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<TITLE>MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND</TITLE>
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<B>As filed with the Securities and Exchange Commission on
November 1, 1999</B>
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<B><FONT size="2">Securities Act File No. 33-48692</FONT></B>
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<B><FONT size="2">Investment Company Act File No. 811-4375</FONT>
</B>
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<DIV align="center"><B><FONT size="4">SECURITIES AND EXCHANGE COMMISSION</FONT></B>
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<B>Washington, D.C. 20549</B>
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<B><FONT size="4">FORM N-1A</FONT></B>
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<B>REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933</B>
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[X]
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<B>Pre-Effective Amendment No.</B>
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[ ]
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<B>Post-Effective Amendment No. 9</B>
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[X]
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<B>and/ or</B>
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<B>REGISTRATION STATEMENT UNDER THE</B>
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<B>INVESTMENT COMPANY ACT OF 1940</B>
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<B>Amendment No. 194</B>
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[X]
</DIV>
<DIV align="center">
<FONT size="2">(Check appropriate box or boxes)</FONT>
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[X]
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<B><FONT size="4">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND
FUND</FONT></B>
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<B>of Merrill Lynch Multi-State Municipal Series Trust</B>
</DIV>
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<FONT size="2">(Exact Name of Registrant as Specified in Charter)
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<B><FONT size="2">800 Scudders Mill Road, Plainsboro, New Jersey
08536</FONT></B>
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<FONT size="2">(Address of Principal Executive Offices)</FONT>
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<B><FONT size="2">Registrant’s Telephone Number, including
Area Code: (609) 282-2800</FONT></B>
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<B><FONT size="2">TERRY K. GLENN</FONT></B>
<DIV align="center">
<B><FONT size="2">Merrill Lynch Multi-State Municipal Series
Trust</FONT></B>
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<B><FONT size="2">800 Scudders Mill Road,</FONT></B>
</DIV>
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<B><FONT size="2">Plainsboro, New Jersey 08536</FONT></B>
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<B><FONT size="2">Mailing Address: P.O. Box 9011, Princeton, New
Jersey 08543-9011</FONT></B>
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<FONT size="2">(Name and Address of Agent for Service)</FONT>
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<I><FONT size="2">Copies to:</FONT></I>
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Counsel for the Trust<BR>
BROWN & WOOD LLP<BR>
One World Trade Center,<BR>
New York, New York 10048-0557<BR>
Attention: Thomas R. Smith, Jr., Esq.<BR>
Brian
M. Kaplowitz, Esq.</FONT></TD>
<TD></TD>
<TD align="center" valign="top"><FONT size="2">
Michael J. Hennewinkel, Esq.<BR>
MERRILL LYNCH<BR>
ASSET MANAGEMENT<BR>
P.O. Box 9011<BR>
Princeton, New Jersey 08543-9011</FONT></TD>
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<FONT size="2"> It is proposed that this filing will become
effective (check appropriate box):</FONT>
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</FONT></DIV>
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<FONT size="2">[X] immediately upon filing pursuant to
paragraph (b)</FONT>
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<FONT size="2">[ ] on (date) pursuant
to paragraph (b)</FONT>
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</FONT></DIV>
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<FONT size="2">[ ] 60 days after
filing pursuant to paragraph (a)(1)</FONT>
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</FONT></DIV>
<DIV align="left">
<FONT size="2">[ ] on (date) pursuant
to paragraph (a)(1)</FONT>
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<DIV align="left">
<FONT size="2">[ ] 75 days after
filing pursuant to paragraph (a)(2)</FONT>
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<FONT size="2">[ ] on (date) pursuant
to paragraph (a)(2) of Rule 485.</FONT>
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<FONT size="2">If appropriate, check the following box:</FONT>
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<FONT size="2">[ ] This post-effective
amendment designates a new effective date for a previously filed
post-effective amendment.</FONT></TD>
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<FONT size="2">Title of Securities Being Registered: Shares of
Beneficial Interest, par value $.10 per share.</FONT>
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<B> [MERRILL LYNCH LOGO] </B>
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<FONT size="5" color="#211E1C">
Merrill
Lynch North Carolina Municipal Bond Fund</FONT>
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</FONT></DIV>
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<FONT size="5" color="#211E1C">
</FONT><FONT size="4" color="#211E1C">of Merrill Lynch
Multi-State Municipal Series Trust</FONT><FONT size="4">
</FONT>
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<FONT size="4" color="#211E1C">November 1, 1999 </FONT>
<FONT size="4"> </FONT>
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<B><FONT size="2">This Prospectus contains information you should
know before investing, including information about risks. Please
read it before you invest and keep it for future reference.
</FONT></B></TD>
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<B><FONT size="2">The Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the
adequacy of this Prospectus. Any representation to the contrary
is a criminal offense.</FONT></B></TD>
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[PROSPECTUS LOGO]
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<FONT size="6" color="#211E1C">Table of Contents
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<TD></TD>
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<TD colspan="3"></TD>
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<TR>
<TD align="center" nowrap colspan="3"><FONT size="2">PAGE</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
[KEY FACTS ICON]</FONT></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2"><FONT color="#211E1C">KEY FACTS</FONT></FONT></TD>
</TR>
<TR>
<TD colspan="3" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Merrill Lynch North Carolina Municipal Bond Fund at a Glance</FONT></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">
3</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Risk/Return Bar Chart</FONT></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">
5</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
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Fees and Expenses</FONT></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">
6</FONT></TD>
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<TR>
<TD colspan="3"> </TD>
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<TR>
<TD align="left" valign="top"><FONT size="2">
[DETAILS ABOUT THE FUND ICON]</FONT></TD>
<TD></TD>
<TD></TD>
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<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2"><FONT color="#211E1C">DETAILS ABOUT THE FUND</FONT></FONT></TD>
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How the Fund Invests</FONT></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">
8</FONT></TD>
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<TR><TD><TR><TD><TR><TD><TR><TD>
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Investment Risks</FONT></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">
9</FONT></TD>
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<TD colspan="3"> </TD>
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[YOUR ACCOUNT ICON]</FONT></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2"><FONT color="#211E1C">YOUR ACCOUNT</FONT></FONT></TD>
</TR>
<TR>
<TD colspan="3" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Merrill Lynch Select Pricing<SUP>SM </SUP>System</FONT></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">
15</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
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How to Buy, Sell, Transfer and Exchange Shares</FONT></TD>
<TD></TD>
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20</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
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Participation in Merrill Lynch Fee-Based Programs</FONT></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">
24</FONT></TD>
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<TR>
<TD colspan="3"> </TD>
</TR>
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<TD align="left" valign="top"><FONT size="2">
[MANAGEMENT OF THE FUND ICON]</FONT></TD>
<TD></TD>
<TD></TD>
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<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2"><FONT color="#211E1C">MANAGEMENT OF THE FUND</FONT></FONT></TD>
</TR>
<TR>
<TD colspan="3" align="left"><HR size="1"></TD>
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<TR>
<TD align="left" valign="top"><FONT size="2">
Fund Asset Management</FONT></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">
27</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Financial Highlights</FONT></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">
28</FONT></TD>
</TR>
<TR>
<TD colspan="3"> </TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
[FOR MORE INFORMATION ICON]</FONT></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="3" align="left" valign="top"><FONT size="2"><FONT color="#211E1C">FOR MORE INFORMATION</FONT></FONT></TD>
</TR>
<TR>
<TD colspan="3" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Shareholder Reports</FONT></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">
Back Cover</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Statement of Additional Information</FONT></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">
Back Cover</FONT></TD>
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</FONT></DIV>
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</FONT></DIV>
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<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
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<FONT color="#211E1C"> Key Facts [KEY FACTS ICON]</FONT>
</DIV>
<DIV align="left">
<FONT size="2">In an effort to help you better understand the
many concepts involved in making an investment decision, we have
defined highlighted terms in this prospectus in the sidebar.
</FONT>
</DIV>
<P align="left">
<B><I><FONT size="2" color="#211E1C">Investment Grade</FONT></I>
</B><FONT size="2"> — any of the four highest debt
obligation ratings by recognized rating agencies, including
Moody’s Investors Service, Inc., Standard & Poor’s
or Fitch IBCA, Inc.</FONT>
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</FONT></DIV>
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<B><I><FONT size="2" color="#211E1C">North Carolina Municipal
Bond</FONT></I></B><FONT size="2"> — a debt obligation
issued by or on behalf of a governmental entity in North Carolina
or other qualifying issuer that pays interest exempt from North
Carolina income taxes as well as from Federal income tax.</FONT>
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</FONT></DIV>
<DIV align="left">
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<FONT size="2" color="#211E1C">MERRILL LYNCH NORTH CAROLINA
MUNICIPAL BOND FUND </FONT><FONT color="#211E1C">AT A GLANCE
</FONT>
</DIV>
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</FONT></DIV>
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</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<B><FONT size="2" color="#211E1C">What is the Fund’s
investment objective?</FONT></B>
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</FONT></DIV>
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</FONT></DIV>
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The investment objective of the Fund is to provide shareholders
with income exempt from Federal and North Carolina income taxes.
<DIV align="left"><FONT size="1">
</FONT></DIV>
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<B><FONT size="2" color="#211E1C">What are the Fund’s main
investment strategies?</FONT></B>
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</FONT></DIV>
<P align="left">
The Fund invests primarily in a portfolio of long term <B><I>
investment grade North Carolina municipal bonds</I></B>. These
may be obligations of a variety of issuers including governmental
entities in North Carolina and issuers located in Puerto Rico,
the U.S. Virgin Islands and Guam. The Fund will invest at least
65% of its assets in North Carolina municipal bonds and at least
80% of its total assets in North Carolina municipal bonds and
other bonds that pay interest exempt from Federal income tax but
not North Carolina income tax. The Fund may invest up to 20% of
its assets in high yield bonds (also known as “junk”
bonds). The Fund also may invest in certain types of derivative
securities. When choosing investments, Fund management considers
various factors, including the credit quality of issuers, yield
analysis, maturity analysis and the call features of the
obligations. Under normal conditions, the Fund’s weighted
average maturity will be more than ten years. The Fund cannot
guarantee that it will achieve its objective.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<B><FONT size="2" color="#211E1C">What are the main risks of
investing in the Fund?</FONT></B>
<P align="left">
As with any fund, the value of the Fund’s
investments — and therefore the value of Fund
shares — may go up or down. These changes may occur in
response to interest rate changes or other factors that may
affect a particular issuer or obligation. Generally, when
interest rates go up, the value of debt instruments like
municipal bonds goes down. If the value of the Fund’s
investments goes down, you may lose money. Prices of longer term
securities generally change more in response to interest rate
changes than prices of shorter term securities.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
In addition, since the Fund invests at least 65% of its assets in
North Carolina municipal bonds, it is more exposed to negative
political or economic factors in North Carolina than a fund that
invests more widely. Derivatives and high yield bonds may be
volatile and subject to liquidity, leverage and credit risks.
<DIV align="left"><FONT size="1">
</FONT></DIV>
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<B><FONT size="2" color="#211E1C">3</FONT></B>
</DIV>
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</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
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</FONT></DIV>
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[KEY FACTS ICON] Key Facts
</DIV>
<P align="left">
<B><FONT size="2" color="#211E1C">Who should invest?</FONT></B>
<P align="left">
The Fund may be an appropriate investment for you if you:
<P>
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<TD width="1%"></TD>
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</FONT></TD></TR>
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<TD> </TD>
<TD>•</TD>
<TD align="left">
Are looking for income that is exempt from Federal and North
Carolina income taxes</TD>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR>
<TD> </TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
Want a professionally managed portfolio without the
administrative burdens of direct investments in municipal bonds</TD>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR>
<TD> </TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD> </TD>
<TD>•</TD>
<TD align="left">
Are looking for liquidity</TD>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR>
<TD> </TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
Can tolerate the risk of loss caused by negative political or
economic developments in North Carolina, changes in interest
rates or adverse changes in the price of bonds in general</TD>
<TD> </TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<B><FONT size="2" color="#211E1C">4</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
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</DIV>
<DIV align="left">
<FONT size="2" color="#211E1C">RISK/ RETURN BAR CHART</FONT>
</DIV>
<DIV align="left">
<HR size="1" width="100%" align="left">
</DIV>
<P align="left">
<FONT size="2"> The bar chart and table shown below provide an
indication of the risks of investing in the Fund. The bar chart
shows changes in the Fund’s performance for Class B
shares for each complete calendar year since the Fund’s
inception. Sales charges are not reflected in the bar chart. If
these amounts were reflected, returns would be less than those
shown. The table compares the average annual total returns for
each class of the Fund’s shares for the periods shown with
those of the Lehman Brothers Municipal Bond Index. How the Fund
performed in the past is not necessarily an indication of how the
Fund will perform in the future.</FONT>
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<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Class B</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
1993</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">13.06</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
1994</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">-7.25</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
1995</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">17.29</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
1996</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.86</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
1997</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.93</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
1998</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.03</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left">
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<FONT size="2"> During the period shown in the bar chart, the
highest return for a quarter was 7.36% (quarter ended
March 31,1995) and the lowest return for a quarter was
–6.60% (quarter ended March 31, 1994). The Fund’s
year-to-date return as of September 30, 1999 was
–3.40%.</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="24%"> </TD>
<TD width="1%"> </TD>
<TD width="23%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="11%"> </TD>
<TD width="1%"> </TD>
<TD width="10%"> </TD>
</TR>
<TR>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Average Annual Total Returns (as of the</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Past</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Past</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>calendar year ended December 31, 1998)</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>One Year</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Five Years</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Since Inception</B></FONT></TD>
</TR>
<TR>
<TD colspan="15"></TD>
</TR>
<TR>
<TD colspan="15"></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="15"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top" nowrap><FONT size="2">North Carolina Municipal Bond Fund* A</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.26%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.52%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.22%†</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top" nowrap><FONT size="2">Lehman Brothers Municipal Bond Index**</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.48%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.22%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.22%††</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="15" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top" nowrap><FONT size="2">North Carolina Municipal Bond Fund* B</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.11%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.86%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.39%†</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top" nowrap><FONT size="2">Lehman Brothers Municipal Bond Index**</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.48%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.22%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.22%††</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="15" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top" nowrap><FONT size="2">North Carolina Municipal Bond Fund* C</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.86%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">N/A</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7.42%†††</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top" nowrap><FONT size="2">Lehman Brothers Municipal Bond Index**</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.48%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">N/A</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.98%#</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="15" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top" nowrap><FONT size="2">North Carolina Municipal Bond Index* D</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.25%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">N/A</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.94%†††</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="left" valign="top" nowrap><FONT size="2">Lehman Brothers Municipal Bond Index**</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.48%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">N/A</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.98%#</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="15" align="left"><HR size="1"></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="2%"></TD>
<TD width="98%"></TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD><FONT size="2"> * </FONT></TD>
<TD align="left">
<FONT size="2">Includes sales charge.</FONT></TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD><FONT size="2"> ** </FONT></TD>
<TD align="left">
<FONT size="2">This unmanaged Index consists of long-term revenue
bonds, prerefunded bonds, general obligation bonds and insured
bonds. Past performance is not predictive of future performance.
</FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="1%"></TD>
<TD width="99%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2"> † </FONT></TD>
<TD align="left">
<FONT size="2">Inception date is September 25, 1992.</FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="1%"></TD>
<TD width="99%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2"> †† </FONT></TD>
<TD align="left">
<FONT size="2">Since September 30, 1992.</FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="1%"></TD>
<TD width="99%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2">††† </FONT></TD>
<TD align="left">
<FONT size="2">Inception date is October 21, 1994.</FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="2%"></TD>
<TD width="98%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2"> # </FONT></TD>
<TD align="left">
<FONT size="2">Since October 31, 1994.</FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="right">
<B><FONT size="2" color="#211E1C">5</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
[KEY FACTS ICON] Key Facts
</DIV>
<DIV align="left">
<FONT size="2" color="#211E1C">UNDERSTANDING EXPENSES</FONT>
</DIV>
<P align="left">
<FONT size="2">Fund investors pay various fees and expenses,
either directly or indirectly. Listed below are some of the main
types of expenses, which all mutual funds may charge:</FONT>
<P align="left">
<B><FONT size="2">Expenses paid directly by the shareholder:
</FONT></B>
<P align="left">
<B><FONT size="2" color="#211E1C">Shareholder Fees</FONT></B>
<FONT size="2"> — these include sales charges which you
may pay when you buy or sell shares of the Fund.</FONT>
<P align="left">
<B><FONT size="2">Expenses paid indirectly by the shareholder:
</FONT></B>
<P align="left">
<B><FONT size="2" color="#211E1C">Annual Fund Operating Expenses
</FONT></B><FONT size="2"> — expenses that cover the
costs of operating the Fund.</FONT>
<P align="left">
<B><FONT size="2" color="#211E1C">Management Fee</FONT></B>
<FONT size="2"> — a fee paid to the Manager for
managing the Fund.</FONT>
<P align="left">
<B><FONT size="2" color="#211E1C">Distribution Fees</FONT></B>
<FONT size="2"> — fees used to support the Fund’s
marketing and distribution efforts, such as compensating
Financial Consultants, advertising and promotion.</FONT>
<P align="left">
<B><FONT size="2" color="#211E1C">Service (Account Maintenance)
Fees</FONT></B><FONT size="2"> — fees used to
compensate securities dealers for account maintenance activities.
</FONT>
<DIV align="left">
<FONT size="2"> <FONT color="#211E1C">FEES AND EXPENSES</FONT>
</FONT>
</DIV>
<DIV align="left">
<HR size="1" width="100%" align="left">
</DIV>
<P align="left">
The Fund offers four different classes of shares. Although your
money will be invested the same way no matter which class of
shares you buy, there are differences among the fees and expenses
associated with each class. Not everyone is eligible to buy
every class. After determining which classes you are eligible to
buy, decide which class best suits your needs. Your Merrill Lynch
Financial Consultant can help you with this decision.
<P align="left">
This table shows the different fees and expenses that you may
pay if you buy and hold the different classes of shares of the
Fund. Future expenses may be greater or less than those indicated
below.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="58%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="3%"> </TD>
<TD width="8%"> </TD>
<TD width="3%"> </TD>
<TD width="6%"> </TD>
<TD width="3%"> </TD>
<TD width="9%"> </TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Shareholder Fees (fees paid directly from your</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>investment)(a):</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Class A</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Class B(b)</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Class C</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Class D</B></FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Maximum Sales Charge (Load) imposed on purchases (as a percentage
of offering price)</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
4.00%(c)</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
4.00%(c)</FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Maximum Deferred Sales Charge (Load) (as a percentage of original
purchase price or redemption proceeds, whichever is lower)</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None(d)</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
4.0%(c)</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
1.0%(c)</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None(d)</FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Maximum Sales Charge (Load) imposed on Dividend Reinvestments</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Redemption Fee</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Exchange Fee</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><I><FONT color="#211E1C">Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):</FONT></I></B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><I><FONT color="#211E1C">Management Fee(e)</FONT></I></B></FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
0.55%</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
0.55%</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
0.55%</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
0.55%</FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><I><FONT color="#211E1C">Distribution and/or Service (12b-1)
Fees(f)</FONT></I></B></FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
0.50%</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
0.60%</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
0.10%</FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Other Expenses (including transfer agency fees)(g)</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
0.48%</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
0.49%</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
0.49%</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
0.49%</FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total Annual Fund Operating Expenses</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
1.03%</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
1.54%</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
1.64%</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
1.14%</FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="2%"></TD>
<TD width="98%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2">(a)</FONT></TD>
<TD align="left">
<FONT size="2">In addition, Merrill Lynch may charge clients a
processing fee (currently $5.35) when a client buys or redeems
shares.</FONT></TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD><FONT size="2">(b)</FONT></TD>
<TD align="left">
<FONT size="2">Class B shares automatically convert to
Class D shares about ten years after you buy them. Then they
will no longer be subject to distribution fees and will pay
lower account maintenance fees.</FONT></TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD><FONT size="2">(c)</FONT></TD>
<TD align="left">
<FONT size="2">Some investors may qualify for reductions in the
sales charge (load).</FONT></TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD><FONT size="2">(d)</FONT></TD>
<TD align="left">
<FONT size="2">You may pay a deferred sales charge if you
purchase $1 million or more and you redeem within one year.
</FONT></TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD><FONT size="2">(e) </FONT></TD>
<TD align="left">
<FONT size="2">The Fund pays the Manager a fee at the annual rate
of 0.55% of the average daily net assets of the Fund for the
first $500 million; 0.525% of the average daily net assets from
$500 million to $1 billion; and 0.50% of the average daily net
assets above $1 billion. For the fiscal year ended
July 31,1999, the fee payable to the Manager from the Fund
was equal to 0.55% of the Fund’s average daily net assets.
</FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<B><FONT size="2" color="#211E1C">6</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<P align="left">
<FONT size="2"> (footnotes continued from
previous page)</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="2%"></TD>
<TD width="98%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2">(f)</FONT></TD>
<TD align="left">
<FONT size="2">The Fund calls the “Service Fee” an
“Account Maintenance Fee.” Account Maintenance Fee is
the term used elsewhere in this Prospectus and in all other Fund
materials. If you hold Class B or Class C shares for a
long time, it may cost you more in distribution (12b-1) fees than
the maximum sales charge that you would have paid if you had
bought one of the other classes.</FONT></TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD><FONT size="2">(g) </FONT></TD>
<TD align="left">
<FONT size="2">The Fund pays the Transfer Agent $11.00 for each
Class A and Class D shareholder account and $14.00 for
each Class B and Class C shareholder account and
reimburses the Transfer Agent’s out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in
the Merrill Lynch Mutual Fund Advisor program. The Fund also pays
a $0.20 monthly closed account charge, which is assessed
upon all accounts that close during the year. This fee begins the
month following the month the account is closed and ends at the
end of the calendar year. For the fiscal year ended July 31,
1999, the Fund paid the Transfer Agent fees totaling $24,602.
The Manager provides accounting services to the Fund at its cost.
For the fiscal year ended July 31, 1999, the Fund
reimbursed the Manager $64,647 for these services.</FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<B><I><FONT size="2">Examples:</FONT></I></B>
<P align="left">
These examples are intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual
funds.
<P align="left">
These examples assume that you invest $10,000 in the Fund for
the time periods indicated, that your investment has a 5% return
each year, that you pay the sales charges, if any, that apply to
the particular class and that the Fund’s operating expenses
remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may
be more or less than the 5% used in this example. Although your
actual costs may be higher or lower, based on these assumptions
your costs would be:
<P align="left">
<FONT size="2">EXPENSES IF YOU <U>DID</U> REDEEM YOUR SHARES:
</FONT>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="48%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1 Year</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>3 Years</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>5 Years</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>10 Years</B></FONT></TD>
</TR>
<TR>
<TD colspan="17"></TD>
</TR>
<TR>
<TD colspan="17"></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="17"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Class A</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">501</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">715</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">946</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">$</FONT></TD>
<TD align="right" valign="top" nowrap><FONT size="2">1,609</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="17" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Class B</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">557</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">686</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">839</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">$</FONT></TD>
<TD align="right" valign="top" nowrap><FONT size="2">1,835</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="17" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Class C</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">267</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">517</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">892</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">$</FONT></TD>
<TD align="right" valign="top" nowrap><FONT size="2">1,944</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="17" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Class D</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">512</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">748</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,003</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">$</FONT></TD>
<TD align="right" valign="top" nowrap><FONT size="2">1,731</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="17" align="left"><HR size="1"></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<FONT size="2">EXPENSES IF YOU <U>DID NOT</U> REDEEM YOUR SHARES:
</FONT>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="48%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1 Year</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>3 Years</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>5 Years</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>10 Years</B></FONT></TD>
</TR>
<TR>
<TD colspan="17"></TD>
</TR>
<TR>
<TD colspan="17"></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="17"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Class A</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">501</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">715</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">946</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">$</FONT></TD>
<TD align="right" valign="top" nowrap><FONT size="2">1,609</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="17" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Class B</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">157</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">486</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">839</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">$</FONT></TD>
<TD align="right" valign="top" nowrap><FONT size="2">1,835</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="17" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Class C</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">167</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">517</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">892</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">$</FONT></TD>
<TD align="right" valign="top" nowrap><FONT size="2">1,944</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="17" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Class D</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">512</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">748</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,003</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="top"><FONT size="2">$</FONT></TD>
<TD align="right" valign="top" nowrap><FONT size="2">1,731</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="17" align="left"><HR size="1"></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="right">
<B><FONT size="2" color="#211E1C">7</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
<FONT size="2" color="#211E1C">HOW THE FUND INVESTS</FONT>
</DIV>
<DIV align="left">
<HR size="1" width="100%" align="left">
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The Fund’s main goal is to seek income that is exempt from
Federal and North Carolina income taxes. The Fund invests
primarily in long term, investment grade North Carolina municipal
bonds. These may be obligations of a variety of issuers
including governmental entities or other qualifying issuers.
Issuers may be located in North Carolina or in other qualifying
jurisdictions such as Puerto Rico, the U.S. Virgin Islands and
Guam.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The Fund may invest in either fixed rate or variable rate
obligations. At least 80% of the Fund’s total assets will be
invested in investment grade securities. The Fund may invest up
to 20% of its total assets in high yield (“junk”)
bonds. These bonds are generally more speculative and involve
greater price fluctuations than investment grade securities.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The Fund will invest at least 80% of its total assets in
obligations that pay interest exempt from Federal income tax and
at least 65% of its total assets in North Carolina municipal
bonds. Under normal conditions, the Fund’s weighted average
maturity will be more than ten years. For temporary periods,
however, the Fund may invest up to 35% of its total assets in
short term tax exempt or taxable money market obligations,
although the Fund will not generally invest more than 20% of its
net assets in taxable money market obligations. As a temporary
measure for defensive purposes, the Fund may invest without
limitation in short term tax-exempt or taxable money market
obligations. These short term investments may limit the potential
for the Fund to achieve its objective.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The Fund may use derivatives including futures, options, indexed
securities and inverse securities. Derivatives are financial
instruments whose value is derived from another security or an
index such as the Lehman Brothers Municipal Bond Index.
<P align="left">
The Fund’s investments may include private activity bonds
that may subject certain shareholders to a Federal alternative
minimum tax.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
North Carolina’s economy is influenced by developments in
the state’s leading areas of agricultural industries and
service and goods production. In recent years, the North Carolina
economy has moved from an agricultural to a service and goods
producing economy. Additionally, North Carolina derives a
significant portion of its revenue from taxes, including
individual income tax, insurance tax and tobacco products taxes.
The Manager believes that current economic conditions in North
Carolina will enable the Fund to continue to invest in high
quality North Carolina municipal bonds.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<FONT color="#211E1C"> Details About the Fund [DETAILS ABOUT THE
FUND ICON]</FONT>
</DIV>
<DIV align="left">
<B><FONT size="2" color="#211E1C">ABOUT THE PORTFOLIO MANAGER
</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<FONT size="2">Michael Kalinoski is the Vice President and
portfolio manager of the Fund. He has been a Vice President of
Merrill Lynch Asset Management since 1999. He was head Municipal
Bond Trader with Strong Funds from 1996 to 1999 and was a member
of the municipal bond investment team of Strong Funds from 1993
to 1996.</FONT>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<B><FONT size="2" color="#211E1C">ABOUT THE MANAGER</FONT></B>
<P align="left">
<FONT size="2">The Fund is managed by Fund Asset Management.
</FONT>
<DIV align="left">
<B><FONT size="2" color="#211E1C">8</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<P align="left">
Fund management considers a variety of factors when choosing
investments, such as:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="6%"></TD>
<TD width="1%"></TD>
<TD width="87%"></TD>
<TD width="6%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD></TD>
<TD align="left">
<B><I><FONT size="2" color="#211E1C">Credit Quality Of Issuers
</FONT></I></B><FONT size="2"> — </FONT>based on bond
ratings and other factors including economic and financial
conditions.</TD>
<TD> </TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD></TD>
<TD align="left">
<B><I><FONT size="2" color="#211E1C">Yield Analysis</FONT></I>
</B><FONT size="2"> — </FONT>takes into account factors
such as the different yields available on different types of
obligations and the shape of the yield curve (longer term
obligations typically have higher yields).</TD>
<TD> </TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD> </TD>
<TD> </TD>
<TD align="left">
<B><I><FONT size="2" color="#211E1C">Maturity Analysis</FONT></I>
</B><FONT size="2"> — </FONT>the weighted average
maturity of the portfolio will be maintained within a desirable
range as determined from time to time. Factors considered include
portfolio activity, maturity of the supply of available bonds
and the shape of the yield curve.</TD>
<TD> </TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
In addition, Fund management considers the availability of
features that protect against an early call of a bond by the
issuer.
<P align="left">
<FONT size="2"> <FONT color="#211E1C">INVESTMENT RISKS</FONT>
</FONT>
<DIV align="left">
<HR size="1" width="100%" align="left">
</DIV>
<P align="left">
This section contains a summary discussion of the general risks
of investing in the Fund. As with any mutual fund, there can be
no guarantee that the Fund will meet its goals or that the
Fund’s performance will be positive for any period of time.
<P align="left">
<B><I><FONT size="2" color="#211E1C">Bond Market And Selection
Risk</FONT></I></B><FONT size="2"> — </FONT>Bond market
risk is the risk that the bond market will go down in value,
including the possibility that the market will go down sharply
and unpredictably. Selection risk is the risk that the
investments that Fund management selects will underperform the
market or other funds with similar investment objectives and
investment strategies.
<P align="left">
<B><I><FONT size="2" color="#211E1C">Credit Risk</FONT></I></B>
<FONT size="2"> — </FONT>Credit risk is the risk that
the issuer will be unable to pay the interest or principal when
due. The degree of credit risk depends on both the financial
condition of the issuer and the terms of the obligation.
<P align="left">
<B><I><FONT size="2" color="#211E1C">Interest Rate Risk</FONT>
</I></B><FONT size="2"> — </FONT>Interest rate risk is
the risk that prices of municipal bonds generally increase when
interest rates decline and decrease when
<DIV align="right">
<B><FONT size="2" color="#211E1C">9</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<P align="left">
[DETAILS ABOUT THE FUND ICON] Details About the Fund
<DIV align="left">
</DIV>
<DIV align="left">
interest rates increase. Prices of longer term securities
generally change more in response to interest rate changes than
prices of shorter term securities.
