualified
for sale under, or are exempt from the requirements of, the
respective securities laws of such states, but we assume no
responsibility or obligation as to your right to sell Class D
A-5
<PAGE>
shares in any jurisdiction. We will file with the Department of
State in New York a Further State Notice with respect to the
Class D shares, if necessary.
14. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or tele-
graphed to you at the address specified by you below.
15. Your first order placed pursuant to this Agreement for
the purchase of Class D shares of the Fund will represent your
acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-----------------------------------
(Authorized Signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
--------------------------------------------
By:
------------------------------------------------
Address: 800 Scudders Mill Road
-----------------------------------------
Plainsboro, New Jersey 08536
-----------------------------------------
Date: , 1994
-------------------------------------------------
A-6
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch North Carolina Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We consent to the use in Post-Effective Amendment No. 3 to Registration
Statement No. 33-48692 of our report dated August 29, 1994 appearing in
the Statement of Additional Information, which is a part of such
Registration Statement, and to the reference to us under the caption
"Financial Highlights" appearing in the Prospectus, which also is a part
of such Registration Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
October 12, 1994
CLASS C DISTRIBUTION PLAN
OF
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the day of October, 1994,
by and between Merrill Lynch Multi-State Municipal Series Trust,
a Massachusetts business trust (the "Trust"), and Merrill Lynch
Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H:
WHEREAS, the Trust is engaged in business as an open-end
investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, the Trust is authorized to establish separate
("Series") each of which will offer separate classes of shares of
beneficial interest par value $0.10 per share (the "Shares") to
selected groups of purchasers; and
WHEREAS, MLFD is a securities firm engaged in the business
of selling shares of investment companies either directly to
purchasers or through other securities dealers; and
WHEREAS, the Trust proposes to enter into a Class C Shares
Distribution Agreement with MLFD, pursuant to which MLFD will act
as the exclusive distributor and representative of the Trust in
the offer and sale of Class C shares of beneficial interest, par
value $0.10 per share (the "Class C shares"), of the Merrill
Lynch [State] Municipal Bond Fund (the "Fund") series of the
Trust to the public; and
WHEREAS, the Trust desires to adopt this Class C Dis-
tribution Plan (the "Plan") pursuant to Rule 12b-1 under the
Investment Company Act, pursuant to which the Trust will pay an
account maintenance fee and a distribution fee to MLFD with
respect to the Fund's Class C shares; and
WHEREAS, the Trustees of the Trust have determined that
there is a reasonable likelihood that adoption of the Plan will
benefit the Fund and its shareholders.
NOW, THEREFORE, the Trust hereby adopts, and MLFD hereby
agrees to the terms of, the Plan in accordance with Rule 12b-1
<PAGE>
under the Investment Company Act on the following terms and
conditions:
1. The Trust shall pay MLFD an account maintenance fee
under the Plan at the end of each month at the annual rate of
0.25% of average daily net assets of the Fund relating to Class C
shares to compensate MLFD and securities firms with which MLFD
enters into related agreements pursuant to Paragraph 3 hereof
("Sub-Agreements") for providing account maintenance activities
with respect to Class C shareholders of the Fund. Expenditures
under the Plan may consist of payments to financial consultants
for maintaining accounts in connection with Class C shares of the
Fund and payment of expenses incurred in connection with such
account maintenance activities including the costs of making
services available to shareholders including assistance in
connection with inquiries related to shareholder accounts.
2. The Trust shall pay MLFD a distribution fee under the
Plan at the end of each month at the annual rate of 0.35% of
average daily net assets of the Fund relating to Class C shares
to compensate MLFD and securities firms with which MLFD enters
into related Sub-Agreements for providing sales and promotional
activities and services. Such activities and services will
relate to the sale, promotion and marketing of the Class C shares
of the Fund. Such expenditures may consist of sales commissions
to financial consultants for selling Class C shares of the Fund,
compensation, sales incentives and payments to sales and
marketing personnel, and the payment of expenses incurred in its
sales and promotional activities, including advertising
expenditures related to the Fund and the costs of preparing and
distributing promotional materials. The distribution fee may
also be used to pay the financing costs of carrying the
unreimbursed expenditures described in this Paragraph 2. Payment
of the distribution fee described in this Paragraph 2 shall be
subject to any limitations set forth in any applicable regulation
of the National Association of Securities Dealers, Inc.
