<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1997
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. 6 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 154 /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)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
</TABLE>
(609) 282-2800
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
------------------------
ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
Copies to:
Counsel for the Trust: Philip L. Kirstein, Esq.
BROWN & WOOD LLP FUND ASSET MANAGEMENT
One World Trade Center P.O. Box 9011
New York, New York 10048-0557 Princeton, New Jersey 08543-9011
Attention: Thomas R. Smith, Jr., Esq.
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX):
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest, par
value $.10 per share
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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;
Performance Data
Item 4. General Description of
Registrant.................. Investment Objective and
Policies; Additional
Information
Item 5. Management of the Fund........ Fee Table; Management of the
Trust; Inside Back Cover Page
Item 5A. Management's Discussion of
Fund Performance............ Not Applicable
Item 6. Capital Stock and Other
Securities.................. Cover Page; Merrill Lynch
Select Pricing(Service Mark)
System; Additional
Information
Item 7. Purchase of Securities Being
Offered..................... Cover Page; Fee Table; Merrill
Lynch Select Pricing(Service
Mark) System; Purchase of
Shares; Shareholder
Services; Additional
Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase...... Fee Table; Merrill Lynch
Select Pricing(Service Mark)
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..................... Additional Information
Item 13. Investment Objective and
Policies.................... Investment Objective and
Policies
Item 14. Management of the Fund........ Management of the Trust
Item 15. Control Persons and Principal
Holders of Securities....... Management of the Trust;
General
Information--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
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
</TABLE>
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.
<PAGE>
PROSPECTUS
NOVEMBER 17, 1997
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 O PHONE NO. (609) 282-2800
Merrill Lynch North Carolina Municipal Bond Fund (the 'Fund') is a mutual
fund that seeks 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, and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the U.S. Virgin
Islands and Guam, which pay interest exempt, in the opinion of bond counsel to
the issuer, from Federal and North Carolina income taxes. The Fund may invest in
certain tax-exempt securities classified as 'private activity bonds' that may
subject certain investors in the Fund to an alternative minimum tax. At times,
the Fund may seek to hedge its portfolio through the use of futures transactions
and options. There can be no assurance that the investment objective of the Fund
will be realized. For more information on the Fund's investment objective and
policies, see 'Investment Objective and Policies' on page 10.
------------------------
Pursuant to the Merrill Lynch Select Pricing(Service Mark) 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(Service Mark) 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(Service Mark)
System' on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the 'Distributor'), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from other securities dealers which have entered into selected
dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner
& Smith Incorporated ('Merrill Lynch'). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50 except that for participants in
certain fee-based programs the minimum initial purchase is $500 and the minimum
subsequent purchase is $50. Merrill Lynch may charge its customers a processing
fee (presently $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through Merrill Lynch Financial Data Services, Inc.
(the 'Transfer Agent') are not subject to the processing fee. See 'Purchase of
Shares' and 'Redemption of Shares'.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated November 17, 1997 (the 'Statement of Additional
Information'), has been filed with the Securities and Exchange Commission (the
'Commission') and is available, without charge, by calling or by writing Merrill
Lynch Multi-State Municipal Series Trust (the 'Trust') at the above telephone
number or address. The Commission maintains a Web site (http://www.sec.gov) that
contains the Statement of Additional Information, material incorporated by
reference and other information regarding the Fund. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus. The Fund
is a separate series of the Trust, an open-end management investment company
organized as a Massachusetts business trust.
------------------------
FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ------------------------------- ---------------- ---------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases
(as a percentage of offering price)... 4.00%(c) None None 4.00%(c)
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(d) 4.0% during the first year, 1.0% for one None(d)
decreasing 1.0% annually year(f)
thereafter to 0.0% after the
fourth year(e)
Exchange Fee............................ None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees(g)...................... 0.55% 0.55% 0.55% 0.55%
Rule 12b-1 Fees(h):
Account Maintenance Fees.............. None 0.25% 0.25% 0.10%
Distribution Fees..................... None 0.25% 0.35% None
(Class B shares convert to
Class D shares automatically
after approximately ten years,
and cease being subject to
distribution fees and are
subject to lower account
maintenance fees)
Other Expenses:
Custodian Fees........................ 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(i)........ 0.05% 0.06% 0.06% 0.05%
Miscellaneous......................... 0.27% 0.27% 0.27% 0.27%
----- ----- ----- -----
Total Other Expenses................ 0.33% 0.34% 0.34% 0.33%
----- ----- ----- -----
Total Fund Operating Expenses(j)........ 0.88% 1.39% 1.49% 0.98%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
- ------------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain participants in fee-based programs. See
'Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares'--page 23 and 'Shareholder Services--Fee-Based Programs'--page 33.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See 'Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares'--page 24.
(c) Reduced for purchases of $25,000 and over and waived for purchases of Class
A shares by participants in connection with certain fee-based programs.
Class A and Class D purchases of $1,000,000 or more may not be subject to an
initial sales charge. See 'Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares'--page 23.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ('CDSC'), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% if redeemed within the first year after purchase. Such CDSC may be
waived in connection with certain fee-based programs. See 'Shareholder
Services--Fee-Based Programs'--page 33.
(Footnotes continued on next page)
2
<PAGE>
(Footnotes continued from previous page)
(e) The CDSC may be modified in connection with certain fee-based programs. See
'Shareholder Services--Fee-Based Programs'--page 33.
(f) The CDSC may be waived in connection with certain fee-based programs. See
'Shareholder Services--Fee-Based Programs'--page 33.
(g) See 'Management of the Trust--Management and Advisory Arrangements'--page
19.
(h) See 'Purchase of Shares--Distribution Plans'--page 27.
(i) See 'Management of the Trust--Transfer Agency Services'--page 20.
(j) For the fiscal year ended July 31, 1997, Fund Asset Management, L.P. (the
'Manager') voluntarily waived $43,196 of the management fees due from the
Fund. Total Fund Operating Expenses in the fee table have been restated to
assume the absence of any such waiver because the Manager may discontinue or
reduce such waiver of fees at any time without notice. For the fiscal year
ended July 31, 1997, the Manager waived management fees totaling 0.08% for
Class A shares, 0.08% for Class B shares, 0.08% for Class C shares and 0.08%
for Class D shares, after which the Fund's total expense ratio was 0.80% for
Class A shares, 1.31% for Class B shares, 1.41% for Class C shares and 0.90%
for Class D shares.
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment
including the maximum $40 initial sales charge (Class A and Class D
shares only) and assuming (1) the Total Fund Operating Expenses for
each class set forth on page 2, (2) a 5% annual return throughout the
periods and (3) redemption at the end of the period (including any
applicable CDSC for Class B and Class C Shares):
Class A................................................................ $ 49 $67 $87 $144
Class B................................................................ $ 54 $64 $76 $167
Class C................................................................ $ 25 $47 $81 $178
Class D................................................................ $ 50 $70 $92 $155
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A................................................................ $ 49 $67 $87 $144
Class B................................................................ $ 14 $44 $76 $167
Class C................................................................ $ 15 $47 $81 $178
Class D................................................................ $ 50 $70 $92 $155
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charge permitted under the Conduct
Rules of the National Association of Securities Dealers, Inc. (the 'NASD').
Merrill Lynch may charge its customers a processing fee (presently $5.35) for
confirming purchases and repurchases. Purchases and redemptions directly through
the Fund's Transfer Agent are not subject to the processing fee. See 'Purchase
of Shares' and 'Redemption of Shares.'
3
<PAGE>
MERRILL LYNCH SELECT PRICING(SERVICE MARK) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) 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(Service
Mark) System is used by more than 50 registered investment companies advised by
Merrill Lynch Asset Management, L.P. ('MLAM') or Fund Asset Management, L.P.
('FAM' or the 'Manager'), an affiliate of MLAM. Funds advised by MLAM or FAM
that use the Merrill Lynch Select Pricing(Service Mark) System are referred to
herein as 'MLAM-advised mutual funds'.
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges will not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See 'Shareholder
Services--Exchange Privilege.'
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
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(Service Mark) System
that the investor believes is most beneficial under his particular
circumstances. More detailed information as to each class of shares is set forth
under 'Purchase of Shares.'
4
<PAGE>
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(2)(3)
B CDSC for a period of four years, at 0.25% 0.25% B shares convert to D shares
a rate of 4.0% during the first automatically after approximately
year, decreasing 1.0% annually to ten years(5)
0.0%(4)
C 1.0% CDSC for one year(6) 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. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors.'
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by participants in connection with certain fee-based programs. Class
A and Class D share purchases of $1,000,000 or more may not be subject to an
initial sales charge but instead may be subject to a 1.0% CDSC if redeemed
within one year. Such CDSC may be waived in connection with certain
fee-based programs. See 'Class A' and 'Class D' below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-based
programs was 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Other eligible investors include
participants in certain fee-based programs. In addition, Class A shares
will be offered at net asset value to Merrill Lynch & Co., Inc. ('ML &
Co.') and its subsidiaries (the term 'subsidiaries,' when used herein
with respect to ML & Co., includes MLAM, the Manager and certain other
entities directly or indirectly wholly owned and controlled by ML &
Co.) and their directors and employees, and to members of the Boards of
MLAM-advised mutual funds. The maximum initial sales charge of 4.00% is
reduced for purchases of $25,000 and over and waived for purchases by
participants of Class A shares in connection with certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge, but if the initial sales charge is waived, such
purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection
with certain fee-based programs. Sales charges also are reduced under a
right of accumulation that takes into account
5
<PAGE>
the investor's holdings of all classes of all MLAM-advised mutual
funds. See 'Purchase of Shares-- Initial Sales Charge
Alternatives--Class A and Class D Shares.'
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.25% of the Fund's average net assets
attributable to Class B shares, as well as a CDSC if they are redeemed
within four years of purchase. Such CDSC may be modified in connection
with certain fee-based programs. Approximately ten years after
issuance, Class B shares will convert automatically into Class D shares
of the Fund, which are subject to a lower account maintenance fee of
0.10% and no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into
Class D shares automatically after approximately eight years. If Class
B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the Class
B shares acquired in the exchange will apply, as will the Class D
account maintenance fee of the acquired fund upon the conversion, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired. Automatic conversion of Class B
shares into Class D shares will occur at least once a month on the
basis of the relative net asset values of the shares of the two classes
on the conversion date, without the imposition of any sales load, fee
or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax
purposes. Shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The
conversion period for dividend reinvestment shares is modified as
described under 'Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares.'
Class C: Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.35% of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
CDSC of 1.0% if they are redeemed within one year of purchase. Such
CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor who purchases Class C shares will
be subject to account maintenance fees and higher distribution fees
that will be imposed on Class C shares for an indefinite period subject
to annual approval by the Trust's Board of Trustees and regulatory
limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 4.00% is reduced
for purchases of $25,000 and over. Purchases of $1,000,000 or more may
not be subject to an initial sales charge, but if the initial sales
charge is waived such purchases may be subject to a CDSC of 1.0% if the
shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with certain fee-based programs. The schedule of
initial sales charges and reductions for Class D shares is the same as
the schedule for Class A shares, except that there is no waiver for
purchases in connection with certain fee-based programs. Class D shares
also will be issued upon conversion of Class B shares as described
above under 'Class B.' See 'Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares.'
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(Service Mark) System that the investor believes is most beneficial under
his particular circumstances.
6
<PAGE>
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the CDSCs imposed in connection with purchases of Class B or Class C
shares. Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors that previously purchased Class A
shares may no longer be eligible to purchase Class A shares of other
MLAM-advised mutual funds, those previously purchased Class A shares, together
with Class B, Class C and Class D share holdings, will count toward a right of
accumulation that may qualify the investor for reduced initial sales charges on
new initial sales charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and Class C shares
to have higher expense ratios, pay lower dividends and have lower total returns
than the initial sales charge shares. The ongoing Class D account maintenance
fees will cause Class D shares to have a higher expense ratio, pay lower
dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately ten years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they are subject to higher distribution fees and 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>
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, 1997 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. Further information about the performance of the Fund is contained
in the Fund's most recent annual report to shareholders which may be obtained,
without charge, by calling or by writing the Trust at the telephone number or
address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------- ----------------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
SEPTEMBER 25, SEPTEMBER 25,
FOR THE YEAR ENDED JULY 31, 1992+ TO FOR THE YEAR ENDED JULY 31, 1992+ TO
---------------------------------- JULY 31, ------------------------------------- JULY 31,
1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
------ ------ ------ ------- ------------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................. $10.36 $10.29 $10.19 $ 10.67 $ 10.00 $ 10.36 $ 10.29 $ 10.19 $ 10.67 $ 10.00
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
Investment income--net.... .51 .51 .54 .54 .46 .46 .46 .49 .49 .41
Realized and unrealized
gain (loss) on
investments--net........ .51 .07 .10 (.42) .67 .52 .07 .10 (.42) .67
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
Total from investment
operations................ 1.02 .58 .64 .12 1.13 .98 .53 .59 .07 1.08
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
Less dividends and
distributions:
Investment income--net.... (.51) (.51) (.54) (.54) (.46) (.46) (.46) (.49) (.49) (.41)
In excess of realized gain
on
investments--net........ -- -- -- (.06) -- -- -- -- (.06) --
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
Total dividends and
distributions............. (.51) (.51) (.54) (.60) (.46) (.46) (.46) (.49) (.55) (.41)
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
Net asset value, end of
period.................... $10.87 $10.36 $10.29 $ 10.19 $ 10.67 $ 10.88 $ 10.36 $ 10.29 $ 10.19 $ 10.67
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share..................... 10.17% 5.76% 6.60% 1.11% 11.52%# 9.71% 5.21% 6.06% .60% 11.06%#
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement............. .80% .75% .71% .50% .20%* 1.31% 1.26% 1.22% 1.01% .70%*
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
Expenses.................... .88% .90% .93% .96% 1.15%* 1.39% 1.41% 1.44% 1.46% 1.67%*
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
Investment income--net...... 4.89% 4.92% 5.43% 5.14% 5.26%* 4.39% 4.41% 4.91% 4.64% 4.77%*
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)............ $8,542 $8,043 $9,256 $11,071 $ 9,311 $41,137 $47,236 $49,978 $50,664 $39,970
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
Portfolio turnover.......... 94.59% 90.22% 52.33% 74.35% 27.98% 94.59% 90.22% 52.33% 74.35% 27.98%
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
------ ------ ------ ------- ------ ------- ------- ------- ------- -------------
</TABLE>
- ------------
+ Commencement of Operations.
# Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads.
8
<PAGE>
<TABLE>
<CAPTION>
CLASS C CLASS D
------------------------------- -------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR OCTOBER 21, FOR THE YEAR OCTOBER 21,
ENDED JULY 31, 1994+ TO ENDED JULY 31, 1994+ TO
---------------- JULY 31, ---------------- JULY 31,
1997 1996 1995 1997 1996 1995
------ ------ ----------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $10.36 $10.28 $ 9.80 $10.37 $10.29 $ 9.80
------ ------ ----------- ------ ------ -----------
Investment income--net................................. .45 .45 .37 .50 .50 .41
Realized and unrealized gain on investments--net....... .51 .08 .48 .51 .08 .49
------ ------ ----------- ------ ------ -----------
Total from investment operations......................... .96 .53 .85 1.01 .58 .90
------ ------ ----------- ------ ------ -----------
Less dividends from investment income--net............... (.45) (.45) (.37) (.50) (.50) (.41)
------ ------ ----------- ------ ------ -----------
Net asset value, end of period........................... $10.87 $10.36 $ 10.28 $10.88 $10.37 $ 10.29
------ ------ ----------- ------ ------ -----------
------ ------ ----------- ------ ------ -----------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share....................... 9.50% 5.20% 8.87%# 10.05% 5.75% 9.39%#
------ ------ ----------- ------ ------ -----------
------ ------ ----------- ------ ------ -----------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................... 1.41% 1.37% 1.37%* .90% .85% .85%*
------ ------ ----------- ------ ------ -----------
------ ------ ----------- ------ ------ -----------
Expenses................................................. 1.49% 1.51% 1.57%* .98% 1.00% 1.05%*
------ ------ ----------- ------ ------ -----------
------ ------ ----------- ------ ------ -----------
Investment income--net................................... 4.28% 4.29% 4.67%* 4.79% 4.81% 5.28%*
------ ------ ----------- ------ ------ -----------
------ ------ ----------- ------ ------ -----------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................. $2,052 $1,772 $ 713 $2,132 $1,880 $ 1,377
------ ------ ----------- ------ ------ -----------
------ ------ ----------- ------ ------ -----------
Portfolio turnover....................................... 94.59% 90.22% 52.33% 94.59% 90.22% 52.33%
------ ------ ----------- ------ ------ -----------
------ ------ ----------- ------ ------ -----------
</TABLE>
- ------------
+ Commencement of Operations.
# Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads.
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal and 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 U.S. 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 bearing interest exempt from
Federal income taxes are referred to herein as 'Municipal Bonds' and obligations
the interest on which is exempt from both Federal 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 may seek to
hedge its portfolio through the use of futures transactions to reduce volatility
in the net asset value of Fund shares.
Municipal Bonds may include several types of bonds. The Fund may also
invest in variable rate demand obligations ('VRDOs'). The interest on Municipal
Bonds may bear a fixed rate or be payable at a variable or floating rate. At
least 80% of the Municipal Bonds purchased by the Fund primarily will be what
are commonly referred to as 'investment grade' securities, which are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Moody's Investors Service, Inc. ('Moody's') (currently Aaa,
Aa, A and Baa), Standard & Poor's Ratings Services ('Standard & Poor's')
(currently AAA, AA, A and BBB) or Fitch Investors Service, Inc. ('Fitch')
(currently AAA, AA, A and BBB). If Municipal Bonds are unrated, such securities
will possess creditworthiness comparable, in the opinion of the Manager, to
obligations in which the Fund may invest. Municipal Bonds rated in the fourth
highest rating category, while considered 'investment grade,' have certain
speculative characteristics and are more likely to be downgraded to
non-investment grade than obligations rated in one of the top three rating
categories. See Appendix II--'Ratings of Municipal Bonds' in the Statement of
Additional Information for more information regarding ratings of debt
securities. An issue of rated Municipal Bonds may cease to be rated or its
rating may be reduced below 'investment grade' subsequent to its purchase by the
Fund. If an obligation is downgraded below investment grade, the Manager will
consider factors such as price, credit risk, market conditions, financial
condition of the issuer and interest rates to determine whether to continue to
hold the obligation in the Fund's portfolio.
The Fund may invest up to 20% of its total assets in Municipal Bonds that
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch, or
which, in the Manager's judgment, possess similar credit characteristics. Such
securities, sometimes referred to as 'high yield' or 'junk' bonds, are
predominantly speculative with respect to the capacity to pay interest and repay
principal in accordance with the terms of the security and generally involve a
greater volatility of price than securities in higher rating categories. The
market prices of high yielding, lower-rated securities may fluctuate more than
higher-rated securities and may decline significantly in periods of general
economic difficulty, which may follow periods of rising interest rates. In
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
10
<PAGE>
Information for additional information regarding ratings of debt securities. The
Fund does not intend to purchase debt securities that are in default or which
the Manager believes will be in default.
Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing the
quality of such bonds not only the creditworthiness of the issuer of such bonds
but also the creditworthiness of the financial institution.
The Fund's investments may also include VRDOs and VRDOs in the form of
participation interests ('Participating VRDOs') in variable rate tax-exempt
obligations held by a financial institution. The VRDOs in which the Fund will
invest are tax-exempt obligations which contain a floating or variable interest
rate adjustment formula and an unconditional right of demand on the part of the
holder thereof to receive payment of the unpaid principal balance plus accrued
interest on a short notice period not to exceed seven days. Participating VRDOs
provide the Fund with a specified undivided interest (up to 100%) of the
underlying obligation and the right to demand payment of the unpaid principal
balance plus accrued interest on the Participating VRDOs from the financial
institution on a specified number of days' notice, not to exceed seven days.
There is, however, the possibility that because of 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.
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
11
<PAGE>
by Fitch) or, if unrated, of comparable quality in the opinion of the Manager.
The Fund at all times will have at least 80% of its net assets invested in
securities the interest on which is exempt from Federal taxation. However,
interest received on certain otherwise tax-exempt securities which are
classified as 'private activity bonds' (in general, bonds that benefit
non-governmental entities) may be subject to a Federal alternative minimum tax.
The percentage of the Fund's net assets invested in 'private activity bonds'
will vary during the year. See 'Distributions and Taxes.' In addition, the Fund
reserves the right to invest temporarily a greater portion of its assets in
Temporary Investments for defensive purposes, when, in the judgment of the
Manager, market conditions warrant. The Fund's hedging strategies, which are
described in more detail under 'Financial Futures Transactions and Options,' are
not fundamental policies and may be modified by the Trustees of the Trust
without the approval of the Fund's shareholders.
POTENTIAL BENEFITS
Investment in shares of the Fund offers several benefits. The Fund offers
investors the opportunity to receive income exempt from Federal and 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 MUNICIPAL 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 may present similar risks, depending on the
particular investment. Certain instruments in which the Fund may invest may be
characterized as derivative securities. See 'Description of Municipal Bonds' and
'Financial Futures Transactions and Options.'
Moreover, the Fund ordinarily will invest at least 65% of its total assets
in North Carolina Municipal Bonds, and therefore it is more susceptible to
factors and conditions adversely affecting issuers of North Carolina Municipal
Bonds than is a municipal bond mutual fund that is not concentrated in issuers
of North Carolina Municipal Bonds to this degree.
The value of Municipal Bonds generally may be affected by uncertainties in
the municipal markets as a result of legislation or litigation changing the
taxation of Municipal Bonds or the rights of Municipal Bond holders in the event
of a bankruptcy. Municipal bankruptcies are rare, and certain provisions of the
U.S. Bankruptcy Code governing such bankruptcies are unclear. Further, the
application of state law to Municipal Bond issuers could produce varying results
among the states or among Municipal Bond issuers within a state. These
uncertainties could have a significant impact on the price of the North Carolina
Municipal Bonds or Municipal Bonds in which the Fund invests.
During recent years, North Carolina has moved from an agricultural to a
service and goods-producing economy. North Carolina experienced a positive
General Fund balance for each of its last five fiscal years. The current
economy has led to an unemployment rate that, as of September 1997, is below the
national average. As of the date of this Prospectus, North Carolina's general
obligation bonds are rated Aaa by Moody's and AAA by Standard & Poor's and
Fitch.
The Manager does not believe that the current economic conditions in North
Carolina or other factors described above will have a significant adverse effect
on the Fund's ability to invest in high quality North Carolina Municipal Bonds.