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<B><I><FONT size="2" color="#211E1C">State Specific Risk</FONT>
</I></B><FONT size="2"> — </FONT>The Fund will invest
primarily in North Carolina municipal bonds. As a result, the
Fund is more exposed to risks affecting issuers of North Carolina
municipal bonds than is a municipal bond fund that invests more
widely. North Carolina experienced a positive General Fund
balance for each of the last six fiscal years and the
unemployment rate has consistently been below the national
average. Moody’s, Standard & Poor’s, and
Fitch’s currently rate the State of North Carolina’s
general obligation bonds Aaa, AAA, and AAA, respectively.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The Fund is a non-diversified fund, which means that it may
invest more of its assets in obligations of a single issuer than
if it were a diversified fund. By concentrating in a smaller
number of investments, the Fund’s risk is increased because
each investment has a greater effect on the Fund’s
performance.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<B><I><FONT size="2" color="#211E1C">Call And Redemption Risk
</FONT></I></B><FONT size="2"> — </FONT>A bond’s
issuer may call a bond for redemption before it matures. If this
happens to a bond the Fund holds, the Fund may lose income and
may have to invest the proceeds in bonds with lower yields.
<P align="left">
Risks associated with certain types of obligations in which the
Fund may invest include:
<P align="left">
<B><I><FONT size="2" color="#211E1C">General Obligation Bonds
</FONT></I></B><FONT size="2"> — </FONT>The faith,
credit and taxing power of the issuer of a general obligation
bond secures payment of interest and repayment of principal.
Timely payments depend on the issuer’s credit quality,
ability to raise tax revenues and ability to maintain an adequate
tax base.
<P align="left">
<B><I><FONT size="2" color="#211E1C">Revenue Bonds</FONT></I></B>
<FONT size="2"> — </FONT>Payments of interest and
principal on revenue bonds are made only from the revenues
generated by a particular facility, class of facilities or the
proceeds of a special tax or other revenue source. These payments
depend on the money earned by the particular facility or class
of facilities. Industrial development bonds are one type of
revenue bond.
<P align="left">
<B><I><FONT size="2" color="#211E1C">Industrial Development Bonds
</FONT></I></B><FONT size="2"> — </FONT>Municipalities
and other public authorities issue industrial development bonds
to finance development of industrial facilities for use by a
private enterprise. The private enterprise pays the principal and
interest on the bond, and the issuer does not pledge its
<DIV align="left">
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<TABLE WIDTH="100%">
<TR>
<TD ALIGN="LEFT"><FONT SIZE="2"><B>10</B></FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND</FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
faith, credit and taxing power for repayment. If the private
enterprise defaults on its payments, the Fund may not receive any
income or get its money back from the investment.
</DIV>
<P align="left">
<B><I><FONT size="2" color="#211E1C">Moral Obligation Bonds
</FONT></I></B><FONT size="2"> — </FONT>Moral
obligation bonds are generally issued by special purpose public
authorities of a state or municipality. If the issuer is unable
to meet its obligations, repayment of these bonds becomes a moral
commitment, but not a legal obligation, of the state or
municipality.
<P align="left">
<B><I><FONT size="2" color="#211E1C">Municipal Notes</FONT></I>
</B><FONT size="2"> — </FONT>Municipal notes are
shorter term municipal debt obligations. They may provide interim
financing in anticipation of tax collection, bond sales or
revenue receipts. If there is a shortfall in the anticipated
proceeds, the notes may not be fully repaid and the Fund may lose
money.
<P align="left">
<B><I><FONT size="2" color="#211E1C">Municipal Lease Obligations
</FONT></I></B><FONT size="2"> — </FONT>In a municipal
lease obligation, the issuer agrees to budget for and appropriate
municipal funds to make payments due on the lease obligation.
However, this does not ensure that funds will actually be
appropriated in future years. The issuer does not pledge its
unlimited taxing power for payment of the lease obligation, but
the leased property secures the obligation. In addition, the
proceeds of a sale may not cover the Fund’s loss.
<P align="left">
<B><I><FONT size="2" color="#211E1C">Insured Municipal Bonds
</FONT></I></B><FONT size="2"> — </FONT>Bonds purchased
by the Fund may be covered by insurance that guarantees timely
interest payments and repayment of principal on maturity. If a
bond’s insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop. Insured bonds
are subject to market risk.
<P align="left">
<B><I><FONT size="2" color="#211E1C">Junk Bonds</FONT></I></B>
<FONT size="2"> — </FONT>Junk bonds are debt securities
that are rated below investment grade by the major rating
agencies or are unrated securities that Fund management believes
are of comparable quality. The Fund does not intend to purchase
debt securities that are in default or that Fund management
believes will be in default. Although junk bonds generally pay
higher rates of interest than investment grade bonds, they are
high risk investments that may cause income and principal losses
for the Fund. Junk bonds generally are less liquid and experience
more price volatility than higher rated debt securities. The
issuers of junk bonds may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade
bonds. In the event of an issuer’s bankruptcy, claims of
other creditors may have priority over the claims of junk bond
holders, leaving few or no
<DIV align="left">
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<TABLE WIDTH="100%">
<TR>
<TD ALIGN="LEFT"><FONT SIZE="2"> MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="2"><B>11</B></FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<P align="left">
[DETAILS ABOUT THE FUND ICON] Details About the Fund
<DIV align="left">
assets available to repay junk bond holders. Junk bonds may be
subject to greater call and redemption risk than higher rated
debt securities.
</DIV>
<P align="left">
<B><I><FONT size="2" color="#211E1C">When Issued Securities,
Delayed Delivery Securities and Forward Commitments</FONT></I>
</B><FONT size="2"> — </FONT>When issued and delayed
delivery securities and forward commitments involve the risk that
the security the Fund buys will lose value prior to its delivery
to the Fund. There also is the risk that the security will not
be issued or that the other party will not meet its obligation,
in which case the Fund loses the investment opportunity of the
assets it has set aside to pay for the security and any gain in
the security’s price.
<P align="left">
<B><I><FONT size="2" color="#211E1C">Variable Rate Demand
Obligations</FONT></I></B><FONT size="2"> — </FONT>
Variable rate demand obligations (VRDOs) are floating rate
securities that combine an interest in a long term municipal bond
with a right to demand payment before maturity from a bank or
other financial institution. If the bank or financial institution
is unable to pay, the Fund may lose money.
<P align="left">
<B><I><FONT size="2" color="#211E1C">Illiquid Investments</FONT>
</I></B><FONT size="2"> — </FONT>The Fund may invest up
to 15% of its assets in illiquid securities that it cannot
easily resell within seven days at current value or that have
contractual or legal restrictions on resale. If the Fund buys
illiquid securities it may be unable to quickly resell them or
may be able to sell them only at a price below current value.
<P align="left">
<B><I><FONT size="2" color="#211E1C">Derivatives</FONT></I></B>
<FONT size="2"> — </FONT>The Fund may use derivative
instruments including indexed and inverse securities, options on
portfolio positions, options on securities or other financial
indices, financial futures and options on such futures.
Derivatives allow the Fund to increase or decrease its risk
exposure more quickly and efficiently than other types of
instruments.
<P align="left">
Derivatives are volatile and involve significant risks,
including:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="6%"></TD>
<TD width="88%"></TD>
<TD width="6%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
<B><I><FONT size="2" color="#211E1C">Credit Risk</FONT></I></B>
<FONT size="2"> — </FONT>the risk that the counterparty
(the party on the other side of the transaction) on a derivative
transaction will be unable to honor its financial obligation to
the Fund.</TD>
<TD> </TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
<B><I><FONT size="2" color="#211E1C">Leverage Risk</FONT></I></B>
<FONT size="2"> — </FONT>the risk associated with
certain types of investments or trading strategies that
relatively small market movements may result in large changes in
the value of an investment. Certain investments or trading
strategies that involve leverage can result in losses that
greatly exceed the amount originally invested.</TD>
<TD> </TD>
</TR>
</TABLE>
<DIV align="left">
<B><FONT size="2" color="#211E1C">12</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="6%"></TD>
<TD width="88%"></TD>
<TD width="6%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
<B><I><FONT size="2" color="#211E1C">Liquidity Risk</FONT></I>
</B><FONT size="2"> — </FONT>the risk that certain
securities may be difficult or impossible to sell at the time
that the seller would like or at the price that the seller
believes the security is currently worth.</TD>
<TD> </TD>
</TR>
</TABLE>
<P align="left">
The Fund may use derivatives for hedging purposes including
anticipatory hedges. Hedging is a strategy in which the Fund uses
a derivative to offset the risk that other Fund holdings may
decrease in value. While hedging can reduce losses, it can also
reduce or eliminate gains if the market moves in a different
manner than anticipated by the Fund or if the cost of the
derivative outweighs the benefit of the hedge. Hedging also
involves the risk that changes in the value of the derivative
will not match those of the holdings being hedged as expected by
the Fund, in which case any losses on the holdings being hedged
may not be reduced. There can be no assurance that the
Fund’s hedging strategy will reduce risk or that hedging
transactions will be either available or cost effective. The Fund
is not required to use hedging and may choose not to do so.
<P align="left">
<B><I><FONT size="2" color="#211E1C"> Indexed And Inverse
Floating Rate Securities</FONT></I></B><FONT size="2">
— </FONT>The Fund may invest in securities whose
potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities.
The return on indexed securities will rise when the underlying
index or interest rate rises and fall when the index or interest
rate falls. The Fund may also invest in securities whose return
is inversely related to changes in an interest rate (inverse
floaters). In general, income on inverse floaters will decrease
when short term rates increase and increase when short term rates
decrease. Investments in inverse floaters may subject the Fund
to the risks of reduced or eliminated interest payments and
losses of principal. In addition, certain indexed securities and
inverse floaters may increase or decrease in value at a greater
rate than the underlying interest rate, which effectively
leverages the Fund’s investment. As a result, the market
value of such securities will generally be more volatile than
that of fixed rate, tax exempt securities. Both indexed
securities and inverse floaters are derivative securities and can
be considered speculative.
<P align="left">
<B><I><FONT size="2" color="#211E1C"> Borrowing And Leverage
</FONT></I></B><FONT size="2"> — </FONT>The Fund may
borrow for temporary emergency purposes including to meet
redemptions. Borrowing may exaggerate changes in the net asset
value of Fund shares and in the yield on <BR>
<DIV align="right">
<B><FONT size="2" color="#211E1C">13</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<P align="left">
[DETAILS ABOUT THE FUND ICON] Details About the Fund
<DIV align="left">
the Fund’s portfolio. Borrowing will cost the Fund interest
expense and other fees. The costs of borrowing may reduce the
Fund’s return. Certain securities that the Fund buys may
create leverage including, for example, when issued securities,
forward commitments and options.
</DIV>
<DIV align="left">
<FONT size="2"> <FONT color="#211E1C">STATEMENT OF ADDITIONAL
INFORMATION</FONT></FONT>
</DIV>
<DIV align="left">
<HR size="1" width="100%" align="left">
</DIV>
<P align="left">
If you would like further information about the Fund, including
how it invests, please see the Statement of Additional
Information.
<DIV align="left">
<B><FONT size="2" color="#211E1C">14</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
<FONT color="#211E1C"> Your Account [YOUR ACCOUNT ICON]</FONT>
</DIV>
<DIV align="left">
</DIV>
<DIV align="left">
<FONT size="2" color="#211E1C">MERRILL LYNCH SELECT PRICING<SUP>
SM</SUP> SYSTEM</FONT>
</DIV>
<DIV align="left">
<HR size="1" width="100%" align="left">
</DIV>
<P align="left">
The Fund offers four share classes, each with its own sales
charge and expense structure, allowing you to invest in the way
that best suits your needs. Each share class represents an
ownership interest in the same investment portfolio. When you
choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your
Merrill Lynch Financial Consultant can help you determine which
share class is best suited to your personal financial goals.
<P align="left">
For example, if you select Class A or D shares, you
generally pay a sales charge at the time of purchase. If you buy
Class D shares, you also pay an ongoing account maintenance
fee of 0.10%. You may be eligible for a sales charge reduction or
waiver.
<P align="left">
If you select Class B or C shares, you will invest the full
amount of your purchase price, but you will be subject to a
distribution fee of 0.25% on Class B shares or 0.35% on
Class C shares and an account maintenance fee of 0.25% on
both classes. Because these fees are paid out of the Fund’s
assets on an ongoing basis, over time these fees increase the
cost of your investment and may cost you more than paying an
initial sales charge. In addition, you may be subject to a
deferred sales charge when you sell Class B or C shares.
<P align="left">
The Fund’s shares are distributed by Merrill Lynch Funds
Distributor, a division of Princeton Funds Distributor, Inc., an
affiliate of Merrill Lynch. The Fund is a series of the Merrill
Lynch Multi-State Municipal Series Trust.
<DIV align="right">
<B><FONT size="2" color="#211E1C">15</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
[YOUR ACCOUNT ICON] Your Account
</DIV>
<DIV align="left">
The table below summarizes key features of the Merrill Lynch
Select Pricing <SUP><FONT size="2">SM</FONT></SUP> System.
</DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="18%"> </TD>
<TD width="3%"> </TD>
<TD width="17%"> </TD>
<TD width="3%"> </TD>
<TD width="17%"> </TD>
<TD width="3%"> </TD>
<TD width="17%"> </TD>
<TD width="3%"> </TD>
<TD width="19%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B><FONT color="#211E1C">Class A</FONT></B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B><FONT color="#211E1C">Class B</FONT></B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B><FONT color="#211E1C">Class C</FONT></B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B><FONT color="#211E1C">Class D</FONT></B></FONT></TD>
</TR>
<TR>
<TD colspan="9"></TD>
</TR>
<TR>
<TD colspan="9"></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="9"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Availability</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Limited to certain investors including:<BR>
• Current Class A shareholders<BR>
• Participants in certain Merrill Lynch- sponsored
programs<BR>
• Certain affiliates of Merrill Lynch</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Generally available through Merrill Lynch. Limited availability
through other securities dealers.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Generally available through Merrill Lynch. Limited availability
through other securities dealers.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Generally available through Merrill Lynch. Limited availability
through other securities dealers.</FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Initial Sales Charge?</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Yes. Payable at time of purchase. Lower sales charges available
for larger investments.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
No. Entire purchase price is invested in shares of the Fund.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
No. Entire purchase price is invested in shares of the Fund.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Yes. Payable at time of purchase. Lower sales charges available
for larger investments.</FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Deferred Sales Charge?</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
No. (May be charged for purchases over $1 million that are
redeemed within one year.)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Yes. Payable if you redeem within four years of purchase.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Yes. Payable if you redeem within one year of purchase.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
No. (May be charged for purchases over $1 million that are
redeemed within one year.)</FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Account Maintenance and<BR>
Distribution Fees?</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
No.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
0.25% Account Maintenance Fee 0.25% Distribution Fee.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
0.25% Account Maintenance Fee 0.35% Distribution Fee.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
0.10% Account Maintenance Fee<BR>
No Distribution Fee.</FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Conversion to Class D shares?</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
No.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Yes, automatically after approximately ten years.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
No.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
No.</FONT></TD>
</TR>
<TR>
<TD colspan="9" align="left"><HR size="1"></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left">
<B><FONT size="2" color="#211E1C">16</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
<B><I><FONT size="2" color="#211E1C">Right of Accumulation</FONT>
</I></B><FONT size="2"> — permits you to pay the sales
charge that would apply to the cost or value (whichever is
higher) of all shares you own in the Merrill Lynch mutual funds
that offer Select Pricing options.</FONT>
</DIV>
<P align="left">
<B><I><FONT size="2" color="#211E1C">Letter of Intent</FONT></I>
</B><FONT size="2"> — permits you to pay the sales
charge that would be applicable if you add up all shares of
Merrill Lynch Select Pricing System funds that you agree to buy
within a 13 month period. Certain restrictions apply.</FONT>
<P align="left">
<B><FONT size="2" color="#211E1C">Class A and Class D
Shares — Initial Sales Charge Options</FONT></B>
<P align="left">
If you select Class A or Class D shares, you will pay a
sales charge at the time of purchase.
<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="28%"> </TD>
<TD width="3%"> </TD>
<TD width="9%"> </TD>
<TD width="1%"> </TD>
<TD width="9%"> </TD>
<TD width="3%"> </TD>
<TD width="10%"> </TD>
<TD width="1%"> </TD>
<TD width="10%"> </TD>
<TD width="3%"> </TD>
<TD width="11%"> </TD>
<TD width="1%"> </TD>
<TD width="11%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Dealer</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>As a % of</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>As a % of</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Compensation</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Offering</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Your</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>as a % of</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Your Investment</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Price</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Investment*</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Offering Price</B></FONT></TD>
</TR>
<TR>
<TD colspan="13"></TD>
</TR>
<TR>
<TD colspan="13"></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="13"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Less than $25,000</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.00%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.17%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.75%</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="13" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
$25,000 but less<BR>
than $50,000</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.75%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.90%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.50%</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="13" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
$50,000 but less<BR>
than $100,000</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.25%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.36%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.00%</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="13" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
$100,000 but less<BR>
than $250,000</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2.50%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2.56%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2.25%</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="13" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
$250,000 but less<BR>
than $1,000,000</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.50%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.52%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.25%</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="13" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
$1,000,000 and over**</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.00%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.00%</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.00%</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="13" align="left"><HR size="1"></TD>
</TR>
</TABLE>
</CENTER>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="1%"></TD>
<TD width="99%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2"> *</FONT></TD>
<TD align="left">
<FONT size="2">Rounded to the nearest one-hundredth percent.
</FONT></TD>
</TR>
<TR valign="top">
<TD><FONT size="2">**</FONT></TD>
<TD align="left">
<FONT size="2">If you invest $1,000,000 or more in Class A
or Class D shares, you may not pay an initial sales charge.
However, if you redeem your shares within one year after
purchase, you may be charged a deferred sales charge. This charge
is 1% of the lesser of the original cost of the shares being
redeemed or your redemption proceeds.</FONT></TD>
</TR>
</TABLE>
<P align="left">
No initial sales charge applies to Class A or Class D
shares that you buy through reinvestment of dividends.
<P align="left">
A reduced or waived sales charge on a purchase of Class A or
Class D shares may apply for:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="6%"></TD>
<TD width="1%"></TD>
<TD width="87%"></TD>
<TD width="6%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>•</TD>
<TD align="left">
Purchases under a <B><I>Right of Accumulation</I></B> or <B><I>
Letter of Intent</I></B></TD>
<TD> </TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>•</TD>
<TD align="left">
TMA <SUP><FONT size="2">SM</FONT></SUP> Managed Trusts</TD>
<TD> </TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>•</TD>
<TD align="left">
Certain Merrill Lynch investment or central asset accounts</TD>
<TD> </TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>•</TD>
<TD align="left">
Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances</TD>
<TD> </TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>•</TD>
<TD align="left">
Certain investors, including directors or trustees of Merrill
Lynch mutual funds and Merrill Lynch employees</TD>
<TD> </TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>•</TD>
<TD align="left">
Certain Merrill Lynch fee-based programs</TD>
<TD> </TD>
</TR>
</TABLE>
<DIV align="right">
<B><FONT size="2" color="#211E1C">17</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
[YOUR ACCOUNT ICON] Your Account
</DIV>
<P align="left">
Only certain investors are eligible to buy Class A shares.
Your Merrill Lynch Financial Consultant can help you determine
whether you are eligible to buy Class A shares or to
participate in any of these programs.
<P align="left">
If you decide to buy shares under the initial sales charge
alternative and you are eligible to buy both Class A and
Class D shares, you should buy Class A since
Class D shares are subject to a 0.10% account maintenance
fee, while Class A shares are not.
<P align="left">
If you redeem Class A or Class D shares and within
30 days buy new shares of the same class, you will not pay a
sales charge on the new purchase amount. The amount eligible for
this “Reinstatement Privilege” may not exceed the
amount of your redemption proceeds. To exercise the privilege,
contact your Merrill Lynch Financial Consultant or the
Fund’s Transfer Agent at 1-800-MER-FUND.
<P align="left">
<B><FONT size="2" color="#211E1C">Class B and Class C
Shares — Deferred Sales Charge Options</FONT></B>
<P align="left">
If you select Class B or Class C shares, you do not pay
an initial sales charge at the time of purchase. However, if you
redeem your Class B shares within four years after
purchase, or your Class C shares within one year after
purchase, you may be required to pay a deferred sales charge. You
will also pay distribution fees of 0.25% for Class B shares
and 0.35% for Class C shares and account maintenance fees
of 0.25% for Class B and Class C shares each year under
distribution plans that the Fund has adopted under
Rule 12b-1. Because these fees are paid out of the
Fund’s assets on an ongoing basis, over time these fees
increase the cost of your investment and may cost you more than
paying an initial sales charge. The Distributor uses the money
that it receives from the deferred sales charges and the
distribution fees to cover the costs of marketing, advertising
and compensating the Merrill Lynch Financial Consultant or other
securities dealer who assists you in purchasing Fund shares.
<P align="left">
<B><I><FONT size="2" color="#211E1C">Class B Shares</FONT>
</I></B>
<P align="left">
If you redeem Class B shares within four years after
purchase, you may be charged a deferred sales charge. The amount
of the charge gradually
<DIV align="left">
<B><FONT size="2" color="#211E1C">18</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
decreases as you hold your shares over time, according to the
following schedule:
</DIV>
<CENTER>
<TABLE width="40%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="56%"> </TD>
<TD width="3%"> </TD>
<TD width="41%"> </TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Years Since Purchase</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Sales Charge*</B></FONT></TD>
</TR>
<TR>
<TD colspan="3"></TD>
</TR>
<TR>
<TD colspan="3"></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>0 – 1</B></FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
<B>4.00%</B></FONT></TD>
</TR>
<TR>
<TD colspan="3" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>1 – 2</B></FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
<B>3.00%</B></FONT></TD>
</TR>
<TR>
<TD colspan="3" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>2 – 3</B></FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
<B>2.00%</B></FONT></TD>
</TR>
<TR>
<TD colspan="3" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>3 – 4</B></FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
<B>1.00%</B></FONT></TD>
</TR>
<TR>
<TD colspan="3" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>4 and thereafter</B></FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
<B>0.00%</B></FONT></TD>
</TR>
<TR>
<TD colspan="3" align="left"><HR size="1"></TD>
</TR>
</TABLE>
</CENTER>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="1%"></TD>
<TD width="99%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2">*</FONT></TD>
<TD align="left">
<FONT size="2">The percentage charge will apply to the lesser of
the original cost of the shares being redeemed or the proceeds of
your redemption. Shares acquired through reinvestment of
dividends are not subject to a deferred sales charge. Not all
Merrill Lynch funds have identical deferred sales charge
schedules. If you exchange your shares for shares of another
fund, the higher charge will apply.</FONT></TD>
</TR>
</TABLE>
<P align="left">
The deferred sales charge relating to Class B shares may be
reduced or waived in certain circumstances, such as:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="6%"></TD>
<TD width="1%"></TD>
<TD width="87%"></TD>
<TD width="6%"></TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD> </TD>
<TD>•</TD>
<TD align="left">
Redemption in connection with participation in certain Merrill
Lynch fee-based programs</TD>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
Withdrawals resulting from shareholder death or disability as
long as the waiver request is made within one year of death or
disability or, if later, reasonably promptly following completion
of probate, or in connection with involuntary termination of an
account in which Fund shares are held</TD>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD> </TD>
<TD>• </TD>
<TD align="left">
Withdrawal through the Merrill Lynch Systematic Withdrawal Plan
of up to 10% per year of your Class B account value at the
time the plan is established</TD>
<TD> </TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Your Class B shares convert automatically into Class D
shares approximately ten years after purchase. Any Class B
shares received through reinvestment of dividends paid on
converting shares will also convert at that time. Class D
shares are subject to lower annual expenses than Class B
shares. The conversion of Class B to Class D shares is
not a taxable event for Federal income tax purposes.
<P align="left">
Different conversion schedules apply to Class B shares of
different Merrill Lynch mutual funds. For example, Class B
shares of a fixed-income fund typically convert approximately ten
years after purchase compared to approximately eight years for
equity funds. If you acquire your Class B
<DIV align="right">
<B><FONT size="2" color="#211E1C">19</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
[YOUR ACCOUNT ICON] Your Account
</DIV>
<DIV align="left">
shares in an exchange from another fund with a shorter conversion
schedule, the Fund’s ten year conversion schedule will
apply. If you exchange your Class B shares in the Fund for
Class B shares of a fund with a shorter conversion schedule,
the other fund’s conversion schedule will apply. The length
of time that you hold both the original and exchanged
Class B shares in both funds will count toward the
conversion schedule. The conversion schedule may be modified in
certain other cases as well.
</DIV>
<P align="left">
<B><I><FONT size="2" color="#211E1C">Class C Shares</FONT>
</I></B>
<P align="left">
If you redeem Class C shares within one year after purchase,
you may be charged a deferred sales charge of 1.00%. The charge
will apply to the lesser of the original cost of the shares being
redeemed or the proceeds of your redemption. You will not be
charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends. The deferred
sales charge relating to Class C shares may be reduced or
waived in connection with involuntary termination of an account
in which Fund shares are held and withdrawals through the Merrill
Lynch Systematic Withdrawal Plan.
<P align="left">
Class C shares do not offer a conversion privilege.
<P align="left">
<FONT size="2"> <FONT color="#211E1C">HOW TO BUY, SELL, TRANSFER
AND EXCHANGE SHARES</FONT></FONT>
<DIV align="left">
<HR size="1" width="100%" align="left">
</DIV>
<P align="left">
The chart below summarizes how to buy, sell, transfer and
exchange shares through Merrill Lynch or other securities
dealers. You may also buy shares through the Transfer Agent. To
learn more about buying shares through the Transfer Agent, call
1-800-MER-FUND. Because the selection of a mutual fund involves
many considerations, your Merrill Lynch Financial Consultant may
help you with this decision.
<DIV align="left">
<B><FONT size="2" color="#211E1C">20</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="20%"> </TD>
<TD width="3%"> </TD>
<TD width="33%"> </TD>
<TD width="3%"> </TD>
<TD width="41%"> </TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>If You Want to</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Your Choices</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Information Important for You to Know</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Buy Shares</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
First, select the share class appropriate for you</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Refer to the Merrill Lynch Select Pricing table on page 16.
Be sure to read this prospectus carefully.</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Next, determine the amount of your investment</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
The minimum initial investment for the Fund is $1,000 for all
accounts except that certain Merrill Lynch fee-based programs
have a $250 initial minimum investment.<BR>
(The minimums for initial investments may be waived under certain
circumstances.)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Have your Merrill Lynch Financial Consultant or securities dealer
submit your purchase order</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
The price of your shares is based on the next calculation of net
asset value after your order is placed. Any purchase orders
placed prior to the close of business on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) will be priced
at the net asset value determined that day.<BR>
Purchase orders placed after that time will be priced at the net
asset value determined on the next business day. The Fund may
reject any order to buy shares and may suspend the sale of shares
at any time. Merrill Lynch may charge a processing fee to
confirm a purchase. This fee is currently $5.35.</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Or contact the Transfer Agent</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
To purchase shares directly, call the Transfer Agent at
1-800-MER-FUND and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this Prospectus.</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Add to Your<BR>
Investment</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Purchase additional shares</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
The minimum investment for additional purchases is generally $50
except that certain programs, such as automatic investment plans,
may have higher minimums.<BR>
(The minimum for additional purchases may be waived under certain
circumstances.)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Acquire additional shares through the automatic dividend
reinvestment plan</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
All dividends are automatically reinvested without a sales
charge.</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Participate in the automatic investment plan</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
You may invest a specific amount on a periodic basis through
certain Merrill Lynch investment or central asset accounts.</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Transfer Shares<BR>
to Another<BR>
Securities Dealer</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Transfer to a participating securities dealer</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
You may transfer your Fund shares only to another securities
dealer that has entered into an agreement with Merrill Lynch.
Certain shareholder services may not be available for the
transferred shares. You may only purchase additional shares of
funds previously owned before the transfer. All future trading
these assets must be coordinated by the receiving firm.</FONT></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="right">
<B><FONT size="2" color="#211E1C">21</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
[YOUR ACCOUNT ICON] Your Account
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="19%"> </TD>
<TD width="3%"> </TD>
<TD width="33%"> </TD>
<TD width="3%"> </TD>
<TD width="42%"> </TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>If You Want to</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Your Choices</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Information Important for You to Know</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Transfer Shares to Another Securities Dealer (continued)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Transfer to a non-participating securities dealer</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
You must either:<BR>
• Transfer your shares to an account with
the Transfer Agent; or<BR>
• Sell your shares, paying any applicable
CDSC.</FONT></TD>
</TR>
<TR>
<TD colspan="5" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Sell Your Shares</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Have your Merrill Lynch Financial Consultant or securities dealer
submit your sales order</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
The price of your shares is based on the next calculation of net
asset value after your order is placed. For your redemption
request to be priced at the net asset value on the day of your
request, you must submit your request to your dealer prior to
that day’s close of business on the New York Stock Exchange
(generally 4:00 p.m. Eastern time). Any redemption request
placed after that time will be priced at the net asset value at
the close of business on the next business day. Dealers must
submit redemption requests to the Fund not more than thirty
minutes after the close of business on the New York Stock
Exchange on the day the request was received.<BR>
Securities dealers, including Merrill Lynch, may charge a fee to
process a redemption of shares. Merrill Lynch currently charges a
fee of $5.35. No processing fee is charged if you redeem shares
directly through the Transfer Agent.<BR>
The Fund may reject an order to sell shares under certain
circumstances.</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Sell through the Transfer Agent</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
You may sell shares held at the Transfer Agent by writing to the
Transfer Agent at the address on the inside back cover of this
prospectus. All shareholders on the account must sign the letter.