3. The Trust hereby authorizes MLFD to enter into
Sub-Agreements with certain securities firms ("Securities
Firms"), including Merrill Lynch, Pierce, Fenner & Smith
Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs
1 and 2 hereof. MLFD may reallocate all or a portion of its
account maintenance fee or distribution fee to such Securities
Firms as compensation for the above-mentioned activities and
services. Such Sub-Agreement shall provide that the Securities
Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting require-
ments set forth in Paragraph 4 hereof.
2
<PAGE>
4. MLFD shall provide the Trust for review by the Board of
Trustees, and the Trustees shall review, at least quarterly, a
written report complying with the requirements of Rule 12b-1
regarding the disbursement of the account maintenance fee and the
distribution fee during such period.
5. This Plan shall not take effect until it has been
approved by a vote of at least a majority, as defined in the
Investment Company Act, of the outstanding Class C voting securi-
ties of the Fund.
6. This Plan shall not take effect until it has been
approved, together with any related agreements, by votes of a
majority of both (a) the Trustees of the Trust and (b) those
Trustees of the Trust who are not "interested persons" of the
Trust, as defined in the Investment Company Act, and have no
direct or indirect financial interest in the operation of this
Plan or any agreements related to it (the "Rule 12b-1 Trustees
cast in person at a meeting or meetings called for the purpose of
voting on the Plan and such related agreements.
7. The Plan shall continue in effect for so long as such
continuance is specifically approved at least annually in the
manner provided for approval of the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a
majority of the Rule 12b-1 Trustees, or by vote of a majority of
the outstanding Class C voting securities of the Fund.
9. The Plan may not be amended to increase materially the
rate of payments provided for herein unless such amendment is
approved by at least a majority, as defined in the Investment
Company Act, of the outstanding Class C voting securities of the
Fund, and by the Trustees of the Trust in the manner provided for
in Paragraph 6 hereof, and no material amendment to the Plan
shall be made unless approved in the manner provided for approval
and annual renewal in Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomina-
tion of Trustees who are not interested persons, as defined in
the Investment Company Act, of the Trust shall be committed to
the discretion of the Trustees who are not interested persons.
11. The Fund shall preserve copies of the Plan and any
related agreements and all reports made pursuant to Paragraph 4
hereof, for a period of not less than six years from the date of
the Plan, or the agreements or such report, as the case may be,
the first two years in an easily accessible place.
3
<PAGE>
12. The Declaration of Trust establishing the Trust, dated
August 2, 1985, a copy of which, together with all amendments
thereto (the "Declaration"), is on file in the office of the
Secretary of the Commonwealth of Massachusetts, provides that the
name "Merrill Lynch Multi-State Municipal Series Trust" refers to
the Trustees under the Declaration collectively as trustees, but
not as individuals or personally; and no Trustee, shareholder,
officer, employee or agent of the Trust shall be held to any
personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or claim or
otherwise in connection with the affairs of the Trust, but the
"Trust Property" only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this
Distribution Plan as of the date first above written.
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES
TRUST
By
-------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
Title:
4
<PAGE>
CLASS C SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the day of October, 1994, by and
between Merrill Lynch Funds Distributor, Inc., a Delaware corpo-
ration ("MLFD"), and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a Delaware corporation ("Securities Firm").
W I T N E S S E T H :
WHEREAS, MLFD has entered into an agreement with Merrill
Lynch Multi-State Municipal Series Trust, a Massachusetts
business trust (the "Trust"), pursuant to which it acts as the
exclusive distributor for the sale of Class C shares of
beneficial interest, par value $0.10 per share (the "Class C
shares"), of the Merrill Lynch [State] Municipal Bond Fund (the
"Fund") series of the Trust; and
WHEREAS, MLFD and the Trust have entered into a Class C
Shares Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended (the "Act"),
pursuant to which MLFD receives an account maintenance fee from
the Fund at the annual rate of 0.25% of average daily net assets
of the Fund relating to Class C shares for account maintenance
activities related to Class C shares of the Fund and a
distribution fee from the Fund at the annual rate of 0.35% of
average daily net assets of the Fund relating to Class C shares
for providing sales and promotional activities and services
related to the distribution of Class C shares of the Fund; and
WHEREAS, MLFD desires the Securities Firm to perform certain
account maintenance activities and sales and promotional
activities and services for the Fund's Class C shareholders and
the Securities Firm is willing to perform such activities and
services;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance
activities and services with respect to the Class C shares of the
Fund and incur expenditures in connection with such activities
and services of the types referred to in Paragraph 1 of the Plan.
2. The Securities Firm shall provide sales and promotional
activities and services with respect to the sale of the Class C
shares of the Fund, and incur distribution expenditures, of the
types referred to in Paragraph 2 of the Plan.