Because the Fund's portfolio will be comprised primarily of investment grade
12
<PAGE>
securities, the Fund is expected to be less subject to market and credit risks
than a fund that invests primarily in lower quality North Carolina Municipal
Bonds. See 'Description of Municipal Bonds' in the Statement of Additional
Information and see also Appendix I--'Economic and Financial 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 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 excluded from gross income for
purposes of Federal income taxation, 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' bonds and 'revenue' bonds, which latter category includes industrial
development bonds ('IDBs') and, for bonds issued after August 15, 1986, private
activity bonds. General obligation bonds are secured by the issuer's pledge of
its faith, credit and taxing power for the payment of principal and interest.
The taxing power of any governmental entity may be limited, however, by
provisions of its state constitution or laws, and an entity's creditworthiness
will depend on many factors, including potential erosion of 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's or entity's control. Accordingly, the capacity
of the issuer of a general obligation bond as to the timely payment of interest
and the repayment of principal when due is affected by the issuer's maintenance
of its tax base.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as payments from the
user of the facility being financed; accordingly, the timely payment of interest
and the repayment of principal in accordance with the terms of the revenue or
special obligation bond is a function of the economic viability of such facility
or such revenue source.
The Fund may purchase IDBs and private activity bonds. IDBs and private
activity bonds are, in most cases, tax-exempt securities issued by states,
municipalities or public authorities to provide funds, usually through a loan or
lease arrangement, to a private entity for the purpose of financing construction
or improvement of a facility to be used by the entity. Such bonds are secured
primarily by revenues derived from loan repayments or lease payments due from
the entity, which may or may not be guaranteed by a parent company or otherwise
secured. IDBs and private activity bonds are generally not secured by a pledge
of the taxing power of the issuer of such bonds. Therefore, an investor should
be aware that repayment of such bonds generally depends on the revenues of a
private entity and be aware of the risks that such an investment may entail.
Continued ability of an entity to generate sufficient revenues for the payment
of principal and interest on such bonds will be affected by many factors
including the size of the entity, its capital structure, demand for its products
or services, competition, general economic conditions, government regulation and
the entity's dependence on revenues from
13
<PAGE>
the operation of the particular facility being financed. The Fund may invest
more than 25% of its total assets in IDBs and private activity bonds. The Fund
also may invest in so-called 'moral obligation' bonds, which are normally issued
by special purpose authorities. If an issuer of moral obligation bonds is unable
to meet itsobligations, the repayment of such bonds becomes a moral commitment,
but not a legal obligation, of the state or municipality in question.
The Fund may invest in Municipal Bonds (and Non-Municipal Tax-Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an index.
To the extent the Fund invests in these types of Municipal Bonds, the Fund's
return on such Municipal Bonds will be subject to risk with respect to the value
of the particular index. Interest and principal payable on the Municipal Bonds
may also be based on relative changes among particular indices. Also, the Fund
may invest in so-called 'inverse floating obligations' or 'residual interest
bonds' on which the interest rates typically decline as market rates increase
and increase as market rates decline. The Fund's return on such types of
Municipal Bonds (and Non-Municipal Tax-Exempt Securities) will be subject to
risk with respect to the value of the particular index, which may include
reduced or eliminated interest payments and losses of invested principal. Such
securities have the effect of providing a degree of investment leverage, since
they may increase or decrease in value in response to changes, as an
illustration, in market interest rates at a rate which is a multiple (typically
two) of the rate at which fixed-rate long-term tax-exempt securities increase or
decrease in response to such changes. As a result, the market values of such
securities will generally be more volatile than the market values of fixed-rate
tax-exempt securities. To seek to limit the volatility of these securities, the
Fund may purchase inverse floating obligations with shorter-term maturities or
which contain limitations on the extent to which the interest rate may vary.
Certain investments in such obligations may be illiquid. The Fund may not invest
in such illiquid obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's total assets. The Manager believes,
however, that indexed and inverse floating obligations represent flexible
portfolio management instruments for the Fund which allow the Fund to seek
potential investment rewards, hedge other portfolio positions or vary the degree
of investment leverage relatively efficiently under different market conditions.
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 type of financing that has not yet developed the depth of
marketability associated with more conventional securities. Certain investments
in lease obligations may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with all other illiquid investments,
would exceed 15% of the Fund's total assets. The Fund may, however, invest
without regard to such limitation in lease obligations which the Manager,
pursuant to guidelines which have been adopted by the Board of Trustees and
subject to the supervision of the Board, 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 by Moody's,
14
<PAGE>
or BBB or better by Standard & Poor's or Fitch. Unrated lease obligations, or
those rated below investment grade, will be considered liquid if the obligations
come to the market through an underwritten public offering and at least two
dealers are willing to give competitive bids. In reference to obligations rated
below investment grade,the Manager must, among other things, also review the
creditworthiness of the municipality obligated to make payment under the lease
obligation and make certain specified determinations based on such factors as
the existence of a rating or credit enhancement such as insurance, the frequency
of trades or quotes for the obligation and the willingness of dealers to make a
market in the obligation.
The value of bonds and other fixed-income obligations may fall when
interest rates rise and rise when interest rates fall. In general, bonds and
other fixed-income obligations with longer maturities will be subject to greater
volatility resulting from interest rate fluctuations than will similar
obligations with shorter maturities. Under normal conditions, it is generally
anticipated that the Fund's average weighted maturity would be in excess of ten
years.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase or sell Municipal Bonds on a delayed delivery basis
or a when-issued basis at fixed purchase terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund enters
into the commitment, and the value of the obligation will thereafter be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery date may be more or less than its purchase price. A
separate account of the Fund will be established with its custodian consisting
of cash, cash equivalents or liquid securities having a market value at all
times at least equal to the amount of the forward commitment.
CALL RIGHTS
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a 'Call
Right'). A holder of a Call Right may exercise such right to require a mandatory
tender for the purchase of related Municipal Bonds, subject to certain
conditions. A Call Right that is not exercised prior to the maturity of the
related Municipal Bond will expire without value. The economic effect of holding
both the Call Right and the related Municipal Bond is identical to that of
holding a Municipal Bond as a non-callable security. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments, would
exceed 15% of the Fund's total assets.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
The Fund is authorized to purchase and sell certain exchange traded
financial futures contracts ('financial futures contracts') solely for the
purpose of hedging its investments in Municipal Bonds against declines in value
and to hedge against increases in the cost of securities it intends to purchase.
However, any transactions involving financial futures or options (including puts
and calls associated therewith) will be in accordance with the Fund's investment
policies and limitations. A financial futures contract obligates the seller of a
contract to deliver and the purchaser of a contract to take delivery of the type
of financial instrument covered by the contract, or in the case of an
index-based futures contract to make and accept a cash settlement, at a specific
future time for a specified price. A sale of financial futures contracts may
provide a hedge against a decline in the value of portfolio securities because
such depreciation may be offset, in whole or in part, by an increase in the
value of the position in the financial futures contracts. A purchase of
financial futures contracts may provide a hedge against an increase in the cost
of securities intended to be purchased, because such appreciation may be offset,
in whole or in part, by an increase in the value of the
15
<PAGE>
position in the futures contracts. Distributions, if any, of net long-term
capital gains from certain transactions in futures or options are taxable at
long-term capital gains rates for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares. Recent legislation has
created new categories of capital gains taxable at different rates, which the
Fund may be able to pass through to shareholders. 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 (the 'CFTC'),
the futures trading activities described herein will not result in the Fund
being deemed to be a 'commodity pool,' as defined under such regulations,
provided that the Fund adheres to certain restrictions. In particular, the Fund
may purchase and sell futures contracts and options thereon (i) for bona fide
hedging purposes, and (ii) for non-hedging purposes, if the aggregate initial
margins and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Fund's portfolio
assets after taking into account unrealized profits and
16
<PAGE>
unrealized losses on any such contracts and options. (However, as stated above,
the Fund intends to engage in options and futures transactions only for hedging
purposes.) Margin deposits may consist of cash or securities acceptable to the
broker and the relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or liquid securities in a segregated account with the Fund's custodian,
so that the amount so segregated plus the amount of initial and variation margin
held in the account of its broker equals the market value of the futures
contracts, thereby ensuring that the use of such futures contract is
unleveraged. It is not anticipated that transactions in futures contracts will
have the effect of increasing portfolio turnover.
Although certain risks are involved in options and futures transactions,
the Manager believes that, because the Fund will engage in futures transactions
only for hedging purposes, the futures portfolio strategies of the Fund will not
subject the Fund to certain risks frequently associated with speculation in
futures transactions. The 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.
This requirement will no longer apply to the Fund after its fiscal year ending
July 31, 1998. 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 in U.S. Government
securities or an affiliate thereof. Under such agreements, the seller agrees,
upon entering into the contract, to repurchase the security from the Fund at a
mutually agreed upon time and price, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period. The Fund may not invest in repurchase
agreements maturing in more than seven days if such investments, together with
the Fund's other illiquid investments, would exceed 15% of the Fund's total
assets. In the event of default by the seller under a repurchase agreement, the
17
<PAGE>
Fund may suffer time delays and incur costs or possible losses in connection
with the disposition of the underlying securities.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act, which means the lesser of (i) 67%
of the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares. Among
its fundamental policies, the Fund may not invest more than 25% of its assets,
taken at market value at the time of each investment, in the securities of
issuers in any particular industry (excluding the U.S. Government and its
agencies and instrumentalities). (For purposes of this restriction, states,
municipalities and their political subdivisions are not considered to be part of
any industry.) Investment restrictions and policies that are non-fundamental
policies may be changed by the Board of Trustees without shareholder approval.
As a non-fundamental policy, the Fund may not borrow amounts in excess of 20% of
its total assets taken at market value (including the amount borrowed), and then
only from banks as a temporary measure for extraordinary or emergency purposes.
In addition, the Fund will not purchase securities while borrowings are
outstanding.
As a non-fundamental policy, the Fund will not invest in securities which
cannot be readily resold because of legal or contractual restrictions or which
cannot otherwise be marketed, redeemed or put to the issuer or a third party, if
at the time of acquisition more than 15% of its total assets would be invested
in such securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Trustees of the Trust has
otherwise determined to be liquid pursuant to applicable law.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the proportion
of its assets that it may invest in obligations of a single issuer. However, the
Fund's investments will be limited so as to qualify for the special tax
treatment afforded regulated investment companies under the Code. See
'Distributions and Taxes--Taxes.' To qualify, among other requirements, the
Trust will limit the Fund's investments so that, at the close of each quarter of
the taxable year, (i) not more than 25% of the market value of the Fund's total
assets will be invested in the securities of a single issuer and (ii) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities of a single
issuer and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer. For purposes of this restriction, the Fund will
regard each state and each political subdivision, agency or instrumentality of
such state and each multi-state agency of which such state is a member and each
public authority which issues securities on behalf of a private entity as a
separate issuer, except that if the security is backed only by the assets and
revenues of a non-government entity then the entity with the ultimate
responsibility for the payment of interest and principal may be regarded as the
sole issuer. These tax-related limitations may be changed by the Trustees of the
Trust to the extent necessary to comply with changes to the Federal tax
requirements. A fund which elects to be classified as 'diversified' under the
1940 Act must satisfy the foregoing 5% and 10% requirements with respect to 75%
of its total assets. To the extent that the Fund assumes large positions in the
obligations of a small number of issuers, the Fund's total return may fluctuate
to 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.
18
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
'interested persons' of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
The Trustees are:
ARTHUR ZEIKEL*--President of the Manager and its affiliate, MLAM; President
and Director of Princeton Services, Inc. ('Princeton Services'); and Executive
Vice President of ML & Co.
JAMES H. BODURTHA--Director and Executive Vice President, The China
Business Group, Inc.
HERBERT I. LONDON--John M. Olin Professor of Humanities, New York
University.
ROBERT R. MARTIN--Former Chairman, Kinnard Investments, Inc.
JOSEPH L. MAY--Attorney in private practice.
ANDRE F. PEROLD--Professor, Harvard Business School.
- ------------------------
* Interested person, as defined in the 1940 Act, of the Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, which is an affiliate of MLAM and is owned and controlled by
ML & Co., a financial services holding company, acts as the manager for the Fund
and provides the Fund with management services. The Manager or MLAM acts as the
investment adviser for more than 140 registered investment companies. MLAM also
provides portfolio management and portfolio analysis services to individuals and
institutions. As of October 31, 1997, the Manager and MLAM had a total of
approximately $271.9 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.
Robert D. Sneeden is the Portfolio Manager of the Fund and has been
responsible for the day-to-day management of the Fund's investment portfolio
since November, 1996. He has been an Assistant Vice President of MLAM since
1994.
Pursuant to the management agreement between the Manager and the Trust on
behalf of the Fund (the 'Management Agreement'), the Manager is entitled to
receive from the Fund a monthly fee based upon the average daily net assets of
the Fund at the following annual rates: 0.55% of the average daily net assets
not exceeding $500 million; 0.525% of the average daily net assets exceeding
$500 million but not exceeding $1.0 billion; and 0.50% of the average daily net
assets exceeding $1.0 billion. For the fiscal year ended July 31, 1997, the
total fee payable by the Fund to the Manager was $303,480 (based on average
daily net assets of approximately $55.2 million), of which $43,196 was
voluntarily waived.
The Management Agreement obligates the Trust on behalf of the Fund to pay
certain expenses incurred in the Fund's operations, including, among other
things, the management fee, legal and audit fees, unaffiliated Trustees' fees
and expenses, registration fees, custodian and transfer agency fees, accounting
and pricing costs,
19
<PAGE>
and certain of the costs of printing proxies, shareholder reports, prospectuses
and statements of additional information. Accounting services are provided to
the Fund by the Manager, and the Fund reimburses the Manager for its costs in
connection with such services. For the fiscal year ended July 31, 1997, the Fund
reimbursed the Manager $53,073 for accounting services. For the fiscal year
ended July 31, 1997, the ratio of total expenses to average net assets was 0.88%
for Class A shares, 1.39% for Class B shares, 1.49% for Class C shares and 0.98%
for Class D shares.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act that incorporates the Code of Ethics of the Manager
(together, the 'Codes'). The Codes significantly restrict the personal investing
activities of all employees of the Manager and, as described below, impose
additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a 'hot' initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security that at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading 'blackout periods' which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
TRANSFER AGENCY SERVICES
The Transfer Agent, which is a subsidiary of ML & Co., acts as the Trust's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the 'Transfer Agency Agreement').
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of $11.00 per Class A or Class D account and up to
$14.00 per Class B or Class C account, and is entitled to reimbursement for
certain transaction charges and out-of-pocket expenses incurred by the Transfer
Agent under the Transfer Agency Agreement. Additionally, a $.20 monthly closed
account charge will be assessed on all accounts which close during the calendar
year. Application of this fee will commence the month following the month the
account is closed. At the end of the calendar year, no further fees will be due.
For purposes of the Transfer Agency Agreement, the term 'account' includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class on a recordkeeping system, provided the recordkeeping system is maintained
by a subsidiary of ML & Co. For the fiscal year ended July 31, 1997, the Fund
paid the Transfer Agent a total fee of $30,021 pursuant to the Transfer Agency
Agreement for providing transfer agency services.
20
<PAGE>
PURCHASE OF SHARES
The Distributor, an affiliate of each of the Manager, MLAM and Merrill
Lynch, acts as the distributor of the shares of the Fund. Shares of the Fund are
offered continuously for sale by the Distributor and other eligible securities
dealers (including Merrill Lynch). Shares of the Fund may be purchased from
securities dealers or by mailing a purchase order directly to the Transfer
Agent. The minimum initial purchase is $1,000 and the minimum subsequent
purchase is $50, except that for participants in certain fee-based programs, the
minimum initial purchase is $500 and the minimum subsequent purchase is $50.
The Fund offers its shares in four classes at a public offering price equal
to the next determined net asset value per share plus sales charges imposed
either at the time of purchase or on a deferred basis depending upon the class
of shares selected by the investor under the Merrill Lynch Select
Pricing(Service Mark) System, as described below. The applicable offering price
for purchase orders is based upon the net asset value of the Fund next
determined after receipt of the purchase orders by the Distributor. As to
purchase orders received by securities dealers prior to the close of business on
the New York Stock Exchange (the 'NYSE') (generally, 4:00 p.m., New York time),
which includes orders received after the close of business on the previous day,
the applicable offering price will be based on the net asset value determined as
of 15 minutes after the close of business on the NYSE on that day, provided the
Distributor in turn receives the order from the securities dealer prior to 30
minutes after the close of business on the NYSE on that day. If the purchase
orders are not received by the Distributor prior to 30 minutes after the close
of business on the NYSE, such orders shall be deemed received on the next
business day. The Trust or the Distributor may suspend the continuous offering
of the Fund's shares at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from time to time.
Any order may be rejected by the Distributor or the Trust. Neither the
Distributor nor the dealers are permitted to withhold placing orders to benefit
themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $5.35) to confirm a sale of shares to such customers.
Purchases made directly through the Fund's Transfer Agent are not subject to the
processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System, which permits each investor to choose the method
of purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees and higher
account maintenance fees. A discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill Lynch
Select Pricing(Service Mark) System is set forth under 'Merrill Lynch Select
Pricing(Service Mark) 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
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, 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
21
<PAGE>
costs relating to a particular class are borne exclusively by that class. Class
B, Class C and Class D shares each have exclusive voting rights with respect to
the Rule 12b-1 distribution plan adopted with respect to such class pursuant to
which account maintenance and/or distribution fees are paid (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). See 'Distribution Plans' below. Each class has
different exchange privileges. See 'Shareholder Services--Exchange Privilege.'
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs and distribution fees with respect to Class B and Class C shares in
that the sales charges and distribution fees applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are eligible
to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(2)(3)
B CDSC for a period of four years, at 0.25% 0.25% B shares convert to D shares
a rate of 4.0% during the first automatically after approximately
year, decreasing 1.0% annually to ten years(5)
0.0%(4)
C 1.0% CDSC for one year(6) 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. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors.'
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by participants in connection with certain fee-based programs. Class
A and Class D share purchases of $1,000,000 or more may not be subject to an
initial sales charge but instead may be subject to a 1.0% CDSC if redeemed
within one year. Such CDSC may be waived in connection with certain
fee-based programs.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-based
programs may be 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
22
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DISCOUNT TO
AS PERCENTAGE AS PERCENTAGE* SELECTED DEALERS
OF OFFERING OF THE NET AS PERCENTAGE OF THE
AMOUNT OF PURCHASE PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------------------------------------------- ------------- --------------- --------------------
<S> <C> <C> <C>
Less than $25,000............................................ 4.00% 4.17% 3.75%
$25,000 but less than $50,000................................ 3.75 3.90 3.50
$50,000 but less than $100,000............................... 3.25 3.36 3.00
$100,000 but less than $250,000.............................. 2.50 2.56 2.25
$250,000 but less than $1,000,000............................ 1.50 1.52 1.25
$1,000,000 and over**........................................ 0.00 0.00 0.00
</TABLE>
- ------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases by participants in connection
with certain fee-based programs. If the sales charge is waived in connection
with a purchase of $1,000,000 or more, such purchases may be subject to a
1.0% CDSC if the shares are redeemed within one year after purchase. Such
CDSC may be waived in connection with certain fee-based programs. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended. For the fiscal year ended July 31, 1997, the Fund sold 270,339 Class
A shares for aggregate net proceeds of $2,840,283. The gross sales charges for
the sale of Class A shares of the Fund for the year were $5,894, of which $619
and $5,275 were received by the Distributor and Merrill Lynch, respectively. For
the fiscal year ended July 31, 1997, the Distributor received no CDSCs with
respect to redemption within one year after purchase of Class A shares purchased
subject to a front-end sales charge waiver. For the fiscal year ended July 31,
1997, the Fund sold 16,824 Class D shares for aggregate net proceeds of
$178,245. The gross sales charges for the sale of Class D shares of the Fund for
the year were $4,136, of which $338 and $3,798 were received by the Distributor
and Merrill Lynch, respectively. For the fiscal year ended July 31, 1997, the
Distributor received no CDSCs with respect to redemption within one year after
purchase of Class D shares purchased subject to a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs and U.S. branches of foreign
banking institutions provided that the program or branch has $3 million or more
initially invested in MLAM-advised mutual funds. Also eligible to purchase Class
A shares at net asset value are participants in certain investment programs
including TMA(Service Mark) Managed Trusts to which Merrill Lynch Trust Company
provides discretionary trustee services, collective investment trusts for which
Merrill Lynch Trust Company serves as trustee and purchases made in connection
with certain fee-based programs. In addition, Class A shares are offered at net
asset value to ML & Co. and its subsidiaries and their directors and employees
23
<PAGE>
and to members of the Boards of MLAM-advised investment companies, including the
Trust. Certain persons who acquire shares of MLAM-advised closed-end funds in
their initial offerings who wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met. In addition, Class A shares of the
Fund and certain other MLAM-advised mutual funds are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from
a sale of certain of their shares of common stock pursuant to a tender offer
conducted by such funds in shares of the Fund and certain MLAM-advised mutual
funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under 'Eligible Class A Investors.' See 'Shareholder
Services--Fee-Based Programs.' Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to Employee
AccessSM Accounts available through authorized employers which provide
employer-sponsored retirement and savings plans that are eligible to purchase
such shares at net asset value. Class A shares are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, subject to
certain conditions, Class A and Class D shares are offered at net asset value to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc., who wish to reinvest in shares of the
Fund the net proceeds from a sale of certain of their shares of common stock,
pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
which declines each year, while Class C shares are subject only to a one-year
1.0% CDSC. On the other hand, approximately ten years after Class B shares are
issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted into
Class D shares of the Fund and thereafter will be subject to lower continuing
fees. See 'Conversion of Class B Shares to Class D Shares' below. Both Class B
and 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 ongoing account maintenance fees are used to
compensate Merrill Lynch for providing continuing account maintenance
activities.
24
<PAGE>
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See 'Distribution
Plans' below.