A signature guarantee will generally be required but may be
waived in certain limited circumstances. You can obtain a
signature guarantee from a bank, securities dealer, securities
broker, credit union, savings association, national securities
exchange and registered securities association. A notary public
seal will not be acceptable. If you hold stock certificates,
return the certificates with the letter. The Transfer Agent will
normally mail redemption proceeds within seven days following
receipt of a properly completed request. If you make a redemption
request before the Fund has collected payment for the purchase
of shares, the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.<BR>
If you hold share certificates, they must be delivered to the
Transfer Agent before they can be converted. Check with the
Transfer Agent or your Merrill Lynch Financial Consultant for
details.</FONT></TD>
</TR>
<TR>
<TD colspan="5" align="left"><HR size="1"></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<B><FONT size="2" color="#211E1C">22</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="19%"> </TD>
<TD width="3%"> </TD>
<TD width="33%"> </TD>
<TD width="3%"> </TD>
<TD width="42%"> </TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>If You Want to</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Your Choices</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Information Important for You to Know</B></FONT></TD>
</TR>
<TR>
<TD colspan="5" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Sell Shares Systematically</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Participate in the Fund’s Systematic Withdrawal Plan</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
You can choose to receive systematic payments from your Fund
account either by check or through direct deposit to your bank
account on a monthly or quarterly basis. If you hold your Fund
shares in a Merrill Lynch CMA® or CBA® Account you can
arrange for systematic redemptions of a fixed dollar amount on a
monthly, bi-monthly, quarterly, semi-annual or annual basis,
subject to certain conditions. Under either method you must have
dividends automatically reinvested. For Class B and C shares your
total annual withdrawals cannot be more than 10% per year of the
value of your shares at the time your plan is established. The
deferred sales charge is waived for systematic redemptions. Ask
your Merrill Lynch Financial Consultant for details.</FONT></TD>
</TR>
<TR>
<TD colspan="5" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Exchange Your Shares</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Select the fund into which you want to exchange. Be sure to read
that fund’s prospectus</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
You can exchange your shares of the Fund for shares of many other
Merrill Lynch mutual funds. You must have held the shares used
in the exchange for at least 15 calendar days before you can
exchange to another fund.<BR>
Each class of Fund shares is generally exchangeable for shares of
the same class of another fund. If you own Class A shares and
wish to exchange into a fund in which you have no Class A
shares (and are not eligible to purchase Class A shares), you
will exchange into Class D shares.<BR>
Some of the Merrill Lynch mutual funds impose a different initial
or deferred sales charge schedule. If you exchange Class A
or D shares for shares of a fund with a higher initial sales
charge than you originally paid, you will be charged the
difference at the time of exchange. If you exchange Class B
shares for shares of a fund with a different deferred sales
charge schedule, the higher schedule will apply. The time you
hold Class B or C shares in both funds will count when
determining your holding period for calculating a deferred sales
charge at redemption. If you exchange Class A or D shares
for money market fund shares, you will receive Class A
shares of Summit Cash Reserves Fund. Class B or C shares of
the Fund will be exchanged for Class B shares of Summit.<BR>
Although there is currently no limit on the number of exchanges
that you can make, the exchange privilege may be modified or
terminated at any time in the future.</FONT></TD>
</TR>
<TR>
<TD colspan="5" align="left"><HR size="1"></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left">
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<TABLE WIDTH="100%">
<TR>
<TD ALIGN="LEFT"><FONT SIZE="2"> MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="2"><B>23</B></FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
[YOUR ACCOUNT ICON] Your Account
</DIV>
<DIV align="left">
<B><I><FONT size="2" color="#211E1C">Net Asset Value</FONT></I>
</B><FONT size="2"> — the market value of the
Fund’s total assets after deducting liabilities, divided by
the number of shares outstanding.</FONT>
</DIV>
<DIV align="left">
<FONT size="2" color="#211E1C">HOW SHARES ARE PRICED</FONT>
</DIV>
<DIV align="left">
<HR size="1" width="100%" align="left">
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
When you buy shares, you pay the <B><I>net asset value</I></B>,
plus any applicable sales charge. This is the offering price.
Shares are also redeemed at their net asset value, minus any
applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the
New York Stock Exchange is open after the close of business on
the Exchange (the Exchange generally closes at 4:00 p.m.
Eastern time). The net asset value used in determining your price
is the next one calculated after your purchase or redemption
order is placed.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Generally, Class A shares will have the highest net asset
value because that class has the lowest expenses, and
Class D shares will have a higher net asset value than
Class B or Class C shares. Class B shares will
have a higher net asset value than Class C shares because
Class B shares have lower distribution expenses than
Class C shares. Also dividends paid on Class A and
Class D shares will generally be higher than dividends paid
on Class B and Class C shares because Class A and
Class D shares have lower expenses.
<P align="left">
<FONT size="2"> <FONT color="#211E1C">PARTICIPATION IN MERRILL
LYNCH FEE-BASED PROGRAMS</FONT></FONT>
<DIV align="left">
<HR size="1" width="100%" align="left">
</DIV>
<P align="left">
If you participate in certain fee-based programs offered by
Merrill Lynch, you may be able to buy Class A shares at net
asset value, including by exchanges from other share classes.
Sales charges on the shares being exchanged may be reduced or
waived under certain circumstances.
<P align="left">
You generally cannot transfer shares held through a fee-based
program into another account. Instead, you will have to redeem
your shares held through the program and purchase shares of
another class, which may be subject to distribution and account
maintenance fees. This may be a taxable event and you will pay
any applicable sales charges.
<P align="left">
If you leave one of these programs, your shares may be redeemed
or automatically exchanged into another class of Fund shares or
into a money market fund. The class you receive may be the class
you originally owned when you entered the program, or in certain
cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class D shares may
be modified. Any redemption or exchange will be at net asset
value. However, if you participate in the program for less than a
specified
<DIV align="left">
<B><FONT size="2" color="#211E1C">24</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
<B><I><FONT size="2" color="#211E1C">Dividends</FONT></I></B>
<FONT size="2"> — Exempt-interest, ordinary income and
capital gains paid to shareholders. Dividends may be reinvested
in additional Fund shares as they are paid.</FONT>
</DIV>
<DIV align="left">
period, you may be charged a fee in accordance with the terms of
the program.
</DIV>
<P align="left">
Details about these features and the relevant charges are
included in the client agreement for each fee-based program and
are available from your Merrill Lynch Financial Consultant.
<P align="left">
<FONT size="2"> <FONT color="#211E1C">DIVIDENDS AND TAXES</FONT>
</FONT>
<DIV align="left">
<HR size="1" width="100%" align="left">
</DIV>
<P align="left">
The Fund will distribute any net investment income monthly and
any net realized long or short term capital gains at least
annually. The Fund may also pay a special distribution at the end
of the calendar year to comply with Federal tax requirements. If
your account is with Merrill Lynch and you would like to receive
dividends in cash, contact your Merrill Lynch Financial
Consultant. If your account is with the Transfer Agent and you
would like to receive dividends in cash, contact the Transfer
Agent.
<P align="left">
<B><FONT size="2" color="#211E1C">Taxes</FONT></B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
To the extent that the dividends distributed by the Fund are from
municipal bond interest income, they are exempt from Federal
income tax. However, certain investors may be subject to a
Federal alternative minimum tax on dividends received from the
Fund. To the extent that the dividends distributed by the Fund
are derived from North Carolina municipal bond interest income or
from gains from certain North Carolina municipal bonds issued
before July 1, 1995, they are also exempt from North
Carolina income taxes. Interest income from other investments may
produce taxable distributions. Dividends derived from capital
gains realized by the Fund will be subject to Federal income tax
and generally (except for gains attributable to certain North
Carolina municipal bonds issued before July 1, 1995) will be
subject to North Carolina income tax as well. If you are subject
to income tax in a state other than North Carolina, the
dividends derived from North Carolina municipal bonds will not be
exempt from income tax in that state.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Generally, within 60 days after the end of the Fund’s
taxable year, the Trust will tell you the amount of
exempt-interest dividends and capital gain dividends you received
that year. Capital gain dividends are taxable for Federal income
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="right">
<B><FONT size="2" color="#211E1C">25</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
[YOUR ACCOUNT ICON] Your Account
</DIV>
<DIV align="left">
</DIV>
<DIV align="left">
<FONT size="2">“BUYING A DIVIDEND”
</FONT>
</DIV>
<P align="left">
<FONT size="2">You may want to avoid buying shares shortly before
the Fund pays a dividend, although the impact on you will be
significantly less than if you were invested in a fund paying
fully taxable dividends. The reason? If you buy shares when a
fund has realized but not yet distributed taxable ordinary income
(if any) or capital gains, you will pay the full price for the
shares and then receive a portion of the price back in the form
of a taxable dividend. Before investing you may want to consult
your tax adviser.</FONT>
<DIV align="left">
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
tax purposes as long term capital gains to you, regardless of how
long you have held your shares. The tax treatment of dividends
from the Fund is the same whether you choose to receive dividends
in cash or to have them reinvested in shares of the Fund.
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
By law, the Fund must withhold 31% of your dividends and proceeds
if you have not provided a taxpayer identification number or
social security number or if the number you have provided is
incorrect.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
If you redeem Fund shares or exchange them for shares of another
fund, any gain on the transaction may be subject to Federal
income tax.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
This section summarizes some of the consequences of an investment
in the Fund under current Federal and North Carolina tax laws.
It is not a substitute for personal tax advice. Consult your
personal tax adviser about the potential tax consequences to you
of an investment in the Fund under all applicable tax laws.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<TABLE WIDTH="100%">
<TR>
<TD ALIGN="LEFT"><FONT SIZE="2"><B>26</B></FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND</FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
Management of the Fund [MANAGEMENT OF THE FUND ICON]
</DIV>
<DIV align="left">
</DIV>
<DIV align="left">
<FONT size="2">FUND ASSET MANAGEMENT</FONT>
</DIV>
<DIV align="left">
<HR size="1" width="100%" align="left">
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Fund Asset Management, the Fund’s Manager, manages the
Fund’s investments and its business operations under the
overall supervision of the Trust’s Board of Trustees. The
Manager has the responsibility for making all investment
decisions for the Fund. The Fund pays the Manager a fee at the
annual rate of 0.55% of the average daily net assets of the Fund
for the first $500 million; 0.525% of the average daily net
assets from $500 million to $1 billion; and 0.50% of
the average daily net assets above $1 billion. For the
fiscal year ended July 31, 1999, the Manager received a fee
equal to 0.55% of the Fund’s average daily net assets.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Fund Asset Management is part of the Asset Management Group of ML
& Co. The Asset Management Group had approximately
$514 billion in investment company and other portfolio
assets under management as of September 1999. This amount
includes assets managed for Merrill Lynch affiliates.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Fund Asset Management was organized as an investment adviser in
1977 and offers investment advisory services to more than
50 registered investment companies.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<B><FONT size="2" color="#211E1C">A Note About Year 2000</FONT>
</B>
<P align="left">
Many computer systems were designed using only two digits to
designate years. These systems may not be able to distinguish the
Year 2000 from the Year 1900 (commonly known as the “Year
2000 Problem”). The Fund could be adversely affected if the
computer systems used by Fund management or other Fund service
providers do not properly address this problem before
January 1, 2000. Fund management expects to have addressed
this problem before then, and does not anticipate that the
services it provides will be adversely affected. The Fund’s
other service providers have told Fund management that they also
expect to resolve the Year 2000 Problem, and Fund management will
continue to monitor the situation as the Year 2000 approaches.
However, if the problem has not been fully addressed, the Fund
could be negatively affected. The Year 2000 Problem could also
have a negative impact on the issuers of securities in which the
Fund invests, and this could hurt the Fund’s investment
returns.
<DIV align="left">
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<TABLE WIDTH="100%">
<TR>
<TD ALIGN="LEFT"><FONT SIZE="2"> MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="2"><B>27</B></FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
[MANAGEMENT OF THE FUND ICON] Management of the Fund
</DIV>
<DIV align="left">
<B><FONT size="2" color="#211E1C">28</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<FONT size="2" color="#211E1C">FINANCIAL HIGHLIGHTS</FONT>
</DIV>
<DIV align="left">
<HR size="1" width="100%" align="left">
</DIV>
<P align="left">
The Financial Highlights table is intended to help you understand
the Fund’s financial performance for the periods shown.
Certain information reflects financial results for a single Fund
share. The total returns in the table represent the rate an
investor would have earned on an investment in the Fund (assuming
reinvestment of all dividends). This information has been
audited by Deloitte & Touche LLP, whose report, along with
the Fund’s financial statements, is included in the
Fund’s annual report to shareholders, which is available
upon request.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<TABLE width="80%" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="38%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="19"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><FONT size="2"><B>Class A</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="19"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><FONT size="2"><B>For the Year Ended July 31,</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Increase (Decrease) in</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><HR size="1"></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Net Asset Value:</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1996</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1995</B></FONT></TD>
</TR>
<TR>
<TD colspan="21"></TD>
</TR>
<TR>
<TD colspan="21"></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="21"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Per Share Operating Performance:</FONT>
</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net asset value, beginning of year</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.00</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.87</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.36</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.29</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.19</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Investment income — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.47</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.50</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.51</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.51</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.54</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Realized and unrealized gain (loss) on investments —
net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.35</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.13</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.51</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.07</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.10</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total from investment operations</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.12</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.63</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.02</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.58</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.64</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Less dividends and distributions:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Investment income — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.47</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.50</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.51</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.51</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.54</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Realized gain on investments — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.20</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">†</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
In excess of realized gain on investments — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.10</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total dividends and distributions</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.77</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.50</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.51</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.51</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.54</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net asset value, end of year</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.35</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.00</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.87</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.36</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.29</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Total Investment Return:*</FONT></B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Based on net asset value per share</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.02</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.99</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.17</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.76</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.60</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Ratios to Average Net Assets:</FONT></B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Expenses, net of reimbursement</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.03</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.90</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.80</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.75</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.71</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Expenses</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.03</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.90</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.88</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.90</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.93</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Investment income — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.39</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.59</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.89</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.92</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.43</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Supplemental Data:</FONT></B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net assets, end of year (in thousands)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9,094</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,753</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,542</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8,043</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9,256</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Portfolio turnover</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">47.52</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">125.23</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">94.59</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">90.22</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">52.33</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
</TABLE>
<P align="right">[Additional columns below]
<P>[Continued from above table, first column(s) repeated]
<TABLE width="80%" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="38%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="19"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><FONT size="2"><B>Class B</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="19"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><FONT size="2"><B>For the Year Ended July 31,</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Increase (Decrease) in</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><HR size="1"></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Net Asset Value:</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1996</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1995</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Per Share Operating Performance:</FONT>
</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net asset value, beginning of year</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.01</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.88</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.36</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.29</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.19</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Investment income — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.42</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.45</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.46</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.46</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.49</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Realized and unrealized gain (loss) on investments —
net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.36</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.13</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.52</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.07</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.10</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total from investment operations</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.06</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.58</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.98</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.53</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.59</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Less dividends and distributions:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Investment income — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.42</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.45</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.46</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.46</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.49</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Realized gain on investments — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.20</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">†</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
In excess of realized gain on investments — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.10</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total dividends and distributions</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.72</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.45</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.46</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.46</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.49</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net asset value, end of year</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.35</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.01</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.88</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.36</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.29</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Total Investment Return:*</FONT></B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Based on net asset value per share</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.41</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.45</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.71</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.21</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.06</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Ratios to Average Net Assets:</FONT></B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Expenses, net of reimbursement</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.54</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.41</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.31</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.26</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.22</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Expenses</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.54</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.41</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.39</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.41</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.44</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Investment income — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.88</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.08</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.39</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.41</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.91</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Supplemental Data:</FONT></B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net assets, end of year (in thousands)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">32,886</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">37,204</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">41,137</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">47,236</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">49,978</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Portfolio turnover</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">47.52</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">125.23</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">94.59</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">90.22</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">52.33</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="1%"></TD>
<TD width="99%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2">*</FONT></TD>
<TD align="left">
<FONT size="2">Total investment returns exclude the effects of
sales charges.</FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<FONT size="2">† Amount is less than $.01 per share.
</FONT>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
<FONT size="2" color="#211E1C">FINANCIAL HIGHLIGHTS (concluded)
</FONT>
</DIV>
<DIV align="left">
<HR size="1" width="100%" align="left">
</DIV>
<P align="left">
<DIV align="left"><FONT size="1">
</FONT></DIV>
<TABLE width="90%" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="39%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="19"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><FONT size="2"><B>Class C</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="15"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>For the</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="15"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Period</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><FONT size="2"><B>For the Year Ended</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>October</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><FONT size="2"><B>July 31,</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>21, 1994†</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Increase (Decrease) in</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>to July 31,</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Net Asset Value:</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1996</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1995</B></FONT></TD>
</TR>
<TR>
<TD colspan="21"></TD>
</TR>
<TR>
<TD colspan="21"></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="21"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Per Share Operating Performance:</FONT>
</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="17" align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net asset value, beginning of period</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.00</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.87</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.36</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.28</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.80</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Investment income — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.41</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.44</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.45</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.45</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.37</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Realized and unrealized gain (loss) on investments —
net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.35</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.13</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.51</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.08</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.48</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="17" align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total from investment operations</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.06</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.57</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.96</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.53</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.85</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Less dividends and distributions:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Investment income — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.41</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.44</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.45</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.45</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.37</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Realized gain on investments — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.20</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">††</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
In excess of realized gain on investments — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.10</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total dividends and distributions</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.71</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.44</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.45</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.45</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.37</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net asset value, end of period</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.35</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.00</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.87</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.36</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.28</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Total Investment Return:**</FONT></B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Based on net asset value per share</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.41</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.35</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.50</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.20</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.87</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%#</FONT></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Ratios to Average Net Assets:</FONT></B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Expenses, net of reimbursement</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.64</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.51</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.41</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.37</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.37</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%*</FONT></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Expenses</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.64</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.51</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.49</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.51</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.57</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%*</FONT></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Investment income — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.78</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.98</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.28</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.29</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.67</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%*</FONT></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Supplemental Data:</FONT></B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net assets, end of period (in thousands)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,404</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,527</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,052</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,772</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">713</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="17" align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Portfolio turnover</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">47.52</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">125.23</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">94.59</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">90.22</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">52.33</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD colspan="21" align="left"><HR size="1"></TD>
</TR>
</TABLE>
<P align="right">[Additional columns below]
<P>[Continued from above table, first column(s) repeated]
<TABLE width="90%" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="39%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="19"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><FONT size="2"><B>Class D</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="19"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="15"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>For the</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="15"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Period</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><FONT size="2"><B>For the Year Ended</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>October</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><FONT size="2"><B>July 31,</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>21, 1994†</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Increase (Decrease) in</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>to July 31,</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Net Asset Value:</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1999</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1998</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1997</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1996</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>1995</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Per Share Operating Performance:</FONT>
</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net asset value, beginning of period</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.01</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.88</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.37</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.29</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.80</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Investment income — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.46</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.49</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.50</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.50</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.41</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Realized and unrealized gain (loss) on investments —
net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.35</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.13</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.51</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.08</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.49</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total from investment operations</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.11</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.62</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.01</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.58</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.90</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Less dividends and distributions:</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Investment income — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.46</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.49</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.50</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.50</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.41</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Realized gain on investments — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.20</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">††</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
In excess of realized gain on investments — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.10</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Total dividends and distributions</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.76</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.49</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.50</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.50</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(.41</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net asset value, end of period</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.36</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.01</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.88</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.37</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.29</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Total Investment Return:**</FONT></B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Based on net asset value per share</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.92</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.88</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.05</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.75</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.39</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%#</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Ratios to Average Net Assets:</FONT></B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Expenses, net of reimbursement</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.14</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.00</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.90</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.85</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.85</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%*</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Expenses</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.14</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.00</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.98</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.00</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.05</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%*</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Investment income — net</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.28</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.49</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.79</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.81</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.28</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%*</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B><FONT color="#211E1C">Supplemental Data:</FONT></B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net assets, end of period (in thousands)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,057</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,534</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,132</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,880</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,377</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Portfolio turnover</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">47.52</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">125.23</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">94.59</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">90.22</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">52.33</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="1%"></TD>
<TD width="99%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2"> *</FONT></TD>
<TD align="left">
<FONT size="2">Annualized.</FONT></TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD><FONT size="2">**</FONT></TD>
<TD align="left">
<FONT size="2">Total investment returns exclude the effects of
sales charges.</FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="1%"></TD>
<TD width="99%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2"> †</FONT></TD>
<TD align="left">
<FONT size="2">Commencement of operations.</FONT></TD>
</TR>
</TABLE>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="1%"></TD>
<TD width="99%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2"> #</FONT></TD>
<TD align="left">
<FONT size="2">Aggregate total investment return.</FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<FONT size="2">†† Amount is less than $.01 per
share.</FONT>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="right">
<B><FONT size="2" color="#211E1C">29</FONT></B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="center">
(This page intentionally left blank)
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="center">
(This page intentionally left blank)
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
<FONT color="#211E1C"> [ML POTENTIAL INVESTORS CHART]</FONT>
</DIV>
<P align="center">
<B><FONT size="2">POTENTIAL</FONT></B>
<DIV align="center">
<B><FONT size="2">INVESTORS</FONT></B>
</DIV>
<DIV align="center">
</DIV>
<DIV align="center">
<I><FONT size="2">Open an account (two options).</FONT></I>
</DIV>
<DIV align="center">
</DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="49%"> </TD>
<TD width="3%"> </TD>
<TD width="48%"> </TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="center" valign="top"><FONT size="2">
<B>1<BR>
MERRILL LYNCH<BR>
FINANCIAL CONSULTANT<BR>
OR SECURITIES DEALER<BR>
<BR>
</B><I>Advises shareholders on their Fund investments.</I></FONT></TD>
<TD></TD>
<TD align="center" valign="bottom"><FONT size="2">
<B>2<BR>
TRANSFER AGENT<BR>
<BR>
Financial Data Services, Inc.<BR>
</B>P.O. Box 45289<BR>
Jacksonville, Florida 32232-5289<BR>
<BR>
<I>Performs recordkeeping and reporting services.</I></FONT></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="center">
</DIV>
<P align="center">
<B><FONT size="2">DISTRIBUTOR</FONT></B>
<DIV align="center">
</DIV>
<DIV align="center">
<B><FONT size="2">Merrill Lynch Funds Distributor,</FONT></B>
</DIV>
<DIV align="center">
<B><FONT size="2">a division of Princeton Funds Distributor, Inc.
</FONT></B>
</DIV>
<DIV align="center">
<FONT size="2">P.O. Box 9081</FONT>
</DIV>
<DIV align="center">
<FONT size="2">Princeton, New Jersey 08543-9081</FONT>
</DIV>
<DIV align="center">
</DIV>
<DIV align="center">
<I><FONT size="2">Arranges for the sale of Fund shares.</FONT>
</I>
</DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="32%"> </TD>
<TD width="3%"> </TD>
<TD width="31%"> </TD>
<TD width="3%"> </TD>
<TD width="31%"> </TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="center" valign="top"><FONT size="2">
<B>COUNSEL<BR>
<BR>
Brown & Wood LLP<BR>
</B>One World Trade Center<BR>
New York, New York 10048-0557<BR>
<BR>
<I>Provides legal advice to the Fund.</I></FONT></TD>
<TD></TD>
<TD align="center" valign="bottom"><FONT size="2">
<B>THE FUND<BR>
<BR>
</B><I>The Board of Trustees<BR>
oversees the Fund.</I></FONT></TD>
<TD></TD>
<TD align="center" valign="bottom"><FONT size="2">
<B>CUSTODIAN<BR>
<BR>
State Street Bank and Trust Company<BR>
</B>P.O. Box 351<BR>
Boston, Massachusetts 02101<BR>
<BR>
<I>Holds the Fund’s assets for safekeeping.</I></FONT></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="center">
</DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="46%"> </TD>
<TD width="3%"> </TD>
<TD width="45%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="center" valign="top"><FONT size="2">
<B>INDEPENDENT AUDITORS<BR>
<BR>
Deloitte & Touche LLP<BR>
</B>117 Campus Drive<BR>
Princeton, New Jersey 08540-6400<BR>
<BR>
<I>Audits the financial<BR>
statements of the Fund on behalf of<BR>
the shareholders.</I></FONT></TD>
<TD></TD>
<TD align="center" valign="top"><FONT size="2">
<B>MANAGER<BR>
<BR>
Fund Asset Management, L.P.<BR>
<BR>
</B>ADMINISTRATIVE OFFICES<BR>
800 Scudders Mill Road<BR>
Plainsboro, New Jersey 08536<BR>
<BR>
MAILING ADDRESS<BR>
P.O. Box 9011<BR>
Princeton, New Jersey 08543-9011<BR>
<BR>
TELEPHONE NUMBER<BR>
1-800-MER-FUND<BR>
<BR>
<I>Manages the Fund’s day-to-day activities.</I></FONT></TD>
<TD></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<FONT size="2">MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND
</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
</DIV>
<DIV align="left">
</DIV>
<DIV align="right">
<FONT size="6">(LOGO)</FONT>
</DIV>
<DIV align="left">
<FONT color="#211E1C"> For More Information [FOR MORE INFORMATION
ICON]</FONT>
</DIV>
<DIV align="left">
<B><FONT size="2" color="#211E1C">Shareholder Reports</FONT></B>
</DIV>
<P align="left">
<FONT size="2">Additional information about the Fund’s
investments is available in the Fund’s annual and
semi-annual reports to shareholders. In the Fund’s annual
report you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund’s
performance during its last fiscal year. You may obtain these
reports at no cost by calling <BR>
1-800-MER-FUND.</FONT>
<P align="left">
<FONT size="2">The Fund will send you one copy of each
shareholder report and certain other mailings, regardless of the
number of Fund accounts you have. To receive separate shareholder
reports for each account, call your Merrill Lynch Financial
Consultant or write to the Transfer Agent at its mailing address.
Include your name, address, tax identification number and
Merrill Lynch brokerage or mutual fund account number. If you
have any questions, please call your Merrill Lynch Financial
Consultant or the Transfer Agent at 1-800-MER-FUND.</FONT>
<P align="left">
<B><FONT size="2" color="#211E1C">Statement of Additional
Information</FONT></B>
<P align="left">
<FONT size="2">The Fund’s Statement of Additional
Information contains further information about the Fund and is
incorporated by reference (legally considered to be part of this
prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville,
Florida 32232-5289 or by calling 1-800-MER-FUND.</FONT>
<P align="left">
<FONT size="2">Contact your Merrill Lynch Financial Consultant or
the Fund at the telephone number or address indicated above if
you have any questions.</FONT>
<P align="left">
<FONT size="2">Information about the Fund (including the
Statement of Additional Information) can be reviewed and copied
at the SEC’s Public Reference Room in Washington, D.C. Call
1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the
SEC’s Internet site at http://www.sec.gov and copies may be
obtained upon payment of a duplicating fee by writing the Public
Reference Section of the SEC, Washington, D.C. 20549-6009.</FONT>
<P align="left">
<B><FONT size="2">You should rely only on the information
contained in this Prospectus. No one is authorized to provide you
with information that is different from information contained in
this Prospectus.</FONT></B>
<DIV align="left">
</DIV>
<DIV align="left">
<FONT size="2">Investment Company Act file #811-4375</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<FONT size="2">Code #16400-10-99</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<FONT size="2">© Fund Asset Management, L.P.</FONT>
</DIV>
<DIV align="left">
<FONT color="#211E1C">Merrill Lynch North Carolina</FONT>
</DIV>
<DIV align="left">
<FONT color="#211E1C">Municipal Bond Fund</FONT>
</DIV>
<DIV align="left">
<FONT color="#211E1C">of Merrill Lynch Multi-State</FONT>
</DIV>
<DIV align="left">
<FONT color="#211E1C">Municipal Series Trust</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="right">
<FONT color="#211E1C">November 1, 1999</FONT>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV> </DIV>
<DIV align="right">
LOGO
</DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center"><B><FONT size="5">Merrill Lynch North Carolina Municipal Bond
Fund</FONT></B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<B>of Merrill Lynch Multi-State Municipal Series Trust</B>
</DIV>
<P align="center">P.O. Box 9011, Princeton, New Jersey 08543-9011 • Phone No.
(609) 282-2800
<P align="center">
<HR size="1" width="30%" align="center">
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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
investment company organized as a Massachusetts business trust.
The investment objective of the Fund is to provide shareholders
with income exempt from Federal and North Carolina income taxes.
The Fund invests primarily in a 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. For more information on the
Fund’s investment objective and policies, see
“Investment Objective and Policies.”
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Pursuant to the Merrill Lynch Select Pricing<SUP>SM</SUP> 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<SUP>SM</SUP> 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 “Purchase of
Shares.”
<P align="center">
<HR size="1" width="30%" align="center">
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
This 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 1, 1999 (the
“Prospectus”), which has been filed with the Securities
and Exchange Commission (the “Commission”) and can be
obtained, without charge, by calling (800) MER-FUND or by
writing the Fund at the above address. The Prospectus is
incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is
incorporated by reference into the Prospectus. The Fund’s
audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1999 annual report
to shareholders. You may request a copy of the annual report at
no charge by calling (800) 456-4587 ext. 789 between 8:00
a.m. and 8:00 p.m. on any business day.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center">
<HR size="1" width="30%" align="center">
<P align="center"><B><FONT size="4">Fund Asset Management — Manager
</FONT></B>
<DIV align="center">
<B><FONT size="4">Merrill Lynch Funds Distributor —
Distributor</FONT></B>
</DIV>
<P align="center">
<HR size="1" width="30%" align="center">
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center">
The date of this Statement of Additional Information is
November 1, 1999
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="center"><B><FONT size="2">TABLE OF CONTENTS</FONT></B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="60%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="87%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Page</B></FONT></TD>
</TR>
<TR>
<TD colspan="2"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Investment Objective and Policies</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Risk Factors and Special Considerations Relating to Municipal
Bonds</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Description of Municipal Bonds</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Financial Futures Transactions and Options</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">7</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Description of Temporary Investments</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Investment Restrictions</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Portfolio Turnover</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">14</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Management of the Trust</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Trustees and Officers</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">15</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Compensation of Trustees</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">16</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Management and Advisory Arrangements</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">17</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Code of Ethics</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">18</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Purchase of Shares</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">19</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Initial Sales Charge Alternatives — Class A and
Class D Shares</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">19</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Reduced Initial Sales Charges</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">21</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Deferred Sales Charge Alternatives — Class B and
Class C Shares</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">23</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Distribution Plans</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">26</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Limitations on the Payment of Deferred Sales Charges</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">27</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Redemption of Shares</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">28</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Redemption</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">29</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Repurchase</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">29</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Reinstatement Privilege — Class A and Class D
Shares</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">30</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Pricing of Shares</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">30</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Determination of Net Asset Value</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">30</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Computation of Offering Price Per Share</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">31</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Portfolio Transactions</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">31</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Transactions in Portfolio Securities</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">31</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Shareholder Services</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">32</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Investment Accounts</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">33</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Exchange Privilege</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">33</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Fee-Based Programs</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">35</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Automatic Investment Plans</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">35</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Automatic Dividend Reinvestment Plan</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">36</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Systematic Withdrawal Plan</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">36</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Dividends and Taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">37</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Dividends</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">37</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Taxes</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">37</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Tax Treatment of Options and Futures Transactions</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">40</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Performance Data</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">41</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
General Information</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">43</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Description of Shares</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">43</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Independent Auditors</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Custodian</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Transfer Agent</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Legal Counsel</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Reports to Shareholders</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Shareholders Inquiries</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Additional Information</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">45</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Financial Statements</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">46</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Appendix I — Economic and Financial Conditions in
North Carolina</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">I-1</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD colspan="2" align="left" valign="top"><FONT size="2">
Appendix II — Ratings of Municipal Bonds</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">II-1</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="center"><B>INVESTMENT OBJECTIVE AND POLICIES</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The investment objective of the Fund is to provide shareholders
with income exempt from Federal and North Carolina income taxes.