<PAGE>
3. As compensation for its activities and services
performed under this Agreement, MLFD shall pay the Securities
Firm an account maintenance fee and a distribution fee at the end
of each calendar month in an amount agreed upon by the parties
hereto.
4. The Securities Firm shall provide MLFD, at least
quarterly, such information as reasonably requested by MLFD to
enable MLFD to comply with the reporting requirements of Rule
12b-1 regarding the disbursement of the account maintenance fee
and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been
approved by votes of a majority of both (a) the Trustees of the
Trust and (b) those Trustees of the Trust who are not "interested
persons" of the Trust, as defined in the Act, and have no direct
or indirect financial interest in the operation of the Plan, this
Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Trustees"), cast in person at a meeting or
meetings called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as
such continuance is specifically approved at least annually in
the manner provided for approval of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the
event of its assignment or in the event of the termination of the
Plan or any amendment to the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
-------------------------------------
Title:
2
CLASS D DISTRIBUTION PLAN
OF
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the day of October, 1994,
by and between Merrill Lynch Multi-State Municipal Series Trust,
a Massachusetts business trust (the "Trust"), and Merrill Lynch
Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H :
WHEREAS, the Trust is engaged in business as an open-end
investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, the Trust is authorized to establish separate
("Series") each of which will offer separate classes of shares of
beneficial interest par value $0.10 per share (the "Shares") to
selected groups of purchasers; and
WHEREAS, MLFD is a securities firm engaged in the business
of selling shares of investment companies either directly to
purchasers or through other securities dealers; and
WHEREAS, the Trust proposes to enter into a Class D Shares
Distribution Agreement with MLFD, pursuant to which MLFD will act
as the exclusive distributor and representative of the Trust in
the offer and sale of Class D shares of beneficial interest, par
value $0.10 per share (the "Class D shares"), of the Merrill
Lynch [State] Municipal Bond Fund (the "Fund") series of the
Trust to the public; and
WHEREAS, the Trust desires to adopt this Class D Dis-
tribution Plan (the "Plan") pursuant to Rule 12b-1 under the
Investment Company Act, pursuant to which the Trust will pay an
account maintenance fee to MLFD with respect to the Fund's Class
D shares; and
WHEREAS, the Trustees of the Trust have determined that
there is a reasonable likelihood that adoption of the Plan will
benefit the Fund and its shareholders.
NOW, THEREFORE, the Trust hereby adopts, and MLFD hereby
agrees to the terms of, the Plan in accordance with Rule 12b-1
<PAGE>
under the Investment Company Act on the following terms and
conditions:
1. The Trust shall pay MLFD an account maintenance fee
under the Plan at the end of each month at the annual rate of
0.10% of average daily net assets of the Fund relating to Class D
shares to compensate MLFD and securities firms with which MLFD
enters into related agreements ("Sub-Agreements") pursuant to
Paragraph 2 hereof for providing account maintenance activities
with respect to Class D shareholders of the Fund. Expenditures
under the Plan may consist of payments to financial consultants
for maintaining accounts in connection with Class D shares of the
Fund and payment of expenses incurred in connection with such
account maintenance activities including the costs of making
services available to shareholders including assistance in
connection with inquiries related to shareholder accounts.
2. The Trust hereby authorizes MLFD to enter into
Sub-Agreements with certain securities firms ("Securities
Firms"), including Merrill Lynch, Pierce, Fenner & Smith
Incorporated, to provide compensation to such Securities Firms
for activities of the type referred to in Paragraph 1. MLFD may
reallocate all or a portion of its account maintenance fee to
such Securities Firms as compensation for the above-mentioned
activities. Such Sub-Agreement shall provide that the Securities
Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting
requirements set forth in Paragraph 3 hereof.
3. MLFD shall provide the Trust for review by the Board of
Trustees, and the Trustees shall review, at least quarterly, a
written report complying with the requirements of Rule 12b-1
regarding the disbursement of the account maintenance fee during
such period.
4. This Plan shall not take effect until it has been
approved by a vote of at least a majority, as defined in the
Investment Company Act, of the outstanding Class D voting securi-
ties of the Fund.
5. This Plan shall not take effect until it has been
approved, together with any related agreements, by votes of a
majority of both (a) the Trustees of the Trust and (b) those
Trustees of the Trust who are not "interested persons" of the
Trust, as defined in the Investment Company Act, and have no
direct or indirect financial interest in the operation of this
Plan or any agreements related to it (the "Rule 12b-1 Trustees"),
cast in person at a meeting or meetings called for the purpose of
voting on the Plan and such related agreements.