Proceeds from the CDSCs and the distribution fees are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to financial
consultants for selling Class B and Class C shares from the 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. The proceeds from the account
maintenance fees are used to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing continuing account maintenance
activities. Approximately ten years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to a lower
account maintenance fee and no distribution fee. Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately eight years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See 'Limitations on
the Payment of Deferred Sales Charges' below. Class B shareholders of the Fund
exercising the exchange privilege described under 'Shareholder
Services--Exchange Privilege' will continue to be subject to the Fund's CDSC
schedule, if such schedule is higher than the CDSC schedule relating to the
Class B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares that are
redeemed within four years of purchase may be subject to a CDSC at the rates set
forth below charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CDSC AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE 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, 1997, the Distributor received CDSCs of
$72,913 with respect to redemptions of Class B shares, all of which were paid to
Merrill Lynch. Additional CDSCs payable to the Distributor may have been waived
or converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
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
25
<PAGE>
and then of shares held longest during the four-year period. The charge will not
be applied to dollar amounts representing an increase in the net asset value
since the time of purchase. A transfer of shares from a shareholder's account to
another account will be assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor makes
his first redemption of 50 shares (proceeds of $600), 10 shares will not be
subject to a CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the CDSC is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Code) of a shareholder. The Class B CDSC also is
waived for any Class B shares that are purchased within qualifying Employee
AccessSM Accounts. Additional information concerning the waiver of the Class B
CDSC is set forth in the Statement of Additional Information. The terms of the
CDSC may be modified in connection with redemptions to fund participation in
certain fee-based programs. See 'Shareholder Services--Fee-Based Programs.'
Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a
percentage of the dollar amount subject thereto. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no Class C CDSC will be imposed on increases
in net asset value above the initial purchase price. In addition, no Class C
CDSC will be assessed on shares derived from reinvestment of dividends or
capital gains distributions. The Class C CDSC may be waived in connection with
redemptions to fund participation in certain fee-based programs. See
'Shareholder Services--Fee-Based Programs.' For the fiscal year ended July 31,
1997, the Distributor received CDSCs of $303 with respect to redemptions of
Class C shares, all of which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applicable to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the 'Conversion Period'), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.10% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
'Conversion Date') on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
26
<PAGE>
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period may be modified for investors who participate in
certain fee-based programs. See 'Shareholder Services--Fee-Based Programs.'
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the 1940 Act (each a 'Distribution
Plan') with respect to the account maintenance and/or distribution fees paid by
the Fund to the Distributor with respect to such classes. The Class B and Class
C Distribution Plans provide for the payment of account maintenance fees and
distribution fees, and the Class D Distribution Plan provides for the payment of
account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each
provides that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid monthly, at the
annual rates of 0.25%, 0.25% and 0.10%, respectively, of the average daily net
assets of the Fund attributable to shares of the relevant class in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) in
connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.25% and
0.35%, respectively, of the average daily net assets of the Fund attributable to
the shares of the relevant class in order to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) for providing shareholder and
distribution services, and bearing certain distribution-related expenses of the
Fund, including payments to financial consultants for selling Class B and Class
C shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended July 31, 1997, the Fund paid the Distributor
$217,371 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $43.5
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended July 31, 1997, the Fund paid the
Distributor $10,871 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately $1.8
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended July 31, 1997, the Fund paid the
Distributor $2,044 pursuant to the Class D Distribution
27
<PAGE>
Plan (based on average net assets subject to such Class D Distribution Plan of
approximately $2.0 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class D shares.
Payments under the Distribution Plans are based on a percentage of average
daily net assets attributable to the shares regardless of the amount of expenses
incurred and, accordingly, distribution-related revenues from the Distribution
Plans may be more or less than distribution-related expenses. Information with
respect to the distribution-related revenues and expenses is presented to the
Trustees for their consideration in connection with their deliberations as to
the continuance of the Class B and Class C Distribution Plans. This information
is presented annually as of December 31 of each year on a 'fully allocated
accrual' basis and quarterly on a 'direct expense and revenue/cash' basis. On
the fully allocated accrual basis, revenues consist of the account maintenance
fees, distribution fees, CDSCs and certain other related revenues, and expenses
consist of financial consultant compensation, branch office and regional
operation center selling and transaction processing expenses, advertising, sales
promotion and marketing expenses, corporate overhead and interest expense. On
the direct expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and CDSCs, and the expenses consist of
financial consultant compensation.
As of December 31, 1996, the fully allocated accrual expenses incurred by
the Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated accrual revenues for such
period by approximately $773,000 (1.77% of Class B net assets at that date). As
of July 31, 1997, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $522,491 (1.27% of
Class B net assets at that date). As of December 31, 1996, the fully allocated
accrual expenses incurred by the Distributor and Merrill Lynch for the period
since commencement of operations of Class C shares exceeded fully allocated
accrual revenues by approximately $8,000 (0.46% of Class C net assets at that
date). As of July 31, 1997, direct cash revenues for the period since the
commencement of operations of Class C shares exceeded direct cash expenses by
$10,677 (0.52% of Class C net assets at that date).
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges) plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being 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.
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
28
<PAGE>
year. However, the Distributor intends to seek annual continuation of the
Distribution Plans. In their review of the Distribution Plans, the Trustees will
be asked to take into consideration expenses incurred in connection with the
account maintenance and/or distribution of each class of shares separately. The
initial sales charges, the account maintenance fee, the distribution fee and/or
the CDSCs received with respect to one class will not be used to subsidize the
sale of shares of another class. Payments of the distribution fee on Class B
shares will terminate upon conversion of those Class B shares into Class D
shares as set forth under 'Deferred Sales Charge Alternatives--Class B and Class
C Shares--Conversion of Class B Shares to Class D Shares.'
REDEMPTION OF SHARES
The Trust is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper notice
of redemption. Except for any CDSC that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so, without charge, by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to Merrill
Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of shares deposited
with the Transfer Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares for which
certificates have been issued may be accomplished by a written letter as noted
above accompanied by certificates for the shares to be redeemed. Redemption
requests should not be sent to the Trust. The redemption request in either event
requires the signature(s) of all persons in whose name(s) the shares are
registered, signed exactly as such name(s) appear(s) on the Transfer Agent's
register. The signature(s) on the redemption request must be guaranteed by an
'eligible guarantor institution' as such term is defined in Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. Notarized signatures are not sufficient. In certain instances, the
Transfer Agent may require additional documents such as, but not limited to,
trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payments will be mailed within seven
days of receipt of a proper notice of redemption.
At various times the Trust may be requested to redeem Fund shares for which
it has not yet received good payment (e.g., cash, Federal funds or certified
check drawn on a United States bank). The Trust may delay or cause to be delayed
the mailing of a redemption check until such time as it has assured itself that
good payment has been collected for the purchase of such Fund shares, which may
take up to 10 days.
29
<PAGE>
REPURCHASE
The Trust also will repurchase Fund shares through a shareholder's listed
securities dealer. The Trust normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after receipt of the order by the dealer, provided that the
request for repurchase is received by the dealer prior to the close of business
on the NYSE (generally, 4:00 p.m., New York time) on the day received and such
request is received by the Trust from such dealer not later than 30 minutes
after the close of business on the NYSE on the same day. Dealers have the
responsibility to submit such repurchase requests to the Trust not later than 30
minutes after the close of business on the NYSE, in order to obtain that day's
closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than any applicable
CDSC). Securities firms that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Trust. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a repurchase of shares
to such customers. Repurchases made directly through the Fund's Transfer Agent
are not subject to the processing fee. The Trust reserves the right to reject
any order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. However, a
shareholder whose order for repurchase is rejected by the Trust may redeem Fund
shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares,
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. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
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.
30
<PAGE>
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 income 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 transaction confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gains distributions. A
shareholder may make additions to his or her Investment Account at any time by
mailing a check directly to the Transfer Agent. Shareholders may also maintain
their accounts through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened automatically at the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he or she be issued certificates for such
shares and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. 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(Service Mark) System, Class A
shareholders may exchange Class A shares of the Fund for Class A shares of a
second MLAM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in the account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second fund.
If the Class A shareholder wants to exchange Class A shares for shares of a
second MLAM-advised mutual fund, and the shareholder does not hold Class A
shares of the second fund in his or her account at the time of the exchange and
is not otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of the
second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
31
<PAGE>
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of the Fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is 'tacked' to the holding period for the newly acquired shares of the other
fund.
Class A, Class B, Class C and Class D shares also are 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 of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see 'Shareholder Services--Exchange Privilege' in the
Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without a sales charge, at the net
asset value per share at the close of business on the monthly payment date for
such dividends and distributions. A shareholder may at any time, by written
notification to Merrill Lynch, if the shareholder's account is maintained with
Merrill Lynch, or by written notification or telephone (1-800-MER-FUND) to the
Transfer Agent if the shareholder's account is maintained with the Transfer
Agent, elect to have subsequent dividends or both dividends and capital gains
distributions paid in cash, rather than reinvested, in which event payment will
be mailed monthly. The Fund is not responsible for any failure of delivery to
the shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks. No CDSC will be
imposed upon redemption of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to receive systematic withdrawal payments from his
or her Investment Account in the form of payment by check or through automatic
payment by direct deposit to his or her bank account on either a monthly or
quarterly basis. Alternatively, a shareholder whose shares are held within a
CMA(Registered) or CBA(Registered) account may elect to have shares redeemed on
a monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA(Registered) or CBA(Registered) Systematic Redemption Program, subject to
certain conditions. With respect to redemptions of Class B or Class C shares
pursuant to a systematic withdrawal plan, the maximum number of Class B or Class
C shares that can be redeemed from an account annually shall not exceed 10% of
the value of
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<PAGE>
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See 'Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares--Contingent Deferred Sales Charges--Class B Shares' and '--Contingent
Deferred Sales Charges--Class C Shares.' Where the systematic withdrawal plan is
applied to Class B shares, upon conversion of the last Class B shares in an
account to Class D shares, the systematic withdrawal plan will automatically be
applied thereafter to Class D shares. See 'Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares--Conversion of Class B Shares to
Class D Shares.'
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C and Class D shares may be
made to an investor's Investment Account by prearranged charges of $50 or more
to his or her regular bank account. Alternatively, investors who maintain
CMA(Registered) or CBA(Registered) accounts may arrange to have periodic
investments made in the Fund in their CMA(Registered) or CBA(Registered) account
or in certain related accounts in amounts of $100 or more through the
CMA(Registered) or CBA(Registered) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a 'Program')
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(800) MER-FUND or (800) 637-3863.
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities of the Fund. Municipal
Bonds and other securities in which the Fund invests are traded primarily in the
over-the-counter market. Where possible, the Trust deals directly with the
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Trust to obtain the best net results in conducting portfolio
transactions for the Fund, taking into account such factors as price (including
the applicable dealer spread), the size, type and difficulty of the transactions
involved, the firm's general execution and operations facilities, and the firm's
risk in
33
<PAGE>
positioning the securities involved and the provision of supplemental investment
research by the firm. While reasonably competitive spreads or commissions are
sought, the Fund will not necessarily be paying the lowest spread or commission
available. The sale of shares of the Fund may be taken into consideration as a
factor in the selection of brokers or dealers to execute portfolio transactions
for the Fund. The portfolio securities of the Fund generally are traded on a net
basis and normally do not involve either brokerage commissions or transfer
taxes. The cost of portfolio securities transactions of the Fund primarily
consists of dealer or underwriter spreads. Under the 1940 Act, persons
affiliated with the Trust, including Merrill Lynch, are prohibited from dealing
with the Trust as a principal in the purchase and sale of securities unless such
trading is permitted by an exemptive order issued by the Commission. The Trust
has obtained an exemptive order permitting it to engage in certain principal
transactions with Merrill Lynch involving high quality short-term municipal
bonds subject to certain conditions. In addition, the Fund may not purchase
securities, including Municipal Bonds, during the existence of any underwriting
syndicate of which Merrill Lynch is a member or in a private placement in which
Merrill Lynch serves as placement agent except pursuant to procedures approved
by the Trustees of the Trust which either comply with rules adopted by the
Commission or with interpretations of the Commission staff. The Trust has
applied for an exemptive order permitting it to, among other things, (i)
purchase high quality tax-exempt securities from Merrill Lynch when Merrill
Lynch is a member of an underwriting syndicate and (ii) purchase tax-exempt
securities from and sell tax-exempt securities to Merrill Lynch in secondary
market transactions. An affiliated person of the Trust may serve as its broker
in over-the-counter transactions conducted for the Fund on an agency basis only.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily prior
to the determination of the net asset value which is calculated 15 minutes after
the close of business on the NYSE (generally, 4:00 p.m., New York time) on that
day. The net investment income of the Fund for dividend purposes consists of
interest earned on portfolio securities, less expenses, in each case computed
since the most recent determination of the net asset value. Expenses of the
Fund, including the management fees and the account maintenance and distribution
fees, are accrued daily. Dividends of net investment income are declared daily
and reinvested monthly in the form of additional full and fractional shares of
the Fund at net asset value as of the close of business on the 'payment date'
unless the shareholder elects to receive such dividends in cash. Shares will
accrue dividends as long as they are issued and outstanding. Shares are issued
and outstanding from the settlement date of a purchase order to the day prior to
the settlement date of a redemption order.
All net realized capital gains, if any, are declared and distributed to the
Fund's shareholders at least annually. Capital gains distributions will be
reinvested automatically in shares unless the shareholder elects to receive such
distributions in cash.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable to that class. See 'Additional Information-- Determination of
Net Asset Value.'
See 'Shareholder Services' for information as to how to elect either
dividend reinvestment or cash payments. Portions of dividends and distributions
which are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of the Fund or received in cash.
34
<PAGE>
TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ('RICs') under the Code. As
long as it so qualifies, the Fund (but not its shareholders) will not be subject
to Federal income tax to the extent that it distributes its net investment
income and net realized capital gains. The Trust intends to cause the Fund to
distribute substantially all of such income.
To the extent that the dividends distributed to the Fund's Class A, Class
B, Class C and Class D shareholders (together, the 'shareholders') are derived
from interest income exempt from Federal tax under Code Section 103(a) and are
properly designated as 'exempt-interest dividends' by the Trust, they will be
excludable from a shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends are included, however, in determining the portion, if
any, of a person's social security benefits and railroad retirement benefits
subject to Federal income taxes. The portion of such exempt-interest dividends
derived from interest received by the Fund from 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 excluded from
taxable income for North Carolina income tax purposes. Interest on indebtedness
incurred or continued to purchase or carry Fund shares is not deductible for
Federal or North Carolina income tax purposes to the extent attributable to
exempt-interest dividends. Persons who may be 'substantial users' (or 'related
persons' of substantial users) of facilities financed by industrial development
bonds or private activity bonds held by the Fund should consult their tax
advisors before purchasing Fund shares.
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. Distributions from investment income and capital gains
of the Fund, including exempt-interest dividends, may also be subject to state
taxes in states other than North Carolina and may be subject to local taxes.
Accordingly, investors in the Fund should consult their tax advisors with
respect to the application of such taxes to the receipt of Fund dividends and to
the holding of shares in the Fund.
To the extent that the Fund's distributions are derived from interest on
its taxable investments (including, 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 both Federal income tax
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 that were issued before
July 1, 1995. Distributions, if any, from an excess of net long-term capital
gains over net short-term capital losses derived from the sale of securities or
from certain transactions in futures or options ('capital gain dividends') are
taxable as long-term capital gains for Federal income tax purposes, regardless
of the length of time the shareholder has owned Fund shares. Such capital gain
dividends are also subject to North Carolina income taxes, except to the extent
attributable to gains from certain obligations of the State of North Carolina
and its political subdivisions that were issued before July 1, 1995. Recent
legislation creates additional categories of capital gains taxable at different
rates. Not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any exempt-interest dividends, ordinary income dividends or capital gain
dividends, as well as the amount of capital gain dividends in
35
<PAGE>
the different categories of capital gain referred to above.Distributions by the
Fund, whether from exempt-interest income, ordinary income or capital gains,
will not be eligible for the dividends received deduction allowed to
corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming 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 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. In addition, any
such loss that is not disallowed under the rule stated above will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. If the Fund pays a dividend in January which was declared in
the previous October, November or December to shareholders of record on a
specified date in one of such months, then such dividend will be treated for tax
purposes as being paid by the Fund and received by its shareholders on December
31 of the year in which such dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies to
interest received on certain 'private activity bonds' issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
'tax preference,' which could subject certain investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund will purchase
such 'private activity bonds,' and the Trust will report to shareholders within
60 days after the 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.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge such
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period
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<PAGE>
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 Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ('backup withholding'). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and 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 advisors 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,
yield and tax-equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return, yield and tax-equivalent yield are computed
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such as
in the case of Class B and Class C shares and the maximum sales charge in the
case of Class A and Class D shares. Dividends paid by the Fund with respect to
each class of shares, to the extent any dividends are paid, will be calculated
in the same manner at the same time on the same day and will be in the same
amount, except that account maintenance 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
37
<PAGE>
(2) the maximum applicable sales charges will not be included with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average annual rates of
return reflect compounding; aggregate total return data generally will be higher
than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time. In advertisements distributed
to investors whose purchases are subject to waiver of the CDSC in the case of
Class B and Class C shares or reduced sales charges in the case of Class A and
Class D shares, the performance data may take into account the reduced, and not
the maximum, sales charge or may not take into account the CDSC and therefore
may reflect greater total return since, due to the reduced sales charges or
waiver of the CDSC, a lower amount of expenses is deducted. See 'Purchase of
Shares.' The Fund's total return may be expressed either as a percentage or as a
dollar amount in order to illustrate such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period. Tax-equivalent yield quotations will be computed
by dividing (a) the part of the Fund's yield that is tax-exempt by (b) one minus
a stated tax rate and (c) adding the result to that part, if any, of the Fund's
yield that is not tax-exempt. The yield for the 30-day period ended July 31,
1997 was 4.33% for Class A shares, 4.01% for Class B shares, 3.91% for Class C
shares and 4.24% for Class D shares and the tax-equivalent yield for the same
period (based on a Federal income tax rate of 28%) was 6.01% for Class A shares,
5.57% for Class B shares, 5.43% for Class C shares and 5.89% for Class D shares.
Total return, yield and tax-equivalent yield figures are based on the
Fund's historical performance and are not intended to indicate future
performance. The Fund's total return, yield and tax-equivalent yield will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to performance data
published by Lipper Analytical Services, Inc. and Morningstar Publications, Inc.
('Morningstar') 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
indicative of the Fund's relative performance for any future period.
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<PAGE>
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York time), on each day during which the NYSE is open
for trading. The net asset value per share is computed by dividing the sum of
the value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
fees payable to the Manager and the Distributor, are accrued daily.
The per share net asset value of the Class A shares generally will be
higher than the per share net asset value of shares of the other classes,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares and the daily expense accruals of the account maintenance fees applicable
with respect to Class D shares; moreover, the per share net asset value of Class
D shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
fees, higher account maintenance fees and higher transfer agency fees applicable
with respect to Class B and Class C shares. It is expected, however, that the
per share net asset value of the classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or distributions
which will differ by approximately the amount of the expense accrual
differentials between the classes.
ORGANIZATION OF THE TRUST
The Trust is a business trust organized on August 2, 1985 under the laws of
Massachusetts. On October 1, 1987, the Trust changed its name from 'Merrill
Lynch Multi-State Tax-Exempt Series Trust' to 'Merrill Lynch Multi-State
Municipal Bond Series Trust,' and on December 22, 1987, the Trust again changed
its name to 'Merrill Lynch Multi-State Municipal Series Trust.' The Trust is an
open-end management investment company comprised of separate series ('Series'),
each of which is a separate portfolio offering shares to selected groups of
purchasers. Each of the Series is managed independently in order to provide to
shareholders who are residents of the state to which such Series relates as high
a level of income exempt from Federal and, in certain cases, state and local
income taxes as is consistent with prudent investment management. The Trustees
are authorized to create an unlimited number of Series and, with respect to each
Series, to issue an unlimited number of full and fractional shares of beneficial
interest, $.10 par value per share, of different classes. Shareholder approval
is not required for the authorization of additional Series or classes of a
Series of the Trust. At the date of this Prospectus, the shares of the Fund are
divided into Class A, Class B, Class C and Class D shares. Class A, Class B,
Class C and Class D shares represent interests in the same assets of the Fund
and are identical in all respects except that Class B, Class C and Class D
shares bear certain expenses relating to the account maintenance associated with
such shares, and Class B and Class C shares bear certain expenses relating to
the distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to distribution and/or account maintenance
expenditures, as applicable. See 'Purchase of Shares.' The Trustees of the Trust
may classify and reclassify the shares of any Series into additional or other
classes at a future date.
Shareholders are entitled to one vote for each full share and to fractional
votes for fractional shares held in the election of Trustees (to the extent
hereinafter provided) and on other matters submitted to the vote of
shareholders. 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, only Class B, Class C or Class D shares of a
Series will have exclusive voting rights with respect to matters relating to the
account maintenance
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<PAGE>
and distribution expenses being borne solely by such class (except that Class B
shareholders may vote upon any material changes to expenses changed under the
Class D Distribution Plan). There normally will be no meeting of shareholders
for the purpose of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders, at
which time the Trustees then in office will call a shareholders' meeting for the
election of Trustees. Shareholders may, in accordance with the terms of the
Declaration of Trust, cause a meeting of shareholders to be held for the purpose
of voting on the removal of Trustees. Also, the Trust will be required to call a
special meeting of shareholders of a Series in accordance with the requirements
of the 1940 Act to seek approval of new management and advisory arrangements, of
a material increase in distribution fees or of a change in the fundamental
policies, objectives or restrictions of a Series. Except as set forth above, the
Trustees shall continue to hold office and appoint successor Trustees. Upon
liquidation or dissolution of a Series, each issued and outstanding share of
that Series is entitled to participate equally in dividends and distributions
declared by the respective Series and in net assets of such Series remaining
after satisfaction of outstanding liabilities except that, as noted above, 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.
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:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
matter, please call your Merrill Lynch Financial Consultant or Merrill Lynch
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.
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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 / / 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 Merrill Lynch Financial Data
Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next
to be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
<TABLE>
<S> <C>
1. ...................................................... 4. ......................................................
2. ...................................................... 5. ......................................................
3. ...................................................... 6. ......................................................
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)
(In the case of co-owners, a joint tenancy with right of survivorship will be presumed unless otherwise specified.)
</TABLE>
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C>
Ordinary Income Dividends Long-Term Capital Gains
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch 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 MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor .........................................................
Signature of Depositor ......................... Date ........................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED 'VOID' OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
41
<PAGE>
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART
1)--(CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
--------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2) that
I am not subject to backup withholding (as discussed in the Prospectus under
'Distributions and Taxes--Taxes') either because I have not been notified that I
am subject thereto as a result of a failure to report all interest or dividends,
or the Internal Revenue Service ('IRS') has notified me that I am no longer
subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
....................................... .......................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
.................. , 19 ......
Date of Initial Purchase
Dear Sir/Madam:
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 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.
<TABLE>
<S> <C>
By: ................................... .......................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both
must sign)
</TABLE>
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name .............................. (2) Name ..............................