The Fund seeks to achieve its objective by investing primarily in
a 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. Obligations exempt from Federal income
taxes are referred to herein as “Municipal Bonds,” and
obligations exempt from 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
investment objective as set forth in the first sentence of this
paragraph is a fundamental policy and may not be changed without
a vote of a majority of the outstanding shares of the Fund. See
“How the Fund Invests” in the Prospectus for a general
discussion of the Fund’s goals, main investment strategies
and main risks. The Fund is classified as a non-diversified Fund
under the Investment Company Act of 1940, as amended (the
“Investment Company Act”).
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Under normal circumstances, except when acceptable securities are
unavailable as determined by Fund Asset Management, L.P. (the
“Manager” or “FAM”), the Fund’s manager,
and for temporary defensive purposes the Fund will invest at
least 65% of its total assets in North Carolina Municipal Bonds.
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 will
be in excess of ten years. 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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The Fund may also invest in variable rate demand obligations
(“VRDOs”) and VRDOs in the form of participation
interests (“Participating VRDOs”) in variable rate
tax-exempt obligations held by a financial institution. See
“Description of Temporary Investments.” 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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
At least 80% of the Fund’s total assets will be invested in
Municipal Bonds that 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 (“S&P")(currently
AAA, AA, A and BBB) or Fitch IBCA, Inc.
(“Fitch")(currently AAA, AA, A and BBB). If unrated,
such securities will possess creditworthiness comparable, in the
opinion of the Manager, to other obligations in which the Fund
may invest. Securities rated in the lowest investment grade
rating category may be considered to have speculative
characteristics.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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
S&P or Fitch or that, 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. See
“Description of Municipal Bonds — ‘High
Yield’ or ‘Junk’ Bonds.” The Fund does not
intend to purchase debt securities that are in default or that
the Manager believes will be in default.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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 that
provides the credit enhancement.
<P align="center">2
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The Fund ordinarily does not intend to realize investment income
not exempt from Federal income tax and North Carolina State
income taxes. However, to the extent that suitable Municipal
Bonds are not available for investment by the Fund, the Fund may
purchase Municipal Bonds issued by other states, their agencies
and instrumentalities, the interest income on which is exempt, in
the opinion of bond counsel to the issuer, from Federal income
tax, but not North Carolina State income taxation. The Fund also
may invest in securities not issued by or on behalf of a state or
territory or by an agency or instrumentality thereof, if the
Fund nevertheless believes such securities to be exempt from
Federal income taxation (“Non-Municipal Tax-Exempt
Securities”). Non-Municipal Tax-Exempt Securities could
include trust certificates or other instruments evidencing
interest in one or more long-term municipal securities.
Non-Municipal Tax-Exempt Securities also may include securities
issued by other investment companies that invest in municipal
bonds, to the extent such investments are permitted by applicable
law. Non-Municipal Tax-Exempt securities will be considered
“Municipal Bonds” for purposes of the Fund’s
investment objective and policies. 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 that
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 total assets invested in “private activity
bonds” will vary during the year. 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 that may be enacted in the future may
affect the availability of Municipal Bonds for investment by the
Fund. See “Dividends and Taxes — Taxes.”
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left"><B>Risk Factors and Special Considerations Relating to Municipal
Bonds</B>
<P align="left">
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 product.
Certain instruments in which the Fund may invest may be
characterized as derivative instruments. See “Investment
Objective and Policies — Description of Municipal
Bonds” and “ — Financial Futures Transactions
and Options.”
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The Fund ordinarily will invest at least 65% of its assets in
North Carolina Municipal Bonds, and therefore it is more
susceptible to factors adversely affecting issuers of North
Carolina Municipal Bonds than is a municipal bond fund that is
not concentrated in issuers of North Carolina Municipal Bonds to
this degree.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The Manager does not believe that the current economic conditions
in North Carolina will have a significant adverse effect on the
Fund’s ability to invest in high quality North Carolina
Municipal Bonds. Because the Fund’s portfolio will be
comprised primarily of investment grade securities, the Fund is
expected to be less subject to market and credit risks than a
fund that invests primarily in lower quality North Carolina
Municipal Bonds. For a discussion of economic and other
conditions in the State of North Carolina, see Appendix
I — “Economic and Financial Conditions in North
Carolina.”
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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 prices of the Municipal Bonds or the
North Carolina Municipal Bonds in which the Fund invests.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left"><B>Description of Municipal Bonds</B>
<P align="left">
Set forth below is a detailed description of the Municipal Bonds
and Temporary Investments in which the Fund may invest.
Information with respect to ratings assigned to tax-exempt
obligations that the Fund may purchase is set forth in
Appendix II to this Statement of Additional Information.
<P align="left">
Municipal Bonds include debt obligations issued to obtain funds
for various public purposes, including the construction of a wide
range of public facilities, refunding of outstanding obligations
and obtaining funds for
<P align="center">3
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
general operating expenses and loans to other public institutions
and facilities. In addition, certain types of bonds are issued
by or on behalf of public authorities to finance various
privately owned or operated facilities, including certain
facilities for the local furnishing of electric energy or gas,
sewage facilities, solid waste disposal facilities and other
specialized facilities. Such obligations are included within the
term Municipal Bonds if the interest paid thereon is excluded
from gross income for Federal income tax purposes and, in the
case of North Carolina Municipal Bonds, exempt from North
Carolina income taxes. Other types of industrial development
bonds or private activity bonds, the proceeds of which are used
for the construction, equipment or improvement of privately
operated industrial or commercial facilities, may constitute
Municipal Bonds, although the current Federal tax laws place
substantial limitations on the size of such issues. The interest
on Municipal Bonds may bear a fixed rate or be payable at a
variable or floating rate. The two principal classifications of
Municipal Bonds are “general obligation” and
“revenue” bonds, which latter category includes
industrial development bonds (“IDBs”) and, for bonds
issued after August 15, 1986, private activity bonds.
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<I>General Obligation Bonds. </I>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 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.
<P align="left">
<I>Revenue Bonds. </I>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.
<P align="left">
<I>IDBs and Private Activity Bonds. </I>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 generally
are not secured by a pledge of the taxing power of the issuer of
such bonds. Therefore, an investor should be aware that repayment
of such bonds generally depends on the revenues of a private
entity and be aware of the risks that such an investment may
entail. Continued ability of an entity to generate sufficient
revenues for the payment of principal and interest on such bonds
will be affected by many factors including the size of the
entity, capital structure, demand for its products or services,
competition, general economic conditions, government regulation
and the entity’s dependence on revenues for the operation of
the particular facility being financed.
<P align="left">
<I>“Moral Obligation” Bonds.</I> The Fund also may
invest in “moral obligation” bonds, which are normally
issued by special purpose public authorities. If an issuer of
moral obligation bonds is unable to meet its obligations, the
repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.
<P align="left">
<I>Municipal Notes. </I>Municipal notes are shorter term
municipal debt obligations. They may provide interim financing in
anticipation of tax collection, bond sales or revenue receipts.
If there is a shortfall in the anticipated proceeds, the note may
not be fully repaid and the Fund may lose money.
<P align="left">
<I>Municipal Commercial Paper. </I>Municipal commercial paper is
generally unsecured and issued to meet short-term financing
needs. The lack of security presents some risk of loss to the
Fund.
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<P align="left">
<I>Municipal Lease Obligations. </I>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, or BBB or better by S&P 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 entity obligated to make payment under
the lease obligation and make certain specified determinations
based on such factors as the existence of a rating or credit
enhancement such as insurance, the frequency of trades or quotes
for the obligation and the willingness of dealers to make a
market in the obligation.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<I>Indexed and Inverse Floating Obligations. </I>The Fund may
invest in North Carolina Municipal Bonds and Municipal Bonds (and
Non-Municipal Tax-Exempt Securities) yielding a return which is
based on a particular index of value or interest rates. For
example, the Fund may invest in North Carolina Municipal Bonds
and Municipal Bonds that pay interest based on an index of
Municipal Bond interest rates. The principal amount payable upon
maturity of certain North Carolina Municipal Bonds and Municipal
Bonds also may be based on the value of the index. To the extent
the Fund invests in these types of Municipal Bonds, the
Fund’s return on such North Carolina Municipal Bonds and
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 vary
inversely with a short-term floating rate (which may be reset
periodically by a dutch auction, a remarketing agent, or by
reference to a short-term tax-exempt interest rate index). The
Fund may purchase synthetically-created inverse floating rate
bonds evidenced by custodial or trust receipts. Generally, income
on inverse floating rate bonds will decrease when short-term
interest rates increase, and will increase when short-term
interest rates decrease. 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, however,
believes 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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<I>When Issued Securities, Delayed Delivery Transactions and
Forward Commitments.</I> The Fund may purchase or sell securities
that it is entitled to receive on a when issued basis. The Fund
may also purchase or
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<DIV align="left">
sell securities on a delayed delivery basis. The Fund may also
purchase or sell securities through a forward commitment. These
transactions involve the purchase or sale of securities by the
Fund at an established price with payment and delivery taking
place in the future. The Fund enters into these transactions to
obtain what is considered an advantageous price to the Fund at
the time of entering into the transaction. The Fund has not
established any limit on the percentage of its assets that may be
committed in connection with these transactions. When the Fund
purchases securities in these transactions, the Fund segregates
liquid securities in an amount equal to the amount of its
purchase commitments.
</DIV>
<P align="left">
There can be no assurance that a security purchased on a when
issued basis will be issued or that a security purchased or sold
through a forward commitment will be delivered. The value of
securities in these transactions on the delivery date may be more
or less than the Fund’s purchase price. The Fund may bear
the risk of a decline in the value of the security in these
transactions and may not benefit from an appreciation in the
value of the security during the commitment period.
<P align="left">
<I>Call and Redemption Risk. </I>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 maturity of the related
Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is
identical to holding a Municipal Bond as a non-callable security.
Certain investments in such obligations may be illiquid. The
Fund may not invest in such illiquid obligations if such
investments, together with other illiquid investments, would
exceed 15% of the Fund’s total assets.
<P align="left">
<I>“High Yield” or “Junk” Bonds.</I> 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 S&P or
Fitch or which, in the Manager’s judgment, possess similar
credit characteristics. See Appendix II —
“Ratings of Municipal Bonds” for additional information
regarding ratings of debt securities. Junk bonds are debt
securities that are rated below investment grade by the major
rating agencies or are unrated securities that Fund management
believes are of comparable quality. Although junk bonds generally
pay higher rates of interest than investment grade bonds, they
are high risk investments that may cause income and principal
losses for the Fund. The major risks in junk bond investments
include the following:
<P align="left">
Junk bonds may be issued by less creditworthy companies. These
securities are vulnerable to adverse changes in the issuer’s
industry and to general economic conditions. Issuers of junk
bonds may be unable to meet their interest or principal payment
obligations because of an economic downturn, specific issuer
developments or the unavailability of additional financing.
<P align="left">
The issuers of junk bonds may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade
bonds. If the issuer experiences financial stress, it may be
unable to meet its debt obligations. The issuer’s ability to
pay its debt obligations also may be lessened by specific issuer
developments, or the unavailability of additional financing.
<P align="left">
Junk bonds are frequently ranked junior to claims by other
creditors. If the issuer cannot meet its obligations, the senior
obligations are generally paid off before the junior obligations.
<P align="left">
Junk bonds frequently have redemption features that permit an
issuer to repurchase the security from the Fund before it
matures. If an issuer redeems the junk bonds, the Fund may have
to invest the proceeds in bonds with lower yields and may lose
income.
<P align="left">
Prices of junk bonds are subject to extreme price fluctuations.
Negative economic developments may have a greater impact on the
prices of junk bonds than on other higher rated fixed income
securities.
<P align="left">
Junk bonds may be less liquid than higher rated fixed income
securities even under normal economic conditions. There are fewer
dealers in the junk bond market, and there may be significant
differences in the prices quoted for junk bonds by the dealers.
Because they are less liquid, judgment may play a greater role in
valuing certain of the Fund’s portfolio securities than in
the case of securities trading in a more liquid market.
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<P align="left">
The Fund may incur expenses to the extent necessary to seek
recovery upon default or to negotiate new terms with a defaulting
issuer.
<P align="left">
<I>Yields. </I>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 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 securities 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.
<P align="left"><B>Financial Futures Transactions and Options</B>
<P align="left">
The Fund may hedge all or a portion of its portfolio investments
against fluctuations in interest rates through the use of options
and certain financial futures contracts and options thereon.
While the Fund’s use of hedging strategies is intended to
reduce the volatility of the net asset value of the Fund’s
shares, the net asset value of the Fund’s shares will
fluctuate. There can be no assurance that the Fund’s hedging
transactions will be effective. Furthermore, the Fund may only
engage in hedging activities from time to time and may not
necessarily be engaging in hedging activities when movements in
interest rates occur. The Fund has no obligation to enter into
hedging transactions and may choose not to do so.
<P align="left">
The Fund is authorized to purchase and sell certain exchange
traded financial futures contracts (“financial futures
contracts”) solely for the purpose of hedging its
investments in Municipal Bonds against declines in value and to
hedge against increases in the cost of securities it intends to
purchase. However, any transactions involving financial futures
or options (including puts and calls associated therewith) will
be in accordance with the Fund’s investment policies and
limitations. A financial futures contract obligates the seller of
a contract to deliver and the purchaser of a contract to take
delivery of the type of financial instrument covered by the
contract, or in the case of index-based futures contracts to make
and accept a cash settlement, at a specific future time for a
specified price. 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. A
sale of financial futures contracts may provide a hedge against a
decline in the value of portfolio securities because such
depreciation may be offset, in whole or in part, by an increase
in the value of the position in the financial futures contracts.
A purchase of financial futures contracts may provide a hedge
against an increase in the cost of securities intended to be
purchased because such appreciation may be offset, in whole or in
part, by an increase in the value of the position in the futures
contracts. Certain Federal income tax requirements may limit the
Fund’s ability to engage in hedging transactions.
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.
See “Dividends and Taxes — Taxes” and
“— Tax Treatment of Options and Futures
Transactions.”
<P align="left">
<I>Futures Contracts. </I>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>i.e.,</I> 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”)).
<P align="left">
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
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<DIV align="left">
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 the market.” At any time prior to the settlement date of
the futures contract, the position may be closed out by taking an
opposite position that 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.
</DIV>
<P align="left">
The Fund deals 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 obligation bonds. Each
bond included in the Municipal Bond Index must be rated A or
higher by Moody’s or S&P 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.
<P align="left">
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.
<P align="left">
The Fund may purchase and sell financial futures contracts on
U.S. Government securities as a hedge against adverse changes in
interest rates as described below. With respect to U.S.
Government securities, currently there are financial futures
contracts based on long-term U.S. Treasury bonds, Treasury notes,
Government National Mortgage Association (“GNMA”)
Certificates and three-month U.S. Treasury bills. The Fund may
purchase and write call and put options on futures contracts on
U.S. Government securities and purchase and sell Municipal Bond
Index futures contracts in connection with its hedging
strategies.
<P align="left">
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 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.
<P align="left">
<I>Futures Strategies. </I>The Fund may sell a financial futures
contract (<I>i.e.,</I> assume a short position) in anticipation
of a decline in the value of its investments in Municipal Bonds
resulting from an increase in interest rates or otherwise. The
risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the
proceeds in securities with shorter maturities or by holding
assets in cash. This strategy, however, entails increased
transaction costs in the form of dealer spreads and typically
would reduce the average yield of the Fund’s portfolio
securities as a result of the shortening of maturities. The sale
of futures contracts provides an alternative means of hedging
against declines in the value of its investments in Municipal
Bonds. As such values decline, the value of the Fund’s
positions in the futures contracts will tend to increase, thus
offsetting all or a portion of the depreciation in the market
value of the Fund’s Municipal Bond investments that 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.
<P align="left">
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 a decrease in
interest rates or otherwise, that may occur before such purchases
can be effected. Subject to the degree correlation between
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<DIV align="left">
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.
</DIV>
<P align="left">
<I>Call Options on Futures Contracts. </I>The Fund may also
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 upon which it is based or 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.
<P align="left">
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.
<P align="left">
<I>Put Options on Futures Contracts. </I>The purchase of a put
option on a futures contract is analogous to the purchase of a
protective put option on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the
Fund’s portfolio against the risk of rising interest rates.
<P align="left">
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.
<P align="left">
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
<P align="left">
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
“Investment Company 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 Fund and commodities brokers with
respect to initial and variation margin. Section 18(f) of
the Investment Company Act prohibits an open-end investment
company such as the Trust from issuing a “senior
security” other than a borrowing from a bank. The staff of
the Commission has in the past indicated that a futures contract
may be a “senior security” under the Investment Company
Act.
<P align="left">
<I>Restrictions on Use of Futures Transactions. </I>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.
<P align="left">
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 (<I>e.g.,</I> 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.
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<P align="left">
<I>Risk Factors in Futures Transactions and Options. </I>
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.
<P align="left">
The particular municipal bonds comprising the index underlying
the Municipal Bond Index financial futures contract may vary from
the bonds held by the Fund. As a result, the Fund’s ability
to hedge effectively all or a portion of the value of its
Municipal Bonds through the use of such financial futures
contracts will depend in part on the degree to which price
movements in the index underlying the financial futures contract
correlate with the price movements of the Municipal Bonds held by
the Fund. The correlation may be affected by disparities in the
average maturity, ratings, geographical mix or structure of the
Fund’s investments as compared to those comprising the
Municipal Bond Index and general economic or political factors.
In addition, the correlation between movements in the value of
the Municipal Bond Index may be subject to change over time as
additions to and deletions from the Municipal Bond Index alter
its structure. The correlation between futures contracts on U.S.
Government securities and the Municipal Bonds held by the Fund
may be adversely affected by similar factors and the risk of
imperfect correlation between movements in the prices of such
futures contracts and the prices of Municipal Bonds held by the
Fund may be greater. Municipal Bond Index futures contracts were
approved for trading in 1986. Trading in such futures contracts
may tend to be less liquid than trading 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.
<P align="left">
The Fund expects to liquidate a majority of the futures contracts
it enters into through offsetting transactions on the applicable
contract market. There can be no assurance, however, that a
liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to
close out a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily
cash payments of variation margin. In such situations, if the
Fund has insufficient cash, it may be required to sell portfolio
securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. The inability to close
out futures positions also could have an adverse impact on the
Fund’s ability to hedge effectively its investments in
Municipal Bonds. The 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 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.
<P align="left">
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.
<P align="left">
Because of low initial margin deposits made upon 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. 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.
Because the Fund will engage in the purchase and sale of futures
contracts solely for hedging purposes,
<P align="center">10
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<DIV align="left">
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.
</DIV>
<P align="left">
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.
<P align="left"><B>Description of Temporary Investments</B>
<P align="left">
The Fund may invest in short-term tax-free and taxable securities
subject to the limitations set forth above and in the Prospectus
under “How the Fund Invests.” 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, revenue anticipation notes and grant
anticipation notes. Anticipation notes are sold as interim
financing in anticipation of tax collection, bond sales,
government grants or revenue receipts. Municipal commercial paper
refers to short-term unsecured promissory notes generally issued
to finance short-term credit needs. The taxable money market
securities in which the Fund may invest as Temporary Investments
consist of U.S. Government securities, U.S. Government agency
securities, domestic bank or savings institution certificates of
deposit and bankers’ acceptances, short-term corporate debt
securities such as commercial paper and repurchase agreements.
These Temporary Investments must have a stated maturity not in
excess of one year from the date of purchase. 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 smaller
institutions if such certificates are fully insured by the FDIC.
<P align="left">
<I>VRDOs and Participating VRDOs. </I>VRDOs are tax-exempt
obligations which contain a floating or variable interest rate
adjustment formula and a 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 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 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.
<P align="left">
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, the 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.
<P align="left">
VRDOs that contain a 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
<P align="center">11
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<P><HR noshade><P>
<DIV align="left">
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 determinations.
</DIV>
<P align="left">
The Temporary Investments, VRDOs and Participating VRDOs in which
the Fund may invest will be in the following rating categories
at the time of purchase: MIG-1/ VMIG-1 through MIG-3/ VMIG-3 for
notes and VRDOs and Prime-1 through Prime-3 for commercial paper
(as determined by Moody’s), SP-1 through SP-2 for notes and
A-1 through A-3 for VRDOs and commercial paper (as determined by
S&P), or F-1 through F-3 for notes, VRDOs and commercial
paper (as determined by Fitch). Temporary Investments, if not
rated, must be of comparable quality in the opinion of the
Manager. 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.
<P align="left">
<I>Repurchase Agreements. </I>The Fund may invest in securities
pursuant to repurchase agreements. Repurchase agreements may be
entered into only with a member bank of the Federal Reserve
System or primary dealer or an affiliate thereof, in U.S.
Government securities. Under such agreements, the bank or primary
dealer or an affiliate thereof agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon
time and price, thereby determining the yield during the term of
the agreement. This results in a fixed rate of return insulated
from market fluctuations during such period. In repurchase
agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligations. Such
agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized loans
by the purchaser to the seller secured by the securities
transferred to the purchaser. In 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 shall be dependent upon intervening fluctuations of the
market value of such security and the accrued interest on the
security. In such event, the Fund would have rights against the
seller for breach of contract with respect to any losses arising
from market fluctuations following the failure of the seller to
perform. The Fund may not invest in repurchase agreements
maturing in more than seven days if such investments, together
with all other illiquid investments, would exceed 15% of the
Fund’s net assets.
<P align="left">
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. The
treatment of purchase and sales contracts is less certain.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<I>Suitability. </I>The economic benefit of an investment in the
Fund depends upon many factors beyond the control of the Fund,
the Manager and its affiliates. Because of its emphasis on North
Carolina Municipal Bonds securities, the Fund should be
considered a vehicle for diversification and not as a balanced
investment program. The suitability for any particular investor
of a purchase of shares in the Fund will depend upon, among other
things, such investor’s tax situation, investment
objectives and an ability to accept the risks associated with
investing in North Carolina Municipal Bonds, including the risk
of loss of principal and the risk of receiving income that is not
exempt from Federal and North Carolina income taxes.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left"><B>Investment Restrictions</B>
<P align="left">
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 Investment Company Act means the
lesser of (i) 67% of the Fund’s shares present at a
<P align="center">12
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<P><HR noshade><P>
<DIV align="left">
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:
</DIV>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="97%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
(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.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
(2) Make investments for the purpose of exercising control
or management.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
(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.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
(4) Make loans to other persons, except that the
acquisition of bonds, debentures or other corporate debt
securities and investment in government obligations, commercial
paper, pass-through instruments, certificates of deposit,
bankers’ acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and
except further that the Fund may lend its portfolio securities,
provided that the lending of portfolio securities may be made
only in accordance with applicable law and the guidelines set
forth in the Fund’s Prospectus and Statement of Additional
Information, as they may be amended from time to time.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
(5) Issue senior securities to the extent such issuance
would violate applicable law.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
(6) Borrow money, except that (i) the Fund may borrow
from banks (as defined in the Investment Company 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.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
(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 (“Securities Act”),
in selling portfolio securities.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
(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.</TD>
</TR>
</TABLE>
<P align="left">
Under the non-fundamental investment restrictions, which may be
changed by the Board of Trustees without shareholder approval,
the Fund may not:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="97%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
(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 Investment Company 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.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
(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.”</TD>
</TR>
</TABLE>
<P align="center">13
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<P><HR noshade><P>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="97%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
(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.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
(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.</TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<I>Non-Diversified Status.</I> The Fund is classified as
non-diversified within the meaning of the Investment Company Act,
which means that the Fund is not limited by such Act in the
proportion of its assets that it may invest in securities of a
single issuer. The Fund’s investments will be limited,
however, in order to qualify for the special tax treatment
afforded regulated investment companies under the Code. See
“Dividends and Taxes — Taxes.” To qualify,
the Fund will comply with certain requirements, including
limiting its 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.
Foreign government securities (unlike U.S. Government
securities) are not exempt from the diversification requirements
of the Code and the securities of each foreign government issuer
are considered to be obligations 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 Investment
Company 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 securities of a small number
of issuers, the Fund’s net asset value may fluctuate to a
greater extent than that of a diversified investment company as a
result of changes in the financial condition or in the
market’s assessment of the issuers, and the Fund may be more
susceptible to any single economic, political or regulatory
occurrence than a diversified investment company.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Because of the affiliation of Merrill Lynch, Pierce, Fenner &
Smith Incorporated (“Merrill Lynch”) with the Manager,
the Fund is prohibited from engaging in certain transactions
involving Merrill Lynch or its affiliates except pursuant to an
exemptive order under the Investment Company Act. See
“Portfolio Transactions.” Without such an exemptive
order the Fund would be prohibited from engaging in portfolio
transactions with Merrill Lynch or any of its affiliates acting
as principal.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left"><B>Portfolio Turnover</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The Manager will effect portfolio transactions without regard to
the time the securities have been held, if, in its judgment, such
transactions are advisable in light of a change in circumstances
of a particular issuer or in general market, financial or
economic conditions. As a result of its investment policies, the
Fund may engage in a substantial number of portfolio transactions
and the Fund’s portfolio turnover rate may vary greatly
from year to year or during periods within a year. The portfolio
turnover rate is calculated by dividing the lesser of the
Fund’s annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities
at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year.
A high portfolio turnover may result in negative tax
consequences, such as an increase in capital gain dividends or in
ordinary income dividends of accrued market discount. See
“Dividends and Taxes — Taxes.” High portfolio
turnover may also involve correspondingly greater transaction
costs in the form of dealer spreads and brokerage commissions,
which are borne directly by the Fund.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center">14
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<P><HR noshade><P>
<P align="center"><B>MANAGEMENT OF THE TRUST</B>
<P align="left"><B>Trustees and Officers</B>
<P align="left">
The Trustees of the Trust consist of seven individuals, five of
whom are not “interested persons” of the Trust as
defined in the Investment Company Act (the “non-interested
Trustees”). The Trustees are responsible for the overall
supervision of the operations of the Trust and perform the
various duties imposed on the directors or Trustees of investment
companies by the Investment Company Act. Information about the
Trustees, executive officers of the Trust and the portfolio
manager of the Fund, including their ages and their principal
occupations for at least the last five years, is set forth below.
Unless otherwise noted, the address of each Trustee, executive
officer and the portfolio manager is P.O. Box 9011,
Princeton, New Jersey 08543-9011.
<P align="left">
TERRY K. GLENN (59) — <I>President and Trustee</I>
(1)(2) — Executive Vice President of the Manager and
Merrill Lynch Asset Management, L.P. (“MLAM”) (which
terms as used herein include their corporate predecessors) since
1983; Executive Vice President and Director of Princeton
Services, Inc. (“Princeton Services”) since 1993;
President of Princeton Funds Distributor, Inc. (“PFD”)
since 1986 and Director thereof since 1991; President of
Princeton Administrators, L.P. since 1988.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
JAMES H. BODURTHA(55) — <I>Trustee</I>
(2)(3) — 36 Popponesset Road, Cotuit, Massachusetts
02635. Director, Gilder Group L.L.C. and related companies since
1999; 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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
HERBERT I. LONDON(60) — <I>Trustee</I>
(2)(3) — 2 Washington Square Village, New York, New
York 10012. John M. Olin Professor of Humanities, New York
University since 1993 and Professor thereof since 1980;
President, Hudson Institute since 1997 and Trustee thereof 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.
<P align="left">
ROBERT R. MARTIN (72) — <I>Trustee</I>
(2)(3) — 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.
<P align="left">
JOSEPH L. MAY (70) — <I>Trustee</I>(2)(3) —
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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
ANDRE F. PEROLD (47) — <I>Trustee</I>
(2)(3) — 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 from 1991 to
1999, TIBCO from 1994 to 1996; and Director, Genbel Securities
Limited and Genbel Bank since 1999.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
ARTHUR ZEIKEL (67) — <I>Trustee</I>(1)(2) —
300 Woodland Avenue, Westfield, New Jersey 07090. Chairman
of the Manager and MLAM from 1997 to 1999 and President thereof
from 1977 to 1997; Chairman of Princeton Services from 1997 to
1999, Director thereof from 1993 to 1999 and President thereof
from 1993 to 1997; Executive Vice President of Merrill Lynch
& Co., Inc. (“ML & Co.”) from 1990 to 1999.
<P align="left">
VINCENT R. GIORDANO (55) — <I>Senior Vice President</I>
(1)(2) — Senior Vice President of the Manager and MLAM
since 1984; Senior Vice President of Princeton Services since
1993.
<P align="center">15
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="left">
KENNETH A. JACOB (48) — <I>Vice President</I>
(1)(2) — First Vice President of MLAM since 1997; Vice
President of MLAM from 1984 to 1997; Vice President of the
Manager since 1984.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
MICHAEL KALINOSKI(29) — <I>Portfolio Manager and Vice
President</I>(1)(2) — Vice President and Portfolio
Manager with MLAM since 1999; from 1996 to 1999 he was the head
Municipal Bond Trader with Strong Funds and from 1993 to 1996 was
a member of the municipal bond investment team of Strong Funds.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
DONALD C. BURKE (39) — <I>Vice President and Treasurer
</I>(1)(2) — Senior Vice President and Treasurer of the
Manager and MLAM since 1999; Senior Vice President and Treasurer
of Princeton Services since 1999; Vice President of PFD since
1999; First Vice President of MLAM from 1997 to 1999; Vice
President of MLAM from 1990 to 1997; Director of Taxation of MLAM
since 1990.
<P align="left">
ALICE A. PELLEGRINO (39) — <I>Secretary</I>
(1)(2) — Vice President of MLAM since 1999; Attorney
associated with MLAM since 1997; Associate with Kirkpatrick &
Lockhart LLP from 1992 to 1997.