2
<PAGE>
6. The Plan shall continue in effect for so long as such
continuance is specifically approved at least annually in the
manner provided for approval of the Plan in Paragraph 5.
7. The Plan may be terminated at any time by vote of a
majority of the Rule 12b-1 Trustees, or by vote of a majority of
the outstanding Class D voting securities of the Fund.
8. The Plan may not be amended to increase materially the
rate of payments provided for in Paragraph 1 hereof unless such
amendment is approved by at least a majority, as defined in the
Investment Company Act, of the outstanding Class D voting
securities of the Fund, and by the Trustees of the Trust in the
manner provided for in Paragraph 5 hereof, and no material
amendment to the Plan shall be made unless approved in the
manner provided for approval and annual renewal in Paragraph 5
hereof.
9. While the Plan is in effect, the selection and nomina-
tion of Trustees who are not interested persons, as defined in
the Investment Company Act, of the Trust shall be committed to
the discretion of the Trustees who are not interested persons.
10. The Fund shall preserve copies of the Plan and any
related agreements and all reports made pursuant to Paragraph 3
hereof, for a period of not less than six years from the date of
the Plan, or the agreements or such report, as the case may be,
the first two years in an easily accessible place.
11. The Declaration of Trust establishing the Trust, dated
August 2, 1985, a copy of which, together with all amendments
thereto (the "Declaration"), is on file in the office of the
Secretary of the Commonwealth of Massachusetts, provides that the
name "Merrill Lynch Multi-State Municipal Series Trust" refers to
the Trustees under the Declaration collectively as trustees, but
not as individuals or personally; and no Trustee, shareholder,
officer, employee or agent of the Trust shall be held to any
personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or claim or
otherwise in connection with the affairs of the Trust, but the
"Trust Property" only shall be liable.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Distribution Plan as of the date first above written.
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES
TRUST
By
--------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
--------------------------------------
Title:
4
<PAGE>
CLASS D SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the day of October, 1994, by and
between Merrill Lynch Funds Distributor, Inc. a Delaware corpo-
ration ("MLFD"), and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a Delaware corporation ("Securities Firm").
W I T N E S S E T H :
WHEREAS, MLFD has entered into an agreement with Merrill
Lynch Multi-State Municipal Series Trust, a Massachusetts
business trust (the "Trust"), pursuant to which it acts as the
exclusive distributor for the sale of Class D shares of
beneficial interest, par value $0.10 per share (the "Class D
shares"), of the Merrill Lynch [State] Municipal Bond Fund (the
"Fund") series of the Trust; and
WHEREAS, MLFD and the Trust have entered into a Class D
Shares Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended (the "Act"),
pursuant to which MLFD receives an account maintenance fee from
the Fund at the annual rate of 0.10% of average daily net assets
of the Fund relating to Class D shares for providing account
maintenance activities and services with respect to Class D
shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain
account maintenance activities and services, including assistance
in connection with inquiries related to shareholder accounts, for
the Fund's Class D shareholders and the Securities Firm is
willing to perform such services;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance
activities and services with respect to the Class D shares of the
Fund and incur expenditures in connection with such activities
and services, of the types referred to in Paragraph 1 of the
Plan.
2. As compensation for its services performed under this
Agreement, MLFD shall pay the Securities Firm a fee at the end of
each calendar month in an amount agreed upon by the parties
hereto.
3. The Securities Firm shall provide MLFD, at least
quarterly, such information as reasonably requested by MLFD to
enable MLFD to comply with the reporting requirements of Rule
<PAGE>
12b-1 regarding the disbursement of the fee during such period
referred to in Paragraph 3 of the Plan.
4. This Agreement shall not take effect until it has been
approved by votes of a majority of both (a) the Trustees of the
Trust and (b) those Trustees of the Trust who are not "interested
persons" of the Trust, as defined in the Act, and have no direct
or indirect financial interest in the operation of the Plan, this
Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Trustees"), cast in person at a meeting or
meetings called for the purpose of voting on this Agreement.
5. This Agreement shall continue in effect for as long as
such continuance is specifically approved at least annually in
the manner provided for approval of the Plan in Paragraph 5.
6. This Agreement shall automatically terminate in the
event of its assignment or in the event of the termination of the
Plan or any amendment to the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
-------------------------------------
Title:
2
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> 6
<CIK> 0000888958
<NAME> MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
<SERIES>
<NUMBER> 12
<NAME> MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-START> AUG-01-1993
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 61124314
<INVESTMENTS-AT-VALUE> 61086463
<RECEIVABLES> 924179
<ASSETS-OTHER> 57639
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 62068281
<PAYABLE-FOR-SECURITIES> 0
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