Account Number ........................ Account Number ........................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
This form, when completed, should be mailed to:
Merrill Lynch North Carolina Municipal Bond Fund
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
Shareholder's signature.
................................................................................
Dealer Name and Address
By:.............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C>
............ ....... .......................................
Branch Code F/C No. F/C Last Name
..............................
Dealer's Customer Account No.
</TABLE>
42
<PAGE>
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1. ACCOUNT REGISTRATION .................................................
(Please Print) Social Security Number
or Taxpayer Identification Number
Name of Owner ..........................................................
First Name Initial Last Name
Name of Co-Owner (if any) ............................................. Account Number....................................
First Name Initial Last Name (if existing account)
Address ........................................................................
.................................................................................
(Zip Code)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of / / Class A, / / Class B*, / / Class C* 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 THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU (CHECK ONE):
/ / $_______________ of / / Class A, / / Class B*, / / Class C* 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 MERRILL LYNCH 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.
*ANNUAL WITHDRAWAL CANNOT EXCEED 10% OF THE VALUE OF SHARES OF SUCH CLASS
HELD IN THE ACCOUNT AT THE TIME THE ELECTION TO JOIN THE SYSTEMATIC
WITHDRAWAL PLAN IS MADE.
43
<PAGE>
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART
2)--(CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch 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.
MERRILL LYNCH 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 ___________________________________ or as soon thereafter as possible.
(Month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of Fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a check or debit is not
honored upon presentation, Merrill Lynch 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.
<TABLE>
<S> <C>
....................................... .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
</TABLE>
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH 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 Merrill Lynch
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.
<TABLE>
<S> <C>
....................................... .......................................
Date Signature of Depositor
....................................... .......................................
Bank Account Number Signature of Depositor
(If joint account, both must sign)
</TABLE>
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
'VOID' SHOULD ACCOMPANY THIS APPLICATION.
44
<PAGE>
[This page intentionally left blank]
<PAGE>
MANAGER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table........................................ 2
Merrill Lynch Select Pricing(Service Mark)
System......................................... 4
Initial Sales Charge Alternatives.............. 7
Deferred Sales Charge Alternatives............. 7
Financial Highlights............................. 8
Investment Objective and Policies................ 10
Potential Benefits............................. 12
Special and Risk Considerations Relating to
Municipal Bonds.............................. 12
Description of Municipal Bonds................. 13
When-Issued Securities and Delayed Delivery
Transactions................................. 15
Call Rights.................................... 15
Financial Futures Transactions and Options..... 15
Repurchase Agreements.......................... 17
Investment Restrictions........................ 18
Management of the Trust.......................... 19
Trustees....................................... 19
Management and Advisory Arrangements........... 19
Code of Ethics................................. 20
Transfer Agency Services....................... 20
Purchase of Shares............................... 21
Initial Sales Charge Alternatives--Class A and
Class D Shares............................... 23
Deferred Sales Charge Alternatives--Class B and
Class C Shares............................... 24
Distribution Plans............................. 27
Limitations on the Payment of Deferred Sales
Charges...................................... 28
Redemption of Shares............................. 29
Redemption..................................... 29
Repurchase..................................... 30
Reinstatement Privilege--Class A and Class D
Shares....................................... 30
Shareholder Services............................. 30
Investment Account............................. 31
Exchange Privilege............................. 31
Automatic Reinvestment of Dividends and Capital
Gains Distributions.......................... 32
Systematic Withdrawal Plans.................... 32
Automatic Investment Plans..................... 33
Fee-Based Programs............................. 33
Portfolio Transactions........................... 33
Distributions and Taxes.......................... 34
Distributions.................................. 34
Taxes.......................................... 35
Performance Data................................. 37
Additional Information........................... 39
Determination of Net Asset Value............... 39
Organization of the Trust...................... 39
Shareholder Reports............................ 40
Shareholder Inquiries.......................... 40
Authorization Form............................... 41
</TABLE>
Code # 16400--1197
[LOGO]
Merrill Lynch
North Carolina Municipal
Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
PROSPECTUS
November 17, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
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 o 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
non-diversified portfolio of long-term investment grade 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 U.S. Virgin Islands and Guam, which pay
interest exempt, in the opinion of bond counsel to the issuer, from Federal and
North Carolina income taxes. There can be no assurance that the investment
objective of the Fund will be realized.
Pursuant to the Merrill Lynch Select Pricing(Service Mark) 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(Service Mark) System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances.
------------------------
The Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated November
17, 1997 (the 'Prospectus'), which has been filed with the Securities and
Exchange Commission (the 'Commission') and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus. Capitalized terms used but not defined herein have the same meanings
as in the Prospectus.
------------------------
FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is November 17, 1997.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal and 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 U.S. 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 Ratings Services ('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 to the issuer, 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 applicable law. Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term municipal securities.
Except when acceptable securities are unavailable as determined by the
Manager, the Fund, under normal circumstances, will invest at least 65% of its
total assets in 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 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
2
<PAGE>
'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 (and Non-Municipal Tax-Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an index.
Also, the Fund may invest in so-called 'inverse floating obligations' or
'residual interest bonds' on which the interest rates typically decline as
market rates increase and increase as market rates decline. For example, to the
extent the Fund invests in these types of Municipal Bonds, the Fund's return on
such Municipal Bonds will be subject to risk with respect to the value of the
particular index, which may include reduced or eliminated interest payments and
losses of invested principal. Such securities have the effect of providing a
degree of investment leverage, since they may increase or decrease in value in
response to changes, as an illustration, in market interest rates at a rate
which is a multiple (typically two) of the rate at which fixed-rate long-term
tax-exempt securities increase or decrease in response to such changes. As a
result, the market values of such securities will generally be more volatile
than the market values of fixed-rate tax-exempt securities. To seek to limit the
volatility of these securities, the Fund may purchase inverse floating
obligations with shorter term maturities or which contain limitations on the
extent to which the interest rate may vary. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments, would
exceed 15% (10% to the extent required by certain state laws) of the Fund's
total assets. The Manager believes, however, that indexed and inverse floating
obligations represent flexible portfolio management instruments for the Fund
which allow the Fund to seek potential investment rewards, hedge other portfolio
positions or to vary the degree of investment leverage relatively efficiently
under different market conditions.
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a 'Call
Right'). A holder of a Call Right may exercise such right to require a mandatory
tender for the purchase of related Municipal Bonds, subject to certain
conditions. A Call Right that is not exercised prior to the maturity of the
related Municipal Bond will expire without value. The economic effect of holding
both the Call Right and the related Municipal Bond is identical to holding a
Municipal Bond as a non-callable security. Certain investments in such
obligations may be illiquid. The Fund may not invest in such
3
<PAGE>
illiquid obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's total assets.
The Fund may invest up to 20% of its total assets in Municipal Bonds which
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or
which, in the Manager's judgment, possess similar credit characteristics ('high
yield securities'). See Appendix II--'Ratings of Municipal Bonds' for additional
information regarding ratings of debt securities. The Manager considers the
ratings assigned by Standard & Poor's, Moody's or Fitch as one of several
factors in its independent credit analysis of issuers.
High yield securities are considered by Standard & Poor's, Moody's and
Fitch to have varying degrees of speculative characteristics. Consequently,
although high yield securities can be expected to provide higher yields, such
securities may be subject to greater market price fluctuations and risk of loss
of principal than lower yielding, higher rated debt securities. Investments in
high yield securities will be made only when, in the judgment of the Manager,
such securities provide attractive total return potential relative to the risk
of such securities, as compared to higher quality debt securities. The Fund
generally will not invest in debt securities in the lowest rating categories
(those rated CC or lower by Standard & Poor's or Fitch or Ca or lower by
Moody's) unless the Manager believes that the financial condition of the issuer
or the protection afforded the particular securities is stronger than would
otherwise be indicated by such low ratings.
Issuers or obligors of high yield securities may be highly leveraged and
may not have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers or obligors
generally are greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers or obligors of high yield securities may be more likely to
experience financial stress, especially if such issuers or obligors are highly
leveraged. In addition, the market for high yield municipal securities is
relatively new and has not weathered a major economic recession, and it is
unknown what effects such a recession might have on such securities. During such
periods, such issuers may not have sufficient revenues to meet their interest
payment obligations. The issuer's ability to service its debt obligations also
may be adversely affected by specific issuer developments, or the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield securities frequently have call or redemption features that
would permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
would likely have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
secondary market for many of these securities, and the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for high
yield securities does exist, it generally is not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the Fund's portfolio. Market
quotations generally are available on many high yield securities
4
<PAGE>
only from a limited number of dealers and may not necessarily represent firm
bids of such dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by the Fund will be purchased upon issuance, which may involve special
risks because the securities so acquired are new issues. In such instances the
Fund may be a substantial purchaser of the issue and therefore have the
opportunity to participate in structuring the terms of the offering. Although
this may enable the Fund to seek to protect itself against certain of such
risks, the considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent that it is required to seek recovery upon a default on a portfolio
holding or participate in the restructuring of the obligation.
DESCRIPTION OF MUNICIPAL BONDS AND TEMPORARY INVESTMENTS
Set forth below is a description of the Municipal Bonds and Temporary
Investments in which the Fund may invest. A more complete discussion concerning
futures and options transactions is set forth under 'Investment Objective and
Policies' in the Prospectus. Information with respect to ratings assigned to
tax-exempt obligations which the Fund may purchase is set forth in Appendix II
to this Statement of Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refunding outstanding obligations and obtaining funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of industrial development bonds or private activity bonds are
issued by or on behalf of public authorities to finance various privately owned
or operated facilities. Such obligations are included within the term Municipal
Bonds if the interest paid thereon is, in the opinion of bond counsel to the
issuer, excluded from gross income for Federal income tax purposes and, in the
case of 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 or commercial facilities, may constitute Municipal
Bonds, although the current Federal tax laws place substantial limitations on
the size of such issues.
The two principal classifications of Municipal Bonds are 'general
obligation' bonds and 'revenue' bonds, which latter category includes industrial
development bonds ('IDBs') and, for bonds issued after August 15, 1986, private
activity bonds. General obligation bonds are secured by the issuer's pledge of
faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special or limited tax or other specific revenue source such as payments from
the user of the facility being financed. IDBs and, in the case of bonds issued
after August 15, 1986, private activity bonds are in most cases revenue bonds
and generally do not constitute the pledge of the credit or taxing power of the
issuer of such bonds. Generally, the payment of the principal of and interest on
such bonds depends solely on the ability of the user of the facility financed by
the bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment, unless a letter of
credit, bond insurance or other security is furnished. The Fund may invest in
Municipal Bonds that are so-called 'moral obligation' bonds, which are normally
issued by
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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. Certain investments in lease obligations may be
illiquid. The Fund may not invest in illiquid lease obligations if such
investments, together with all other illiquid investments, would exceed 15% of
the Fund's total assets. The Fund may, however, invest without regard to such
limitation in lease obligations which the Manager, pursuant to the guidelines
which have been adopted by the Board of Trustees and subject to the supervision
of the Board of Trustees, determines to be liquid. The Manager will deem lease
obligations liquid if they are publicly offered and have received an investment
grade rating of Baa or better by Moody's, or BBB or better by Standard & Poor's
or Fitch. Unrated lease obligations, or those rated below investment grade, will
be considered liquid if the obligations come to the market through an
underwritten public offering and at least two dealers are willing to give
competitive bids. In reference to the latter, the Manager must, among other
things, also review the creditworthiness of the municipality obligated to make
payment under the lease obligation and make certain specified determinations
based on such factors as the existence of a rating or credit enhancement such as
insurance, the frequency of trades or quotes for the obligation and the
willingness of dealers to make a market in the obligation.
Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the financial condition of the issuer, the
general conditions of the Municipal Bond market, the maturity of the obligation
and the rating of the issue. The ability of the Fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
bonds in which the Fund invests to meet their obligations for the payment of
interest and principal when due. There are variations in the risks involved in
holding Municipal Bonds, both within a particular classification and between
classifications, depending on numerous factors. Furthermore, the rights of
owners of Municipal Bonds and the obligations of the issuer of such Municipal
Bonds may be subject to applicable bankruptcy, insolvency and similar laws and
court decisions affecting the rights of creditors generally and to general
equitable principles, which may limit the enforcement of certain remedies.
DESCRIPTION OF TEMPORARY INVESTMENTS
The Fund may invest in short-term tax-free and taxable securities subject
to the limitations set forth under 'Investment Objective and Policies.' The
tax-exempt money market securities may include municipal notes, municipal
commercial paper, municipal bonds with a remaining maturity of less than one
year, variable rate demand notes and participations therein. Municipal notes
include tax anticipation notes, bond anticipation notes and grant anticipation
notes. Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales, government grants or revenue receipts. Municipal
commercial paper refers to short-term unsecured promissory notes generally
issued to finance short-term credit needs. The taxable money market securities
in which the Fund may invest as Temporary Investments consist of U.S. Government
securities, U.S. Government agency securities, domestic bank or savings
institution certificates of deposit and bankers' acceptances, short-
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term corporate debt securities such as commercial paper, and repurchase
agreements. These Temporary Investments must have a stated maturity not in
excess of one year from the date of purchase.
Variable rate demand obligations ('VRDOs') are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility that
because of default or insolvency the demand feature of VRDOs and Participating
VRDOs, described below, may not be honored. The interest rates are adjustable at
intervals (ranging from daily to up to one year) to some prevailing market rate
for similar investments, such adjustment formula being calculated to maintain
the market value of the VRDOs at approximately the par value of the VRDOs on the
adjustment date. The adjustments typically are set at a rate determined by the
remarketing agent or based upon the Public Securities Association Index or some
other appropriate interest rate adjustment index. The Fund may invest in all
types of tax-exempt instruments currently outstanding or to be issued in the
future which satisfy the short-term maturity and quality standards of the Fund.
The Fund also may invest in VRDOs in the form of participation interests
('Participating VRDOs') in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank. Participating VRDOs provide
the Fund 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, Moody's or Fitch. Investments in corporate bonds and
debentures (which must have maturities at the date of purchase of one year or
less) must be rated at the time of purchase at least A by Standard & Poor's,
Moody's or Fitch. Notes and VRDOs at the time of purchase must be rated SP-1/A-1
through SP-2/A-3 by Standard & Poor's, MIG-l/VMIG-1 through MIG-4/VMIG-4 by
Moody's or F-1 through F-3 by Fitch. Temporary Investments, if not rated, must
be of comparable quality to securities rated in the above rating categories in
the opinion of the Manager. The Fund may not invest in any security issued by a
commercial bank or a savings institution unless the bank or institution is
organized and operating in the United States, has total assets of at least one
billion dollars and is a member of the Federal Deposit Insurance Corporation
('FDIC'), except that up to 10% of total assets may be invested in certificates
of deposit of small institutions if such certificates are fully insured by the
FDIC.
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REPURCHASE AGREEMENTS
The Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System or a primary dealer in U.S. Government securities or an affiliate
thereof. Under such agreements, the seller agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period. In
repurchase agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligations. Such agreements usually
cover short periods, such as under one week. Repurchase agreements may be
construed to be collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. In a repurchase agreement, the Fund
will require the seller to provide additional collateral if the market value of
the securities falls below the repurchase price at any time during the term of
the repurchase agreement. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a repurchase
agreement, instead of the contractual fixed rate of return, the rate of return
to the Fund will depend on intervening fluctuations of the market value of such
security and the accrued interest on the security. In such event, the Fund would
have rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to perform.
The Fund may not invest in repurchase agreements maturing in more than seven
days if such investments, together with all other illiquid investments, would
exceed 15% of the Fund's total assets.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities 'sold.' Therefore,
amounts earned under such agreements will not be considered tax-exempt interest.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
Reference is made to the discussion concerning futures transactions under
'Investment Objective and Policies' in the Prospectus. Set forth below is
additional information concerning these transactions.
As described in the Prospectus, the Fund may purchase and sell exchange
traded financial futures contracts ('financial futures contracts') to hedge its
portfolio of Municipal Bonds against declines in the value of such securities
and to hedge against increases in the cost of securities the Fund intends to
purchase. However, any transactions involving financial futures or options will
be in accordance with the Fund's investment policies and limitations. To hedge
its portfolio, the Fund may take an investment position in a futures contract
which will move in the opposite direction from the portfolio position being
hedged. While the Fund's use of hedging strategies is intended to moderate
capital changes in portfolio holdings and thereby reduce the volatility of the
net asset value of Fund shares, the Fund anticipates that its net asset value
will fluctuate. Set forth below is information concerning futures transactions.
Description of Futures Contracts. A futures contract is an agreement
between two parties to buy and sell a security or, in the case of an index-based
futures contract, to make and accept a cash settlement for a set price on a
future date. A majority of transactions in futures contracts, however, do not
result in the actual delivery of the underlying instrument or cash settlement,
but are settled through liquidation, i.e., by entering into an offsetting
transaction. Futures contracts have been designed by boards of trade which have
been designated 'contracts markets' by the Commodity Futures Trading Commission
('CFTC').
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The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as 'initial margin' and
represents a 'good faith' deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called 'variation margin,' are required to be made on a daily basis as
the price of the futures contract fluctuates making the long and short positions
in the futures contract more or less valuable, a process known as 'marking to
market.' At any time prior to the settlement date of the futures contract, the
position may be closed out by taking an opposite position which will operate to
terminate the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the broker, and the purchaser realizes a loss or gain. In addition,
a nominal commission is paid on each completed sale transaction.
The Fund may deal in financial futures contracts based on a long-term
municipal bond index developed by the Chicago Board of Trade ('CBT') and The
Bond Buyer (the 'Municipal Bond Index'). The Municipal Bond Index is comprised
of 40 tax-exempt municipal revenue and general obligations bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
Standard & Poor's and must have a remaining maturity of 19 years or more. Twice
a month new issues satisfying the eligibility requirements are added to, and an
equal number of old issues are deleted from, the Municipal Bond Index. The value
of the Municipal Bond Index is computed daily according to a formula based on
the price of each bond in the Municipal Bond Index, as evaluated by six
dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the exchange
membership which is also responsible for handling daily accounting of deposits
or withdrawals of margin.
As described in the Prospectus, the Fund may purchase and sell financial
futures contracts on U.S. Government securities as a hedge against adverse
changes in interest rates as described below. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-term
U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage
Association ('GNMA') Certificates and three-month U.S. Treasury bills. The Fund
may purchase and write call and put options on futures contracts on U.S.
Government securities in connection with its hedging strategies.
Subject to policies adopted by the Trustees, the Fund also may engage in
other futures contracts transactions such as futures contracts on other
municipal bond indices that may become available if the Manager and the Trustees
should determine that there is normally a sufficient correlation between the
prices of such futures contracts and the Municipal Bonds in which the Fund
invests to make such hedging appropriate.
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
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<PAGE>
investments which are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions, commissions on futures
transactions are lower than transaction costs incurred in the purchase and sale
of Municipal Bonds. In addition, the ability of the Fund to trade in the
standardized contracts available in the futures markets may offer a more
effective defensive position than a program to reduce the average maturity of
the portfolio securities due to the unique and varied credit and technical
characteristics of the municipal debt instruments available to the Fund.
Employing futures as a hedge also may permit the Fund to assume a defensive
posture without reducing the yield on its investments beyond any amounts
required to engage in futures trading.
When the Fund intends to purchase Municipal Bonds, the Fund may purchase
futures contracts as a hedge against any increase in the cost of such Municipal
Bonds, resulting from an increase in interest rates or otherwise, that may occur
before such purchases can be effected. Subject to the degree of correlation
between the Municipal Bonds and the futures contracts, subsequent increases in
the cost of Municipal Bonds should be reflected in the value of the futures held
by the Fund. As such purchases are made, an equivalent amount of futures
contracts will be closed out. Due to changing market conditions and interest
rate forecasts, however, a futures position may be terminated without a
corresponding purchase of portfolio securities.
Call Options on Futures Contracts. The Fund also may purchase and sell
exchange traded call and put options on financial futures contracts on U.S.
Government securities. The purchase of a call option on a futures contract is
analogous to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the futures contract on which it
is based or on the price of the underlying debt securities, it may or may not be
less risky than ownership of the futures contract or underlying debt securities.
Like the purchase of a futures contract, the Fund will purchase a call option on
a futures contract to hedge against a market advance when the Fund is not fully
invested.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is below
the exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any decline that may have occurred in the
Fund's portfolio holdings.
Put Options on Futures Contracts. The purchase of options on a futures
contract is analogous to the purchase of protective put options on portfolio
securities. The Fund will purchase put options on futures contracts to hedge the
Fund's portfolio against the risk of rising interest rates.
The writing of a put option on a futures contract constitutes a partial
hedge against increasing prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is higher
than the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
Municipal Bonds which the Fund intends to purchase.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an option
will be included in initial margin. The writing of an option on a futures
contract involves risks similar to those relating to futures contracts.
The Trust has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the '1940 Act'), in connection with its strategy of investing
in futures contracts. Section 17(f) relates to the custody of securities and
other assets of an investment company and may be deemed to prohibit certain
arrangements between the Trust and commodities brokers with respect to initial
and variation margin. Section 18(f) of the 1940 Act prohibits an open-end
investment company such as the Trust from issuing a 'senior security' other than
a borrowing from a bank. The
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staff of the Commission has in the past indicated that a futures contract may be
a 'senior security' under the 1940 Act.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed 5%
of the liquidation value of the Fund's portfolio assets after taking into
account unrealized profits and unrealized losses on any such contracts and
options. (However, the Fund intends to engage in options and futures
transactions only for hedging purposes). Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When the Fund purchases futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or liquid securities will be deposited in a segregated account with
the Fund's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the futures contract, thereby ensuring that the use of such
futures is unleveraged.
Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged security,
the Fund will experience either a loss or gain on the futures contract which is
not completely offset by movements in the price of the hedged securities. To
compensate for imperfect correlations, the Fund may purchase or sell futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
futures contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts.
The particular municipal bonds comprising the index underlying the
Municipal Bond Index financial futures contracts may vary from the Municipal
Bonds held by the Fund. As a result, the Fund's ability to hedge effectively all
or a portion of the value of its Municipal Bonds through the use of such
financial futures contracts will depend in part on the degree to which price
movements in the index underlying the financial futures contract correlate with
the price movements of the Municipal Bonds held by the Fund. The correlation may
be affected by disparities in the average maturity, ratings, geographical mix or
structure of the Fund's investments as compared to those comprising the
Municipal Bond Index, and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may
be subject to change over time as additions to and deletions from the Municipal
Bond Index alter its structure. The correlation between futures contracts on
U.S. Government securities and the Municipal Bonds held by the Fund may be
adversely affected by similar factors, and the risk of imperfect correlation
between movements in the prices of such futures contracts and the prices of the
Municipal Bonds held by the Fund may be greater.