<DIV align="left">
<HR size="1" width="18%" align="left">
</DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="97%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2">(1) </FONT></TD>
<TD align="left">
<FONT size="2">Interested person, as defined in the Investment
Company Act, of the Trust.</FONT></TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD><FONT size="2">(2) </FONT></TD>
<TD align="left">
<FONT size="2">Such Trustee or officer is a director, trustee or
officer of certain other investment companies for which the
Manager or MLAM acts as the investment adviser or manager.</FONT></TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD><FONT size="2">(3) </FONT></TD>
<TD align="left">
<FONT size="2">Member of the Trust’s Audit and Nominating
Committee, which is responsible for the selection of the
independent auditors and the selection and nomination of
non-interested Trustees.</FONT></TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
As of October 1, 1999, the Trustees, officers of the Trust
and officers of the Fund as a group (12 persons) owned an
aggregate of less than 1% of the outstanding shares of the Fund.
At such date, Mr. Zeikel, a Trustee of the Trust,
Mr. Glenn, a Trustee and officer of the Trust and the other
officers of the Trust and the Fund owned an aggregate of less
than 1% of the outstanding shares of common stock of ML & Co.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left"><B>Compensation of Trustees</B>
<P align="left">
The Trust pays each non-interested Trustee a fee of $10,000 per
year plus $1,000 per Board meeting attended. The Trust also
compensates members of its Audit and Nominating Committee (the
“Committee”), which consists of all the non-interested
Trustees, a fee of $2,000 per year plus $500 per Committee
meeting attended. The Trust reimburses each non-interested
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.
<P align="left">
The following table shows the compensation earned by the
non-interested Trustees for the fiscal year ended July 31,
1999 and the aggregate compensation paid to them from all
registered investment companies advised by the Manager and its
affiliate, MLAM (“MLAM/ FAM-advised funds”), for the
calendar year ended December 31, 1998.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="26%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="7%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="6%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Aggregate</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Pension or</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Estimated</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Compensation from</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Retirement Benefits</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Annual</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Trust and Other</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Position with</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Compensation</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Accrued as Part of</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Benefits upon</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>MLAM/FAM-</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Name</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Trust</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>From Fund</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Fund Expense</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Retirement</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Advised Funds(1)</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
James H. Bodurtha</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">Trustee</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">583</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">None</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">None</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">163,500</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Herbert I. London</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">Trustee</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">583</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">None</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">None</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">163,500</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Robert R. Martin</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">Trustee</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">583</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">None</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">None</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">163,500</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Joseph L. May</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">Trustee</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">583</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">None</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">None</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">163,500</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
André F. Perold</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">Trustee</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">583</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">None</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">None</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">163,500</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<HR size="1" width="18%" align="left">
</DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="97%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2">(1) </FONT></TD>
<TD align="left">
<FONT size="2">The Trustees serve on the boards of
MLAM/FAM-advised funds as follows: Mr. Bodurtha (29
registered investment companies consisting of 47 portfolios);
Mr. London (29 registered investment companies consisting of
47 portfolios); Mr. Martin (29 registered investment
companies consisting of 47 portfolios); Mr. May (29
registered investment companies consisting of 47 portfolios); and
Mr. Perold (29 registered investment companies consisting
of 47 portfolios).</FONT></TD>
</TR>
</TABLE>
<P align="left">
Trustees of the Trust may purchase Class A shares of the
Fund at net asset value. See “Purchase of Shares —
Initial Sales Charge Alternatives — Class A and
Class D Shares — Reduced Initial Sales
Charges — Purchase Privilege of Certain Persons.”
<P align="center">16
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="left"><B>Management and Advisory Arrangements</B>
<P align="left">
<I>Management Services. </I>The Manager provides the Fund with
investment advisory and management services. Subject to the
supervision 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 Trust and the Fund.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<I>Management Fee. </I>The Trust has entered into a management
agreement on behalf of the Fund with the Manager (the
“Management Agreement”), pursuant to which the Manager
receives for its services to the Fund monthly compensation at the
annual rate of 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 $1.0 billion.
The table below sets forth information about the total
management fees paid by the Fund to the Manager and the amount of
any fee waiver for the periods indicated.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="52%"> </TD>
<TD width="3%"> </TD>
<TD width="10%"> </TD>
<TD width="1%"> </TD>
<TD width="10%"> </TD>
<TD width="3%"> </TD>
<TD width="10%"> </TD>
<TD width="1%"> </TD>
<TD width="10%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Amount of Fee</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Voluntarily</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Fiscal Year Ended July 31,</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Management Fee</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Waived by Manager</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
1999</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">279,289</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
1998</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">284,947</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
1997</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">303,480</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">43,196</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<I>Payment of Fund Expenses. </I>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 redemption expenses, expenses of
portfolio transactions, expenses of registering the shares under
federal and state securities laws, pricing costs (including the
daily calculation of net asset value), expenses of printing
shareholder reports, prospectuses and statements of additional
information, except to the extent paid by Merrill Lynch Funds
Distributor, a division of PFD (the “Distributor”) as
described below, fees for legal and auditing services, Commission
fees, interest, certain taxes and other expenses attributable to
a particular Series. Expenses that will be allocated on the
basis of asset size of the respective Series include fees and
expenses of non-interested Trustees, state franchise taxes, costs
of printing proxies and other expenses relating to shareholder
meetings and other expenses properly payable by the Trust. The
organizational expenses of the Trust were paid by the Trust, and
if additional Series are added to the Trust, the organizational
expenses will be allocated among the Series 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 Trust by the Manager and
the Trust reimburses the Manager for its costs in connection with
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 distribution of Class B and Class C
shares will be financed by the Trust pursuant to the Distribution
Plans in compliance with Rule 12b-1 under the Investment
Company Act. See “Purchase of Shares —
Distribution Plans.” Reference is made to “Management
of the Fund” in the Prospectus for certain information
concerning the management and advisory arrangements of the Trust.
<P align="left">
<I>Organization of the Manager. </I>The Manager is a limited
partnership, the partners of which are ML & Co., a
financial services holding company and the parent of Merrill
Lynch, and Princeton Services. ML & Co. and Princeton
Services are “controlling persons” of the Manager as
defined under the Investment Company Act because of their
ownership of its voting securities or their power to exercise a
controlling influence over its management or policies.
<P align="center">17
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="left">
<I>Duration and Termination. </I>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
Investment Company 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
or by vote of the shareholders of the Fund.
<P align="left">
<I>Transfer Agency Services. </I>Financial Data Services, Inc.
(the “Transfer Agent”), 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 a fee of $11.00 per Class A or
Class D account and $14.00 per Class B or Class C
account and is entitled to reimbursement for certain transaction
charges and out-of-pocket expenses incurred by the Transfer Agent
under the Transfer Agency Agreement. Additionally, a
$.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of
this fee will commence the month following the month the account
is closed. At the end of the calendar year, no further fees will
be due. For purposes of the Transfer Agency Agreement, the term
“account” includes a shareholder account maintained
directly by the Transfer Agent and any other account representing
the beneficial 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.
<P align="left">
<I>Distribution Expenses. </I>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 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.
<P align="left"><B>Code of Ethics</B>
<P align="left">
The Board of Trustees of the Trust has adopted a Code of Ethics
under Rule 17j-1 of the Investment Company 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.
<P align="left">
The Codes require that all employees of the Manager pre-clear any
personal securities investment (with limited exceptions, such as
government securities). The pre-clearance 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).
<P align="center">18
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="center"><B>PURCHASE OF SHARES</B>
<P align="left">
Reference is made to “How to Buy, Sell, Transfer and
Exchange Shares” in the Prospectus.
<P align="left">
The Fund offers four classes of shares under the Merrill Lynch
Select Pricing<SUP>SM</SUP> 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 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 (also
known as service 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 contingent deferred sales
charges (“CDSCs”), distribution fees 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 do not affect the net asset value of
any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of
shares are calculated in the same manner at the same time and
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.”
<P align="left">
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.
<P align="left">
The Merrill Lynch Select Pricing<SUP>SM</SUP> System is used by
more than 50 registered investment companies advised by MLAM or
FAM. Funds advised by MLAM or FAM that utilize the Merrill Lynch
Select Pricing<SUP>SM</SUP> System are referred to herein as
“Select Pricing Funds.”
<P align="left">
The Fund or the Distributor may suspend the continuous offering
of the Fund’s shares of any class at any time in response to
conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. Any order may
be rejected by the Fund or the Distributor. Neither the
Distributor nor the dealers are permitted to withhold placing
orders to benefit themselves by a price change. Merrill Lynch may
charge its customers a processing fee (presently $5.35) to
confirm a sale of shares to such customers. Purchases made
directly through the Transfer Agent are not subject to the
processing fee.
<P align="left"><B>Initial Sales Charge Alternatives — Class A and
Class D Shares</B>
<P align="left">
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
deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for
reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time
the accumulated ongoing account maintenance and distribution fees
on Class B or Class C shares may exceed the initial
sales charges and, in the case of Class D shares, the
account maintenance fee. Although some investors who previously
purchased Class A shares may no longer be eligible to
purchase Class A shares of other Select Pricing Funds, those
previously purchased Class A shares, together with
Class B, Class C and Class D share holdings, will
count toward a right of accumulation which may qualify the
investor for a reduced initial sales charge 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
<P align="center">19
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
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.
</DIV>
<P align="left">
The term “purchase,” as used in the Prospectus and this
Statement of Additional Information in connection with an
investment in Class A and Class D shares of the Fund,
refers to a single purchase by an individual or to concurrent
purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their
children under the age of 21 years purchasing shares for his,
her or their own account and to single purchases by a trustee or
other fiduciary purchasing shares for a single trust estate or
single fiduciary account although more than one beneficiary is
involved. The term “purchase” also includes purchases
by any “company,” as that term is defined in the
Investment Company 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.
<P align="left"><I>Eligible Class A Investors</I>
<P align="left">
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 who currently own
Class A shares 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 provided that
the program has $3 million or more initially invested in
Select Pricing Funds. Also eligible to purchase Class A
shares in a shareholder account at net asset value are
participants in certain investment programs including TMA<SUP>SM
</SUP> 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 certain purchases made in connection with certain fee-based
programs. In addition, Class A shares are offered at net
asset value to ML & Co. and its subsidiaries and their
directors and employees and to members of the Boards of
MLAM-advised investment companies. Certain persons who acquired
shares of certain MLAM-advised closed-end funds in their initial
offerings who wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in shares of the
Fund also may purchase Class A shares of the Fund if certain
conditions are met. In addition, Class A shares of the Fund
and certain other Select Pricing Funds are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. and, if certain conditions are met, to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the
net proceeds from a sale of certain of their shares of common
stock pursuant to a tender offer conducted by such funds in
shares of the Fund and certain other Select Pricing Funds.
<P align="left"><I>Class A and Class D Sales Charge Information</I>
<P align="center"><B>Class A Shares</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="26%"> </TD>
<TD width="3%"> </TD>
<TD width="6%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="7%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="7%"> </TD>
<TD width="3%"> </TD>
<TD width="8%"> </TD>
<TD width="3%"> </TD>
<TD width="8%"> </TD>
</TR>
<TR>
<TD colspan="17"></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="17"><HR size="1"></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2">For the Fiscal Year</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Gross Sales</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Sales Charges</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Sales Charges</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">CDSCs Received on</FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2">Ended</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Charges</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Retained By</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Paid To</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Redemption of</FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2">July 31,</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Collected</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Distributor</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Merrill Lynch</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Load-Waived Shares</FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
1999</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,124</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">161</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,963</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
1998</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,530</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">173</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,357</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
1997</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,894</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">619</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,275</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center">20
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="center"><B>Class D Shares</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="26%"> </TD>
<TD width="3%"> </TD>
<TD width="6%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="7%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="7%"> </TD>
<TD width="3%"> </TD>
<TD width="8%"> </TD>
<TD width="3%"> </TD>
<TD width="8%"> </TD>
</TR>
<TR>
<TD colspan="17"></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="17"><HR size="1"></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2">For the Fiscal Year</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Gross Sales</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Sales Charges</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Sales Charges</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">CDSCs Received on</FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2">Ended</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Charges</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Retained By</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Paid To</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Redemption of</FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2">July 31,</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Collected</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Distributor</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Merrill Lynch</FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2">Load-Waived Shares</FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
1999</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">13,469</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">765</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">12,704</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
1998</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,975</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">436</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,539</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
1997</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,136</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">338</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,798</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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.
<P align="left"><B>Reduced Initial Sales Charges</B>
<P align="left">
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 to obtain such investments.
<P align="left">
<I>Reinvested Dividends. </I>No initial sales charges are imposed
upon Class A and Class D shares issued as a result of
the automatic reinvestment of dividends.
<P align="left">
<I>Right of Accumulation. </I>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 Select Pricing Funds. For any such
right of accumulation to be made available, the Distributor must
be provided at the time of purchase, by the purchaser or the
purchaser’s securities dealer, with sufficient information
to permit confirmation of qualification. Acceptance of the
purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares
held in the name of a nominee or custodian under pension,
profit-sharing or other employee benefit plans may not be
combined with other shares to qualify for the right of
accumulation.
<P align="left">
<I>Letter of Intent. </I>Reduced sales charges are applicable to
purchases aggregating $25,000 or more of the Class A or
Class D shares of the Fund or any Select Pricing Funds made
within a 13-month period starting with the first purchase
pursuant to a Letter of Intent. The Letter of Intent is available
only to investors whose accounts are established and maintained
at the Fund’s Transfer Agent. The Letter of Intent is not
available to employee benefit plans for which Merrill Lynch
provides plan participant recordkeeping services. The Letter of
Intent 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 Intent may be included under a
subsequent Letter of Intent executed within 90 days of such
purchase if the Distributor is informed in writing of this intent
within such 90-day period. The value of Class A and
Class D shares of the Fund and of other Select Pricing Funds
presently held, at cost or maximum offering price (whichever is
higher), on the date of the first purchase under the Letter of
Intent, 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 Intent (minimum of $25,000), the investor will be
notified and must pay, within 20 days of the expiration of
such Letter, the difference between the sales charge on the
Class A or Class D shares purchased at the reduced rate
and the sales charge applicable to the shares actually purchased
through the Letter. Class A or Class D shares equal to
at least 5.0% 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 Intent must be at least 5.0% of the dollar amount
of such Letter. If a purchase during the term of such Letter
would otherwise be subject to a further reduced sales charge
based on the right of accumulation, the purchaser will be
entitled on that purchase and subsequent purchases to the further
reduced percentage sales charge that would be applicable to a
single
<P align="center">21
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
purchase equal to the total dollar value of the Class A or
Class D shares then being purchased under such Letter, but
there will be no retroactive reduction of the sales charge on any
previous purchase.
</DIV>
<P align="left">
The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of
Intent will be deducted from the total purchases made under such
Letter. An exchange from the Summit Cash Reserves Fund into the
Fund that creates a sales charge will count toward completing a
new or existing Letter of Intent from the Fund.
<P align="left">
<I>TMA<SUP>SM</SUP></I> Managed Trusts. Class A shares are
offered at net asset value to TMA<SUP>SM</SUP> Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee
services.
<P align="left">
<I>Employee Access<SUP>SM</SUP></I> <I>Accounts. </I>Provided
applicable threshold requirements are met, either Class A or
Class D shares are offered at net asset value to Employee
Access<SUP>SM</SUP> Accounts available through authorized
employers. The initial minimum investment for such accounts is
$500, except that the initial minimum investment for shares
purchased for such accounts pursuant to the Automatic Investment
Program is $50.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<I>Purchase Privilege of Certain Persons. </I>Trustees of the
Trust, members of the Boards of other MLAM-advised funds, ML
& Co. and its subsidiaries (the term
“subsidiaries,” when used herein with respect to ML
& Co., includes MLAM, FAM 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. The
Fund realizes economies of scale and reduction of sales-related
expenses by virtue of the familiarity of these persons with the
Fund. Employees and directors of trustees wishing to purchase
shares of the Fund must satisfy the Fund’s suitability
standards.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Class D shares of the Fund are offered at net asset value,
without a sales charge, to an investor that has a business
relationship with a Financial Consultant who joined Merrill Lynch
from another investment firm within six months prior to the date
of purchase by such investor, if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from
a redemption of shares of a mutual fund that was sponsored by the
Financial Consultant’s previous firm and was subject to a
sales charge either at the time of purchase or on a deferred
basis; and, second, the investor must establish that such
redemption had been made within 60 days prior to the
investment in the Fund and the proceeds from the redemption had
been maintained in the interim in cash or a money market fund.
<P align="left">
Class D shares of the Fund are also offered at net asset
value, without a sales charge, to an investor that has a business
relationship with a Merrill Lynch Financial Consultant and that
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.
<P align="left">
Class D shares of the Fund are offered at net asset value,
without a sales charge, to an investor that has a business
relationship with a Merrill Lynch Financial Consultant and that
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.
<P align="left">
<I>Closed-End Fund Investment Option. </I>Class A shares of
the Fund and certain other Select Pricing Funds (“Eligible
Class A Shares”) are offered at net asset value to
shareholders of certain closed-end funds advised by FAM or MLAM
who purchased such closed-end fund shares prior to
October 21, 1994 (the date the Merrill Lynch Select Pricing
<SUP>SM</SUP> System commenced operations) and wish to reinvest
the net proceeds from a sale of their closed-end fund shares of
common stock in Eligible Class A Shares, if the conditions
set
<P align="center">22
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
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 buy Class A shares) or Class D
shares of the Fund and other Select Pricing Funds (“Eligible
Class D Shares”), if the following conditions are met.
First, the sale of closed-end fund shares must be made through
Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Eligible Class D
Shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing
dividends from shares of common stock acquired in such offering.
Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there
must be a minimum purchase of $250 to be eligible for the
investment option.
</DIV>
<P align="left">
Shareholders of certain MLAM-advised continuously offered
closed-end funds may reinvest at net asset value the net proceeds
from a sale of certain shares of common stock of such funds in
shares of the Fund. Upon exercise of this investment option,
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. will receive Class D
shares of the Fund, except that shareholders already owning
Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such
additional Class A shares will be held in the same account
as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to
exercise this investment option, a shareholder of one of the
above-referenced continuously offered closed-end funds (an
“eligible fund”) must sell his or her shares of common
stock of the eligible fund (the “eligible shares”) back
to the eligible fund in connection with a tender offer conducted
by the eligible fund and reinvest the proceeds immediately in
the designated class of shares of the Fund. This investment
option is available only with respect to eligible shares as to
which no Early Withdrawal Charge or CDSC (each as defined in the
eligible fund’s prospectus) is applicable. Purchase orders
from eligible fund shareholders wishing to exercise this
investment option will be accepted only on the day that the
related tender offer terminates and will be effected at the net
asset value of the designated class of the Fund on such day.
<P align="left">
<I>Acquisition of Certain Investment Companies. </I>Class D
shares may be offered at net asset value 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.
<P align="left"><B>Deferred Sales Charge Alternatives — Class B
and Class C Shares</B>
<P align="left">
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 Select Pricing Funds.
<P align="left">
Because no initial sales charges are deducted at the time of the
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 that do
not qualify for the 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.
<P align="left">
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. See
“Pricing of Shares — Determination of Net Asset
Value” below.
<P align="left"><I>Contingent Deferred Sales Charges — Class B
Shares</I>
<P align="left">
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. In
determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the
lowest
<P align="center">23
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
applicable rate being charged. 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. It will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to
reinvestment of dividends and then of shares held longest during
the four-year period. 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.
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The following table sets forth the Class B CDSC:
<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="70%"> </TD>
<TD width="3%"> </TD>
<TD width="13%"> </TD>
<TD width="1%"> </TD>
<TD width="13%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>CDSC as a Percentage</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>of Dollar Amount</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Year Since Purchase Payment Made</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Subject to Change</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
0-1</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.0%</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
1-2</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.0%</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
2-3</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2.0%</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
3-4</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.0%</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
4 and thereafter</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">None</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
To provide an example, assume an investor purchased 100 shares at
$10 per share (at a cost of $1,000) and in the third year after
purchase, the net asset value per share is $12 and, during such
time, the investor has acquired 10 additional shares upon
dividend reinvestment. If at such time the investor makes his or
her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment.
With respect to the remaining 40 shares, the charge is applied
only to the original cost of $10 per share and not to the
increase in net asset value of $2 per share. Therefore, $400 of
the $600 redemption proceeds will be charged at a rate of 2.0%
(the applicable rate in the third year after purchase).
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The Class B CDSC may be waived on redemptions of shares in
certain circumstances, including any partial or complete
redemption following the death or disability (as defined in the
Internal Revenue Code of 1986, as amended (the “Code”)
of a Class B shareholder (including one who owns the
Class B shares as joint tenant with his or her spouse),
provided the redemption is requested within one year of the death
or initial determination of disability or, if later, reasonably
promptly, following completion of probate. The Class B CDSC
may be waived or its terms may be modified in connection with
certain fee-based programs. The Class B CDSC may also be
waived in connection with involuntary termination of an account
in which Fund shares are held or for withdrawals through the
Merrill Lynch Systematic Withdrawal Plan. See “Shareholder
Services — Fee- Based Programs and
“— Systematic Withdrawal Plan.”
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<I>Conversion of Class B Shares to Class D Shares. </I>
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 the average daily 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 value 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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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 the 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.
<P align="left">
In general, Class B shares of equity Select Pricing Funds
will convert approximately eight years after initial purchase and
Class B shares of taxable and tax-exempt fixed income
Select Pricing Funds will convert
<P align="center">24
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
approximately ten years after initial purchase. If, during the
Conversion Period, a shareholder exchanges Class B shares
with an eight-year Conversion Period for Class B shares with
a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the
exchange will apply and the holding period for the shares
exchanged will be tacked on to the holding period for the shares
acquired. The conversion period also may be modified for
investors that participate in certain fee-based programs. See
“Shareholder Services — Fee-Based Programs.”
</DIV>
<P align="left">
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.
<P align="left">
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.
<P align="left"><I>Contingent Deferred Sales Charges — Class C
Shares</I>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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. 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. 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. It
will be assumed that the redemption is first of shares held for
over one year or shares acquired pursuant to reinvestment of
dividends and then of shares held longest during the one-year
period. 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. The Class C CDSC may be waived in connection
with involuntary termination of an account in which Fund shares
are held and withdrawals through the Merrill Lynch Systematic
Withdrawal Plan. See “Shareholder Services —
Fee-Based Programs” and “ — Systematic
Withdrawal Plan.” The Class C CDSC of the Fund and
certain other MLAM-advised mutual funds may be waived with
respect to Class C shares purchased by an investor with the
net proceeds of a tender offer made by certain MLAM-advised
closed end funds, including Merrill Lynch Senior Floating Rate
Fund II, Inc. Such waiver is subject to the requirement that the
tendered shares shall have been held by the investor for a
minimum of one year and to such other conditions as are set forth
in the prospectus for the related closed end fund.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center">25
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="left"><I>Class B and Class C Sales Charge Information</I>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="60%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="39%"> </TD>
<TD width="3%"> </TD>
<TD width="16%"> </TD>
<TD width="1%"> </TD>
<TD width="15%"> </TD>
<TD width="3%"> </TD>
<TD width="11%"> </TD>
<TD width="1%"> </TD>
<TD width="11%"> </TD>
</TR>
<TR>
<TD colspan="9"></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="9"><FONT size="2"><B>Class B Shares*</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="9"><HR size="1"></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>For the Fiscal Year</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>CDSCs Received</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>CDSCs Paid to</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Ended July 31,</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>by Distributor</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Merrill Lynch</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
1999</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">38,152</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">38,152</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
1998</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">39,234</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">39,234</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
1997</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">72,913</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">72,913</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="9" align="center" valign="top"><FONT size="2">* Additional Class B CDSCs payable to the Distributor may have been waived or converted to a contingent obligation in connection with a shareholder’s participation in certain
fee-based programs.</FONT></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="60%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="39%"> </TD>
<TD width="3%"> </TD>
<TD width="16%"> </TD>
<TD width="1%"> </TD>
<TD width="15%"> </TD>
<TD width="3%"> </TD>
<TD width="11%"> </TD>
<TD width="1%"> </TD>
<TD width="11%"> </TD>
</TR>
<TR>
<TD colspan="9"></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="9"><FONT size="2"><B>Class C Shares</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="9"><HR size="1"></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>For the Fiscal Year</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>CDSCs Received</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>CDSCs Paid to</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Ended July 31,</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>by Distributor</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Merrill Lynch</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
1999</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">396</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">396</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
1998</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">219</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">219</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
1997</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">303</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">303</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Merrill Lynch compensates its Financial Consultants for selling
Class B and Class C shares at the time of purchase from
its own funds. Proceeds from the CDSC and the distribution fee
are paid to the Distributor and are used in whole or in part by
the Distributor to defray the expenses of dealers (including
Merrill Lynch) related to providing distribution-related services
to the Fund in connection with the sale of the Class B and
Class C shares, such as the payment of compensation to
financial consultants for selling Class B and Class C shares
from the dealer’s own funds. The combination of the CDSC
and the ongoing distribution fee facilitates the ability of the
Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. See
“Distribution Plans” below. 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.
<P align="left"><B>Distribution Plans</B>
<P align="left">
Reference is made to “Fees and Expenses” 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 Investment Company
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.
<P align="left">
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 with respect to Class B, Class C
and Class D shares. Each of those classes has exclusive voting
rights with respect to the 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).
<P align="left">
The Distribution Plans for Class B and Class C shares
each provides 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 rates 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
<P align="center">26
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
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.
</DIV>
<P align="left">
The Fund’s Distribution Plans are subject to the provisions
of Rule 12b-1 under the Investment Company Act. 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 each
related class of shareholders. Each Distribution Plan further
provides that, so long as the Distribution Plan remains in
effect, the selection and nomination of non-interested Trustees
shall be committed to the discretion of the non-interested
Trustees then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the non-interested 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
non-interested 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 non-interested Trustees who have no
direct or indirect financial interest in the Distribution Plan,
cast in person at a meeting called for that purpose.
Rule 12b-1 further requires that the Fund preserve copies of
the Distribution Plan and any report made pursuant to such plan
for a period of not less than six years from the date of the
Distribution Plan or such report, the first two years in an
easily accessible place.
<P align="left">
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. 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 annually, as of December 31
of each year, on a “fully allocated accrual” basis and
quarterly on a “direct expense and revenue/cash” basis.
On the fully allocated accrual basis, revenues consist of the
account maintenance fees, distribution fees, the CDSCs and
certain other related revenues, and expenses consist of financial
consultant compensation, branch office and regional operation
center selling and transaction processing expenses, advertising,
sales promotion and marketing expenses, corporate overhead and
interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution
fees and CDSCs and the expenses consist of financial consultant
compensation.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
As of December 31, 1998, the last date for which fully
allocated accrual data is available, the fully allocated accrual
expenses of the Distributor and Merrill Lynch for the period
since the commencement of operations of Class B shares
exceeded the fully allocated accrual revenues by approximately
$646,000 (1.74% of Class B net assets at that date). As of
July 31, 1999, direct cash revenues for the period since the
commencement of operations of Class B shares exceeded
direct cash expenses by $833,004 (2.53% of Class B net
assets at that date). As of December 31, 1998, the fully
allocated accrual expenses incurred by the Distributor and
Merrill Lynch for the period since the commencement of operations
of Class C shares exceeded the fully allocated accrual
revenues by approximately $11,000 (.48% of Class C net
assets at that date). As of July 31, 1999, direct cash
expenses for the period since the commencement of operations of
Class C shares exceeded direct cash revenues by $29,242
(1.22% of Class C net assets at that date).
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
For the fiscal year ended July 31, 1999, the Fund paid the
Distributor $180,557 pursuant to the Class B Distribution
Plan (based on average daily net assets subject to such
Class B Distribution Plan of approximately
$36.2 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities
and services in connection with Class B shares. For the
fiscal year ended July 31, 1999, the Fund paid the
Distributor $14,332 pursuant to the Class C Distribution
Plan (based on average daily net assets subject to such
Class C Distribution Plan of approximately
$2.4 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities
and services in connection
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center">27
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
with Class C shares. For the fiscal year ended July 31,
1999, the Fund paid the Distributor $3,197 pursuant to the
Class D Distribution Plan (based on average daily net assets
subject to such Class D Distribution Plan of approximately
$3.2 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with
Class D shares.
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left"><B>Limitations on the Payment of Deferred Sales Charges</B>
<P align="left">
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 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.
<P align="left">
The following table sets forth comparative information as of
July 31, 1999 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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="25%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="2%"> </TD>
<TD width="1%"> </TD>
<TD width="2%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="1%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="27"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="27"><FONT size="2"><B>Data Calculated as of July 31, 1999</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="27"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="27"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="27"><FONT size="2"><B>(in thousands)</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="23"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Annual</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="23"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Distribution</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Allowable</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Allowable</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Amounts</B></FONT></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Fee at</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Eligible</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Aggregate</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Interest on</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Maximum</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Previously</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Aggregate</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Current Net</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Gross</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Sales</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Unpaid</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Amount</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Paid to</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Unpaid</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Asset</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Sales(1)</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Charges(2)</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Balance(3)</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Payable</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Distributor(4)</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Balance</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Level(5)</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>Class B Shares for the period September 25, 1992
(commencement of operations) to July 31, 1999</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Under NASD Rule as Adopted</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">66,100</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,131</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,119</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6,250</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,250</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5,000</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">82</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Under Distributor’s Voluntary Waiver</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">66,100</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,131</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">331</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4,462</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,250</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,212</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">82</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
<B>Class C Shares, for the period October 21, 1994
(commencement of operations) to July 31, 1999</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Under NASD Rule as Adopted</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,677</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">230</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">62</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">292</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">30</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">262</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<HR size="1" width="18%" align="left">
</DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="97%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2">(1) </FONT></TD>
<TD align="left">
<FONT size="2">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.</FONT></TD>
</TR>
<TR valign="top">
<TD><FONT size="2">(2) </FONT></TD>
<TD align="left">
<FONT size="2">Includes amounts attributable to exchanges from
Summit Cash Reserves Fund (“Summit”) which are not
reflected in Eligible Gross Sales. Shares of Summit can only be
purchased by exchange from another fund (the “redeemed
fund”). Upon such an exchange, the maximum allowable sales
charge payment to the redeemed fund is reduced in accordance with
the amount of the redemption. This amount is then added to the
maximum allowable sales charge payment with respect to Summit.
Upon an exchange out of Summit, the remaining balance of this
amount is deducted from the maximum allowable sales charge
payment to Summit and added to the maximum allowable sales charge
payment to the fund into which the exchange is made.</FONT></TD>
</TR>
<TR valign="top">
<TD><FONT size="2">(3) </FONT></TD>
<TD align="left">
<FONT size="2">Interest is computed on a monthly basis based upon
the prime rate, as reported in <I>The Wall Street Journal</I>,
plus 1.0%, as permitted under the NASD Rule.</FONT></TD>
</TR>
</TABLE>
<P align="center">28
<!-- PAGEBREAK -->
<P><HR noshade><P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="97%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2">(4) </FONT></TD>
<TD align="left">
<FONT size="2">Consists of CDSC payments, distribution fee
payments and accruals. See “What are the Fund’s fees
and expenses?” in the Prospectus. This figure may include
CDSCs that were deferred when a shareholder redeemed shares prior
to the expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in
Class A shares in conjunction with the shareholder’s
participation in the Merrill Lynch Mutual Fund Advisor (Merrill
Lynch MFA<SUP>SM</SUP>) 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.
</FONT></TD>
</TR>
<TR valign="top">
<TD><FONT size="2">(5) </FONT></TD>
<TD align="left">
<FONT size="2">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).</FONT></TD>
</TR>
</TABLE>
<P align="center"><B>REDEMPTION OF SHARES</B>
<P align="left">
Reference is made to “How to Buy, Sell, Transfer and
Exchange Shares” in the Prospectus.
<P align="left">
The Fund 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.
<P align="left">
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.
<P align="left">
The value of shares at the time of 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.
<P align="left"><B>Redemption</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
A shareholder wishing to redeem shares held with the Transfer
Agent may do so without charge by tendering the shares directly
to the Transfer Agent at Financial Data Services, Inc., P.O. Box
45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Financial
Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of
shares deposited with the Transfer Agent may be accomplished by a
written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been
issued may be accomplished by a written letter as noted above
accompanied by certificates for the shares to be redeemed.
Redemption requests should not be sent to the Fund. 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 signatures on the redemption request may require a
guarantee by an “eligible guarantor institution” as
defined in Rule 17Ad-15 under the Securities Exchange Act of
1934 (the “Exchange Act”), the existence and validity
of which may be verified by the Transfer Agent through the use of
industry publications. In the event a signature guarantee is
required, notarized signatures are not sufficient. In general,
signature guarantees are waived on redemptions of less than
$50,000 as long as the following requirements are met:
(i) all requests require the signature(s) of all persons in
whose name(s) shares are recorded on the Transfer Agent’s
register; (ii) all checks must be mailed to the stencil
address of record on the Transfer Agent’s register and
(iii) the stencil address must not have changed within
30 days. Certain rules may apply regarding certain account
types such as but not limited to UGMA/ UTMA accounts, Joint
Tenancies With Rights of Survivorship, contra broker
transactions, and institutional accounts. 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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center">29
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
At various times the Fund may be requested to redeem shares for
which it has not yet received good payment (<I>e.g.,</I> cash,
Federal funds or certified check drawn on a U.S. bank). The Fund
may delay or cause to be delayed the mailing of a redemption
check until such time as it has assured itself that good payment
(<I>e.g.,</I> cash, Federal funds or certified check drawn on a
U.S. bank) has been collected for the purchase of such Fund
shares, which will not exceed 10 days.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left"><B>Repurchase</B>
<P align="left">
The Fund also will repurchase Fund shares through a
shareholder’s listed securities dealer. The Fund 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 the order is placed. Shares will be priced at the
net asset value calculated on the day the request is received,
provided that the request for repurchase is submitted to the
dealer prior to the regular close of business on the NYSE
(generally, the NYSE closes at 4:00 p.m., Eastern time) and such
request is received by the Fund from such dealer not later than
30 minutes after the close of business on the NYSE on the same
day. Dealers have the responsibility of submitting such
repurchase requests to the Fund not later than 30 minutes after
the close of business on the NYSE, in order to obtain that
day’s closing price.
<P align="left">
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (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 Fund. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a
repurchase of shares to such customers. Repurchases made directly
through the Transfer Agent on accounts held at the Transfer
Agent are not subject to the processing fee. The Fund 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 Fund may redeem Fund
shares as set forth above.
<P align="left"><B>Reinstatement Privilege — Class A and
Class D Shares</B>
<P align="left">
Shareholders who have redeemed their Class A or Class D
shares of the Fund 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.
<P align="center"><B>PRICING OF SHARES</B>
<P align="left"><B>Determination of Net Asset Value</B>
<P align="left">
Reference is made to “How Shares are Priced” in the
Prospectus.
<P align="left">
The net asset value of the shares of all classes of the Fund is
determined by the Manager once daily Monday through Friday after
the close of business on the NYSE on each day the NYSE is open
for trading. The NYSE generally closes at 4:00 p.m., Eastern
time. The NYSE is not open for trading 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.
<P align="left">
Net asset value is computed by dividing 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
<P align="center">30
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
accrued expenses) by the total number of shares outstanding at
such time, rounded to the nearest cent. Expenses, including the
fees payable to the Manager and Distributor, are accrued daily.
</DIV>
<P align="left">
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 the Class D shares; moreover, the per share net asset
value of the Class B and Class C shares generally will
be lower than the per share net asset value of Class D
shares reflecting the daily expense accruals of the distribution
fees and higher transfer agency fees applicable with respect to
Class B and Class C shares of the Fund. The per share
net asset value of Class C shares will generally be lower than
the per share net asset value of Class B shares reflecting
the daily expense accruals of the higher distribution fees
applicable with respect to Class C shares. 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 or distributions, which will
differ by approximately the amount of the expense accrual
differentials between the classes.
<P align="left">
The Municipal Bonds and other portfolio securities in which the
Fund invests are traded primarily in over- the-counter
(“OTC”) municipal bond and money markets and are valued
at the last available bid price for long positions and at the
last available ask price for short positions in the OTC market or
on the basis of yield equivalents as obtained from one or more
dealers that make markets in the securities. One bond is the
“yield equivalent” of another bond when, taking into
account market price, maturity, coupon rate, credit rating and
ultimate return of principal, both bonds will theoretically
produce an equivalent return to the bondholder. Financial futures
contracts and options thereon, which are traded on exchanges,
are valued at their settlement prices as of the close of such
exchanges. Short-term investments with a remaining maturity of
60 days or less are valued on an amortized cost basis which
approximates market value. Securities and assets for which market
quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the
Trustees of the Trust, including valuations furnished by a
pricing service retained by the Trust, which may utilize a matrix
system for valuations. The procedures of the pricing service and
its valuations are reviewed by the officers of the Trust under
the general supervision of the Trustees.
<P align="left"><B>Computation of Offering Price Per Share</B>
<P align="left">
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, 1999 is set forth
below.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="50%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Class A</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Class B</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Class C</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Class D</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net Assets</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9,093,647</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">32,886,527</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">2,404,144</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,056,693</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Number of Shares Outstanding</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">878,407</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3,176,191</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">232,226</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">295,144</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Net Asset Value Per Share (net assets divided by number of shares
outstanding)</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.35</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.35</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.35</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.36</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Sales Charge (for Class A and Class D shares: 4.00% of
offering price; 4.17% of net asset value per share)*</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.43</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">**</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">**</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">.43</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Offering Price</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.78</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.35</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.35</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.79</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left"><HR size="4" noshade></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<HR size="1" width="18%" align="left">
</DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="97%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2"> * </FONT></TD>
<TD align="left">
<FONT size="2">Rounded to the nearest one-hundredth percent;
assumes maximum sales charge is applicable.</FONT></TD>
</TR>
</TABLE>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="97%"></TD>
</TR>
<TR valign="top">
<TD><FONT size="2">** </FONT></TD>
<TD align="left">
<FONT size="2">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 — Contingent Deferred Sales
Charges — Class B Shares” and “—
Contingent Deferred Sales Charges — Class C
Shares” herein.</FONT></TD>
</TR>
</TABLE>
<P align="center">31
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="center"><B>PORTFOLIO TRANSACTIONS</B>
<P align="left"><B>Transactions in Portfolio Securities</B>
<P align="left">
Subject to policies established by the Trustees, the Manager is
primarily responsible for the execution of the Fund’s
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. 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 results in conducting portfolio
transactions for the Fund, taking into account such factors as
price (including the applicable dealer spread or commission), the
size, type and difficulty of the transaction involved, the
firm’s general execution and operations facilities and the
firm’s risk in positioning the securities involved. The
portfolio securities of the Fund generally are traded on a
principal 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. While reasonable competitive spreads or
commissions are sought, the Fund will not necessarily be paying
the lowest spread or commission available. Transactions with
respect to the securities of small and emerging growth companies
in which the Fund may invest may involve specialized services on
the part of the broker or dealer and thereby entail higher
commissions or spreads than would be the case with transactions
involving more widely traded securities.
<P align="left">
Subject to obtaining the best net results, dealers who provide
supplemental investment research (such as information concerning
tax-exempt securities, economic data and market forecasts) to the
Manager may receive orders for transactions by the Fund.
Information so received will be in addition to and not in lieu of
the services required to be performed by the Manager under its
Management Agreement and the expense of the Manager will not
necessarily be reduced as a result of the receipt of such
supplemental information. Supplemental investment research
obtained from such dealers might be used by the Manager in
servicing all of its accounts and all such research might not be
used by the Manager in connection with the Fund. 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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Because of the affiliation of Merrill Lynch with the Manager, the
Fund is prohibited from engaging in certain transactions
involving such firm or its affiliates except pursuant to an
exemptive order under the Investment Company Act. Included among
such restricted transactions are purchases from or sales to
Merrill Lynch of securities in transactions in which it acts as
principal. Under an exemptive order, the Trust may effect
principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities subject to conditions set forth
in such order. The Fund executed no transactions under the order
for the fiscal years ended July 31, 1997, 1998 and 1999.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
An affiliated person of the Trust may serve as broker for the
Fund in OTC transactions conducted on an agency basis. Certain
court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the Investment
Company 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.
<P align="left">
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 Investment Company 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 that may be purchased in any one issue and the
assets of the Fund that may be invested in a particular issue.
<P align="center">32
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="left">
Section 11(a) of the Exchange Act 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. 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 MLAM.
<P align="left">
Because of different objectives or other factors, a particular
security may be bought for one or more clients of the Manager or
an affiliate when one or more clients of the Manager or an
affiliate are selling the same security. If purchases or sales of
securities arise for consideration at or about the same time
that would involve the Fund or other clients or funds for which
the Manager or an affiliate acts as manager 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 an affiliate 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.
<P align="center"><B>SHAREHOLDER SERVICES</B>
<P align="left">
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 and instructions as to how to
participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from
the Distributor or Merrill Lynch.
<P align="left"><B>Investment Accounts</B>
<P align="left">
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 dividends. The statements will
also show any other activity in the account since the preceding
statement. Shareholders will also receive separate confirmations
for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of dividends. A
shareholder with an account held at the Transfer Agent may make
additions to his or her Investment Account at any time by mailing
a check directly to the Transfer Agent. A shareholder may also
maintain an account through Merrill Lynch. Upon the transfer of
shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder’s name may be opened
automatically at the Transfer Agent.
<P align="left">
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.
<P align="left">
Shareholders may transfer their Fund shares from Merrill Lynch to
another securities dealer that has entered into a selected
dealer agreement with Merrill Lynch. Certain shareholder services
may not be available for the transferred shares. After the
transfer, the shareholder may purchase additional shares of funds
owned before the transfer and all future trading of these assets
must be coordinated by the new firm. If a shareholder wishes to
transfer his or her shares to a securities dealer that has not
entered into a selected dealer agreement with Merrill Lynch, the
shareholder must either (i) redeem his or her shares, paying
any applicable CDSC or (ii) continue to maintain an
Investment Account at the Transfer Agent for those shares. The
shareholder may also request the new securities dealer to
maintain the shares in an account at the Transfer Agent
registered in the name of the securities dealer for the benefit
of the shareholder whether the securities dealer has entered into
a selected dealer agreement or not.
<P align="center">33
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="left"><B>Exchange Privilege</B>
<P align="left">
U.S. shareholders of each class of shares of the Fund have an
exchange privilege with certain other Select Pricing Funds and
Summit Cash Reserves Fund (“Summit”), a series of
Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated for
exchange by holders of Class A, Class B, Class C
and Class D shares of Select Pricing Funds. Shares with a
net asset value of at least $100 are required to qualify for the
exchange privilege and any shares utilized in an exchange must
have been held by the shareholder for at least 15 days.
Before effecting an exchange, shareholders should obtain a
currently effective prospectus of the fund into which the
exchange is to be made. Exercise of the exchange privilege is
treated as a sale of the exchanged shares and a purchase of the
acquired shares for Federal income tax purposes.
<P align="left">
<I>Exchanges of Class A and Class D Shares. </I>
Class A shareholders may exchange Class A shares of the
Fund for Class A shares of a second Select Pricing Fund if
the shareholder holds any Class A shares of the second fund
in his or her account in which the exchange is made at the time
of the exchange or is otherwise eligible to purchase Class A
shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second Select
Pricing Fund, but does not hold Class A shares of the second
fund in his or her account at the time of the exchange and is
not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of
the second fund as a result of the exchange. Class D shares
also may be exchanged for Class A shares of a second Select
Pricing Fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in
the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Class D shares are exchangeable with shares of the same
class of other Select Pricing Funds.
<P align="left">
Exchanges of Class A or Class D shares outstanding
(“outstanding Class A or Class D shares”) for
Class A or Class D shares of other Select Pricing
Funds or for Class A shares of Summit, (“new
Class A or Class D shares”) are transacted on the
basis of relative net asset value per Class A or
Class D share, respectively, plus an amount equal to the
difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales
charge payable at the time of the exchange on the new
Class A or Class D shares. With respect to outstanding
Class A or Class D shares as to which previous
exchanges have taken place, the “sales charge previously
paid” shall include the aggregate of the sales charges paid
with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are
sold on a no-load basis in each of the funds offering
Class A or Class D shares. For purposes of the exchange
privilege, Class A or Class D shares acquired through
dividend reinvestment shall be deemed to have been sold with a
sales charge equal to the sales charge previously paid on the
Class A or Class D shares on which the dividend was
paid. Based on this formula, Class A and Class D shares
generally may be exchanged into the Class A or Class D
shares, respectively, of the other funds with a reduced sales
charge or without a sales charge.
<P align="left">
<I>Exchanges of Class B and Class C Shares. </I>Certain
Select Pricing Funds with Class B or Class C shares
outstanding (“outstanding Class B or Class C
shares”) offer to exchange their Class B or
Class C shares for Class B or Class C shares,
respectively, of certain other Select Pricing Funds or for
Class B shares of Summit (“new Class B or
Class C shares”) on the basis of relative net asset
value per Class B or Class C share, without the payment
of any CDSC that might otherwise be due on redemption of the
outstanding shares. Class B shareholders of the Fund
exercising the exchange privilege will continue to be subject to
the Fund’s CDSC schedule if such schedule is higher than the
CDSC schedule relating to the new Class B shares acquired
through use of the exchange privilege. In addition, Class B
shares of the Fund acquired through use of the exchange privilege
will be subject to the Fund’s CDSC schedule if such
schedule is higher than the CDSC schedule relating to the
Class B shares of the fund from which the exchange has been
made. For purposes of computing the CDSC that may be payable on a
disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B or Class C
shares is “tacked” to the holding period of the new
Class B or Class C shares. For example, an investor may
exchange Class B or Class C shares of the Fund for
those of Merrill Lynch Special Value Fund, Inc. (“Special
Value Fund”) after having held the Fund’s Class B
shares for two and a half years. The 2% CDSC that generally would
apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B
shares of Special Value Fund
<P align="center">34
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
and receive cash. There will be no CDSC due on this redemption,
since by “tacking” the two and a half year holding
period of Fund Class B shares to the three-year holding
period for the Special Value Fund Class B shares, the
investor will be deemed to have held the Special Value Fund
Class B shares for more than five years.
</DIV>
<P align="left">
<I>Exchanges for Shares of a Money Market Fund. </I>Class A
and Class D shares are exchangeable for Class A shares
of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A
shares of Summit have an exchange privilege back into
Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back
into Class B or Class C shares of Select Pricing Funds and,
in the event of such an exchange, the period of time that
Class B shares of Summit are held will count toward
satisfaction of the holding period requirement for purposes of
reducing any CDSC and toward satisfaction of any Conversion
Period with respect to Class B shares. Class B shares
of Summit will be subject to a distribution fee at an annual rate
of 0.75% of average daily net assets of such Class B
shares. This exchange privilege does not apply with respect to
certain Merrill Lynch fee-based programs for which alternative
exchange arrangements may exist. Please see your Merrill Lynch
Financial Consultant for further information.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Prior to October 12, 1998, exchanges from the Fund and other
Select Pricing Funds into a money market Fund were directed to
certain Merrill Lynch-sponsored money market funds other than
Summit. Shareholders who exchanged Select Pricing Fund shares for
shares of such other money market funds and subsequently wish to
exchange those money market fund shares for shares of the Fund
will be subject to the CDSC schedule applicable to such Fund
shares, if any. The holding period for those money market fund
shares will not count toward satisfaction of the holding period
requirement for reduction of the CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward
satisfaction of the Conversion Period. However, the holding
period for Class B or Class C shares of a Fund received
in exchange for such money market fund shares will be aggregated
with the holding period for the fund shares originally exchanged
for such money market fund shares for purposes of reducing the
CDSC or satisfying the Conversion Period.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<I>Exchanges by Participants in the MFA Program. </I>The
Fund’s exchange privilege is also modified with respect to
purchases of Class A and Class D shares by investors
under the MFA Program. First, the initial allocation of assets is
made under the MFA Program. Then any subsequent exchange under
the MFA Program of Class A or Class D shares of a
Select Pricing Fund for Class A or Class D shares of
the Fund will be made solely on the basis of the relative net
asset values of the shares being exchanged. Therefore, there will
not be a charge for any difference between the sales charge
previously paid on the shares of the other Select Pricing Fund
and the sales charge payable on the shares of the Fund being
acquired in the exchange under the MFA Program.
<P align="left">
<I>Exercise of the Exchange Privilege. </I>To exercise the
exchange privilege, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the Fund of
the exchange. Shareholders of the Fund, and shareholders of the
other Select Pricing Funds with shares for which certificates
have not been issued, may exercise the exchange privilege by wire
through their securities dealers. The Fund reserves the right to
require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the
rules of the Commission. The Fund reserves the right to limit the
number of times an investor may exercise the exchange privilege.
Certain funds may suspend the continuous offering of their
shares to the general public at any time and may thereafter
resume such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange
legally may be made. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose
shares may be distributed by the Distributor.
<P align="left"><B>Fee-Based Programs</B>
<P align="left">
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
<P align="center">35
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
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
1-800-MER-FUND or 1-800-637-3863.
</DIV>
<P align="left"><B>Automatic Investment Plans</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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) or Class B, Class C or
Class D shares at the applicable public offering price.
These purchases may be made either through the shareholder’s
securities dealer, or by mail directly to the Transfer Agent,
acting as agent for such securities dealer. Voluntary
accumulation also can be made through a service known as the
Fund’s Automatic Investment Plan. The Fund would be
authorized, on a regular basis, to provide systematic additions
to the Investment Account of such shareholder through charges of
$50 or more to the regular bank account of the shareholder by
either pre-authorized checks or automated clearing house debits.
An investor whose shares of the Fund are held within a CMA®
or CBA® Account may arrange to have periodic investments
made in the Fund in amounts of $100 or more through the CMA®
or CBA® Automatic Investment Program.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left"><B>Automatic Dividend Reinvestment Plan</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Unless specific instructions are given as to the method of
payment, dividends will be automatically reinvested, without
sales charge, in additional full and fractional shares of the
Fund. Such reinvestment will be at the net asset value of shares
of the Fund as determined after the close of business on the NYSE
on the monthly payment date for such dividends. No CDSC will be
imposed upon redemption of shares issued as a result of the
automatic reinvestment of dividends.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Shareholders may, at any time, by written notification to Merrill
Lynch if their account is maintained with Merrill Lynch, or by
written notification or by telephone (1-800-MER-FUND) to the
Transfer Agent, if their 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 shares of the Fund or vice versa (provided that, in the event
that a payment on an account maintained at the Transfer Agent
would amount to $10.00 or less, a shareholder will not receive
such payment in cash and such payment will automatically be
reinvested in additional shares). Commencing ten days after the
receipt by the Transfer Agent of such notice, those instructions
will be effected. 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 checks. Cash payments can also be directly deposited
to the shareholder’s bank account.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left"><B>Systematic Withdrawal Plan</B>
<P align="left">
A shareholder may elect to receive systematic withdrawals from
his or her Investment Account by check or through automatic
payment by direct deposit to his or her bank account on either a
monthly or quarterly basis as provided below. Quarterly
withdrawals are available for shareholders that 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.
<P align="center">36
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<P><HR noshade><P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
At the time of each withdrawal payment, sufficient shares are
redeemed from those on deposit in the shareholder’s account
to provide the withdrawal payment specified by the shareholder.
The shareholder may specify the dollar amount and the class of
shares to be redeemed. Redemptions will be made at net asset
value as determined after the close of business on the NYSE
(generally, the NYSE closes at 4:00 p.m., Eastern time) on the
24th day of each month or the 24th day of the last month of each
quarter, whichever is applicable. If the NYSE is not open for
business on such date, the shares will be redeemed at the net
asset value determined after the close of business on the NYSE on
the following business day. The check for the withdrawal payment
will be mailed, or the direct deposit of the withdrawal payment
will be made, on the next business day following redemption. When
a shareholder is making systematic withdrawals, dividends on all
shares in the Investment Account are automatically reinvested in
shares of the Fund. A shareholder’s Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by
the shareholder, the Fund, the Transfer Agent or the
Distributor.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
With respect to redemptions of Class B or Class C
shares pursuant to a systematic withdrawal plan, the maximum
number of Class B or Class C shares that can be
redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the
election to join the systematic withdrawal plan was made. Any
CDSC that otherwise might be due on such redemption of
Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be
redeemed in the same order as Class B or Class C shares
are otherwise redeemed. See “Purchase of Shares —
Deferred Sales Charge Alternatives — Class B and
Class C Shares.” Where the systematic withdrawal plan
is applied to Class B shares, upon conversion of the last
Class B shares in an account to Class D shares, the
systematic withdrawal plan will be applied thereafter to
Class D shares if the shareholder so elects. If an investor
wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Merrill
Lynch Financial Consultant.
<P align="left">
Withdrawal payments should not be considered as dividends. 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 Fund will not knowingly accept purchase
orders for shares of the Fund from investors that maintain a
Systematic Withdrawal Plan unless such purchase is equal to at
least one year’s scheduled withdrawals or $1,200, whichever
is greater. Automatic investments may not be made into an
Investment Account in which the shareholder has elected to make
systematic withdrawals.
<P align="left">
Alternatively, a shareholder whose shares are held within a
CMA® or CBA® Account may elect to have shares redeemed
on a monthly, bimonthly, quarterly, semiannual or annual basis
through the CMA® or CBA® 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® or CBA® 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® or CBA®
Systematic Redemption Program, eligible shareholders should
contact their Merrill Lynch Financial Consultant.
<P align="center">37
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<P><HR noshade><P>
<P align="center"><B>DIVIDENDS AND TAXES</B>
<P align="left"><B>Dividends</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The net investment income of the Fund is declared as dividends
daily prior to the determination of the net asset value, which is
calculated after the close of business on the NYSE (generally,
the NYSE closes at 4:00 p.m., Eastern time) on that day. The
net investment income of the Fund for dividend purposes consists
of interest earned on portfolio securities, less expenses, in
each case computed since the most recent determination of net
asset value. Expenses of the Fund, including the management fees
and the account maintenance and distribution fees, are accrued
daily. Dividends of net investment income are declared daily and
reinvested monthly in the form of additional full and fractional
shares of the Fund at net asset value as of the close of business
on the “payment date” unless the shareholder elects to
receive such dividends in cash. Shares will accrue dividends as
long as they are issued and outstanding. Shares are issued and
outstanding from the settlement date of a purchase order to the
day prior to settlement date of a redemption order.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
All net realized capital gains, if any, are declared and
distributed to the Fund’s shareholders at least annually.
Capital gain dividends will be reinvested automatically in shares
of the Fund unless the shareholder elects to receive such
distributions in cash.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The per share dividends 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 “Pricing of
Shares — Determination of Net Asset Value.”
<P align="left">
See “Shareholder Services” for information as to how to
elect either dividend reinvestment or cash payments. Portions of
dividends 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.
<P align="left"><B>Taxes</B>
<P align="left">
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.
<P align="left">
As discussed in “General Information — Description
of Shares,” 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. Losses in one
Series do not offset gains in another Series, and the
requirements (other than certain organizational requirements) for
qualifying for RIC status will be determined at the Series level
rather than at the Trust level.
<P align="left">
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.
<P align="left">
The Trust intends to qualify the Fund to pay
“exempt-interest dividends” as defined in
Section 852(b)(5) of the Code. Under such section if, at the
close of each quarter of the Fund’s taxable year, at least
50% of the value of the Fund’s total assets consists of
obligations exempt from Federal income tax (“tax-exempt
obligations”) under Section 103(a) of the Code
(relating generally to obligations of a state or local
governmental unit), the Fund shall be qualified to pay
exempt-interest dividends to its Class A, Class B,
Class C and Class D shareholders (together the
“shareholders”). Exempt-interest dividends are
dividends or any part thereof paid by the Fund that are
attributable to interest on tax-exempt obligations and designated
by the Trust as exempt-interest dividends in a written notice
mailed to the Fund’s shareholders within 60 days
<P align="center">38
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<P><HR noshade><P>
<DIV align="left">
after the close of the Fund’s taxable year. The Fund will
allocate interest from tax-exempt obligations (as well as
ordinary income, capital gains and tax preference items discussed
below) among the Class A, Class B, Class C and
Class D shareholders according to a method (which it
believes is consistent with the Commission rule permitting the
issuance and sale of multiple classes of shares) that is based
upon the gross income that is allocable to the 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.
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Exempt-interest dividends 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
income tax purposes or for North Carolina income tax purposes to
the extent attributable to exempt-interest dividends.
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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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 taxes. 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 taxes; 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 taxes. 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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Distributions from investment income and capital gains of the
Fund, including exempt-interest dividends, will be included in
the North Carolina capital stock, surplus and undivided profits
base in computing the North Carolina franchise tax and may also
be subject to state taxes in states other than North Carolina and
local taxes. 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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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. Certain categories of
capital gains are
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center">39
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<P><HR noshade><P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
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 and 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.
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
All or a portion of the Fund’s gains from the sale or
redemption of tax-exempt obligations purchased at a market
discount will be treated as ordinary income rather than capital
gain. This rule may increase the amount of ordinary income
dividends received by shareholders. Distributions in excess of
the Fund’s earnings and profits will first reduce the
adjusted tax basis of a holder’s shares and, after such
adjusted tax basis is reduced to zero, will constitute capital
gains to such holder (assuming the shares are held as a capital
asset). Any loss upon the sale or exchange of Fund shares held
for six months or less will be disallowed to the extent of any
exempt-interest dividends received by the shareholder. In
addition, any such loss that is not disallowed under the rule
stated above will be treated as long-term capital loss to the
extent of any capital gain dividends 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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The Code subjects interest received on certain otherwise
tax-exempt securities to a Federal 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 (<I>e.g.</I>, 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 a Federal alternative minimum tax.
The Fund will purchase such “private activity bonds,”
and the Trust will report to shareholders within 60 days
after calendar year-end the portion of the Fund’s dividends
declared during the year which constitute an item of tax
preference for alternative minimum tax purposes. The Code further
provides that corporations are subject to a Federal 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 Federal alternative minimum tax on
exempt-interest dividends paid by the Fund.
<P align="left">
The Fund may invest in high yield securities, as described in
“Investment Objective and Policies — Description
of Municipal Bonds.” Furthermore, the Fund may also invest
in instruments the return on which includes non-traditional
features such as indexed principal or interest payments
(“non-traditional 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 non-traditional instruments could be
recharacterized as taxable ordinary income.
<P align="left">
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 on 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.
<P align="left">
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
reduces any sales charge the shareholder would have owed upon
purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
<P align="left">
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
<P align="center">40
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<P><HR noshade><P>
<DIV align="left">
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.
</DIV>
<P align="left">
Ordinary income dividends paid to shareholders that are
nonresident aliens or foreign entities will be subject to a 30%
United States withholding tax under existing provisions of the
Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders
are urged to consult their own tax advisors concerning the
applicability of the United States withholding tax.
<P align="left">
Under certain provisions of the Code, some shareholders may be
subject to a 31% withholding tax on certain ordinary income
dividends and on capital gain dividends and redemption payments
(“backup withholding”). Generally, shareholders subject
to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who,
to the Trust’s knowledge, have furnished an incorrect
number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that
such shareholder is not otherwise subject to backup withholding.
<P align="left">
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.
<P align="left"><B>Tax Treatment of Options and Futures Transactions</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The Fund may purchase and 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
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>i.e.</I>,
each such option or financial futures contract will be treated
as sold for its fair market value on the last day of the taxable
year), and any gain or loss attributable to Section 1256
contracts will be 60% long-term and 40% short-term capital gain
or loss). Application of these rules to Section 1256
contracts held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to market rules outlined
above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of changes in price or
interest rates with respect to its investments.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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
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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Shareholders are urged to consult their tax advisers regarding
the availability of any exemptions from state or local taxes and
with specific questions as to Federal, foreign, state or local
taxes.
<P align="center"><B>PERFORMANCE DATA</B>
<P align="left">
From time to time the Fund may include its average annual total
return and other total return data, as well as yield and
tax-equivalent yield, in advertisements or information furnished
to present or prospective shareholders. Total return, 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.
<P align="center">41
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="left">
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 Class B and Class C
shares.
<P align="left">
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.
<P align="left">
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.