The Fund expects to liquidate a majority of the futures contracts it enters
into through offsetting transactions on the applicable contract market. There
can be no assurance, however, that a liquid secondary market will exist for any
particular futures contract at any specific time. Thus, it may not be possible
to close out a futures position. In the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may be
required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The
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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 were approved for trading in 1986.
Trading in such futures contracts may tend to be less liquid than that in other
futures contracts. The trading of futures contracts also is subject to certain
market risks, such as inadequate trading activity, which could at times make it
difficult or impossible to liquidate existing positions.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the 1940 Act means the lesser of
(i) 67% of the Fund's shares present at a meeting at which more than 50% of the
outstanding shares of the Fund are represented or (ii) more than 50% of the
Fund's outstanding shares). The Fund may not:
1. Invest more than 25% of its assets, taken at market value at the
time of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities). For purposes of this restriction, states,
municipalities and their political subdivisions are not considered part of
any industry.
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments,
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certificates of deposit, bankers' acceptances, repurchase agreements or any
similar instruments shall not be deemed to be the making of a loan, and
except further that the Fund may lend its portfolio securities, provided
that the lending of portfolio securities may be made only in accordance
with applicable law and the guidelines set forth in the Fund's Prospectus
and Statement of Additional Information, as they may be amended from time
to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the 1940 Act) in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) the Fund may, to the extent permitted
by applicable law, borrow up to an additional 5% of its total assets for
temporary purposes, (iii) the Fund may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio
securities and (iv) the Fund may purchase securities on margin to the
extent permitted by applicable law. The Fund may not pledge its assets
other than to secure such borrowings or, to the extent permitted by the
Fund's investment policies as set forth in its Prospectus and Statement of
Additional Information, as they may be amended from time to time, in
connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.
7. Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the 'Securities Act'), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section
12(d)(1)(F) or (G) (the 'fund of funds' provisions) of the 1940 Act at any
time the Fund's shares are owned by another investment company that is part
of the same group of investment companies as the Fund.
b. Make short sales of securities or maintain a short position,
except to the extent permitted by applicable law. The Fund currently does
not intend to engage in short sales, except short sales 'against the box.'
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Trustees of the Trust
has otherwise determined to be liquid pursuant to applicable law.
d. Notwithstanding fundamental investment restriction (6) above,
borrow amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes. In addition, the Fund will
not purchase securities while borrowings are outstanding.
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In addition, to comply with Federal income tax requirements for
qualification as a 'regulated investment company,' the Fund's investments will
be limited in a manner such that, at the close of each quarter of each fiscal
year, (a) no more than 25% of the Fund's total assets are invested in the
securities of a single issuer, and (b) with regard to at least 50% of the Fund's
total assets, no more than 5% of its total assets are invested in the securities
of a single issuer. For purposes of this restriction, the Fund will regard each
state and each political subdivision, agency or instrumentality of such state
and each multi-state agency of which such state is a member and each public
authority which issues securities on behalf of a private entity as a separate
issuer, except that if the security is backed only by the assets and revenues of
a non-governmental entity then the entity with the ultimate responsibility for
the payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the Trustees of the Trust to the
extent necessary to comply with changes to the Federal income tax requirements.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated (Merrill Lynch) with the Fund, the Fund is prohibited from engaging
in certain transactions involving such firm or its affiliates except for
brokerage transactions permitted under the 1940 Act involving only usual and
customary commissions or transactions pursuant to an exemptive order under the
1940 Act. Included among such restricted transactions will be purchases from or
sales to Merrill Lynch of securities in transactions in which it acts as
principal. See 'Portfolio Transactions.' An exemptive order has been obtained
which permits the Trust to effect principal transactions with Merrill Lynch in
high quality, short-term, tax-exempt securities subject to conditions set forth
in such order.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
Information about the Trustees and executive officers of the Trust, and the
portfolio manager of the Fund, including their ages and principal occupations
for at least the last five years, is set forth below. Unless otherwise noted,
the address of each Trustee and executive officer is P.O. Box 9011, Princeton,
New Jersey 08543-9011.
ARTHUR ZEIKEL (65)--President and Trustee(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Merrill Lynch Asset Management, L.P. ('MLAM', which term as used
herein includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ('Princeton Services') since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ('ML & Co.') since 1990.
JAMES H. BODURTHA (53)--Trustee(2)--36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (58)--Trustee(2)--113-115 University Place, New York, New
York 10003. John M. Olin Professor of Humanities, New York University since 1993
and Professor thereof since 1980; President, Hudson Institute since 1997 and
Trustee since 1980; Dean, Gallatin Division of New York University from 1976 to
1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from 1984 to
1985; Director, Damon Corporation from 1991 to 1995; Overseer, Center for Naval
Analyses from 1983 to 1993; Limited Partner, Hypertech LP since 1996.
14
<PAGE>
ROBERT R. MARTIN (70)--Trustee(2)--513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990
to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989; Director,
Carnegie Capital Management from 1977 to 1985 and Chairman thereof in 1979;
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC Industries,
Inc. in 1994; Trustee, Northland College since 1992.
JOSEPH L. MAY (68)--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 (45)--Trustee(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and Associate
Professor from 1983 to 1989; Trustee, The Common Fund, since 1989; Director,
Quantec Limited since 1991 and TIBCO from 1994 to 1996.
TERRY K. GLENN (57)--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 Merrill Lynch Funds
Distributor Inc. ('MLFD' or the 'Distributor') since 1986 and Director thereof
since 1991; President of Princeton Administrators, L.P. since 1988.
VINCENT R. GIORDANO (53)--Senior Vice President(1)(2)--Senior Vice
President of the Manager and MLAM since 1984; Vice President of MLAM from 1980
to 1984; Senior Vice President of Princeton Services since 1993.
KENNETH A. JACOB (46)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997; Vice President of the
Manager since 1984.
ROBERT D. SNEEDEN (44)--Vice President and Portfolio Manager of the
Fund(1)(2)--Assistant Vice President of MLAM since 1994.
DONALD C. BURKE (37)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
GERALD M. RICHARD (48)--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 thereof since 1981.
ROBERT E. PUTNEY, III (37)--Secretary(1)(2)--Director (Legal Advisory) of
MLAM since 1997; Vice President of MLAM from 1994 to 1997; Attorney employed by
MLAM from 1991 to 1994; Attorney in private practice prior thereto.
- ------------------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At October 1, 1997, the Trustees and officers of the Trust as a group (13)
owned an aggregate of less than 1% of the outstanding shares of the Fund. At
such date, Mr. Zeikel, a Trustee and officer of the Trust, and the other
officers of the Trust owned an aggregate of less than 1% of the outstanding
shares of Common Stock of ML & Co.
15
<PAGE>
COMPENSATION OF TRUSTEES
The Trust pays each Trustee not affiliated with the Manager (each a
'non-affiliated Trustee') a fee of $10,000 per year plus $1,000 per meeting
attended, together with such Trustee's actual out-of-pocket expenses relating to
attendance at meetings. The Trust also compensates members of its Audit and
Nominating Committee (the 'Committee'), which consists of all the non-affiliated
Trustees, an annual fee of $2,000 per year plus $500 per meeting attended. The
Trust reimburses each non-affiliated Trustee for his out-of-pocket expenses
relating to attendance at Board and Committee meetings. The fees and expenses of
the Trustees are allocated to the respective series of the Trust on the basis of
asset size. For the fiscal year ended July 31, 1997, fees and expenses paid to
non-affiliated Trustees that were allocated to the Fund aggregated $2,823.
The following table sets forth for the fiscal year ended July 31, 1997,
compensation paid by the Fund to the non-affiliated Trustees and, for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
registered investment companies (including the Trust) advised by the Manager and
its affiliate, MLAM ('FAM/MLAM Advised Funds') to the non-affiliated Trustees:
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR COMPENSATION
RETIREMENT FROM TRUST AND
BENEFITS OTHER
ACCRUED AS FAM/MLAM
PART OF ADVISED FUNDS
COMPENSATION TRUST'S PAID TO
NAME OF TRUSTEE FROM FUND EXPENSE TRUSTEE(1)
- ------------------------------------------------------------- ------------ -------------- -------------------
<S> <C> <C> <C>
James H. Bodurtha............................................ $585 None $ 148,500
Herbert I. London............................................ $585 None $ 148,500
Robert R. Martin............................................. $585 None $ 148,500
Joseph L. May................................................ $585 None $ 148,500
Andre F. Perold.............................................. $585 None $ 148,500
</TABLE>
- ------------------
(1) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (22 registered investment companies consisting of 46 portfolios);
Mr. London (22 registered investment companies consisting of 46 portfolios);
Mr. Martin (22 registered investment companies consisting of 46 portfolios);
Mr. May (22 registered investment companies consisting of 46 portfolios);
and Mr. Perold (22 registered investment companies consisting of 46
portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to 'Management of the Trust--Management and Advisory
Arrangements' in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Manager or its
affiliates. Because of different objectives or other factors, a particular
security may be bought for one or more clients when one or more clients are
selling the same security. If the Manager or its affiliates purchase or sell
securities for the Fund or other funds for which they act as manager or for
their advisory clients and such sales or purchases arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Manager or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
16
<PAGE>
Pursuant to a management agreement between the Trust on behalf of the Fund
and the Manager (the 'Management Agreement'), the Manager receives for its
services to the Fund monthly compensation based upon the average daily net
assets of the Fund at the following annual rates: 0.55% of the average daily net
assets not exceeding $500 million; 0.525% of the average daily net assets
exceeding $500 million but not exceeding $1.0 billion; and 0.50% of the average
daily net assets exceeding $1.0 billion. For the fiscal years ended July 31,
1995, 1996 and 1997, the total advisory fees payable by the Fund to the Manager
were $331,791, $337,198 and $303,480, respectively. During the fiscal years
ended July 31, 1995, 1996 and 1997, the Manager voluntarily waived $133,074,
$90,848 and $43,196, respectively, of such fees.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Trust connected with investment and economic
research, trading and investment management of the Trust, as well as the fees of
all Trustees of the Trust who are affiliated persons of ML & Co. or any of its
affiliates. The Fund pays all other expenses incurred in its operation and a
portion of the Trust's general administrative expenses allocated on the basis of
the asset size of the respective series of the Trust ('Series'). Expenses that
will be borne directly by the Series include, among other things, redemption
expenses, expenses of portfolio transactions, expenses of registering the shares
under Federal and state securities laws, pricing costs (including the daily
calculation of net asset value), expenses of printing shareholder reports,
prospectuses and statements of additional information (except to the extent paid
by the Distributor as described below), fees for legal and auditing services,
Commission fees, interest, certain taxes and other expenses attributable to a
particular Series. Expenses that will be allocated on the basis of asset size of
the respective Series include fees and expenses of unaffiliated Trustees, state
franchise taxes, costs of printing proxies and other expenses related to
shareholder meetings, and other expenses properly payable by the Trust. The
organizational expenses of the Trust were paid by the Trust, and as additional
Series are added to the Trust, the organizational expenses are allocated among
the Series (including the Fund) in a manner deemed equitable by the Trustees.
Depending upon the nature of a lawsuit, litigation costs may be assessed to the
specific Series to which the lawsuit relates or allocated on the basis of the
asset size of the respective Series. The Trustees have determined that this is
an appropriate method of allocation of expenses. Accounting services are
provided to the Fund by the Manager, and the Fund reimburses the Manager for its
costs in connection with such services. For the fiscal years ended July 31,
1995, 1996 and 1997, the Fund reimbursed the Manager $331,791, $337,198 and
$303,480, respectively, for such services. As required by the Fund's
distribution agreements, the Distributor will pay the promotional expenses of
the Fund incurred in connection with the offering of shares of the Fund. Certain
expenses in connection with the account maintenance and the distribution of
Class B and Class C shares will be financed by the Fund pursuant to the
Distribution Plans in compliance with Rule 12b-1 under the 1940 Act. See
'Purchase of Shares--Distribution Plans.'
The Manager is a limited partnership, the partners of which are ML & Co.
and Princeton Services. ML & Co. and Princeton Services are 'controlling
persons' of the Manager as defined under the 1940 Act because of their ownership
of its voting securities or their power to exercise a controlling influence over
its management or policies.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement will remain in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Trustees who are not parties to
such contract or interested persons (as defined in the 1940 Act) of any such
party. Such contracts are not assignable and may be terminated without penalty
on 60 days' written notice at the option of either party thereto or by vote of
the shareholders of the Fund.
17
<PAGE>
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(Service Mark) System: shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Each Class A, Class B, Class C and Class D share of the Fund
represents identical interests in the investment portfolio of the Fund and has
the same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees, and Class B and Class C shares
bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid (except that Class B shareholders may vote upon any material charges to
expenses charged under the Class D Distribution Plan). Each class has different
exchange privileges. See 'Shareholder Services--Exchange Privilege.'
The Merrill Lynch Select Pricing(Service Mark) System is used by more
than 50 registered investment companies advised by MLAM or its affiliate, the
Manager. Funds advised by MLAM or the Manager that utilize the Merrill Lynch
Select Pricing(Service Mark) System 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 gross sales charges for the sale of Class A shares for the fiscal year
ended July 31, 1995 were $12,051, of which the Distributor received $1,108 and
Merrill Lynch received $10,943. The gross sales charges for the sale of Class A
shares for the fiscal year ended July 31, 1996 were $5,618, of which the
Distributor received $547 and Merrill Lynch received $5,071. The gross sales
charges for the sale of Class A shares for the fiscal year ended July 31, 1997
were $5,894, of which the Distributor received $619 and Merrill Lynch received
$5,275. The gross sales charges for the sale of Class D shares for the period
October 21, 1994 (commencement of operations) to July 31, 1995 were $5,112, of
which the Distributor received $431 and Merrill Lynch received $4,681. The gross
sales charges for the sale of Class D shares for the year ended July 31, 1996
were $5,930, of which the Distributor received $572 and Merrill Lynch received
$5,358. The gross sales charges for the sale of Class D shares for the fiscal
year ended July 31, 1997 were $4,136, of which the Distributor received $338 and
Merrill Lynch received $3,798. For the fiscal years ended July 31, 1995, 1996
and 1997, the Distributor received no contingent deferred sales charges
('CDSCs') with respect to redemption within one year after purchase of Class A
shares purchased subject to a front-end sales charge waiver. For the period
October 21, 1994 (commencement of operations) to July 31, 1995 and for the
fiscal years ended July 31, 1996 and 1997, the
18
<PAGE>
Distributor received no CDSCs with respect to redemption within one year after
purchase of Class D shares purchased subject to a front-end sales charge waiver.
The term 'purchase,' as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children under
the age of 21 years purchasing shares for his or her or their own account and to
single purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account although more than one beneficiary is
involved. The term 'purchase' also includes purchases by any 'company,' as that
term is defined in the 1940 Act, but does not include purchases by any such
company that has not been in existence for at least six months or which has no
purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or broker-
dealer or clients of an investment adviser.
Closed-End Fund Investment Option. Class A shares of the Fund and other
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, the date
the Merrill Lynch Select Pricing(Service Mark) System commenced operations, and
wish to reinvest the net proceeds from 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.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an 'eligible fund') must sell his or her shares of
common stock of the eligible fund (the 'eligible shares') back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the Fund.
This investment option is available only with respect to eligible shares as to
which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only
19
<PAGE>
on the day that the related tender offer terminates and will be effected at the
net asset value of the designated class of the Fund on such day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of 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 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.
Employee Access(Service Mark) Accounts. Provided applicable threshold
requirements are met, either Class A or Class D shares are offered at net asset
value to Employee Access(Service Mark) Accounts available through authorized
20
<PAGE>
employers. The initial minimum for such accounts is $500, except that the
initial minimum for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
TMA(Service Mark) Managed Trusts. shares are offered to TMASM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Purchase Privilege of Certain Persons. of the Trust, members of the Boards
of other MLAM-advised investment companies, ML & Co. and its subsidiaries (the
term 'subsidiaries', when used herein with respect to ML & Co., includes MLAM,
the Manager and certain other entities directly or indirectly wholly owned and
controlled by ML & Co.), and their directors and employees, and any trust,
pension, profit-sharing or other benefit plan for such persons, may purchase
Class A shares of the Fund at net asset value.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Financial
Consultant and who has invested in a mutual fund sponsored by a non-Merrill
Lynch company for which Merrill Lynch has served as a selected dealer and where
Merrill Lynch has either received or given notice that such arrangement will be
terminated ('notice'), if the following conditions are satisfied: first, the
investor must purchase Class D shares of the Fund with proceeds from a
redemption of shares of such other mutual fund and the shares of such other fund
were subject to a sales charge either at the time of purchase or on a deferred
basis; and second, such purchase of Class D shares must be made within 90 days
after such notice.
Class D shares of the Fund 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 shares
of such other mutual fund and that such shares have been outstanding for a
period of no less than six months; and second, such purchase of Class D shares
must be made within 60 days after the redemption and the proceeds from the
redemption must be maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund that
might result from an acquisition of assets having net unrealized appreciation
that is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities that (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, that
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under 'Investment Objective and
Policies' herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
21
<PAGE>
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 Fund and its related class of shareholders. Each
Distribution Plan can be terminated at any time, without penalty, by the vote of
a majority of the Independent Trustees or by the vote of the holders of a
majority of the outstanding related class of voting securities of the Fund. A
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without the approval of the related class of shareholders, and
all material amendments are required to be approved by the vote of Trustees,
including a majority of the Independent Trustees who have no direct or indirect
financial interest in such Distribution Plan, cast in person at a meeting called
for that purpose. Rule 12b-1 further requires that the Trust preserve copies of
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 Conduct Rules of the National
Association of Securities Dealers, Inc. (the 'NASD') imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross 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.
22
<PAGE>
The following table sets forth comparative information as of July 31, 1997
with respect to the Class B and Class C shares of the Fund, indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to the Class B shares, the Distributor's voluntary
maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1997
-------------------------------------------------------------------------------------------
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES (1) CHARGES BALANCE (2) PAYABLE DISTRIBUTOR (3) BALANCE LEVEL (4)
--------- --------- ----------- ------- ---------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD
SEPTEMBER 25, 1992 (COMMENCEMENT
OF OPERATIONS) TO JULY 31, 1997:
Under NASD Rule as Adopted.......... $60,204 $ 3,763 $ 1,284 $5,047 $978 $ 4,069 $103
Under Distributor's Voluntary
Waiver............................ $60,204 $ 3,763 $ 301 $4,064 $978 $ 3,086 $103
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994 (COMMENCEMENT OF
OPERATIONS) TO JULY 31, 1997:
Under NASD Rule as Adopted.......... $2,482 $155 $23 $178 $13 $165 $7
</TABLE>
- ------------------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
'Purchase of Shares--Distribution Plans' in the Prospectus. This figure may
include CDSCs that were deferred when a shareholder redeemed shares prior to
the expiration of the applicable CDSC period and invested the proceeds,
without the imposition of a sales charge, in Class A shares in conjunction
with the shareholder's participation in the Merrill Lynch Mutual Funds
Advisor (Merrill Lynch MFA(Service Mark)) Program (the 'MFA Program'). The
CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum (with respect to Class B shares) or
the NASD maximum (with respect to Class B and Class C shares).
REDEMPTION OF SHARES
Reference is made to 'Redemption of Shares' in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the NYSE is restricted as determined by the Commission or the
NYSE is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of shareholders
of the Fund.
The value of shares at the time of the redemption may be more or less than
the shareholder's cost, depending in part on the market value of the securities
held by the Fund at such time.
23
<PAGE>
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under 'Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares,' while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in certain circumstances
including following the death or disability of a Class B shareholder.
Redemptions for which the waiver applies are any partial or complete redemptions
following the death or disability (as defined in the Internal Revenue Code of
1986, as amended (the 'Code')) of a Class B shareholder (including one who owns
the Class B shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial determination of
disability. For the fiscal years ended July 31, 1995, 1996 and 1997, the
Distributor received CDSCs of $153,402, $99,445 and $72,912, respectively, with
respect to redemptions of Class B shares, all of which were paid to Merrill
Lynch. Additional CDSCs payable to the Distributor during the fiscal year ended
July 31, 1997, may have been waived or converted to a contingent obligation in
connection with a shareholder's participation in certain fee-based programs. For
the period October 21, 1994 (commencement of operations) to July 31, 1995, the
Distributor received no CDSCs with respect to redemptions of Class C shares. For
the fiscal years ended July 31, 1996 and 1997, the Distributor received CDSCs of
$931 and $303, respectively, with respect to redemptions of Class C shares, all
of which were paid to Merrill Lynch.
PORTFOLIO TRANSACTIONS
Reference is made to 'Investment Objective and Policies' and 'Portfolio
Transactions' in the Prospectus.
Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Fund as a principal in the purchase and sale of securities
unless such trading is permitted by an exemptive order issued by the Commission.
Since over-the-counter ('OTC') transactions are usually principal transactions,
affiliated persons of the Trust, including Merrill Lynch, may not serve as
dealer in connection with transactions with the Fund. The Trust has obtained an
exemptive order permitting it to engage in certain principal transactions with
Merrill Lynch involving high quality short-term municipal bonds subject to
certain conditions. For the fiscal years ended July 31, 1995, 1996 and 1997, the
Fund engaged in [no] transactions pursuant to such order. Affiliated persons of
the Trust may serve as its broker in OTC transactions conducted on an agency
basis. Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the 1940 Act in order to seek
to recapture underwriting and dealer spreads from affiliated entities. The
Trustees have considered all factors deemed relevant and have made a
determination not to seek such recapture at this time. The Trustees will
reconsider this matter from time to time.
The Fund may not purchase securities, including Municipal Bonds, during the
existence of any underwriting syndicate of which Merrill Lynch is a member or in
a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Trustees of the Trust which either comply
with rules adopted by the Commission or with interpretations of the Commission
staff. Rule 10f-3 under the 1940 Act sets forth conditions under which the Fund
may purchase municipal bonds from an underwriting syndicate of which Merrill
Lynch is a member. The rule sets forth requirements relating to, among other
things, the terms of an issue of municipal bonds purchased by the Fund, the
amount of municipal bonds which may be purchased in any one issue and the assets
of the Fund which may be invested in a particular issue.