<P align="left">
Set forth below is total return, yield and tax-equivalent yield
information for the Class A, Class B, Class C and
Class D shares of the Fund for the periods indicated.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="32%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="7"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Class A Shares</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Class B Shares</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Expressed as</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Redeemable Value</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Expressed as</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Redeemable Value</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>a percentage</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>of a hypothetical</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>a percentage</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>of a hypothetical</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>based on a</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>$1,000 investment</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>based on a</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>$1,000 investment</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>hypothetical</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>at the end of</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>hypothetical</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>at the end of</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Period</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>$1,000 investment</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>the period</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>$1,000 investment</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>the period</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="15"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><FONT size="2"><B>Average Annual Total Return</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><FONT size="2"><B>(including maximum applicable sales charges)</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
One Year Ended July 31, 1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3.02)</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">969.80</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3.34)</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">966.60</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Five Years Ended July 31, 1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.00</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,276.50</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.33</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,296.30</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Inception (September 25, 1992) to July 31, 1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.46</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,439.40</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.56</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,448.40</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="15" align="center" valign="bottom"><FONT size="2"><B>Annual Total Return<BR>(excluding maximum applicable sales charges)</B></FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Year ended July 31,</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.02</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,010.20</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.41</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,004.10</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
1998</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.99</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,059.90</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.45</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,054.50</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
1997</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.17</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,101.70</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.71</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,097.10</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
1996</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.76</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,057.60</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.21</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,052.10</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
1995</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.60</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,066.00</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.06</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,060.60</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
1994</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1.11</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11,011.10</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.60</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,006.00</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Inception (September 25, 1992) to July 31, 1993</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.52</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,115.20</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">11.06</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,110.60</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center">42
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="34%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="7%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="7%"> </TD>
<TD width="3%"> </TD>
<TD width="5%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
<TD></TD>
<TD colspan="3"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="15"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><FONT size="2"><B>Aggregate Total Return</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="15"><FONT size="2"><B>(including maximum applicable sales charges)</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Inception (September 25, 1992) to July 31, 1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">43.94</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,439.40</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">44.84</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,448.40</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="15" align="center" valign="bottom"><FONT size="2"><B>Yield</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
30 days ended July 31, 1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.86</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.51</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="15" align="center" valign="bottom"><FONT size="2"><B>Tax Equivalent Yield*</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
30 days ended July 31, 1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.36</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.88</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<HR size="1" width="18%" align="left">
</DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="2%"></TD>
<TD width="98%"></TD>
</TR>
<TR valign="top">
<TD>* </TD>
<TD align="left">
Based on a Federal income tax rate of 28%.</TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="32%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
<TD width="1%"> </TD>
<TD width="6%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="7"></TD>
<TD></TD>
<TD colspan="7"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Class C Shares</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><FONT size="2"><B>Class D Shares</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="7"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Expressed as</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Redeemable Value</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Expressed as</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Redeemable Value</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>a percentage</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>of a hypothetical</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>a percentage</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>of a hypothetical</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>based on a</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>$1,000 investment</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>based on a</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>$1,000 investment</B></FONT></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>hypothetical</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>at the end of</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>hypothetical</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>at the end of</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Period</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>$1,000 investment</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>the period</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>$1,000 investment</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>the period</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="15" align="center" valign="bottom"><FONT size="2"><B>Average Annual Total Return<BR>(including maximum applicable sales charges)</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
One year ended July 31, 1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(0.53)</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">994.70</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">(3.12)</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">968.80</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Inception (October 21, 1994) to<BR>
July 31, 1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">6.10</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,326.60</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.75</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,306.00</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="15" align="center" valign="bottom"><FONT size="2"><B>Annual Total Return<BR>(excluding maximum applicable sales charges)</B></FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Year Ended July 31,</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.41</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,004.10</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">0.92</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,009.20</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
1998</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.35</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,053.50</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.88</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,058.80</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
1997</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.50</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,095.00</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">10.05</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,100.50</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
1996</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.20</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,052.00</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.75</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,057.50</FONT></TD>
<TD></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Inception (October 21, 1994) to July 31, 1995</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">8.87</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,088.70</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">9.39</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,093.90</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="15" align="center" valign="bottom"><FONT size="2"><B>Aggregate Total Return<BR>(including maximum applicable sales charges)</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Inception (October 21, 1994) to July 31, 1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">32.66</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,326.60</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">30.60</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">1,306.00</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="15" align="center" valign="bottom"><FONT size="2"><B>Yield</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
30 days ended July 31, 1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.41</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">3.76</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD colspan="15" align="center" valign="bottom"><FONT size="2"><B>Tax Equivalent Yield*</B></FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
30 days ended July 31, 1999</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">4.74</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">5.22</FONT></TD>
<TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="right" valign="bottom" nowrap><FONT size="2">—</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<HR size="1" width="18%" align="left">
</DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="2%"></TD>
<TD width="98%"></TD>
</TR>
<TR valign="top">
<TD>* </TD>
<TD align="left">
Based on a Federal income tax rate of 28%.</TD>
</TR>
</TABLE>
<P align="left">
In order to reflect the reduced sales charges in the case of
Class A or Class D shares, or the waiver of the CDSC in
the case of Class B or Class C shares applicable to
certain investors, as described under “Purchase of
Shares” the total return data quoted by the Fund in
advertisements directed to such investors may take into account
the reduced, and not the maximum, sales charge or may not take
into account the CDSC, and, therefore, may reflect greater total
return since, due to the reduced sales charges or the waiver of
CDSCs, a lower amount of expenses may be deducted.
<P align="left">
On occasion, the Fund may compare its performance to the Lehman
Brothers Municipal Bond Index or other market indices or to
performance data published by Lipper Analytical Services, Inc.,
Morningstar Publications, Inc. (“Morningstar”), CDA
Investment Technology, Inc., <I>Money Magazine, U.S. News &
World Report, Business Week, Forbes Magazine, Fortune Magazine
</I> or other industry publications. When comparing its
performance to a market index, the Fund may refer to various
statistical measures derived from the historic performance of the
Fund and the index such as standard deviation and beta. In
addition, from time to time the Fund may include its Morningstar
risk-adjusted performance ratings in advertisements or
<P align="center">43
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
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.
</DIV>
<P align="left">
Total return 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.
<P align="center"><B>GENERAL INFORMATION</B>
<P align="left"><B>Description of Shares</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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, 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 with income exempt from Federal, and in
certain cases state and local, income taxes. 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 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.
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. Shareholder approval is not required for the
authorization of additional Series or classes of a Series of the
Trust.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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 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. All
shares of the Trust have equal voting rights. Each class has
exclusive voting rights with respect to matters relating to
distribution and/ or account maintenance expenditures, as
applicable (except that Class B shareholders may vote upon
any material changes to expenses charged under the Class D
Distribution Plan). 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.
<P align="left">
Each issued and outstanding share of a Series is entitled to one
vote and to participate equally in dividends and distributions
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 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
<P align="center">44
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left">
required to call a special meeting of shareholders in accordance
with the requirements of the Investment Company Act to seek
approval of new management and advisory arrangements, of a
material increase in distribution fees or a change in the
fundamental policies, objectives or restrictions of a Series.
</DIV>
<P align="left">
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 or similar rights and will be freely transferable.
Redemption and conversion rights are discussed elsewhere herein
and in the Prospectus. Shares do not have cumulative voting
rights and the holders of more than 50% of the shares of the
Trust voting for the election of Trustees can elect all of the
Trustees if they choose to do so and in such event the holders of
the remaining shares would not be able to elect any Trustees. No
amendments may be made to the Declaration of Trust, other than
amendments necessary to conform the Declaration to certain laws
or regulations, to change the name of the Trust, or to make
certain non-material changes, without the affirmative vote of a
majority of the outstanding shares of the Trust, or of the
affected Series or class, as applicable.
<P align="left">
The Declaration of Trust establishing the Trust dated
August 2, 1985, a copy of which, together with all
amendments thereto (the “Declaration”) is on file in
the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name “Merrill Lynch Multi-State Municipal
Series Trust” refers to the Trustees under the Declaration
collectively as Trustees, but not as individuals or personally;
and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability; nor shall resort
be had to their private property for the satisfaction of any
obligation or claim of the Trust, but the “Trust
Property” only shall be liable. 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.
<P align="left">
The Manager provided the initial capital for the Fund by
purchasing 10,000 shares of the Fund for $100,000. Such
shares were acquired for investment and can only be disposed of
by redemption. If additional Series are added to the Trust, the
organizational expenses will be allocated among the Series in a
manner deemed equitable by the Trustees.
<P align="left"><B>Independent Auditors</B>
<P align="left">
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New
Jersey 08540-6400, has been selected as the independent auditors
of the Trust. The selection of independent auditors is subject to
approval by the non-interested Trustees of the Trust. The
independent auditors are responsible for auditing the annual
financial statements of the Fund.
<P align="left"><B>Custodian</B>
<P align="left">
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
receipt and delivery of securities and collecting interest on the
Fund’s investments.
<P align="left"><B>Transfer Agent</B>
<P align="left">
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 “How
to Buy, Sell, Transfer and Exchange Shares — Through
the Transfer Agent” in the Prospectus.
<P align="left"><B>Legal Counsel</B>
<P align="left">
Brown & Wood LLP, One World Trade Center, New York, New York
10048-0557, is counsel for the Trust.
<P align="center">45
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="left"><B>Reports to Shareholders</B>
<P align="left">
The fiscal year of the Fund ends on July 31 of each year.
The Trust sends to the Fund’s shareholders, 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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left"><B>Shareholder Inquiries</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Shareholder inquiries may be addressed to the Fund at the address
or telephone number set forth on the cover page of this
Statement of Additional Information.
<P align="left"><B>Additional Information</B>
<P align="left">
The Prospectus and this Statement of Additional Information do
not contain all the information set forth in the Registration
Statement and the exhibits relating thereto, which the Trust has
filed with the Securities and Exchange Commission, Washington,
D.C., under the Securities Act and the Investment Company Act, to
which reference is hereby made.
<P align="left">
Under a separate agreement, ML & Co. has granted the
Trust the right to use the “Merrill Lynch” name and has
reserved the right to withdraw its consent to the use of such
name by the Trust at any time or to grant the use of such name to
any other company, and the Trust has granted ML & Co.
under certain conditions, the use of any other name it might
assume in the future, with respect to any corporation organized
by ML & Co.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
To the knowledge of the Trust, the following persons or entities
owned beneficially 5% or more of any class of the Fund’s
shares as of October 1, 1999:
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="35%"> </TD>
<TD width="3%"> </TD>
<TD width="42%"> </TD>
<TD width="3%"> </TD>
<TD width="8%"> </TD>
<TD width="1%"> </TD>
<TD width="8%"> </TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Name</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Address</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Percent of Class</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Mr. Fletcher Horn</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
4010 Beresford Road<BR>
Charlotte, North Carolina 28211</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="center" valign="top" nowrap><FONT size="2">5.7% of Class A</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
T. Jerry Walker and<BR>
Marie L. Walker JTWROS</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
109 Bosswood Court<BR>
Cary, North Carolina 27511</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="center" valign="top" nowrap><FONT size="2">5.6% of Class A</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Eric Bolen and<BR>
Elizabeth Bolen<BR>
Joint Trustees</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
c/o Department of Biology<BR>
University of North Carolina at Wilmington<BR>
Wilmington, North Carolina 28403</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="center" valign="top" nowrap><FONT size="2">14% of Class C</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Mrs. Carlotte A. Stark</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
400 Charlotte St. #601<BR>
Asheville, North Carolina 28801</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="center" valign="top" nowrap><FONT size="2">9.2% of Class C</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Barbara Schroeder</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
4900 Kingpost Drive<BR>
Fuquay Vaina, North Carolina 27526</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="center" valign="top" nowrap><FONT size="2">20.5% of Class D</FONT></TD>
<TD></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Leo E. Magiera<BR>
Trustee by Magiera Trust</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
85 Sakonnet Trail<BR>
Pinehurst, North Carolina 28374</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="center" valign="top" nowrap><FONT size="2">5.5% of Class D</FONT></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center"><B>FINANCIAL STATEMENTS</B>
<P align="left">
The Fund’s audited financial statements are incorporated in
this Statement of Additional Information by reference to its 1999
annual report to shareholders. You may request a copy of the
annual report at no charge by calling (800) 456-4587 ext.
789 between 8:00 a.m. and 8:00 p.m. on any business day.
<P align="center">46
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<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center"><B>APPENDIX I</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center">
<B>ECONOMIC AND FINANCIAL CONDITIONS IN NORTH CAROLINA</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<I>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.</I>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The State of North Carolina (the “State”) has three
major operating funds: the General Fund, the Highway Fund and the
Highway Trust Fund. North Carolina 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 and tobacco products tax. State sales
taxes on food, as well as the inheritance and soft drink taxes,
are 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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Fiscal year 1997 ended with a positive General Fund balance
of approximately $874.8 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 (bringing the total reserve to $221.2 million
after prior withdrawals). An additional $49.4 million was
transferred to the Clean Water Management Trust Fund (bringing
the total reserve to $49.4 million after prior withdrawals)
and $115 million and $156 million were reserved in
newly-created Disaster Relief and Intangible Tax Refund Reserves,
respectively. The Disaster Relief Reserve was used to cover
disaster relief funds spent during fiscal year 1997. An
additional $61 million was reserved for the State to acquire
the shares of the North Carolina Railroad Company not held by
the State. No additional amounts were transferred to the Savings
Reserve for the year (the existing balance of $500.9 million
having met the statutory reserve requirements). After additional
reserves, the unreserved General Fund balance at the end of
fiscal year 1997 was approximately $318.7 million.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Fiscal year 1998 ended with a positive General Fund balance
of approximately $1,662 million. Along with additional
reserves, $21.6 million was reserved in the Savings Reserve,
and $55 million was reserved to fund public school employee
performance bonuses, longevity payments, school bus purchases
and purchases of additional school technology. $145 million
was placed in the Reserve for Repairs and Renovations of State
Facilities (bringing the total reserve to $174.2 million),
and $47.4 million was placed in the reserve for the Clean
Water Management Trust Fund. After additional reserves, the
unreserved General Fund balance at the end of fiscal
year 1998 was approximately $101 million.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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. Based on a modified accrual basis, the
General Fund balance at June 30, 1997 and 1998 was
$1,703.9 million and $1,669.7 million, respectively.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
On October 28, 1998, the North Carolina General Assembly
adopted the biennium budget for 1998 to 2000. The
$12.6 billion budget for fiscal year 1999 included over
$100 million in new spending for the state’s
universities and community colleges, over $90 million in new
spending for health and human services, including
$42.5 million for expansion of North Carolina’s Smart
Start program for preschool children, and almost $30 million
in new spending on law enforcement. The legislature also
approved teacher pay raises averaging 6.5%.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
On June 30, 1999, the General Assembly adopted a $13.5
billion budget for fiscal year 1999-2000, an increase of 4.6%
from the previous year, with no new taxes or tax relief.
Primarily focusing on education, the General Assembly authorized
7.5% raises for teachers in the public schools and salary and
tuition increases at
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</FONT></DIV>
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<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
community colleges and universities. Additionally, the General
Assembly allocated $30 million to the Clean Water Management
Trust Fund to provide grants and loans to local governments to
clean up and protect rivers and streams and to preserve open
spaces.
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The General Assembly also took action to reduce some taxes,
including elimination of the sales tax on food (estimated cost
$185.5 million in fiscal years 1999-2000) and the
inheritance tax (estimated cost $52.5 million in fiscal
years 1999-2000).
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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 the state governments that,
if enacted into law, could affect fiscal and economic policies of
the states, including the State.
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</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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
has announced that the State’s seasonally adjusted
unemployment rate in September 1999 was 3.1% of the labor force,
as compared with an unemployment rate of 4.2% nationwide.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
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.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<I>Patton v. State of North Carolina </I>and <I>Bailey v. State
of North Carolina</I> — State Tax Refunds —
Federal and State Retirees. On May 8, 1998, in <I>Bailey, et
al. v. State of North Carolina</I>, the North Carolina Supreme
Court held that the act of the General Assembly that repealed a
tax exemption on State and local government retirement benefits
was an unconstitutional impairment of contract and a taking of
property without just compensation. Accordingly, retirement
benefits that were vested before August 1989 were held to be
exempt from State income taxation. In addition, the North
Carolina Supreme Court ruled that recovery of taxes previously
paid by retirees on those benefits was not limited to retirees
who paid the tax under protest or requested a refund within the
time periods specified by the statute.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Potential refunds and interest are estimated by the State to be
$352.68 million through December 31, 1997, with respect
to refunds, and through June 30, 1998, with respect to
interest. Until this matter is resolved, any additional potential
refunds and interest will continue to accrue. In addition to
refunds and interest, the State will be unable to continue to tax
the applicable retirement benefits, thus reducing future
revenue. The case was remanded by the North Carolina Supreme
Court for administration and further orders to carry out the
decision. Under the initial order of the trial judge, the State
would offset its liabilities to improperly taxed retirees by
allowing tax credits to eligible retirees to be applied against
future State income taxes, or in the case of eligible retirees
who are deceased, no longer residents of the State, or who have
no tax liability, to be paid in whole to such retirees or their
estates.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Federal retirees in <I>Patton, et al. v. State of North Carolina
</I>, filed a class action suit in Wake County Superior Court in
1995 seeking monetary relief for taxes paid since 1989. This case
was brought in anticipation of a favorable outcome for the
plaintiffs in the <I>Bailey </I>case. The federal retirees allege
that a result in the <I>Bailey </I>case that exempts State and
local retirement benefits from State income taxes would require a
similar exemption for federal retirement benefits under the
United States Supreme Court’s 1989 decision in <I>Davis v.
Michigan</I>. In <I>Davis</I>, the United States Supreme Court
ruled that a Michigan income tax statute that taxed
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</FONT></DIV>
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<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
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 <I>Davis </I>
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 by the act of
the General Assembly held unconstitutional in <I>Bailey</I>. The
<I>Patton </I>case was being held in abeyance pending the outcome
in <I>Bailey</I>. Potential refunds and interest have been
estimated by the State to be $585.09 million through
June 30, 1997. Until this matter is resolved, any additional
potential refunds and interest have continued and will continue
to accrue.
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
In June 1998, the plaintiff classes in the <I>Bailey </I>and
<I>Patton </I>cases reached a tentative settlement with the
State of North Carolina. Under the terms of the settlement, the
General Assembly will appropriate $400 million in the
1998-1999 fiscal year, and $399 million by July 15,
1999 in the 1999-2000 fiscal year, to a settlement fund. Amounts
in the fund will be paid to the state, local and federal retirees
in the cases. The terms of the settlement provide that such
payments will completely extinguish all of the State’s
liability to the retirees arising from the taxation of state,
local and federal retirement income and benefits from 1989
through 1997.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
The tentative court settlement was made subject to the
appropriation of funds by the General Assembly and to court
approval following notice to the class members. The
$400 million appropriation was made by action of the General
Assembly in September 1998, and on October 7, 1998,
the court entered an order approving the settlement. The final
$399 million appropriation was made by action of the General
Assembly in June 1999.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<I>Smith et. al. v. State of North Carolina</I> — State
Tax Refunds — Intangibles Tax. On February 21,
1996, the U.S. Supreme Court declared North Carolina’s
intangibles tax unconstitutional. Subsequently, the State
refunded intangibles taxes paid by all persons who had paid such
taxes under protest in compliance with the state’s tax
refund statute. In the <I>Smith </I>case, refunds were sought by
a class of taxpayers who had not complied with the tax refund
statute. On December 4, 1998, the Supreme Court ruled that
North Carolina will have to pay these refunds. Refunds to
non-protesters will total approximately $233 million plus
interest of approximately $100 million. In July 1999, the
General Assembly authorized the appropriation of $440 million
over the next two years to pay such refunds, and a tentative
court settlement made subject to such appropriations was
approved. An initial $200 million appropriation was made by
action of the General Assembly on July 21, 1999. In order to
achieve final consummation of the settlement, the General
Assembly must appropriate an additional $240 million amount for
such refunds no later than July 10, 2000.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
In its 1996 Short Session, the North Carolina General Assembly
approved 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). In November 1997, the State issued
$250 million of the authorized highway bonds (Highway
Bonds). In March 1998, the State issued an additional
$450 million of the authorized school bonds (Public School
Building Bonds). In March 1999, the State again issued an
additional $450 million of the authorized school bonds (Public
School Building Bonds). The offering of the remaining $1.15
billion of these authorized bonds is anticipated to occur over
the next two to four years.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
On November 3, 1998, North Carolina voters approved the
issuance of $800 million in clean water bonds and
$200 million in natural gas facilities bonds. The clean
water bonds will provide grants and loans for needed water and
sewer improvement projects for the State’s municipalities,
and fund programs to reduce pollution in the State’s
waterways. The natural gas bond issue will provide grants, loans
and other financing for local distribution companies or state or
local government agencies to build natural gas facilities, in
part to help attract industry to the State’s rural regions.
In September 1999, the State issued a total of $197.4 million of
authorized clean water bonds and natural gas facilities bonds,
$177.4 million of which were a combination of clean water bonds
and natural gas facilities bonds and $20 million of which were
solely natural gas facilities bonds. In October 1999, the State
issued an additional $2.6 million of authorized clean water
bonds.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Hurricane Floyd struck North Carolina on September 16, 1999,
causing significant flood and wind damage and some loss of life.
The effects of the storm and its aftermath have been, and
continue to be, felt in the eastern part of the State. Federal
and State disaster recovery and relief efforts are ongoing to
assist victims
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</FONT></DIV>
<DIV align="left">
of the storm. The final estimate of property damage caused by the
storm and its aftermath has not yet been determined but is
expected to exceed the $6 billion of damages caused by
Hurricane Fran in 1996.
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
In the opinion of the Offices of the Governor and the State
Treasurer, notwithstanding the devastation caused by Hurricane
Floyd, the storm and its consequences should not have a material
adverse impact upon the ability of the State to meet its
financial obligations, including timely payment of principal and
interest on the Bonds.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Currently, Moody’s, Standard & Poor’s and
Fitch rate North Carolina general obligation bonds Aaa, AAA, and
AAA, respectively.
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</FONT></DIV>
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<P align="center"><B>APPENDIX II</B>
<P align="center">
<B>RATINGS OF MUNICIPAL BONDS</B>
<P align="left">
Description of Moody’s Investors Service, Inc.’s
(“Moody’s”) Long-Term Debt Ratings
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="92%"> </TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Aaa</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as “gilt edged.” Interest
payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of
such issues.</FONT></TD>
</TR>
<TR>
<TD colspan="3"> </TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Aa</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD colspan="3"> </TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
A</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD colspan="3"> </TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Baa</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD colspan="3"> </TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Ba</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD colspan="3"> </TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
B</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD colspan="3"> </TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Caa</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD colspan="3"> </TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Ca</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD colspan="3"> </TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
C</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
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.</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
<I>Note: </I>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.
<P align="left">
<I>Short Term Notes: </I>The three ratings of Moody’s for
short-term notes are MIG 1/ VMIG 1, MIG 2/ VMIG 2 and MIG 3/ VMIG
3; MIG 1/ VMIG 1 denotes “best quality strong protection
from established cash flows”; MIG 2/ VMIG 2 denotes
“high quality” with “ample margins of
protection”; MIG 3/ VMIG 3 instruments are of
“favorable quality but lacking the undeniable strength of
the preceding grades.”
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<P align="left"><B>Description of Moody’s Commercial Paper Ratings</B>
<P align="left">
Moody’s Commercial Paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having
an original maturity in excess of nine months. Moody’s
employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of
rated issuers:
<P align="left">
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.
<P align="left">
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.
<P align="left">
Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of short-term promissory
obligations. The effects of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes to the level of debt
protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
<P align="left">
Issuers rated Not Prime do not fall within any of the Prime
rating categories.
<P align="left"><B>Description of Standard & Poor’s, a Division of The
McGraw-Hill Companies, Inc. (“Standard &
Poor’s”), Municipal Debt Ratings</B>
<P align="left">
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 program. It takes into consideration
the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation.
<P align="left">
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.
<P align="left">
The ratings are based on current information furnished by the
obligors or obtained by Standard & Poor’s from other
sources Standard & Poor’s considers reliable. Standard
& Poor’s does not perform an audit in connection with
any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn
as a result of changes in, or unavailability of, such
information, or based on circumstances.
<P align="left">
The ratings are based, in varying degrees, on the following
considerations:
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="4%"></TD>
<TD width="93%"></TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD> </TD>
<TD> I. </TD>
<TD align="left">
Likelihood of payment-capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;</TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD> II.</TD>
<TD align="left">
Nature of and provisions of the obligation;</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>III.</TD>
<TD align="left">
Protection afforded to, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting
creditors’ rights.</TD>
</TR>
</TABLE>
<P align="center">II-2
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<P><HR noshade><P>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="11%"> </TD>
<TD width="3%"> </TD>
<TD width="86%"> </TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
AAA</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Debt rated “AAA” has the highest rating assigned by
Standard & Poor’s. Capacity to meet its financial
commitment on the obligation is extremely strong.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
AA</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Debt rated “AA” differs from the highest rated issues
only in small degree. The Obligor’s capacity to meet its
financial commitment on the obligation is very strong.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
A</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
BBB</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
BB</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Debt rated “BB,” “B,” “CCC,”
“CC” and “C” are regarded as having
significant speculative</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
B</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
characteristics.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
CCC</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
"BB” indicates the least degree of speculation and
“C” the highest degree of speculation.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
CC</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
While such debt will likely have some quality and protective
characteristics, these may be</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
C</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
outweighed by large uncertainties or major risk exposures to
adverse conditions.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
D</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
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 similar action if payments on an
obligation are jeopardized.</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
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.
<P align="left"><B>Description of Standard & Poor’s Commercial Paper
Ratings</B>
<P align="left">
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-1” for
the highest-quality obligations to “D” for the lowest.
These categories are as follows:
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="11%"> </TD>
<TD width="3%"> </TD>
<TD width="86%"> </TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
A-1</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
A-2</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="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.”</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
A-3</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
B</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Issues rated “B” are regarded as having only
speculative capacity for timely payment.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
C</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
D</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
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.</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
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 or 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.
<P align="center">II-3
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<P><HR noshade><P>
<P align="left">
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.
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="3%"></TD>
<TD width="3%"></TD>
<TD width="94%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>— </TD>
<TD align="left">
Amortization schedule — the larger the final maturity
relative to other maturities, the more likely it will be treated
as a note.</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>— </TD>
<TD align="left">
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.</TD>
</TR>
</TABLE>
<P align="left">
Note rating symbols are as follows:
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="11%"> </TD>
<TD width="3%"> </TD>
<TD width="86%"> </TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
SP-1</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
SP-2</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
SP-3</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Speculative capacity to pay principal and interest.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
c</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
The “c” subscript is used to provide additional
information to investors that the bank may terminate its
obligation to purchase tendered bonds if the long-term credit
rating of the issuer is below an investment-grade level and/or
the issuer’s bonds are deemed taxable.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
p</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
The letter “p” indicates that the rating is
provisional. A provisional rating assumes the successful
completion of the project financed by the debt being rated and
indicates that payment of debt service requirements is largely or
entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the
likelihood of or the risk of default upon failure of such
completion. The investor should exercise his own judgment with
respect to such likelihood and risk.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
*</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Continuance of the ratings is contingent upon Standard &
Poor’s receipt of an executed copy of the escrow agreement
or closing documentation confirming investments and cash flows.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
r</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
The “r” highlights derivative, hybrid, and certain
other obligations that Standard & Poor’s believes may
experience high volatility or high variability in expected
returns as a result of noncredit risks. Examples of such
obligations are securities with principal or interest return
indexed to equities, commodities, or currencies; certain swaps
and options, and interest-only and principal-only mortgage
securities. The absence of an “r” symbol should not be
taken as an indication that an obligation will exhibit no
volatility or variability in total return.</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="left"><B>Description of Fitch IBCA, Inc.’s (“Fitch”)
Investment Grade Bond Ratings</B>
<P align="left">
Fitch investment grade bond ratings provide a guide to investors
in determining the credit risk associated with a particular
security. The rating represents 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.
<P align="left">
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 and credit quality.
<P align="left">
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guarantees unless
otherwise indicated.
<P align="left">
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.
<P align="center">II-4
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<P><HR noshade><P>
<P align="left">
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.
<P align="left">
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.
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="92%"> </TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
AAA</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
AA</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
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+.”</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
A</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
BBB</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
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.</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
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.
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="16%"> </TD>
<TD width="3%"> </TD>
<TD width="81%"> </TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
NR</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Indicates that Fitch does not rate the specific issue.</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Conditional</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Suspended</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Withdrawn</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
FitchAlert</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
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.</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
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.
<P align="left"><B>Description of Fitch’s Speculative Grade Bond Ratings</B>
<P align="left">
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.
<P align="center">II-5
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<P><HR noshade><P>
<P align="left">
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.
<P align="left">
Bonds that have the rating are of similar but not necessarily
identical credit quality since rating categories cannot fully
reflect the differences in degrees of credit risk.
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="7%"> </TD>
<TD width="3%"> </TD>
<TD width="90%"> </TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
BB</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
B</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
CCC</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
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.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
CC</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
C</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Bonds are in imminent default in payment of interest or
principal.</FONT></TD>
</TR>
<TR>
<TD align="right" valign="top"><FONT size="2">
DDD<BR>
DD<BR>
D</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or
reorganization of the obligor. “DDD” represents the
highest potential for recovery on these bonds, and “D”
represents the lowest potential for recovery.</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
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.
<P align="left"><B>Description of Fitch’s Short-Term Ratings</B>
<P align="left">
Fitch’s short-term ratings apply to debt obligations that
are payable on demand or have original maturities of up to three
years, including commercial paper, certificates of deposit,
medium-term notes, and municipal and investment notes.
<P align="left">
The short-term ratings places greater emphasis than a long-term
rating on the existence of liquidity necessary to meet the
issuer’s obligations in a timely manner.