The Fund does not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who provide
supplemental investment research (such as information concerning tax-exempt
securities, economic data and market forecasts) to the Manager may receive
orders for transactions by the Fund. Information so received will be in addition
to and not in lieu of the services required to
24
<PAGE>
be performed by the Manager under its Management Agreement, and the expenses of
the Manager will not necessarily be reduced as a result of the receipt of such
supplemental information.
The Trust has no obligation to deal with any broker in the execution of
transactions for the Fund's portfolio securities. In addition, consistent with
the Conduct Rules of the NASD and policies established by the Trustees of the
Trust, the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to its Manager. As a result of the investment policies described in
the Prospectus, the Fund's annual portfolio turnover rate may be higher than
that of other investment companies. The portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the
particular fiscal year by the monthly average of the value of the portfolio
securities owned by the Fund during the particular fiscal year. For purposes of
determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded. The portfolio turnover rates for
the fiscal years ended July 31, 1996 and 1997 were 90.22% and 94.59%,
respectively.
Section 11(a) of the Securities and Exchange Act of 1934, as amended,
generally prohibits members of the U.S. national securities exchanges from
executing exchange transactions for their affiliates and institutional accounts
that they manage unless the member (i) has obtained prior express authorization
from the account to effect such transactions, (ii) at least annually furnishes
the account with a statement setting forth the aggregate compensation received
by the member in effecting such transactions and (iii) complies with any rules
the Commission has prescribed with respect to the requirements of clauses (i)
and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
Reference is made to 'Additional Information--Determination of Net Asset
Value' in the Prospectus for information concerning the determination of net
asset value.
The net asset value of shares of all classes of the Fund is determined by
the Manager once daily, Monday through Friday, as of 15 minutes after the close
of business on the NYSE (generally, 4:00 p.m., New York time) on each day during
which the NYSE is open for trading. The NYSE is not open on New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net asset value per share is computed by dividing the sum of the value of
the securities held by the Fund plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at such
time, rounded to the nearest cent. Expenses, including the fees payable to the
Manager and the Distributor, are accrued daily. The per share net asset value of
Class B, Class C and Class D shares generally will be lower than the per share
net asset value of Class A shares, reflecting the daily expense accruals of the
account maintenance, 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, higher account maintenance fees and
higher transfer agency fees
25
<PAGE>
applicable with respect to Class B and Class C shares of the Fund. It is
expected, however, that the per share net asset value of the four classes will
tend to converge (although not necessarily meet) immediately after the payment
of dividends, which will differ by approximately the amount of the expense
accrual differentials between the classes.
The Municipal Bonds and other portfolio securities in which the Fund
invests are traded primarily in OTC municipal bond and money markets and are
valued at the last available bid price in the OTC 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. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains distributions. These statements will also show any
other activity in the account since the previous statement. Shareholders also
will receive separate confirmations for each purchase or sale transaction other
than automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. A shareholder may make
additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or continue to
maintain an Investment Account at the Transfer Agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new brokerage
firm to maintain such shares in an account registered in the name of the
brokerage firm for the benefit of the shareholder at the Transfer Agent. If the
new brokerage firm is willing to accommodate the shareholder in
26
<PAGE>
this manner, the shareholder must request that he or she be issued certificates
for his or her shares, and then must turn the certificates over to the new firm
for reregistration as described in the preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Transfer Agent, acting as agent for such
securities dealers. Voluntary accumulation also can be made through a service
known as the Fund's Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks or automated 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(Registered)or CBA(Registered)accounts
may arrange to have periodic investments made in the Fund in their
CMA(Registered)or CBA(Registered)accounts or in certain related accounts in
amounts of $100 or more through the CMA(Registered)or CBA(Registered)Automated
Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
automatically reinvested in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of business
on the monthly payment date for such dividends and distributions. Shareholders
may elect in writing to receive either their income dividends or capital gains
distributions, or both, in cash, in which event payment will be mailed on or
about the payment date.
Shareholders may, at any time, notify Merrill Lynch in writing if their
account is maintained with Merrill Lynch or notify the Transfer Agent in writing
or by telephone (1-800-MER-FUND) if their account is maintained with the
Transfer Agent that they no longer wish to have their dividends and/or capital
gains distributions reinvested in shares of the Fund or vice versa and,
commencing ten days after the receipt by the Transfer Agent of such notice, such
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account of Class A, Class B, Class C or Class D shares on
either a monthly or quarterly basis as provided below. Quarterly withdrawals are
available for shareholders who have acquired shares of the Fund having a value,
based on cost or the current offering price, of $5,000 or more, and monthly
withdrawals are available for shareholders with shares having a value of $10,000
or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. Redemptions will be made at net asset value as
determined 15 minutes after the close of business on the NYSE (generally, 4:00
p.m., New York time) on the 24th day of each month or the 24th day of the last
month of each quarter, whichever is applicable. If the NYSE is not open for
business on such date, the shares will be redeemed at the close of business on
the following business day. The check for the withdrawal payment will be mailed,
or the direct deposit for the withdrawal payment will be made, on the next
business day following redemption. When a shareholder is making systematic
withdrawals, dividends and distributions on all shares in the Investment Account
are reinvested automatically in Fund shares.
27
<PAGE>
A shareholder's Systematic Withdrawal Plan may be terminated at any time,
without charge or penalty, by the shareholder, the Trust, the Transfer Agent or
the Distributor.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such Class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See 'Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares--Contingent Deferred Sales Charges--Class B Shares' and '--Contingent
Deferred Sales Charges-Class C Shares' in the Prospectus. Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last Class
B shares in an account to Class D shares, the systematic withdrawal plan will
automatically be applied thereafter to Class D shares. See 'Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and C Shares--Conversion of
Class B Shares to Class D Shares' in the Prospectus; if an investor wishes to
change the amount being withdrawn in a systematic withdrawal plan the investor
should contact his or her Financial Consultant.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. The Trust will not knowingly accept purchase orders for shares of
the Fund from investors who maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a
CMA(Registered)or CBA(Registered)account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA(Registered)or CBA(Registered)Systematic Redemption Program. The minimum
fixed dollar amount redeemable is $50. The proceeds of systematic redemptions
will be posted to the shareholder's account three business days after the date
the shares are redeemed. All redemptions are made at net asset value. A
shareholder may elect to have his or her shares redeemed on the first, second,
third, or fourth Monday of each month, in the case of monthly redemptions, or of
every other month, in the case of bimonthly redemptions. For quarterly,
semiannual or annual redemptions, the shareholder may select the month in which
the shares are to be redeemed and may designate whether the redemption is to be
made on the first, second, third or fourth Monday of the month. If the Monday
selected is not a business day, the redemption will be processed at net asset
value on the next business day. The CMA(Registered) or CBA(Registered)
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the CMA(Registered)or CBA(Registered)Systematic Redemption
Program, eligible shareholders should contact their Financial Consultant.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill Lynch
Select Pricing(Service Mark) 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 or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, but does not hold Class A shares
28
<PAGE>
of the second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the shareholder
will receive Class D shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of a second MLAM-advised
mutual 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 are 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 for the newly acquired shares of the other fund as more fully
described below. Class A, Class B, Class C and Class D shares also are
exchangeable for shares of certain MLAM-advised money market funds as follows:
Class A shares may be exchanged for shares of Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Reserves Money Fund (available only for exchanges
within certain retirement plans), Merrill Lynch U.S.A. Government Reserves and
Merrill Lynch U.S. Treasury Money Fund; Class B, Class C and Class D shares may
be exchanged for shares of Merrill Lynch Government Fund, Merrill Lynch
Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund and Merrill
Lynch Treasury Fund. Shares with a net asset value of at least $100 are required
to qualify for the exchange privilege, and any
shares utilized in an exchange must have been held by the shareholder for at
least 15 days. It is contemplated that the exchange privilege may be applicable
to other new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ('outstanding Class A or
Class D shares') for Class A or Class D shares of another MLAM-advised mutual
fund ('new Class A or Class D shares') are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the 'sales charge previously paid' shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A or Class D shares acquired through dividend reinvestment shall be deemed
to have been sold with a sales charge equal to the sales charge previously paid
on the Class A or Class D shares on which the dividend was paid. Based on this
formula, Class A or Class D shares generally may be exchanged into the Class A
or Class D shares of the other funds or into shares of certain money market
funds with a reduced or without a sales charge.
In addition, each of the funds with Class B or Class C shares outstanding
('outstanding Class B or Class C shares') offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ('new Class B or Class C shares') on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than the
CDSC schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through use
of the exchange privilege will be subject to the Fund's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B shares of the
fund from which the exchange has been made. For purposes of computing the sales
charge that may be payable on a disposition of the new Class B or Class C
shares, the holding period for the outstanding Class B or Class C shares is
'tacked' to the holding period of the new Class B or Class C shares. For
example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ('Special Value Fund') after having
held the Fund's Class B shares for two and
29
<PAGE>
a half years. The 2% CDSC that generally would apply to a redemption would not
apply to the exchange. Three years later the investor may decide to redeem the
Class B shares of Special Value Fund and receive cash. There will be no CDSC due
on this redemption, since by 'tacking' the two and a half year holding period of
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 Special Value
Fund Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Manager or its affiliates, but the period of
time that Class B or Class C shares are held in a 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 that were acquired as
a result of an exchange for Class B or Class C shares of the 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 newly-acquired fund will be aggregated with previous holding
periods for purposes of reducing the CDSC. Thus, for example, an investor may
exchange Class B shares of the Fund for shares of Merrill Lynch Institutional
Fund ('Institutional Fund') after having held the Fund's 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 that the shareholder continued to hold for an additional two
and a half years, any subsequent redemption would not incur a CDSC.
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, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other MLAM advised funds
described above with shares for which certificates have not been issued, may
exercise the exchange privilege by wire through their securities dealers. The
Fund reserves the right to require a properly completed Exchange Application.
This exchange privilege may be modified or terminated at any time in accordance
with the rules of the Commission. The Fund reserves the right to limit the
number of times an investor may exercise the exchange privilege. Certain funds
may suspend the continuous offering of their shares at any time and thereafter
may resume such offering from time to time. The exchange privilege is available
only to U.S. shareholders in states where the exchange legally may be made.
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'). As long as it so qualifies, the
Fund (but not its shareholders) will not be subject to Federal income tax to the
extent that it distributes its net investment income and net realized capital
gains. The Trust intends to cause the Fund to distribute substantially all of
such income.
As discussed in the Fund's Prospectus, the Trust has established other
series in addition to the Fund (together with the Fund, the 'Series'). Each
Series of the Trust is treated as a separate corporation for Federal income tax
purposes. Each Series, therefore, is considered to be a separate entity in
determining its treatment under the rules for RICs described in the Prospectus.
Losses in one Series do not offset gains in another Series, and the requirements
(other than certain organizational requirements) for qualifying for RIC status
are determined at the Series level rather than at the Trust level.
30
<PAGE>
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 its
total assets consists of obligations exempt from Federal income tax ('tax-exempt
obligations') under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be qualified
to pay exempt-interest dividends to its Class A, Class B, Class C and Class D
shareholders (together, the 'shareholders'). Exempt-interest dividends are
dividends or any part thereof paid by the Fund that are attributable to interest
on tax-exempt obligations and designated by the Trust as exempt-interest
dividends in a written notice mailed to the Fund's shareholders within 60 days
after the close of the Fund's taxable year. For this purpose, the Fund will
allocate interest from tax-exempt obligations (as well as ordinary income,
capital gains, including new categories of capital gains, and tax preference
items, discussed below) among the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with the
Commission rule permitting the issuance and sale of multiple classes of shares)
that is based on the gross income allocable to Class A, Class B, Class C and
Class D shareholders during the taxable year, or such other method as the
Internal Revenue Service may prescribe. To the extent that the dividends
distributed to the Fund's shareholders are derived from interest income exempt
from Federal income tax under Code Section 103(a) and are properly designated as
exempt-interest dividends, they will be excludable from a shareholder's gross
income for Federal income tax purposes. Exempt-interest dividends are included,
however, in determining the portion, if any, of a person's social security and
railroad retirement benefits subject to Federal income taxes. Interest on
indebtedness incurred or continued to purchase or carry shares of a RIC paying
exempt-interest dividends, such as the Fund, will not be deductible by the
investor for Federal or North Carolina income tax purposes. Shareholders are
advised to consult their tax advisors with respect to whether exempt-interest
dividends retain the exclusion under Code Section 103(a) if a shareholder would
be treated as a 'substantial user' or 'related person' under Code Section 147(a)
with respect to property financed with the proceeds of an issue of 'industrial
development bonds' or 'private activity bonds,' if any, held by the Fund.
The portion of 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 that were issued before July 1, 1995 also are not subject
to North Carolina individual or corporate income tax; however, for such
obligations issued after June 30, 1995, distributions of gains attributable to
disposition will not be exempt from 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 that constitutes exempt-interest dividends and the portion that 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.
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
31
<PAGE>
Carolina franchise tax and may also be subject to state taxes in states other
than North Carolina and local taxes. Accordingly, investors in the Fund,
including, in particular, corporate investors which may be subject to the North
Carolina franchise tax, should consult their tax advisors with respect to the
application of such taxes to an investment in the Fund and to the receipt of
Fund dividends and as to their North Carolina tax situation in general.
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 that were issued before July 1, 1995.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ('capital gain dividends') are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares. 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 that were issued before July 1, 1995. Recent legislation creates
additional categories of capital gains taxable at different rates. Not later
than 60 days after the close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amounts of any
exempt-interest dividends, ordinary income dividends or capital gain dividends,
as well as the amount of capital gain dividends in the different categories of
capital gain referred to above. Distributions by the Fund, whether from
exempt-interest income, ordinary income or capital gains, will not be eligible
for the dividends received deduction allowed to corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Any loss upon the sale or
exchange of Fund shares held for six months or less will be 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. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. 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 certain investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund will purchase
such 'private activity bonds,' and the Trust will report to shareholders within
60 days after the 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
32
<PAGE>
between taxable income as adjusted for other tax preferences and the
corporation's 'adjusted current earnings,' which more closely reflect a
corporation's economic income. Because an exempt-interest dividend paid by the
Fund will be included in adjusted current earnings, a corporate shareholder may
be required to pay alternative minimum tax on exempt-interest dividends paid by
the Fund.
The Fund may invest in high yield securities as described in the
Prospectus. Furthermore, the Fund may also invest in instruments the return on
which includes nontraditional features such as indexed principal or interest
payments ('nontraditional instruments'). These instruments may be subject to
special tax rules under which the Fund may be required to accrue and distribute
income before amounts due under the obligations are paid. In addition, it is
possible that all or a portion of the interest payments on such high yield
securities and/or nontraditional instruments could be recharacterized as taxable
ordinary income.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge such
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisors concerning the applicability of the U.S. withholding tax.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ('backup withholding'). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ('financial
futures contracts'). The Fund may also purchase and write call and put options
on such financial futures contracts. In general, unless an election is available
to the Fund or an exception applies, such options and financial futures
contracts that are 'Section 1256 contracts' will be 'marked to market' for
Federal income tax purposes at the end of each taxable year, i.e., each such
option or financial futures contract will be treated as sold for its fair market
value on the last day of the taxable year, and any gain or loss attributable to
Section 1256 contracts will be 60% long-term and 40% short-term capital gain or
loss.
33
<PAGE>
Application of these rules to Section 1256 contracts held by the Fund may alter
the timing and character of distributions to shareholders. The mark-to-market
rules outlined above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of changes in price or interest rates
with respect to its investments.
Code Section 1092, which applies to certain 'straddles,' may affect the
taxation of the Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, the Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in financial futures contracts or
the related options.
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. Under recently enacted
legislation, this requirement will no longer apply to the Fund after its fiscal
year ending July 31, 1998.
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 advisors regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.
34
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective shareholders.
From time to time, the Fund may include the Fund's Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales literature. Total
return, yield and tax-equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return, yield and tax-equivalent yield are determined
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of the Class B and
Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) the maximum applicable sales charges will not be included with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
35
<PAGE>
Set forth below is the total return, yield and tax-equivalent yield
information for Class A, Class B, Class C and Class D shares of the Fund for the
periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------------ ------------------------------------ -----------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS
A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END OF HYPOTHETICAL
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT
- ------------------------------ ----------------- ---------------- ----------------- ---------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C> <C>
One year ended July 31,
1997........................ 5.76% $ 1,057.60 5.71% $ 1,057.10 8.50%
Inception (September 25, 1992)
to July 31, 1997............ 6.30% $ 1,344.40 6.68% $ 1,367.90
Inception (October 21, 1994)
to July 31, 1997............ 8.50%
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C> <C>
Year ended July 3, 1997....... 10.17% $ 1,101.70 9.71% $ 1,097.10 9.50%
Year ended July 31, 1996...... 5.76% $ 1,057.60 5.21% $ 1,052.10 5.20%
Year ended July 31, 1995...... 6.60% $ 1,066.00 6.06% $ 1,060.60
Year ended July 31, 1994...... 1.11% $ 1,011.10 0.60% $ 1,006.00
Inception (September 25, 1992)
to July 31, 1993............ 11.52% $ 1,115.20 11.06% $ 1,110.60
Inception (October 21, 1994)
to July 31, 1995............ 8.87%
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C> <C>
Inception (September 25, 1992)
to July 31, 1997............ 34.44% $ 1,344.40 36.79% $ 1,367.90
Inception (October 21, 1994)
to July 31, 1997............ 25.42%
YIELD
30 days ended July 31, 1997... 4.33% 4.01% 3.91%
TAX-EQUIVALENT YIELD*
30 days ended July 31, 1997... 6.01% 5.57% 5.43%
<CAPTION>
CLASS D SHARES
------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
$1,000 A PERCENTAGE $1,000
INVESTMENT BASED ON A INVESTMENT
AT THE END HYPOTHETICAL AT THE END
PERIOD OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
- ------------------------------ ---------------- ----------------- ----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C>
One year ended July 31,
1997........................ $ 1,085.00 5.65% $ 1,056.50
Inception (September 25, 1992)
to July 31, 1997............
Inception (October 21, 1994)
to July 31, 1997............ $ 1,254.20 7.50% $ 1,222.20
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C>
Year ended July 3, 1997....... $ 1,095.00 10.05% $ 1,100.50
Year ended July 31, 1996...... $ 1,052.00 5.75% $ 1,057.50
Year ended July 31, 1995......
Year ended July 31, 1994......
Inception (September 25, 1992)
to July 31, 1993............
Inception (October 21, 1994)
to July 31, 1995............ $ 1,088.70 9.39% $ 1,093.90
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C>
Inception (September 25, 1992)
to July 31, 1997............
Inception (October 21, 1994)
to July 31, 1997............ $ 1,254.20 22.22% $ 1,222.20
Yield
<S> <C>
30 days ended July 31, 1997... 4.24%
Tax-Equivalent Yield*
<S> <C>
30 days ended July 31, 1997... 5.89%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
36
<PAGE>
In order to reflect the reduced sales charges, in the case of Class A or
Class D shares, or the waiver of the CDSC, in the case of Class B shares or
Class C shares, applicable to certain investors, as described under 'Purchase of
Shares' and 'Redemption of Shares,' respectively, the total return data quoted
by the Fund in advertisements directed to such investors may not take into
account the reduced, and not the maximum, sales charge or may not take into
account the CDSC and, therefore, may reflect greater total return since, due to
the reduced sales charges or the waiver of sales charges, a lower amount of
expenses may be deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust provides that the Trust shall be comprised of
separate Series each of which will consist of a separate portfolio which will
issue separate shares. The Trust is presently comprised of the Fund, Merrill
Lynch Arizona Municipal Bond Fund, Merrill Lynch Arkansas Municipal Bond Fund,
Merrill Lynch Colorado Municipal Bond Fund, Merrill Lynch Connecticut Municipal
Bond Fund, Merrill Lynch Florida Municipal Bond Fund, Merrill Lynch Maryland
Municipal Bond Fund, Merrill Lynch Massachusetts Municipal Bond Fund, Merrill
Lynch Michigan Municipal Bond Fund, Merrill Lynch 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
interests in the same assets of the Fund and are identical in all respects
except that Class B, Class C and Class D shares bear certain expenses related to
the account maintenance and/or distribution expenditures. The Board of Trustees
may classify and reclassify the shares of any Series into additional or other
classes at a future date.
All shares of the Trust have equal voting rights, except that only shares
of the respective Series are entitled to vote on matters concerning only that
Series and, as noted above, Class B, Class C and Class D shares will have
exclusive voting rights with respect to matters relating to the account
maintenance and/or distribution expenses, as appropriate, being borne solely by
such class. Each issued and outstanding share of a Series is entitled to one
vote and to participate equally in dividends and distributions declared with
respect to that Series and, upon liquidation or dissolution of the Series, in
the net assets of such Series remaining after satisfaction of outstanding
liabilities, except that, as noted above, expenses relating to distribution
and/or account maintenance of the Class B, Class C and Class D shares are borne
solely by the respective class. There normally will be no 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.
37
<PAGE>
The obligations and liabilities of a particular Series are restricted to
the assets of that Series and do not extend to the assets of the Trust
generally. The shares of each Series, when issued, will be fully paid and
nonassessable, have no preference, preemptive, conversion, exchange or similar
rights, and will be freely transferable. Holders of shares of any Series are
entitled to redeem their shares as set forth elsewhere herein and in the
Prospectus. Shares do not have cumulative voting rights, and the holders of more
than 50% of the shares of the Trust voting for the election of Trustees can
elect all of the Trustees if they choose to do so, and in such event the holders
of the remaining shares would not be able to elect any Trustees. No amendments
may be made to the Declaration of Trust, other than amendments necessary to
conform the Declaration to certain laws or regulations, to change the name of
the Trust, or to make certain non-material changes, without the affirmative vote
of a majority of the outstanding shares of the Trust or the affected Series or
class, as applicable.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of the Fund for $100,000. Such shares were acquired for investment and
can only be disposed of by redemption. The organizational expenses of the Fund
were paid by the Fund and are being amortized over a period not exceeding five
years. The proceeds realized by the Manager (or any subsequent holder) upon the
redemption of any of the shares initially purchased by it will be reduced by the
proportionate amount of unamortized organizational expenses which the number of
shares redeemed bears to the number of shares initially purchased. Such
organizational expenses include certain of the initial organizational expenses
of the Trust which have been allocated to the Fund by the Trustees. If
additional Series are added to the Trust, the organizational expenses will be
allocated among the Series in a manner deemed equitable by the Trustees.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on July 31, 1997 is calculated as set
forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets.............................................. $8,542,506 $41,136,651 $2,051,569 $2,131,934
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Number of Shares Outstanding............................ 785,535 3,782,186 188,665 195,987
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Net Asset Value Per Share (net assets divided by number
of shares outstanding)................................ $ 10.87 $ 10.88 $ 10.87 $ 10.88
Sales Charge (for Class A and Class D shares:
4.00% of offering price; 4.17% of net asset value per
share)*............................................... .45 ** ** .45
---------- ----------- ---------- ----------
Offering Price.......................................... $ 11.32 $ 10.88 $ 10.87 $ 11.33
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
</TABLE>
- ------------------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares. See 'Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares' in
the Prospectus and 'Redemption of Shares--Deferred Sales Charges--Class B and
Class C Shares' herein.