<P align="left">
Fitch short-term ratings are as follows:
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="8%"> </TD>
<TD width="3%"> </TD>
<TD width="89%"> </TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
F-1+</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
<I>Exceptionally Strong Credit Quality. </I>Issues assigned this
rating are regarded as having the strongest degree of assurance
for timely payment.</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
F-1</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
<I>Very Strong Credit Quality. </I>Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated “F-1+.”</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center">II-6
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<P><HR noshade><P>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="8%"> </TD>
<TD width="3%"> </TD>
<TD width="89%"> </TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
F-2</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
<I>Good Credit Quality. </I>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.</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
F-3</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
<I>Fair Credit Quality. </I>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.</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
F-S</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
<I>Weak Credit Quality. </I>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.</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
D</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
<I>Default. </I>Issues assigned this rating are in actual or
imminent payment default.</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
LOC</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
The symbol “LOC” indicates that the rating is based on
a letter of credit issued by a commercial bank.</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center">II-7
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<P><HR noshade><P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
<B>Code #16860-10-99</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="center"><B>PART C. OTHER INFORMATION</B>
<P align="left"><B>Item 23. <I>Exhibits</I></B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="4%"> </TD>
<TD width="1%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="82%"> </TD>
</TR>
<TR>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Exhibit</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Number</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Description</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="center" nowrap><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">1(a)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Declaration of Trust of the Registrant, dated August 2,
1985.(a)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">(b)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Amendment to Declaration of Trust, dated September 18,
1987.(a)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">(c)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Amendment to Declaration of Trust, dated December 21,
1987.(a)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">(d)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Amendment to Declaration of Trust, dated October 3, 1988.(a)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">(e)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Amendment to Declaration of Trust, dated October 17, 1994
and instrument establishing Class C and Class D shares
of beneficial interest.(a)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">(f)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Instrument establishing Merrill Lynch North Carolina Municipal
Bond Fund (the “Fund”) as a series of the
Registrant.(a)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">(g)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Instrument establishing Class A and Class B shares of
beneficial interest of the Fund.(a)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">2</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
By-Laws of the Registrant.(a)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">3</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Portions of the Declaration of Trust, Certificate of
Establishment and Designation and By-Laws of the Registrant
defining the rights of holders of the Fund as a series of the
Registrant.(b)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">4(a)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Form of Management Agreement between the Registrant and Fund
Asset Management, L.P.(a)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">(b)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Supplement to Management Agreement between Registrant and Fund
Asset Management, L.P.(e)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">5(a)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Form of Revised Class A Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc. (now known
as Princeton Funds Distributor, Inc.) (the
“Distributor”) (including Form of Selected Dealers
Agreement).(e)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">(b)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Form of Class B Distribution Agreement between the
Registrant and the Distributor (including Form of Selected
Dealers Agreement).(e)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">(c)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Form of Class C Distribution Agreement between the
Registrant and the Distributor (including Form of Selected
Dealers Agreement).(e)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">(d)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Form of Class D Distribution Agreement between the
Registrant and the Distributor (including Form of Selected
Dealers Agreement).(e)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">(e)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Letter Agreement between the Fund and the Distributor, dated
September 15, 1993, in connection with the Merrill Lynch
Mutual Fund Advisor Program.(c)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">6</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
None.</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">7</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Form of Custody Agreement between the Registrant and State Street
Bank and Trust Company.(d)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">8</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between the Registrant and
Merrill Lynch Financial Data Services, Inc. (now known as
Financial Data Services, Inc.)(d)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">9(a)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Opinion of Brown & Wood LLP, counsel to the Registrant.(g)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">(b)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Consent of Brown & Wood LLP, counsel to the Registrant.</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Consent of Deloitte & Touche LLP, independent auditors for
the Registrant</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">11</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
None.</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">12</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Certificate of Fund Asset Management, L.P.(a)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">13(a)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Class B Distribution Plan of the Registrant and Class B
Distribution Plan Sub-Agreement.(c)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">(b)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Form of Class C Distribution Plan of the Registrant and
Class C Distribution Plan Sub-Agreement.(e)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">(c)</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Form of Class D Distribution Plan of the Registrant and
Class D Distribution Plan Sub-Agreement.(e)</FONT></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">14</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
None.</FONT></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center">C-1
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="3%"> </TD>
<TD width="4%"> </TD>
<TD width="3%"> </TD>
<TD width="81%"> </TD>
</TR>
<TR>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Exhibit</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Number</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Description</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="center" nowrap><HR size="1"></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">15</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
—</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Merrill Lynch Select Pricing<SUP>SM </SUP>System Plan pursuant to
Rule 18f-3.(f)</FONT></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
<HR size="1" width="18%" align="left">
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="92%"> </TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
(a)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Filed on November 1, 1995 as an Exhibit to Post-Effective
Amendment No. 5 to the Registrant’s Registration
Statement on Form N-1A (File No. 33-48692) under the
Securities Act of 1933, as amended, relating to shares of the
Fund (the “Registration Statement”).</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
(b)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
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. 3 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. 3 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. 3 to
the Registration Statement.</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
(c)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Filed on November 24, 1993 as an Exhibit to Post-Effective
Amendment No. 2 to the Registration Statement.</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
(d)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Incorporated by reference to Exhibit 8 to Post-Effective
Amendment No. 3 to Registrant’s Registration Statement
on Form N-1A under the Securities Act of 1933, filed on
October 14, 1994, relating to shares of Merrill Lynch
Minnesota Municipal Bond Fund series of the Registrant (File
No. 33-44734).</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
(e)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Filed on October 18, 1994 as an Exhibit to Post-Effective
Amendment No. 3 to the Registration Statement.</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
(f)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Incorporated by reference to Exhibit 18 to Post-Effective
Amendment No. 13 to Registrant’s Registration Statement
on Form N-1A under the Securities Act of 1933, filed on
January 25, 1996, relating to shares of Merrill Lynch New
York Municipal Bond Fund series of the Registrant (File No.
2-99473).</FONT></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
(g)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Filed on August 20, 1992 as an Exhibit to Pre-Effective
Amendment No. 1 to the Registration Statement. Refiled with
Post-Effective Amendment No. 9 pursuant to Electronic Data
Gathering, Analysis and Retrieval (EDGAR) requirements.</FONT></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left"><B>Item 24. <I>Persons Controlled by or Under
Common Control with Registrant</I></B>
<P align="left">
The Registrant is not controlled by or under common control with
any other person.
<P align="left"><B>Item 25. <I>Indemnification</I></B>
<P align="left">
Section 5.3 of the Registrant’s Declaration of Trust
provides as follows:
<P align="left">
“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 or she may be
lawfully entitled; provided that no Person may satisfy any right
of indemnity or reimbursement granted herein or in
Section 5.1 or to which he or she may be otherwise entitled
except out of the property of the Trust, and no
<P align="center">C-2
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<P><HR noshade><P>
<DIV align="left">
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.”
</DIV>
<P align="left">
Insofar as the conditional advancing of indemnification moneys
for actions based upon the Investment Company Act of 1940 may be
concerned, such payments will be made only on the following
conditions: (i) the advances must be limited to amounts
used, or to be used, for the preparation or presentation of a
defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only
upon receipt of a written promise by, or on behalf of, the
recipient to repay that amount of the advance which exceeds the
amount which it is ultimately determined that he or she is
entitled to receive from the Registrant by reason of
indemnification; and (iii)(a) such promise must be secured by a
surety bond, other suitable insurance or an equivalent form of
security which assures that any repayments may be obtained by the
Registrant without delay or litigation, which bond, insurance or
other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the
Registrant’s disinterested, non-party Trustees, or an
independent legal counsel in a written opinion, shall determine,
based upon a review of readily available facts that the recipient
of the advance ultimately will be found entitled to
indemnification.
<P align="left">
In Section 9 of the Class A, Class B, Class C
and Class D Shares Distribution Agreements relating to the
securities being offered hereby, the Registrant agrees to
indemnify the Distributor and each person, if any, who controls
the Distributor within the meaning of the Securities Act of 1933,
as amended (“1933 Act”), against certain types of
civil liabilities arising in connection with the Registration
Statement or Prospectus and Statement of Additional Information.
<P align="left">
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.
<P align="left"><B>Item 26. <I>Business and Other Connections of
Investment Adviser</I></B>
<P align="left">
Fund Asset Management, L.P. (the “Manager” or
“FAM”) acts as the investment adviser for the following
open-end registered investment companies: CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury
Fund, The Corporate Fund Accumulation Program, Inc., Financial
Institutions Series Trust, Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate
High Yield Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc.,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc., and The
Municipal Fund Accumulation Program, Inc.; and for the following
closed-end registered investment companies: Apex Municipal Fund,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Corporate High Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings
Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings
California Insured Fund III, Inc., MuniHoldings California
Insured Fund IV, Inc., MuniHoldings California Insured
Fund V, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings Florida
<P align="center">C-3
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<P><HR noshade><P>
<DIV align="left">
Insured Fund III, MuniHoldings Florida Insured Fund IV,
MuniHoldings Florida Insured Fund V, MuniHoldings Insured
Fund, Inc., MuniHoldings Insured Fund II, Inc., MuniHoldings
Insured Fund III, Inc., MuniHoldings Insured Fund IV,
Inc., MuniHoldings Michigan Insured Fund, Inc., MuniHoldings
Michigan Insured Fund II, Inc., MuniHoldings New Jersey Insured
Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc.,
MuniHoldings New Jersey Insured Fund III, Inc., MuniHoldings
New Jersey Insured Fund IV, Inc., MuniHoldings New York
Fund, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniHoldings New York Insured Fund II, Inc., MuniHoldings
New York Insured Fund III, Inc., MuniHoldings New York
Insured Fund IV, Inc., MuniHoldings Pennsylvania Insured
Fund, MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured
Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield
Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Michigan
Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New
Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured
Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield
Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior
High Income Portfolio, Inc. and Worldwide DollarVest Fund, Inc.
</DIV>
<P align="left">
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 Disciplined Equity Fund, Inc., Merrill
Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation
Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch
Global Holdings, Inc., Merrill Lynch Global Resources Trust,
Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global
Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate
Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/ Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets
Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch
Retirement Series Trust, Merrill Lynch Series Fund,
Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill
Lynch Strategic Dividend Fund, Merrill Lynch U.S. Treasury Money
Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc. and Hotchkis and Wiley Funds (advised by
Hotchkis and Wiley, a division of MLAM); and for the following
closed-end registered investment companies: Merrill Lynch High
Income Municipal Bond Fund, Inc., Merrill Lynch Senior Floating
Rate Fund, Inc. and Merrill Lynch Senior Floating Rate
Fund II, Inc. MLAM also acts as sub-adviser to Merrill Lynch
World Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio, two investment portfolios of EQ Advisors Trust.
<P align="left">
The address of each of these registered investment companies is
P.O. Box 9011, Princeton, New Jersey 08543-9011, except that
the address of Merrill Lynch Funds for Institutions Series and
Merrill Lynch Intermediate Government Bond Fund is One Financial
Center, 23rd Floor, Boston, Massachusetts 02111-2665. The address
of the Manager, MLAM, Princeton Services, Inc. (“Princeton
Services”) and Princeton Administrators, L.P.
(“Princeton Administrators”) is also P.O.
Box 9011, Princeton, New Jersey 08543-9011. The address of
Princeton Funds Distributor, Inc., (“PFD”) and of
Merrill Lynch Funds Distributor (“MLFD”) is P.O. Box
9081, Princeton, New Jersey 08543-9081. The address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated
(“Merrill Lynch”) and Merrill Lynch & Co.,
Inc. (“ML & Co.”) is World Financial Center,
North Tower, 250 Vesey Street, New York, New York
10281-1201. The address of the Fund’s transfer agent,
Financial Data Services, Inc. (“FDS”), is
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
<P align="center">C-4
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="left">
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, 1997 for his, her or
its own account or in the capacity of director, officer, partner
or trustee. In addition, Mr. Glenn is President and
Mr. Burke is Vice President and Treasurer of all or
substantially all of the investment companies described in the
first two paragraphs of this Item 26, and Messrs. Doll,
Giordano and Monagle are officers of one or more of such
companies.
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="35%"> </TD>
<TD width="3%"> </TD>
<TD width="18%"> </TD>
<TD width="3%"> </TD>
<TD width="41%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Position(s) with the</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Other Substantial Business,</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Name</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Manager</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Profession, Vocation or Employment</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
ML & Co.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Limited Partner</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Financial Services Holding Company; Limited Partner of MLAM</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Princeton Services</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
General Partner</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
General Partner of MLAM</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Jeffrey M. Peek</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
President</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
President of MLAM; President and Director of Princeton Services;
Executive Vice President of ML & Co.; Managing Director and
Co-Head of the Investment Banking Division of Merrill Lynch in
1997</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Terry K. Glenn</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Executive Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Executive Vice President of MLAM; Executive Vice President and
Director of Princeton Services; President and Director of PFD;
Director of FDS; President of Princeton Administrators</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Gregory A. Bundy</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Chief Operating Officer and Managing Director</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Chief Operating Officer and Managing Director of MLAM; Chief
Operating Officer and Managing Director of Princeton Services;
Co-CEO of Merrill Lynch Australia from 1997 to 1999</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Donald C. Burke</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President and Treasurer</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President, Treasurer and Director of Taxation of
MLAM; Senior Vice President and Treasurer of Princeton Services;
Vice President of PFD; First Vice President of MLAM from 1997 to
1999; Vice President of MLAM from 1990 to 1997</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Michael G. Clark</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President of MLAM; Senior Vice President of Princeton
Services; Treasurer and Director of PFD; First Vice President of
MLAM from 1997 to 1999; Vice President of MLAM from 1996 to 1997</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Robert C. Doll</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President of MLAM; Senior Vice President of Princeton
Services; Chief Investment Officer of Oppenheimer Funds, Inc. in
1999 and Executive Vice President thereof from 1991 to 1999</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Linda L. Federici</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President of MLAM; Senior Vice President of Princeton
Services</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Vincent R. Giordano</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President of MLAM; Senior Vice President of Princeton
Services</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Michael J. Hennewinkel</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President, Secretary and General Counsel</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President, Secretary and General Counsel of MLAM;
Senior Vice President of Princeton Services</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Philip L. Kirstein</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President of MLAM; Senior Vice President, Secretary,
General Counsel and Director of Princeton Services</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center">C-5
<!-- PAGEBREAK -->
<P><HR noshade><P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="35%"> </TD>
<TD width="3%"> </TD>
<TD width="18%"> </TD>
<TD width="3%"> </TD>
<TD width="41%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Position(s) with the</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Other Substantial Business,</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Name</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Manager</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Profession, Vocation or Employment</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Debra W. Landsman-Yaros</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President of MLAM; Senior Vice President of Princeton
Services; Vice President of PFD</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Stephen M. M. Miller</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Executive Vice President of Princeton Administrators; Senior Vice
President of Princeton Services</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Joseph T. Monagle, Jr.</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President of MLAM; Senior Vice President of Princeton
Services</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Brian A. Murdock</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President of MLAM; Senior Vice President of Princeton
Services</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Gregory D. Upah</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Senior Vice President of MLAM; Senior Vice President of Princeton
Services</FONT></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left"><B>Item 27. <I>Principal Underwriters</I></B>
<P align="left">
(a) MLFD, a division of PFD, acts as the principal
underwriter for the Registrant and for each of the open-end
registered investment companies referred to in the first two
paragraphs of Item 26 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. The Municipal Fund Accumulation
Program, Inc. MLFD also acts as the principal underwriter for the
following closed-end registered investment companies: Merrill
Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Municipal Strategy Fund, Inc., Merrill Lynch Senior Floating Rate
Fund, Inc. and Merrill Lynch Senior Floating Rate Fund II,
Inc. A separate division of PFD acts as the principal underwriter
of a number of other investment companies.
<P align="left">
(b) Set forth below is information concerning each director
and officer of PFD. The principal business address of each such
person is P.O. Box 9081, Princeton, New Jersey 08543-9081,
except that the address of Messrs. Breen, Crook, Fatseas and
Wasel is One Financial Center, 23rd Floor, Boston, Massachusetts
02111-2665.
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="45%"> </TD>
<TD width="3%"> </TD>
<TD width="23%"> </TD>
<TD width="3%"> </TD>
<TD width="26%"> </TD>
</TR>
<TR>
<TD></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Position(s) and Office(s)</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Position(s) and Office(s)</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Name</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>with PFD</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>with Registrant</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap><HR size="1"></TD>
</TR>
<TR>
<TD align="left" valign="top"><FONT size="2">
Terry K. Glenn</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
President and Director</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
President and Trustee</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Michael G. Clark</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Treasurer and Director</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Thomas J. Verage</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Director</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Robert W. Crook</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Senior Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Michael J. Brady</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
William M. Breen</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Donald C. Burke</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Vice President and Treasurer</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
James T. Fatseas</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Debra W. Landsman-Yaros</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Michelle T. Lau</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Salvatore Venezia</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
William Wasel</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Vice President</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR>
<TD align="left" valign="top"><FONT size="2">
Robert Harris</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Secretary</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
None</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="left">
(c) Not applicable.
<P align="left"><B>Item 28. <I>Location of Accounts and Records
</I></B>
<P align="left">
All accounts, books and other documents required to be maintained
by Section 31(a) of the 1940 Act and the rules thereunder
are maintained at the offices of the Registrant
(800 Scudders Mill Road, Plainsboro, New Jersey 08536), and
its transfer agent, Financial Data Services, Inc. (4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484).
<P align="center">C-6
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="left"><B>Item 29. <I>Management Services</I></B>
<P align="left">
Other than as set forth under the caption “Management of the
Fund — Fund Asset Management” 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.
<P align="left"><B>Item 30. <I>Undertakings.</I></B>
<P align="left">
Not applicable.
<P align="center">C-7
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="center"><B>SIGNATURES</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Pursuant to the requirements of the Securities Act and the
Investment Company Act, the Registrant certifies that it meets
all the requirements for effectiveness of this Registration
Statement under Rule 485(b) under the Securities Act and has
duly caused this Registration Statement to be signed on its
behalf by the undersigned, duly authorized, in the Township of
Plainsboro, and the State of New Jersey, on the 29th day of
October 1999.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="38%"></TD>
<TD width="62%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST</TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="center">
(Registrant)</TD>
</TR>
</TABLE>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="38%"></TD>
<TD width="2%"></TD>
<TD width="60%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD>By: </TD>
<TD align="center">
/s/ DONALD C. BURKE</TD>
</TR>
</TABLE>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="38%"></TD>
<TD width="62%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
<HR size="1" align="left"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="center">
(Donald C. Burke,</TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="center">
Vice President and Treasurer)</TD>
</TR>
</TABLE>
<P align="left">
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been
signed below by the following persons in the capacities and on
the date(s) indicated.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="43%"> </TD>
<TD width="3%"> </TD>
<TD width="40%"> </TD>
<TD width="3%"> </TD>
<TD width="11%"> </TD>
</TR>
<TR>
<TD align="center" nowrap><FONT size="2"><B>Signature</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Title</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Date</B></FONT></TD>
</TR>
<TR>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap><HR size="1"></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
TERRY K. GLENN*<BR>
<HR size="1">(Terry K. Glenn)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
President and Trustee (Principal Executive Officer)</FONT></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"> </TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
DONALD C. BURKE*<BR>
<HR size="1">(Donald C. Burke)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Vice President and Treasurer (Principal Financial and Accounting
Officer)</FONT></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"> </TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
JAMES H. BODURTHA*<BR>
<HR size="1">(James H. Bodurtha)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Trustee</FONT></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"> </TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
HERBERT I. LONDON*<BR>
<HR size="1">(Herbert I. London)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Trustee</FONT></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"> </TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
ROBERT R. MARTIN*<BR>
<HR size="1">(Robert R. Martin)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Trustee</FONT></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"> </TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
JOSEPH L. MAY*<BR>
<HR size="1">(Joseph L. May)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Trustee</FONT></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"> </TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
ANDRE F. PEROLD*<BR>
<HR size="1">(Andre F. Perold)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Trustee</FONT></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD colspan="5"> </TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
ARTHUR ZEIKEL*<BR>
<HR size="1">(Arthur Zeikel)</FONT></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
Trustee</FONT></TD>
<TD></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="46%"> </TD>
<TD width="3%"> </TD>
<TD width="32%"> </TD>
<TD width="3%"> </TD>
<TD width="16%"> </TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
*By: /s/ DONALD C. BURKE<BR>
<HR size="1">(Donald C. Burke, Attorney-in-Fact)</FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="top"><FONT size="2">
October 29, 1999</FONT></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center">C-8
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="center"><B>POWER OF ATTORNEY</B>
<P align="left">
The undersigned Directors/ Trustees and officers of each of the
registered investment companies listed below hereby authorize
Terry K. Glenn, Donald C. Burke and Joseph T. Monagle, Jr., or
any of them, as attorney-in-fact, to sign on his or her behalf in
the capacities indicated any Registration Statement or amendment
thereto (including post-effective amendments) for each of the
following registered investment companies and to file the same,
with all exhibits thereto, with the Securities and Exchange
Commission: Merrill Lynch California Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill
Lynch Convertible Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Growth Fund, Merrill Lynch
World Income Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings
California Insured Fund II, Inc., MuniHoldings Florida Insured
Fund III, MuniHoldings Michigan Insured Fund, Inc., MuniHoldings
New York Fund, Inc., MuniHoldings New York Insured Fund II, Inc.,
MuniHoldings New York Insured Fund III, Inc., MuniHoldings
Pennsylvania Insured Fund, MuniVest Pennsylvania Insured Fund,
MuniYield Fund, Inc., MuniYield Arizona Fund, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida
Fund, MuniYield Michigan Fund, Inc., MuniYield New Jersey Fund,
Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield Quality Fund, Inc. and MuniYield
Quality Fund II, Inc.
<P align="left">Dated: April 7, 1999
<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="52%"> </TD>
<TD width="3%"> </TD>
<TD width="45%"> </TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
/s/ TERRY K. GLENN</FONT></TD>
<TD></TD>
<TD align="center" valign="top"><FONT size="2">
/s/ JOSEPH L. MAY</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
Terry K. Glenn</FONT></TD>
<TD></TD>
<TD align="center" valign="top"><FONT size="2">
Joseph L. May</FONT></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
(President/ Principal Executive Officer/<BR>
Director/ Trustee)</FONT></TD>
<TD></TD>
<TD align="center" valign="top"><FONT size="2">
(Director/Trustee)</FONT></TD>
</TR>
<TR>
<TD colspan="3"> </TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
/s/ JAMES H. BODURTHA</FONT></TD>
<TD></TD>
<TD align="center" valign="top"><FONT size="2">
/s/ ANDRE F. PEROLD</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
James H. Bodurtha</FONT></TD>
<TD></TD>
<TD align="center" valign="top"><FONT size="2">
Andre F. Perold</FONT></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
(Director/ Trustee)</FONT></TD>
<TD></TD>
<TD align="center" valign="top"><FONT size="2">
(Director/ Trustee)</FONT></TD>
</TR>
<TR>
<TD colspan="3"> </TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
/s/ HERBERT I. LONDON</FONT></TD>
<TD></TD>
<TD align="center" valign="top"><FONT size="2">
/s/ ARTHUR ZEIKEL</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
Herbert I. London</FONT></TD>
<TD></TD>
<TD align="center" valign="top"><FONT size="2">
Arthur Zeikel</FONT></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
(Director/ Trustee)</FONT></TD>
<TD></TD>
<TD align="center" valign="top"><FONT size="2">
(Director/Trustee)</FONT></TD>
</TR>
<TR>
<TD colspan="3"> </TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
/s/ ROBERT R. MARTIN</FONT></TD>
<TD></TD>
<TD align="center" valign="top"><FONT size="2">
/s/ DONALD C. BURKE</FONT></TD>
</TR>
<TR>
<TD align="left"><HR size="1"></TD>
<TD></TD>
<TD align="left"><HR size="1"></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
Robert R. Martin</FONT></TD>
<TD></TD>
<TD align="center" valign="top"><FONT size="2">
Donald C. Burke</FONT></TD>
</TR>
<TR>
<TD align="center" valign="top"><FONT size="2">
(Director/ Trustee)</FONT></TD>
<TD></TD>
<TD align="center" valign="top"><FONT size="2">
(Vice President/Treasurer/Principal Financial<BR>
and Accounting Officer)</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center">C-9
<!-- PAGEBREAK -->
<P><HR noshade><P>
<P align="center"><B>EXHIBIT INDEX</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">
<TR>
<TD width="6%"> </TD>
<TD width="1%"> </TD>
<TD width="5%"> </TD>
<TD width="3%"> </TD>
<TD width="75%"> </TD>
<TD width="3%"> </TD>
<TD width="7%"> </TD>
</TR>
<TR>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Exhibit</B></FONT></TD>
<TD></TD>
<TD></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="3"><FONT size="2"><B>Numbers</B></FONT></TD>
<TD></TD>
<TD align="center" nowrap><FONT size="2"><B>Description</B></FONT></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD align="center" nowrap colspan="3"><HR size="1"></TD>
<TD></TD>
<TD align="center" nowrap><HR size="1"></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">9</FONT></TD>
<TD align="left" valign="top" nowrap><FONT size="2">(a)</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Opinion of Brown & Wood, LLP, dated August 20, 1992.</FONT></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">9</FONT></TD>
<TD align="left" valign="top" nowrap><FONT size="2">(b)</FONT></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Consent of Brown & Wood LLP, counsel to the Registrant</FONT></TD>
<TD></TD>
<TD></TD>
</TR>
<TR>
<TD></TD>
<TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
<TD></TD>
<TD></TD>
<TD align="left" valign="bottom"><FONT size="2">
Consent of Deloitte & Touche LLP, independent auditors for
the Registrant</FONT></TD>
<TD></TD>
<TD></TD>
</TR>
</TABLE>
</CENTER>
<DIV align="left"><FONT size="1">
</FONT></DIV>
</BODY>
</HTML>
<HTML>
<HEAD>
<TITLE>OPINION OF BROWN & WOOD, LLP</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<P align="right"><B>EXHIBIT 9(a)</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center"><B><FONT size="4">BROWN & WOOD</FONT></B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center"><B> ONE WORLD TRADE CENTER</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<B>NEW YORK, NEW YORK 10048-0557</B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="center"><B> TELEPHONE: 212-839-5300</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="center">
<B>FACSIMILE: 212-839-5599</B>
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="38%"></TD>
<TD width="62%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
August 20, 1992</TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">Merrill Lynch North Carolina Municipal Bond Fund
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
of Merrill Lynch Multi-State Municipal Series Trust
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
Box 9011
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
Princeton, New Jersey 08543-9011
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">Dear Sirs:
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
This opinion is furnished in connection with the registration by
Merrill Lynch North Carolina Municipal Bond Fund (the
“Fund”) of Merrill Lynch Multi-State Municipal
Series Trust, a Massachusetts business trust (the
“Trust”), of an indefinite number of Class A
shares of beneficial interest, par value $0.10 per share, and
Class B shares of beneficial interest, par value
$0.10 per share, (together, the “Shares”), under
the Securities Act of 1933 pursuant to a registration statement
on Form N-1A (File No. 33-48692), as amended (the
“Registration Statement”).
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
As counsel for the Fund, we are familiar with the proceedings
taken by it in connection with the authorization, issuance and
sale of the Shares. In addition, we have examined and are
familiar with the Declaration of Trust of the Trust, the By-Laws
of the Trust, the instrument establishing the Fund as a series of
the Trust, the instrument designating the Class A and
Class B Shares, and such other documents as we have deemed
relevant to the matters referred to in this opinion.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
Based upon the foregoing, we are of the opinion that the Shares,
upon issuance and sale in the manner referred to in the
Registration Statement for consideration not less than the par
value thereof, will be legally issued, fully paid and
nonassessable shares of beneficial interest of the Fund.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
In rendering this opinion, we have relied as to matters of
Massachusetts law upon an opinion of Bingham, Dana & Gould,
dated August 20, 1992 rendered to the Trust.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the use of our name in the
Prospectus and Statement of Additional Information constituting
parts thereof.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="38%"></TD>
<TD width="62%"></TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
Very truly yours,</TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR>
<TD> </TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
/s/ BROWN & WOOD</TD>
</TR>
<TR><TD><FONT size="1">
</FONT></TD></TR>
</TABLE>
</BODY>
</HTML>
<HTML>
<HEAD>
<TITLE>CONSENT OF BROWN & WOOD LLP</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<P align="right"><B>EXHIBIT 9(b)</B>
<P align="center"><B><FONT size="4">BROWN & WOOD LLP</FONT></B>
<P align="center"><B>ONE WORLD TRADE CENTER</B>
<DIV align="center">
<B>NEW YORK, N.Y. 10048-0557</B>
</DIV>
<P align="center"><B>TELEPHONE: 212-839-5300</B>
<DIV align="center">
<B>FACSIMILE: 212-839-5599</B>
</DIV>
<P>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="38%"></TD>
<TD width="62%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
November 1, 1999</TD>
</TR>
</TABLE>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">Merrill Lynch North Carolina Municipal Bond Fund of
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
Merrill Lynch Multi-State Municipal Series Trust
</DIV>
<DIV align="left">
800 Scudders Mill Road
</DIV>
<DIV align="left">
Plainsboro, New Jersey 08536
</DIV>
<P align="left">Ladies and Gentlemen:
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
We consent to the filing with Post-Effective Amendment No. 9
to the Registration Statement of Merrill Lynch North Carolina
Municipal Bond Fund of Merrill Lynch Multi-State Municipal
Series Trust on Form N-1A (File Nos. 33-48692 and 811-4375)
of our opinion dated August 20, 1992, originally filed on
August 20, 1992 as an Exhibit to Pre-Effective Amendment
No. 1 to such Registration Statement and to the use of our
name in the prospectus and statement of additional information
constituting parts thereof.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR>
<TD width="38%"></TD>
<TD width="62%"></TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
Very truly yours,</TD>
</TR>
<TR>
<TD> </TD>
</TR>
<TR valign="top">
<TD> </TD>
<TD align="left">
/s/ BROWN & WOOD LLP</TD>
</TR>
</TABLE>
</BODY>
</HTML>
<HTML>
<HEAD>
<TITLE>CONSENT OF DELOITTE & TOUCHE LLP</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<P align="right"><B>EXHIBIT 10</B>
<P align="left"><B>INDEPENDENT AUDITORS’ CONSENT</B>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">Merrill Lynch North Carolina Municipal Bond Fund of <BR>
Merrill Lynch Multi-State Municipal Series Trust:
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
We consent to the incorporation by reference in this
Post-Effective Amendment No. 9 to Registration Statement
No. 33-48692 of our report dated September 8, 1999
appearing in the annual report to shareholders of Merrill Lynch
North Carolina Municipal Bond Fund for the year ended
July 31, 1999, and to the reference to us under the caption
“Financial Highlights” in the Prospectus, which is a
part of such Registration Statement.
<DIV align="left"><FONT size="1">
</FONT></DIV>
<P align="left">
/s/ Deloitte & Touche LLP
<DIV align="left">
<HR size="1" width="41%" align="left">
</DIV>
<DIV align="left">
Deloitte & Touche LLP
</DIV>
<DIV align="left">
Princeton, New Jersey
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
<DIV align="left">
October 27, 1999
</DIV>
<DIV align="left"><FONT size="1">
</FONT></DIV>
</BODY>
</HTML>