38
<PAGE>
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 approval by the independent Trustees of the
Trust. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101, acts as the custodian of the Fund's assets. The custodian is responsible
for safeguarding and controlling the Fund's cash and securities, handling the
delivery of securities and collecting interest on the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Trust's transfer agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
'Management of the Trust-- Transfer Agency Services' in the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on July 31 of each year. The Trust sends
to shareholders of the Fund at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Commission, Washington,
D.C., under the Securities Act and the 1940 Act, to which reference is hereby
made.
The Declaration of Trust establishing the Trust dated August 2, 1985, a
copy of which, together with all amendments thereto (the 'Declaration') is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name 'Merrill Lynch Multi-State Municipal Series Trust' refers
to the Trustees under the Declaration collectively as Trustees, but not as
individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Trust shall be held to any personal liability; nor shall resort be
had to any such person's private property for the satisfaction of any obligation
or claim of the Trust but the 'Trust Property' only shall be liable.
To the knowledge of the Trust, no person or entity owned beneficially 5% or
more of the Fund's shares on November 3, 1997.
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APPENDIX I
ECONOMIC AND FINANCIAL CONDITIONS IN NORTH CAROLINA
The following information is a brief summary of factors affecting the
economy of the state and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers, however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
The State of North Carolina (the 'State') has three major operating funds:
the General Fund, the Highway Fund, and the Highway Trust Fund. 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 and
soft drink tax (the latter is currently being phased out). 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.
Fiscal year 1996 ended with a positive General Fund balance of
approximately $573.4 million. An additional $153.1 million was available from a
reserved fund balance. Of this aggregate amount, $77.3 million was reserved in
the Savings Reserve (bringing the total reserve to $500.9 million) and $130.0
million was reserved in the Reserve for Repair and Renovation of State
Facilities (bringing the total reserve to $151.3 million after prior
withdrawals). An additional $47.1 million was transferred to a Clean Water
Management Trust Fund created in 1996, $39.5 was reserved in a Capital
Improvement Reserve and $26.2 was transferred to Federal Retiree Refund and
Administration Accounts created in 1996, leaving an unrestricted General Fund
balance at June 30, 1996 of approximately $406.1 million.
Fiscal year 1997 ended with a positive General Fund balance of
approximately $760.6 million. Along with additional reserves, $135 million was
reserved in the Reserve for Repair and Renovation of State Facilities, in
addition to a supplemental reserve of $39.3 million for repairs and renovations.
An additional $49.4 million was transferred to the Clean Water Management Trust
Fund and $115 million and $156 million were reserved in newly-created Disaster
Relief and Intangible Tax Refund Reserves, respectively. No additional amounts
were transferred to the Savings Reserve for the year. After additional reserves,
the unrestricted General Fund balance at the end of fiscal year 1997 was
approximately $319.9 million.
The foregoing results are presented on a budgetary basis. Accounting
principles applied to develop data on a budgetary basis differ significantly
from those principles used to present financial statements in conformity with
generally accepted accounting principles (GAAP). Based on a modified accrual
basis, the General Fund balance at June 30, 1996 was $1,422.1 million. The
foregoing results for fiscal year 1997 are based upon unaudited financial
information supplied by the North Carolina General Assembly. Modified accrual
basis results for fiscal year 1997 were not available as of the date this
Appendix was prepared.
Under the State's constitutional and statutory scheme, the Governor is
required to prepare and propose a biennial budget to the General Assembly. The
General Assembly is responsible for considering the budget proposed by the
Governor and enacting the final budget. In enacting the final budget, the
General Assembly may modify the budget proposed by the Governor as it deems
necessary. The Governor is responsible for administering the budget enacted by
the General Assembly.
On August 28, 1997, the General Assembly adopted the biennium budget for
1997 to 1999. The $11.4 billion budget for fiscal year 1998 included a 7.6%
increase in spending over the fiscal year 1997 budget.
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<PAGE>
Highlights of the new budget included increased spending for education, with
$181 million in funding for teacher pay raises averaging 6.5% and $92 million to
implement the newly-enacted Excellent Schools Act, which raises teacher salaries
to the national average over four years and requires teachers at low performing
schools to pass competency tests. Money was also reserved for schools that
achieve or surpass academic goals, school technology funds, new school buses,
staff development programs, community college job training programs, and other
education purposes. The General Assembly also passed a welfare reform program,
adopted a streamlined process for cleaning up brownfields for reuse as
industrial and commerical sites, and cut the State sales tax on food by 1%
beginning in 1998.
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. The Congress of the United States
is considering a number of matters affecting the Federal government's
relationship with state governments that, if enacted into law, could affect
fiscal and economic policies of the states, including the State.
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 'Employment Security Commission'), in July 1997, the State
ranked tenth among the states in non-agricultural employment and eighth in
manufacturing employment. The Employment Security Commission estimated the
State's seasonally adjusted unemployment rate in September 1997 to be 3.7% of
the labor force, as compared with an unemployment rate of 4.9% nationwide.
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 v. State of North Carolina and Patton v. State of North
Carolina--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 (Swanson). 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 petitioned the United States
Supreme Court for review of that decision, which petition was denied. The United
States District Court ruled in favor of the defendants in the companion federal
case, and a petition for reconsideration was denied. Plaintiffs appealed to the
United States Court of Appeals, which concurred with the lower court's ruling.
The United States Supreme Court rejected an appeal, ruling that the lawsuit was
a state matter, leaving the North Carolina Supreme Court's ruling in force.
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Despite these victories in court, the General Assembly in its 1996 Special
Session adopted legislation allowing for a refund of taxes for federal retirees.
Effective for tax years beginning on or after January 1, 1996, federal retirees
are entitled to a North Carolina income tax credit for taxes paid on their
pension benefits during tax years 1985 through 1988. In the alternative, a
partial refund may be claimed in lieu of a credit for eligible taxpayers.
An additional lawsuit was filed in 1995 in State court by Federal
pensioners to recover State income taxes paid on Federal retirement benefits
(Patton). This case grew out of a claim by Federal pensioners in the original
Federal court case in Swanson. In the new lawsuit, the plaintiffs allege that
when the State granted an increase in retirement benefits to State retirees in
the same legislation that equalized tax treatment between state and Federal
retirees, the increased benefits to State retirees constituted an indirect
violation of Davis. The lawsuit seeks a refund of taxes paid by Federal retirees
on Federal retirement benefits received in the years 1989 through 1993 and
refunds or monetary relief sufficient to equalize the alleged on-going
discriminatory treatment for those years. Potential refunds exceed $300 million.
This case has been suspended pending final judgment in Bailey (discussed below),
and no court date has been set. Should plaintiffs prevail in Bailey, such a
result, the Federal retirees allege, would reestablish the disparity of
treatment between State and Federal pension income which was held
unconstitutional in Davis. The North Carolina Attorney General believes that
sound legal authority and arguments support the denial of this claim.
2. Bailey v. State of North Carolina--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 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.
On May 31, 1995 the Superior Court issued an order ruling in favor of the
plaintiffs. Under the terms of the order, the Superior Court found that the act
of the General Assembly that repealed the tax exemption on State and local
government retirement benefits is null, void and unenforceable and that
retirement benefits which were vested before August 1989 are exempt from
taxation. An appeal from this order is pending in the North Carolina Supreme
Court.
The North Carolina Attorney General's Office estimates that the amount in
controversy is approximately $40 to $45 million annually for the tax years 1989
through 1992. In addition, it is anticipated that the decision reached in this
case will govern the resolution of tax refund claims made by retired state and
local government employees for taxes paid on retirement benefit income for tax
years after 1991. Furthermore, if the order of the Superior Court is upheld, its
provisions would apply prospectively to prevent future taxation of State and
local government retirement benefits that were vested before August 1989. The
North Carolina Attorney General believes that sound legal arguments support the
State's position on the merits.
In its 1996 Short Session, the North Carolina General Assembly approved
additional State general obligation bonds in the amount of $950 million for
highways and $1.8 billion for schools. These bonds were approved by the voters
of the State in November, 1996. In March, 1997, the State issued $450 million of
the authorized school bonds (Public School Building Bonds). An additional
offering of $250 million of the authorized highway bonds is anticipated to occur
in November, 1997. The offering of the remaining $2.05 billion of these
authorized bonds is anticipated to occur over the next two-five years.
As of the date of this Statement of Additional Information, Moody's,
Standard & Poor's and Fitch 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
<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as 'gilt edge.' Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically unreliable over any great length
of time. Such bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as
well assured. Often the protection of interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest
and principal payments or of maintenance of other terms of the contract over any long period of time may
be Small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
</TABLE>
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
Short-term Notes: The four ratings of Moody's for short-term notes are
MIG1/VMIG1, MIG2/VMIG2, MIG3/VMIG3 and MIG4/VMIG4; MIG1/VMIG1 denotes 'best
quality. . .strong protection by established cash flows'; MIG2/VMIG2 denotes
'high quality' with ample margins of protection; MIG3/VMIG3 notes are of
'favorable quality. . .but. . .lacking the undeniable strength of the preceding
grades'; MIG4/VMIG4 notes are of
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'adequate quality. . .[p]rotection commonly regarded as required of an
investment security is present. . .there is specific risk.'
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa-judged
to be the best quality, carry the smallest degree of investment risk; Aa--judged
to be of high quality by all standards; A--possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment ability of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading market
positions in well-established industries; high rates of return on funds
employed; conservative capitalization 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 supporting institutions) have a strong ability
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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ('STANDARD & POOR'S')
MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers or other
forms of credit enhancement of the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
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The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms
of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by Standard & Poor's. Capacity to meet its financial
commitment on the obligation is extremely strong.
AA Debt rated 'AA' differs from the highest-rated obligations only in small degree. The obligor's capacity to
meet its financial commitment on the obligation is very strong.
A Debt rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having significant speculative characteristics.
B 'BB' indicates the lowest degree of speculation and 'C' the highest degree of speculation. While such
CCC bonds will likely have some quality and protective characteristics, these may be outweighed by large
CC uncertainties or major exposures to adverse conditions.
C
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 payments on an obligation are
not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D' rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are
jeopardized.
</TABLE>
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.
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 several categories, ranging from 'A' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 This designation 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'.
</TABLE>
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<TABLE>
<S> <C>
A-3 Issues carrying this designation have an adequate capacity for timely payment. They are, however, 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
Standard & Poor's believes that such payments will be made during such grace period.
</TABLE>
A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to 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:
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to
pay debt service is given a plus (+) designation.
SP-2 A satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
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.
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<PAGE>
Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch 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.
<TABLE>
<S> <C>
AAA Bonds considered to be investment grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not quite as strong as bonds rated 'AAA'. Because
bonds rated in the 'AAA' and 'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest
and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds, and therefore, impair
timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
</TABLE>
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the 'AAA' category.
<TABLE>
<S> <C>
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of a project or the occurrence of a
specific event.
Suspended A rating is suspended when Fitch deems the amount of information available from the issuer to be
inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or refinanced and, at Fitch's
discretion, when an issuer fails to furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an occurrence that is likely to result in
a rating change and the likely direction of such change. These are designated as 'Positive,'
indicating a potential upgrade, 'Negative,' for potential downgrade, or 'Evolving,' where ratings
may be raised or lowered. FitchAlert is relatively short-term, and should be resolved within 12
months.
</TABLE>
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<PAGE>
Ratings Outlook: An outlook is used to describe the most likely direction
of any rating change over the intermediate term. It is described as 'Positive'
or 'Negative.' The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
<TABLE>
<S> <C>
BB Bonds are considered speculative. The obligor's ability to pay interest and repay principal
may be affected over time by adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor in satisfying its debt service
requirements.
B Bonds are considered highly speculative. While bonds in this class are currently meeting debt
service requirements, the probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for reasonable business and
economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may lead to default.
The ability to meet obligations requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or principal seems probable
over time.
C Bonds are in imminent default in payment of interest or principal.
DDD Bonds are in default on interest and/or principal payments. Such bonds are extremely
DD speculative and should be valued on the basis of their ultimate recovery value in liquidation
D or reorganization of the obligor. 'DDD' represents the highest potential for recovery on
these bonds, and 'D' represents the lowest potential for recovery.
</TABLE>
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the 'DDD,' 'DD' or 'D' categories.
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes and municipal and
investment notes.
48
<PAGE>
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
<TABLE>
<S> <C>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated 'F-1+'.
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned 'F-1+' and 'F-1' ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes could cause these securities
to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or imminent payment default.
LOC The symbol 'LOC' indicates that the rating is based on a letter of credit issued by a commercial bank.
</TABLE>
49
<PAGE>
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, 1997, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the four-year period 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,
1997 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, 1997, 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
September 5, 1997
50
<PAGE>
Merrill Lynch North Carolina Municipal Bond Fund July 31, 1997
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
North Carolina -- 88.8%
<S> <C> <C> <C> <C>
AA Aa3 $2,250 Charlotte-Mecklenberg Hospital Authority, North Carolina, Health
Care System Revenue Bonds, Series A, 5.875% due 1/15/2026 $2,355
AAA Aaa 2,000 Charlotte, North Carolina, Water and Sewer, GO, UT, 5.60% due 5/01/2021 2,088
A A2 500 Chatham County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority Revenue Bonds (Carolina Power and Light
Company), 6.30% due 6/15/2014 535
AAA Aaa 1,000 Cumberland County, North Carolina, COP (Civic Center Project), Series A,
6.40% due 12/01/2024 (b) 1,107
NR* Baa1 1,500 Haywood County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority, Environmental Improvement Revenue Bonds
(Champion International Corporation Project), AMT, 6.25% due 9/01/2025 1,580
A A2 3,500 Martin County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (Solid Waste Disposal - Weyerhaeuser
Company), AMT, 6.80% due 5/01/2024 3,872
AAA Aaa 2,000 North Carolina Eastern Municipal Power Agency, Power System Revenue
Refunding Bonds, Series B, 5.875% due 1/01/2021 (c) 2,119
North Carolina Educational Facilities, Finance Agency Revenue Bonds:
AA+ Aa1 2,000 (Duke University Project), Series C, 6.75% due 10/01/2021 2,202
AAA NR* 900 Refunding (Elon College Project), 6.375% due 1/01/2007 (d) 979
North Carolina HFA, Revenue Bonds:
AA Aa 2,720 AMT, Series V, 6.80% due 9/01/2025 2,878
AA Aa 660 Series U, 6.70% due 3/01/2018 702
North Carolina HFA, S/F Revenue Bonds:
AA Aa2 1,755 AMT, Series X, 6.70% due 9/01/2026 1,863
AA Aa2 1,940 Series W, 6.50% due 3/01/2018 2,052
North Carolina Medical Care Commission, Hospital Revenue Bonds:
AAA Aaa 2,000 (Moore Regional Hospital Project), 5% due 10/01/2018 (b) 1,929
NR* Aaa 2,000 (Presbyterian Hospital Project), 7.375% due 10/01/2000 (e) 2,234
AAA Aaa 750 Refunding (Alamance Health Services Inc. Project), Series A, 6.375% due
8/15/2020 (a) 824
A+ A1 2,000 (Rex Hospital Project), 6.25% due 6/01/2017 2,142
NR* A 2,375 North Carolina State Educational Assistance Authority Revenue Bonds
(Guaranteed Student Loan), AMT, Series C, Sub-lien, 6.35% due 7/01/2016 2,509
AAA Aaa 2,000 North Carolina State, GO, Series A, 5.10% due 3/01/2003 2,096
AAA Aaa 4,000 Pasquotank County, North Carolina, COP (Public Schools Project), 5% due
6/01/2015 (c) 3,953
</TABLE>
51
<PAGE>
Merrill Lynch North Carolina Municipal Bond Fund July 31, 1997
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
North Carolina (concluded)
<S> <C> <C> <C> <C>
AA+ Aa 5,115 Raleigh, North Carolina, Combined Enterprise System Revenue Bonds,
5.125% due 3/01/2022 5,121
A- A 700 Shelby, North Carolina, Combined Producing Facilities System Revenue Bonds
(Capital Improvement), 6.625% due 6/01/2002 (e) 790
AA Aa3 800 University of North Carolina, Chapel Hill, Hospital Revenue Bonds (Board
of Governors), 6.375% due 2/15/2017 854
AA+ Aa2 1,000 University of North Carolina, Chapel Hill, Revenue Refunding Bonds
(Parking System), Series B, 5.10% due 5/15/2009 1,033
<CAPTION>
Puerto Rico -- 8.2%
<S> <C> <C> <C> <C>
BBB+ Baa1 1,000 Puerto Rico Electric Power Authority, Power Revenue Refunding Bonds,
Series U, 6% due 7/01/2014 1,062
AA Aa3 2,000 Puerto Rico Industrial, Medical and Environmental Pollution Control
Facilities, Financing Authority Revenue Bonds (Motorola Inc. Project),
Series A, 6.75% due 1/01/2014 2,211
A Baa1 1,150 Puerto Rico Public Buildings Authority, Guaranteed Government Facilities
Revenue Bonds, Series B, 5.25% due 7/01/2021 1,133
Total Investments (Cost -- $48,829) -- 97.0% 52,223
Other Assets Less Liabilities -- 3.0% 1,640
---------
Net Assets -- 100.0% $53,863
=========
</TABLE>
(a) FSA Insured.
(b) AMBAC Insured.
(c) MBIA Insured.
(d) Connie Lee Insured.
(e) Prerefunded.
* Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
PORTFOLIO ABBREVIATIONS
<TABLE>
<S> <C> <C>
To simplify the listings of Merrill Lynch North Carolina AMT Alternative Minimum Tax (subject to)
Municipal Bond Fund's portfolio holdings in the Schedule COP Certificates of Participation
of Investments, we have abbreviated the names of many GO General Obligation Units
of the securities according to the list at right. HFA Housing Finance Agency
S/F Single-Family
UT Unlimited Tax
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch North Carolina Municipal Bond Fund July 31, 1997
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of July 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $48,828,526) (Note 1a) $52,222,936
Receivables:
Securities sold $999,617
Interest 789,293
Beneficial interest sold 219,965 2,008,875
---------
Deferred organization expenses (Note 1e) 1,550
Prepaid registration fees and other assets (Note 1e) 1,453
-------------
Total assets 54,234,814
-------------
Liabilities: Payables:
Beneficial interest redeemed 169,308
Dividends to shareholders (Note 1f) 62,048
Investment adviser (Note 2) 24,814
Distributor (Note 2) 18,418 274,588
---------
Accrued expenses and other liabilities 97,566
-------------
Total liabilities 372,154
-------------
Net Assets: Net assets $53,862,660
=============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized $78,554
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 378,219
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 18,867
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 19,599
Paid-in capital in excess of par 50,885,056
Accumulated realized capital losses on investments -- net (Note 5) (912,045)
Unrealized appreciation on investments -- net 3,394,410
-------------
Net assets $53,862,660
=============
Net Asset Value: Class A -- Based on net assets of $8,542,506 and 785,535 shares of
beneficial interest outstanding $10.87
=============
Class B -- Based on net assets of $41,136,651 and 3,782,186 shares of
beneficial interest outstanding $10.88
=============
Class C -- Based on net assets of $2,051,569 and 188,665 shares of
beneficial interest outstanding $10.87
=============
Class D -- Based on net assets of $2,131,934 and 195,987 shares of
beneficial interest outstanding $10.88
=============
See Notes to Financial Statements.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch North Carolina Municipal Bond Fund July 31, 1997
FINANCIAL INFORMATION (continued)
Statement of Operations
For the Year Ended
July 31, 1997
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $3,141,784
(Note 1d):
Expenses: Investment advisory fees (Note 2) $303,480
Account maintenance and distribution fees -- Class B (Note 2) 217,371
Professional fees 56,468
Accounting services (Note 2) 53,073
Transfer agent fees -- Class B (Note 2) 24,461
Printing and shareholder reports 20,297
Account maintenance and distribution fees -- Class C (Note 2) 10,871
Amortization of organization expenses (Note 1e) 10,285
Pricing fees 5,370
Custodian fees 4,173
Transfer agent fees -- Class A (Note 2) 3,611
Trustees fees and expenses 2,823
Registration fees (Note 1e) 2,718
Account maintenance fees -- Class D (Note 2) 2,044
Transfer agent fees -- Class C (Note 2) 1,008
Transfer agent fees -- Class D (Note 2) 941
-----------
Total expenses before reimbursement 718,994
Reimbursement of expenses (Note 2) (43,196)
-----------
Total expenses after reimbursement 675,798
-----------
Investment income -- net 2,465,986
-----------
Realized & Realized gain on investments -- net 1,451,500
Unrealized Gain on Change in unrealized appreciation on investments -- net 1,158,014
Investments -- Net -----------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $5,075,500
===========
See Notes to Financial Statements.
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch North Carolina Municipal Bond Fund July 31, 1997
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
For the Year Ended July 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $2,465,986 $2,759,757
Realized gain (loss) on investments -- net 1,451,500 (418,368)
Change in unrealized appreciation on investments -- net 1,158,014 883,090
------------ ------------
Net increase in net assets resulting from operations 5,075,500 3,224,479
------------ ------------
Dividends to Investment income -- net:
Shareholders Class A (383,781) (425,644)
(Note 1f): Class B (1,906,705) (2,197,971)
Class C (77,565) (58,322)
Class D (97,935) (77,820)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (2,465,986) (2,759,757)
------------ ------------
Beneficial Interest Net decrease in net assets derived from beneficial interest transactions (7,677,756) (2,857,107)
Transactions ------------ ------------
(Note 4):
Net Assets: Total decrease in net assets (5,068,242) (2,392,385)
Beginning of year 58,930,902 61,323,287
------------ ------------
End of year $53,862,660 $58,930,902
============ ============
See Notes to Financial Statements.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch North Carolina Municipal Bond Fund July 31, 1997
FINANCIAL INFORMATION (continued)
Financial Highlights
Class A
The following per share data and ratios have been derived For the
from information provided in the financial statements. Period
Sept. 25,
1992+ to
For the Year Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.36 $10.29 $10.19 $10.67 $10.00
Operating ------- ------- ------- ------- -------
Performance: Investment income -- net .51 .51 .54 .54 .46
Realized and unrealized gain (loss) on ------- ------- ------- ------- -------
investments -- net .51 .07 .10 (.42) .67
Total from investment operations 1.02 .58 .64 .12 1.13
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income -- net (.51) (.51) (.54) (.54) (.46)
In excess of realized gain on
investments -- net -- -- -- (.06) --
------- ------- ------- ------- -------
Total dividends and distributions (.51) (.51) (.54) (.60) (.46)
------- ------- ------- ------- -------
Net asset value, end of period $10.87 $10.36 $10.29 $10.19 $10.67
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 10.17% 5.76% 6.60% 1.11% 11.52%++++
Return:** ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .80% .75% .71% .50% .20%*
======= ======= ======= ======= =======
Net Assets:
Expenses .88% .90% .93% .96% 1.15%*
======= ======= ======= ======= =======
Investment income -- net 4.89% 4.92% 5.43% 5.14% 5.26%*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $8,542 $8,043 $9,256 $11,071 $9,311
Data: ======= ======= ======= ======= =======
Portfolio turnover 94.59% 90.22% 52.33% 74.35% 27.98%
======= ======= ======= ======= =======
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++++ Aggregate total investment return.
See Notes to Financial Statements.
56
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch North Carolina Municipal Bond Fund July 31, 1997
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
Class B
For the
Period
Sept. 25,
The following per share data and ratios have been derived 1992+ to
from information provided in the financial statements. For the Year Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.36 $10.29 $10.19 $10.67 $10.00
Operating --------- --------- --------- --------- ---------
Performance: Investment income -- net .46 .46 .49 .49 .41
Realized and unrealized gain (loss) on
investments -- net .52 .07 .10 (.42) .67
--------- --------- --------- --------- ---------
Total from investment operations .98 .53 .59 .07 1.08
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net (.46) (.46) (.49) (.49) (.41)
In excess of realized gain on
investments -- net -- -- -- (.06) --
--------- --------- --------- --------- ---------
Total dividends and distributions (.46) (.46) (.49) (.55) (.41)
--------- --------- --------- --------- ---------
Net asset value, end of period $10.88 $10.36 $10.29 $10.19 $10.67
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 9.71% 5.21% 6.06% .60% 11.06%++++
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses, net of reimbursement 1.31% 1.26% 1.22% 1.01% .70%*
Net Assets: ========= ========= ========= ========= =========
Expenses 1.39% 1.41% 1.44% 1.46% 1.67%*
========= ========= ========= ========= =========
Investment income -- net 4.39% 4.41% 4.91% 4.64% 4.77%*
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $41,137 $47,236 $49,978 $50,664 $39,970
Data: ========= ========= ========= ========= =========
Portfolio turnover 94.59% 90.22% 52.33% 74.35% 27.98%
========= ========= ========= ========= =========
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++++ Aggregate total investment return.
See Notes to Financial Statements.
57
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch North Carolina Municipal Bond Fund July 31, 1997
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
The following per share data and ratios have been derived from information provided in the financial statements.
Class C Class D
For the For the
For the Period For the Period
Year Oct 21, Year Oct. 21,
Ended 1994+ to Ended 1994+ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of
Operating period $10.36 $10.28 $9.80 $10.37 $10.29 $9.80
Performance: -------- -------- -------- -------- -------- --------
Investment income -- net .45 .45 .37 .50 .50 .41
Realized and unrealized gain on
investments -- net .51 .08 .48 .51 .08 .49
-------- -------- -------- -------- -------- --------
Total from investment operations .96 .53 .85 1.01 .58 .90
-------- -------- -------- -------- -------- --------
Less dividends from investment
income -- net (.45) (.45) (.37) (.50) (.50) (.41)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $10.87 $10.36 $10.28 $10.88 $10.37 $10.29
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value per share 9.50% 5.20% 8.87%++ 10.05% 5.75% 9.39%++++
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.41% 1.37% 1.37%* .90% .85% .85%*
Net Assets: ======== ======== ======== ======== ======== ========
Expenses 1.49% 1.51% 1.57%* .98% 1.00% 1.05%*
======== ======== ======== ======== ======== ========
Investment income -- net 4.28% 4.29% 4.67%* 4.79% 4.81% 5.28%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $2,052 $1,772 $713 $2,132 $1,880 $1,377
======== ======== ======== ======== ======== ========
Portfolio turnover 94.59% 90.22% 52.33% 94.59% 90.22% 52.33%
======== ======== ======== ======== ======== ========
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++++ Aggregate total investment return.
See Notes to Financial Statements.
58
<PAGE>
Merrill Lynch North Carolina Municipal Bond Fund July 31, 1997
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 four classes of shares under the
Merrill Lynch Select Pricing sm System. Shares of Class A and Class D are sold
with a front-end sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
that Class B, Class C and Class D Shares bear certain expenses related to the
account maintenance of such shares, and Class B and Class C Shares also bear
certain expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its account
maintenance and 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. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
[bullet] 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 securities 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.
59
<PAGE>
Merrill Lynch North Carolina Municipal Bond Fund July 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
(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.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund
has also entered into a Distribution Agreement and Distribution Plans
with Merill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"),
a wholly-owned subsidiary of Merrill Lynch Group, Inc.
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, 1997, FAM earned fees of $303,480, of which
$43,196 was voluntarily waived.
Pursuant to the distribution plans (the "Distribution Plans") adopted by the
Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the
Fund pays the Distributor ongoing account maintenance and distribution fees. The
fees are accrued daily and paid monthly at annual rates based upon the average
daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.25%
Class C 0.25% 0.35%
Class D 0.10% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary 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 account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended July 31, 1997, MLFD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D Shares as
follows:
MLFD MLPF&S
Class A $619 $5,275
Class D $338 $3,798
For the year ended July 31, 1997, MLPF&S received contingent deferred sales
charges of $99,867 and $303 relating to transactions in Class B and Class C
Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), 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, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 1997 were $49,575,173 and $51,542,225, respectively.
Net realized and unrealized gains as of July 31, 1997 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $1,451,500 $3,394,410
----------- -----------
Total $1,451,500 $3,394,410
=========== ===========
As of July 31, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $3,394,410, all of which related to appreciated securities. The
aggregate cost of investments at July 31, 1997 for Federal income tax purposes
was $48,828,526.
60
<PAGE>
Merrill Lynch North Carolina Municipal Bond Fund July 31, 1997
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions was
$7,677,756 and $2,857,107 for the years ended July 31, 1997 and July 31, 1996,
respectively.
Transactions in shares of beneficial interest for each class were as follows:
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 270,339 $2,840,283
Shares issued to shareholders
in reinvestment of dividends 19,995 209,655
----------- -----------
Total issued 290,334 3,049,938
Shares redeemed (280,995) (2,952,777)
----------- -----------
Net increase 9,339 $97,161
=========== ===========
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 58,755 $612,296
Shares issued to shareholders
in reinvestment of dividends 21,168 221,122
----------- -----------
Total issued 79,923 833,418
Shares redeemed (203,627) (2,141,307)
----------- -----------
Net decrease (123,704) $(1,307,889)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 433,279 $4,563,112
Shares issued to shareholders
in reinvestment of dividends 93,482 979,826
----------- -----------
Total issued 526,761 5,542,938
Automatic conversion
of shares (19,775) (208,529)
Shares redeemed (1,282,597) (13,453,017)
----------- -----------
Net decrease (775,611) $(8,118,608)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 538,507 $5,640,207
Shares issued to shareholders
in reinvestment of dividends 104,530 1,092,438
----------- -----------
Total issued 643,037 6,732,645
Automatic conversion
of shares (26,183) (268,153)
Shares redeemed (917,172) (9,576,731)
----------- -----------
Net decrease (300,318) $(3,112,239)
=========== ===========
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 55,606 $588,031
Shares issued to shareholders
in reinvestment of dividends 2,481 26,004
----------- -----------
Total issued 58,087 614,035
Shares redeemed (40,463) (423,014)
----------- -----------
Net increase 17,624 $191,021
=========== ===========
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 119,097 $1,249,580
Shares issued to shareholders
in reinvestment of dividends 1,766 18,424
----------- -----------
Total issued 120,863 1,268,004
Shares redeemed (19,138) (201,506)
----------- -----------
Net increase 101,725 $1,066,498
=========== ===========
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 16,824 $178,245
Automatic conversion
of shares 19,775 208,529
Shares issued to shareholders
in reinvestment of dividends 4,050 42,482
----------- -----------
Total issued 40,649 429,256
Shares redeemed (26,015) (276,586)
----------- -----------
Net increase 14,634 $152,670
=========== ===========
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 41,562 $439,067
Automatic conversion
of shares 26,183 268,153
Shares issued to shareholders
in reinvestment of dividends 2,314 24,132
----------- -----------
Total issued 70,059 731,352
Shares redeemed (22,465) (234,829)
----------- -----------
Net increase 47,594 $496,523
=========== ===========
5. Capital Loss Carryforward:
At July 31, 1997, the Fund had a net capital loss carryforward of approximately
$592,000, all of which expires in 2004. This amount will be available to offset
like amounts of any future taxable gains.
61
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.............. 2
Description of Municipal Bonds and Temporary
Investments.................................. 5
Description of Municipal Bonds............... 5
Description of Temporary Investments......... 6
Repurchase Agreements........................ 8
Financial Futures Transactions and Options... 8
Investment Restrictions........................ 12
Management of the Trust........................ 14
Trustees and Officers........................ 14
Compensation of Trustees..................... 16
Management and Advisory Arrangements......... 16
Purchase of Shares............................. 18
Initial Sales Charge Alternatives--Class A
and Class D Shares......................... 18
Reduced Initial Sales Charges................ 20
Distribution Plans........................... 22
Limitations on the Payment of Deferred Sales
Charges.................................... 22
Redemption of Shares........................... 23
Deferred Sales Charges--Class B and
Class C Shares............................. 24
Portfolio Transactions......................... 24
Determination of Net Asset Value............... 25
Shareholder Services........................... 26
Investment Account........................... 26
Automatic Investment Plans................... 27
Automatic Reinvestment of Dividends and
Capital Gains Distributions................ 27
Systematic Withdrawal Plans.................. 27
Exchange Privilege........................... 28
Distributions and Taxes........................ 30
Tax Treatment of Options and Futures
Transactions............................... 33
North Carolina Income and Franchise Taxes.... 34
Performance Data............................... 35
General Information............................ 37
Description of Shares........................ 37
Computation of Offering Price Per Share...... 38
Independent Auditors......................... 39
Custodian.................................... 39
Transfer Agent............................... 39
Legal Counsel................................ 39
Reports to Shareholders...................... 39
Additional Information....................... 39
Appendix I--Economic and Financial Conditions
in North Carolina............................ 40
Appendix II--Ratings of Municipal Bonds........ 43
Independent Auditors' Report................... 50
</TABLE>
Code # 16411--1197
[LOGO]
Merrill Lynch
North Carolina Municipal
Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
STATEMENT OF
ADDITIONAL
INFORMATION
November 17, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the years in the four-year
period ended July 31, 1997 and for the period September 25, 1992
(commencement of operations) to July 31, 1993.
Contained in Part B:
Schedule of Investments as of July 31, 1997.
Statement of Assets and Liabilities as of July 31, 1997.
Statement of Operations for the year ended July 31, 1997.
Statements of Changes in Net Assets for each of the years in the
two-year period ended July 31, 1997.
Financial Highlights for each of the years in the four-year
period ended July 31, 1997 and for the period September 25, 1992
(commencement of operations) to July 31, 1993.
(B) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------
<S> <C>
1(a) -- Declaration of Trust of the Registrant, dated August 2, 1985.(a)
(b) -- Amendment to Declaration of Trust, dated September 18, 1987.(a)
(c) -- Amendment to Declaration of Trust, dated December 21, 1987.(a)
(d) -- Amendment to Declaration of Trust, dated October 3, 1988.(a)
(e) -- Amendment to Declaration of Trust, dated October 17, 1994 and
instrument establishing Class C and Class D shares of beneficial
interest.(a)
(f) -- Instrument establishing Merrill Lynch North Carolina Municipal Bond
Fund (the 'Fund') as a series of Registrant.(a)
(g) -- Instrument establishing Class A and Class B shares of beneficial
interest of the Fund.(a)
2 -- By-Laws of Registrant.(a)
3 -- None.
4 -- Portions of the Declaration of Trust, Establishment and Designation
and By-Laws of the Registrant defining the rights of holders of the
Fund as a series of the Registrant.(b)
5(a) -- Form of Management Agreement between Registrant and Fund Asset
Management, L.P.(a)
(b) -- Supplement to Management Agreement between Registrant and Fund
Asset Management, L.P.(e)
6(a) -- Form of Revised Class A Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc. (including
Form of Selected Dealers Agreement).(e)
(b) -- Form of Class B Shares Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc.(a)
(c) -- Form of Class C Shares Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc. (including Form of
Selected Dealers Agreement).(e)
(d) -- Form of Class D Shares Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc. (including Form of
Selected Dealers Agreement).(e)
(e) -- Letter Agreement between the Fund and Merrill Lynch Funds
Distributor, Inc., dated September 15, 1993, in connection with the
Merrill Lynch Mutual Fund Adviser program.(c)
7 -- None.
8 -- Form of Custody Agreement between Registrant and State Street Bank
& Trust Company.(d)
9 -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Merrill Lynch
Financial Data Services, Inc.(f)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------
<S> <C>
10 -- None.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 -- None.
13 -- Certificate of Fund Asset Management, L.P.(a)
14 -- None.
15(a) -- Form of Class B Distribution Plan of the Registrant and Class B
Distribution Plan Sub-Agreement.(g)
(b) -- Form of Class C Distribution Plan and Class C Distribution Plan
Sub-Agreement of Registrant.(e)
(c) -- Form of Class D Distribution Plan and Class D Distribution Plan
Sub-Agreement of Registrant.(e)
16(a) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
A shares.(a)
(b) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
B shares.(a)
(c) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
C shares.(a)
(d) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
D shares.(a)
17(a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
18 -- Merrill Lynch Select Pricing(Service Mark) System Plan pursuant
to Rule 18f-3.(h)
</TABLE>
- ------------------
(a) Filed on November 1, 1995 as an Exhibit to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A under the Securities Act of
1933, as amended (File No. 33-91311) (the 'Registration Statement').
(b) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX, X
and XI of the Registrant's Declaration of Trust, as amended, filed as
Exhibits 1(a), 1(b), 1(c), 1(d) and 1(e) with Post-Effective Amendment No. 5
to the Registration Statement; to the Certificates of Establishment and
Designation establishing the Fund as a series of the Registrant and
establishing Class A and Class B shares of beneficial interest of the Fund,
filed as Exhibits 1(f) and 1(g), respectively, with Post-Effective Amendment
No. 4 to the Registration Statement; and to Articles I, V and VI of the
Registrant's By-Laws, filed as Exhibit 2 with Post-Effective Amendment No. 4
to the Registration Statement.
(c) Filed on November 24, 1993 as an Exhibit to Post-Effective Amendment No. 2
to the Registration Statement.
(d) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 3 to
the Registration Statement on Form N-1A under the Securities Act of 1933, as
amended, filed on October 14, 1994, relating to shares of Merrill Lynch
Minnesota Municipal Bond Fund series of the Registrant (File No. 33-44734).
(e) Filed on October 18, 1994 as an Exhibit to Post-Effective Amendment No. 3 to
the Registration Statement.
(f) Incorporated by reference to Exhibit 9 to Post-Effective Amendment No. 5 to
the Registration Statement, filed on October 20, 1995, relating to shares of
Merrill Lynch Arizona Municipal Bond Fund series of the Registrant (File No.
33-41311).
(g) Incorporated by reference to Exhibit 15(a) to Post-Effective Amendment No. 4
to the Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, filed on October 26, 1995, relating to shares of Merrill Lynch
Michigan Municipal Bond Fund series of the Registrant (File No. 33-55576).
(Footnotes continued on next page)
C-2
<PAGE>
(Footnotes continued from previous page)
(h) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, filed on January 25, 1996, relating to shares of Merrill Lynch
New York Municipal Bond Fund series of the Registrant (File No. 2-99473).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1997*
- -------------------------------------------------- ---------------------
<S> <C>
Class A Shares of beneficial interest, par value
$0.10 per share................................. 351
Class B Shares of beneficial interest, par value
$0.10 per share................................. 1,259
Class C Shares of beneficial interest, par value
$0.10 per share................................. 61
Class D Shares of beneficial interest, par value
$0.10 per share................................. 51
</TABLE>
- ------------------
* The number of holders includes holders of record plus beneficial owners whose
shares are held of record by Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
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 which it is ultimately determined 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
C-3
<PAGE>
delay or litigation, which bond, insurance or other form of security must be
provided by the recipient of the advance, or (b) a majority of a quorum of the
Registrant's disinterested, non-party Trustees, or an independent legal counsel
in a written opinion, shall determine, based upon a review of readily available
facts that the recipient of the advance ultimately will be found entitled to
indemnification.
In Section 9 of the Distribution Agreements relating to the securities
being offered hereby, the Registrant agrees to indemnify the Distributor and
each person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the '1933 Act'), against certain types of civil
liabilities arising in connection with the Registration Statement or Prospectus
and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. (the 'Manager' or 'FAM') acts as the investment
adviser for the following open-end registered investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund,
Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation
Program, Inc.; and the following closed-end registered investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Debt Strategies Fund, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Fund, Inc.,
MuniHoldings New York Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund,
Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc.,
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 open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund
For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global Convertible
Fund, Inc., Merrill Lynch Global Holdings, Inc.,
C-4
<PAGE>
Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc.,
Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money
Fund, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series
Funds, Inc., and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a
division of MLAM); and the following closed-end investment companies:
Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc.
and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as a
sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisory Trust.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Intermediate Government Bond Fund is
One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646. The address
of the Manager, MLAM, Princeton Services, Inc. ('Princeton Services') and
Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds Distributor, Inc. ('MLFD') is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ('Merrill Lynch') and Merrill Lynch & Co.,
Inc. ('ML & Co.') is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281. The address of the Fund's transfer agent, Merrill Lynch
Financial Data Services, Inc. ('MLFDS'), is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
August 1, 1995 for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Glenn is
Executive Vice President and Mr. Richard is Treasurer of substantially all of
the investment companies described in the first two paragraphs of this item and
Messrs. Giordano, Harvey, Kirstein and Monagle are directors, trustees or
officers of one or more of such companies.
Officers and partners of FAM are set forth as follows:
<TABLE>
<CAPTION>
POSITION(S)
WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
ML & Co.................. Limited Partner Financial Services Holding Company;
Limited Partner of MLAM
Princeton Services....... General Partner General Partner of MLAM
Arthur Zeikel............ President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML &
Co.
Terry K. Glenn........... Executive Vice Executive Vice President of MLAM;
President Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Linda A. Federici........ Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services
Vincent R. Giordano...... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Elizabeth Griffin........ Senior Vice Senior Vice President of MLAM
President
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION(S)
WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
Norman R. Harvey......... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Michael J. Hennewinkel... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Philip L. Kirstein....... Senior Vice Senior Vice President, General
President, Counsel and Secretary of MLAM;
General Senior Vice President, General
Counsel and Counsel, Secretary and Director
Secretary of Princeton Services
Ronald M. Kloss.......... Senior Vice Senior Vice President and
President and Controller of MLAM; Senior Vice
Controller President and Controller of
Princeton Services
Debra Landsman-Yaros..... Senior Vice Senior Vice President of MLAM;
President Vice President of MLFD; Senior
Vice President of Princeton
Services
Stephen M. M. Miller..... Senior Vice Executive Vice President of
President Princeton Administrators, L.P.;
Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr.... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Michael L. Quinn......... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services; Managing Director and
First Vice President of Merrill
Lynch from 1989 to 1995
Richard L. Reller........ Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services; Director of MLFD
Gerald M. Richard........ Senior Vice Senior Vice President and Treasurer
President and of MLAM; Senior Vice President and
Treasurer Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
Gregory Upah............. Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services
Ronald L. Welburn........ Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., MuniAssets Fund, Inc., and The
Municipal Fund Accumulation Program, Inc. and MLFD also acts as the principal
underwriter for the following closed-end investment companies: Merrill Lynch
High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) AND OFFICES POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
- -------------------------- ------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn............ President and Director Executive Vice President
Richard L. Reller......... Director None
Thomas Verage............. Director None
William E. Aldrich........ Senior Vice President None
Robert W. Crook........... Senior Vice President None
Kevin P. Boman............ Vice President None
Michael J. Brady.......... Vice President None
William M. Breen.......... Vice President None
Michael E. Clark.......... Vice President None
James T. Fatseas.......... Vice President None
Debra W. Landsman-Yaros... Vice President None
Michelle T. Lau........... Vice President None
Gerald M. Richard......... Vice President and Treasurer
Treasurer
Salvatore Venezia......... Vice President None
William Wasel............. Vice President None
Robert Harris............. Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and Merrill Lynch Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption 'Management of the
Trust--Management and Advisory Arrangements' in the Prospectus constituting Part
A of the Registration Statement and under 'Management of the Trust-Management
and Advisory Arrangements' in the Statement of Additional Information
constituting Part B of the Registration Statement, the Registrant is not a party
to any management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a Prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
Township of Plainsboro, and the State of New Jersey, on the 17th day of
November, 1997.
MERRILL LYNCH MULTI-STATE MUNICIPAL
SERIES TRUST
(Registrant)
By: /s/ GERALD M. RICHARD
----------------------------------
(Gerald M. Richard, Treasurer)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities and on the date(s) indicated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
ARTHUR ZEIKEL* President and Trustee
- --------------------------------------- (Principal Executive Officer)
(Arthur Zeikel)
/s/GERALD M. RICHARD Treasurer (Principal Financial
- --------------------------------------- and Accounting Officer)
(Gerald M. Richard)
JAMES H. BODURTHA* Trustee
- ---------------------------------------
(James H. Bodurtha)
HERBERT I. LONDON* Trustee
- ---------------------------------------
(Herbert I. London)
ROBERT R. MARTIN* Trustee
- ---------------------------------------
(Robert R. Martin)
JOSEPH L. MAY* Trustee
- ---------------------------------------
(Joseph L. May)
ANDRE F. PEROLD* Trustee
- ---------------------------------------
(Andre F. Perold)
*By: /s/ GERALD M. RICHARD November 17, 1997
(Gerald M. Richard, Attorney-in-Fact)
</TABLE>
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
17(a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
</TABLE>
<PAGE>
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. 6 to Registration
Statement No. 33-48692 of our report dated September 5, 1997 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
November 14, 1997
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